Category: Business

Business rates is the commonly used term for non-domestic property rates. Business rates are charged on most non-domestic premises, including most commercial properties such as shops, offices, pubs, warehouses and factories. Some properties are eligible for discounts from the local council on their business rates. This is called non-domestic property rates relief or business rates relief. 

In Scotland, there are a number of reliefs available including Small Business Bonus Scheme, reliefs for empty or newly re-occupied properties and charitable rate relief. Businesses need to apply to their local council for relief. 

Business rates relief through the Small Business Bonus Scheme (SBBS) scheme is available if the combined rateable value of all business premises is £35,000 or less, if the rateable value of individual premises is £18,000 or less and the property is actively occupied.

Empty properties in Scotland can receive 50% rates relief for the first 3 months they are empty. They can then claim a further 10% discount.

Empty industrial properties can qualify for 100% relief from non-domestic rates for the first 6 months that they are empty. They can then claim a further 10% discount. It is also possible, under certain circumstances, to receive 100% relief for the time a property is unoccupied, for example, if it is a listed building. 

Registered charities in Scotland can apply for 80% rates relief. This only applies if their property is mostly used for charitable purposes. Certain councils may also offer up to 20% additional relief on top of the 80%, meaning that no rates would be payable. There are similar provisions for registered Community Amateur Sports Clubs.

Rates reliefs are handled differently in England, Wales and Northern Ireland.

Tax relief may be available for post-cessation expenses of a trade. In order to be an allowable post-cessation expense, the trade must have ceased, and the expense must have been deductible in calculating the trading profits.

This means that the expense still has to meet the wholly and exclusively test and be revenue, not capital, expenditure. The expenditure can be apportioned if necessary. The way in which post-cessation expenses can be relieved depends on the person incurring the expenditure and the type of expenditure incurred.

The following are examples of expenses that would likely be categorised as post-cessation expenses:

• remedying defective work done, goods supplied, or services rendered while the business was continuing or as damages in respect of such defective work, goods or services whether awarded by a Court or agreed during negotiations on a claim;
• paying legal or other professional expenses incurred in connection with the costs above;
• insuring against liabilities arising out of any such claim or against the incurring of such expenses; and
• collecting, or seeking to collect, debts which were considered in computing the profits of the trade before discontinuance.

An expense specifically relating to the cessation itself is not an allowable expense.

Forthcoming 'basis of assessment' reforms will change the way trading income is allocated to tax years for the self-employed. The changes will affect sole traders and partnerships that use an accounting date between 6 April and 30 March. There is no change to the rule for companies.

The reforms will change the basis period from a ‘current year basis’ to a ‘tax year basis’. Under the current rules there can be overlapping basis periods, which charge tax on profits twice and generate corresponding ‘overlap relief’ which is usually given on cessation of the business. The new method of using a ‘tax year basis’ will remove the basis period rules and prevents the creation of further overlap relief.

The new rules will come into effect in the 2024-25 tax year with 2023-24 being a transitional year. During the transitional year, all businesses’ basis periods will be aligned to the tax year and all outstanding overlap relief can be used against profits for that tax year.

Affected businesses in 2023-24 will be assessed on the tax for profits for the:

• 12-month accounting period they have previously been using; and
• for the rest of the 2023-24 tax year — minus any overlap relief that may be due — spread over the next 5 tax years.

The changes do not affect sole traders and partnerships who already draw up annual accounts to a date between 31 March and 5 April.

Affected businesses should ensure they are prepared for the changes as there may be cashflow implications. 

There are special rules which can apply to farmers and market gardeners that prepare their accounts on accruals basis. This includes special rules for farmers’ averaging relief, dealing with losses and the treatment of compensation for compulsory slaughter.

The special rules also refer to the use of the herd basis. The herd basis is a special method of calculating profits or losses which may be used by farmers who keep production livestock. Usually, farm animals are treated as trading stock. However, under the herd basis a herd or flock of production animals is excluded from trading stock and treated, in most but not all circumstances, like a capital asset.

Any farmer that wishes to use the herd basis must elect to do so. Where a herd basis election is in force, the treatment for calculating farming profits of the herd or herds covered by the election is governed by special rules. The herd basis rule can also apply where animals are jointly owned, for example, in some share-farming arrangements.

From the farmer’s point of view, the main benefits are likely to be that:

• the cost of maintaining the herd can be charged against tax; and
• any profit on its eventual disposal will be tax-free.

Note, that these special rules do not apply to farmers and market gardeners who calculate their profits using the cash basis.

There are special statutory demerger provisions that are designed to make it easier to divide and place into separate corporate ownership the trading activities of a company or group of companies. Using these provisions, an exempt demerger will be deemed to take place and the distribution will normally be exempt for Income Tax purposes and usually not give rise to any CGT as the gains are effectively rolled over.

The provisions do not apply where a trading activity is to be sold or becomes owned by a person other than the existing member of the original company.

The provisions allow the removal of the distribution charge in appropriate circumstances, making the distribution an ‘exempt distribution’. This applies to trading activities only. Companies that make use of the demerger provisions range from small private companies to some of the UK’s largest public companies.

The legislation also provides for a clearance procedure. Using this a company that wants to demerge trading activities can obtain advance confirmation from HMRC that the distribution that will arise will be an exempt distribution.

The use of these demerger provisions, when available, can be beneficial and help companies avoid adverse consequences of other more complex demerger options.

HMRC publishes a list of income streams that are excluded from a UK property business. The list includes fishing concerns, hotels and guest houses, tied premises, caravan sites, lodgers and tenants in your own home, extra services to tenants and letting surplus trade accommodation. In most cases the income from these activities will be taxed as income of a trade and not as property income.

In addition, there are certain receipts that can arise out of the use of land, and which are specifically excluded by statute from a rental business. These include yearly interest, income from the occupation of woodlands managed on a commercial basis, income from mines and quarries and income from farming and market gardening.

There is also a £1,000 property income allowance that applies to income from property (including foreign property). If a taxpayer’s annual gross property income is £1,000 or less the amount is exempt from tax and does not need to be reported on a tax return.

The rules for deciding whether a gift given in the course of business is deductible are complex. The rules for business gifts generally follow those for business entertaining expenditure. This means that HMRC take the view that in general business gifts are not an allowable deduction from profit for tax purposes.

However, there are exceptions to this rule. Where the following exceptions apply, the expenses incurred in providing the gift are deductible from trading profits. The exceptions are where:

• the gift is of an item which it is the trader’s trade to provide and it is given away in the ordinary course of the trade to advertise to the public
• the gift incorporates a conspicuous advertisement for the trader, although there are exclusions relating to the type of gift and the total amount per person
• the gift is provided to the employees of the trader so long as this is not incidental to gifts being provided to others
• the gift is given to charity or other specific bodies.

HMRC is clear that in some instances, something that appears to be a gift may actually be a part of a sale to a customer. HMRC’s manuals provide the example of a bunch of flowers presented to a customer who has just purchased a new car would effectively have been paid for by the customer – it is a part of the cost of the car. Similarly, gifts offered to customers who purchase a certain level of goods are really discounts on sale and not business gifts. Gifts of this nature are not disallowed by the legislation.

The 1,25% increase in NIC contributions from April 2022 will be mirrored by a similar increase in the tax charge on dividends. From April 2022, the dividend tax increases will apply as follows:

• Basic rate taxpayers will see an increase from the present 7.5% to 8.75%.
• Higher rate taxpayers will see an increase from 32.5% to 33.75%.
• Additional rate taxpayers will see an increase from 38.1% to 39.35%.

This change will apply UK-wide. It will be scored at the Budget and legislated for in the next Finance Bill.

Dividend tax is charged on taxable dividend income an individual receives that falls outside of the personal allowance (£12,570 in 2021-22) and the dividend allowance (£2,000 in 2021-22). Taxable dividend income excludes, for example, dividends on assets held in ISAs.

Affected basic rate taxpayers are expected to pay, on average, an additional £150 on their dividend income in 2022-2314 . Affected higher rate taxpayers are expected to pay, on average, an additional £403 on their dividend income in 2022-23. Additional and higher rate taxpayers are expected to contribute over 70 per cent of the revenue from this increase in 2022-23.

There are special rules for the taxation of post-cessation receipts and expenses after a trade has ceased. These provisions also apply to professions and vocations as they apply to trades.

Tax relief may be available for post-cessation expenses of a trade, although expenses still have to satisfy the wholly and exclusively test and be revenue in nature in order to qualify for relief. In order to be an allowable post-cessation expense, the trade must have ceased and the expense would have been deductible in calculating the trading profits. Post-cessation expenses must be set against post-cessation receipts arising in the same period as the expense before any other method of relief can be considered.

There are a number of different ways in which post-cessation expenses can be relieved These depend on the person incurring the expenditure and the type of expenditure incurred. An expense specifically relating to the cessation itself is not an allowable expense.

When deciding whether an expense is allowed or disallowed it is important to consider that the expenditure must be incurred wholly and exclusively for the purposes of your trade or employment. 

Under the legislation any expenditure not incurred wholly and exclusively for the purposes of the trade, profession or vocation should be disallowed. HMRC takes a slightly more relaxed view that a strict reading of the legislation would suggest. 

One of the main points HMRC examines when considering the application of the ‘wholly and exclusively’ test relates to apportionment and duality.

In this regard, HMRC’s internal manuals state that:

When you consider the application of the ‘wholly and exclusively’ test, it is important that you distinguish between cases where:

1. a definite part or proportion of an expense has been laid out or expended wholly and exclusively for the purposes of the trade, profession or vocation. That part or proportion should not be disallowed on the ground that the entire expense is not laid out or expended wholly and exclusively for the purposes of the trade, profession or vocation,
2. an expense has been incurred for a dual purpose. Such expenditure should be disallowed.

For example, when considering the running costs of a car used partly for the purposes of the trade and partly for other purposes, HMRC’s position is that the costs apportioned to the business use of the car would be deductible. 

The cash basis scheme helps sole traders and other unincorporated businesses benefit from a simpler way of managing their financial affairs. Landlords can use the cash basis when recording income and expenditure i.e., recording the flow of money from and to the business.

The scheme is not open to limited companies and limited liability partnerships. The entry threshold for the cash basis scheme is £150,000 and you can stay in the scheme until your business turnover reaches £300,000.

Unlike other taxpayers that need to opt-in to use the scheme, the legislation assumes that landlords will use the cash basis as the default method of calculation. A landlord can still elect to opt out of the scheme in which case they can continue to use generally accepted accounting practice (GAAP) to calculate their taxable profits. Landlords are also required to continue using GAAP if their rental receipts are more than the £300,000 scheme threshold.

HMRC’s property income manual lists the following criteria of when the cash basis is not available to a property business. 

A: The property business is run by a company, limited liability partnership (LLP), trustees or a corporate firm (a partnership with at least one non-individual member).

B: Receipts that would be brought into account under the cash basis for the tax year exceed £150,000. This amount must be proportionally reduced if the property business is only carried out for part of the tax year.

C: If the property business is being carried on jointly with a spouse or civil partner, the same basis must be used by both individuals, unless they make a declaration under S837/ITA 2007 that they are beneficially entitled to the income in unequal shares.

D: Business premises renovation allowance has been claimed, and a balancing event in the tax year gives rise to a balancing adjustment.

E: An election is made to use GAAP because the person believes that traditional accounting is more appropriate. The election must be made within one year of the filing date for that tax year.

When deciding whether an expense is allowed or disallowed for tax purposes it is important to bear in mind that the expenditure must be incurred wholly and exclusively for the purposes of your trade or employment.

Under the legislation any expenditure not incurred wholly and exclusively for the purposes of the trade, profession or vocation should be disallowed. Interestingly, HMRC takes a slightly more relaxed view than a strict reading of the legislation would suggest.

HMRC’s own internal manuals offers advice to HMRC inspectors to exercise care when applying the ‘wholly and exclusively’ test. The advice states that where there is an incidental benefit that does not, of itself, mean that the expenditure is disallowed.

The following example helps clarify this point.  A self-employed consulting engineer may travel to exotic locations to advise on projects. The travel and the exotic locations may be benefits but where there was no private purpose they are incidental to the carrying on of the profession and the cost is allowable.

It is also possible to apportion part of an expense where necessary. For example, when considering the running costs of a car used partly for the purposes of the trade and partly for other purposes.  HMRC’s position is that the costs associated with the business use of the car would be deductible.

Directors that have drawn remuneration from their companies as a mix of low salary and higher dividends would seem to be overlooked by the schemes announced in the past two weeks to support the employed and the self-employed.

In the first news story published by government announcing the Self-Employed Income Support arrangements (26 March 2020), the following paragraph was inserted:

“Those who pay themselves a salary and dividends through their own company are not covered by the scheme but will be covered for their salary by the Coronavirus Job Retention Scheme if they are operating PAYE schemes”. 

On this basis, the only financial support that directors could claim is the Job Retention Scheme. This will be based on their salary – not salary plus dividends – and only if they furlough themselves (play no active role in their businesses). It is likely that a director's statutory responsibilities will not count as work if a claim under the Coronavirus Job Protection Scheme is made.

The Annual Investment Allowance (AIA) allows business owners to claim the total amount of qualifying expenditure on plant and machinery, up to certain limits. This deduction reduces profits subject to tax.

The AIA can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non-residential property business or a furnished holiday let business. Please note, that partnerships or trusts with a mixture of individuals and companies in the business structure are unable to qualify for AIA.

The AIA was permanently set at £200,000 for all qualifying expenditure on or after 1 January 2016. However, this limit was temporarily increased to £1 million for a 2-year period from 1 January 2019 to 31 December 2020. This increased limit is a generous allowance and should cover the annual spend of most small and medium sized businesses. 

The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to cars.

There is now just three months left until the end of the tax year. If you are thinking of incurring large items of capital expenditure for your business, now is a good time to consider your investment options.

HMRC’s guidance lists the following useful examples about a change of accounting date:

If your accounting date in 2016 to 2017 is more than 12 months after the end of the basis period for 2015 to 2016, your basis period is the period between the end of the basis period for 2015 to 2016 and the new accounting date.

For example, your basis period for 2015 to 2016 ended on 31 May 2015, and the new accounting date is 31 August 2016, your basis period is the 15-month period 1 June 2015 to 31 August 2016.

If your accounting date in 2016 to 2017 is less than 12 months after the end of the basis period for 2015 to 2016, your basis period is the 12 months ending on the new accounting date.

For example, your basis period for 2015 to 2016 ended on 31 December 2015 and the new accounting date is 31 July 2016, your basis period is the 12-month period 1 August 2015 to 31 July 2016, see ‘Overlap profits’, below.

If your new accounting date is 31 March or 1, 2, 3 or 4 April, see Accounting dates in the period 31 March to 4 April below.

In the first example, above an overlap occurs because of the change in accounting date. A portion of profits is effectively taxed twice, this is known as overlap profit. Overlap profits relief can be used to reduce the profits on the final tax return when the business ceases trading or if the accounting period changes but the ideal scenario would usually be not to create the overlap in the first place.