Tax and lease premiums

Where a freeholder (or landlord) of a property grants a new lease to a new tenant there are sometimes upfront payments due, usually known as a lease premium. The payments of these premiums are increasingly popular, and the tax implications can be complicated depending on the length of the lease.

For leases of 50 years or less a proportion of the premium is taxed as income. The proportion to be charged as income depends on the length of the lease. The shorter the lease, the greater the proportion to be charged. For leases of more than 50 years, the premium is treated as a capital sum and represents a capital gain by the freeholder. In this case none of the premium is treated as income. Certain other sums paid are treated like premiums. In some circumstances the tenant may be able to claim relief on the ‘income’ element of the premium paid.

A landlord may also be entitled to relief against their own rental business income for premiums paid to obtain a property that is now let, or where a lease was acquired for which an earlier tenant had paid a premium.

What is overlap relief?

The assessment of self-employed or partnerships profits is usually relatively straight-forward if the accounting date – the date to which accounts are prepared – falls between 31 March and 5 April. However, overlap profits can arise where a business year end date is not coterminous with the end of the tax year.

Overlap profits can happen in the first 2 or 3 years of the business or in any year in which there is a change of basis period because of a change of the accounting date.

For example, if a client's business starts 1 January 2018 and their chosen year end date is 31 December 2019, the basis periods are:

  • 2018 to 2019, 1 January 2019 to 5 April 2019
  • 2019 to 2020, 1 January 2019 to 31 December 2019

The portion of accounts from 1 January 2019 to 5 April 2019 is therefore taxed twice and is known as overlap profit.

Overlap relief can be used to reduce the profits on the final tax return when the business ceases trading or if the accounting period changes. Overlap relief is a mandatory deduction. The full amount of the relief available for a particular tax year must be given as a deduction for that tax year. No part of the deduction can be waived.

If overlap profits were created some time ago, and profits have been declining in recent years, it may be prudent to consider a change of accounting date closer to, or at the end of, the tax year. In this way, the overlap relief can be claimed and tax liabilities reduced at a beneficial time for the business or partnership. There can also be Income Tax and National Insurance savings.

Reminder of “bed and breakfasting” rules

Historically, the term bed and breakfasting (sale and repurchase) of shares referred to transactions whereby someone sold shares one day and bought them back the next morning. This used to have Capital Gains Tax (CGT) benefits by crystallising a gain or a loss but is no longer tax effective over such a short period. The rules changed in 1998 when new legislation introduced special share matching rules. Under these rules there are a number of limitations, including a 30-day waiting period before the shares can be repurchased again.

However, it is possible under certain circumstances to use a modified bed and breakfasting type of arrangement to sell an asset only to buy it back again a short time later. A gain could be created in order to use up the annual exempt amount or a non-resident may 'bed and breakfast' their chargeable assets to establish a higher base cost before they enter the UK tax regime.

Proper consideration should be taken before undertaking such transactions to ensure that all tax aspects have been observed. For example, in order for any bed and breakfast transaction to be effective, there must be a genuine transfer of beneficial ownership of the asset and the share matching rules must be met.

Company Unique Taxpayer References

The Company Unique Taxpayer References (UTR) is the primary identifier for the company and should be used whenever HMRC is contacted and when tax returns are filed.

When a new limited company is registered, Companies House will inform HMRC of the new company and a UTR (ten-digit number) will be issued. HMRC will then issue a letter to the company's registered address outlining important information about registering the company online for Corporation Tax and filing Company Tax Returns.

The letter, which will be sent to the companies registered address, will also contain the company’s ten-digit UTR. The number can also be found on other documents issued by HMRC such as form CT603 ‘Notice to deliver a company Tax Return’, Depending on the type of document issued the reference may be printed next to the headings 'Tax Reference', 'UTR' or 'Official Use'.

It is possible to locate a company UTR by making a request online at https://www.tax.service.gov.uk/ask-for-copy-of-your-corporation-tax-utr.

HMRC will send the number by post to the company’s registered address as shown at Companies House.

Not sure if you need to submit a tax return?

There are a number of reasons why you may need to register with HMRC to submit a tax return. This could include:

  • if you are self-employed and earning more than £1,000 per year from the self-employed activity,
  • if you are a company director,
  • if you have an annual income over £100,000 and / or if you have certain income from savings, investment or property.

And see HMRC's list of criteria to file set out below.

If you need to complete a tax return for the first time you should inform HMRC as soon as possible. The latest date that HMRC should be notified is by 5 October following the end of the tax year for which a return needs to be filed. For example, if you had income that necessitated you registering for Self Assessment in the 2018-19 tax year, you need to notify HMRC by 5 October 2019.

HMRC has published a check list of reasons that you may be required to submit a Self Assessment return. The list includes the following:

  • If you are self-employed;
  • If you had £2,500 or more in untaxed income;
  • Have savings or investment income of £10,000 or more before tax;
  • If you have made profits from selling things like shares, a second home or other chargeable assets and need to pay Capital Gains Tax;
  • If you are a company director – unless it was for a non-profit organisation (such as a charity) and you didn’t get any pay or benefits, like a company car;
  • If your income (or that of your partner’s) was over £50,000 and one of you claimed Child Benefit;
  • If you had taxable income from abroad;
  • If you lived abroad and had a UK income; or
  • If your income was over £100,000.

In certain limited circumstances HMRC can also ask you to complete tax returns for other reasons.

Uncertain if you need to register?

Please call with details of your various income sources in the UK if you would like help to decide, if you do need to register for Self-Assessment and/or with the completion and filing of your return.

Have you adopted the new minimum wage rates?

The new National Minimum Wage (NMW) and National Living Wage (NLW) rates came into effect on 1 April 2019. The NLW first came into effect on 1 April 2016 and is the minimum hourly rate that must be paid to those aged 25 or over. The new rate for the NLW is £8.21 which is a 38p or almost 5% increase over the previous year.

The hourly rate of the NMW (for 21-24 year olds) increased to £7.70 (a rise of 32p). The rates for 18-20 year olds increased to £6.15 (a rise of 25p), and the rate for workers above the school leaving age but under 18 increased to £4.35 (a rise of 15p). The NMW rate for apprentices increased by 20p to £3.90.

Penalties may be levied if you get this wrong

It is important that you ensure that you have adopted the new rates as there are significant penalties for employers who are found to have paid workers less that they are entitled to by law. If you have underpaid an employee, you must pay any arrears immediately. There are penalties for non-payment of up to 200% of the amount owed, unless the arrears are paid within 14 days. The maximum fine for non-payment can be up to £20,000 per employee and employers who fail to pay face a possible 15-year ban from being a company director as well as being publicly named and shamed.

Deadline to reduce taxable benefits

Employees can often reimburse their employers for benefits provided in order to lessen their taxable benefits and thereby reduce or avoid a tax charge. This is referred to in the legislation as ‘making good’ and most often involves the employee making a cash payment to their employer. The payment has the effect of reducing the taxable value of the benefit in kind, often to zero. This reimbursement process reduces the amount of the employee’s taxable earnings, and indirectly, the amount of your employer's National Insurance payments.

Any employees using this option, need to be aware of the 6 July deadline for making the reimbursement. For example, if the benefit in kind was received during the 2018-19 tax year, the deadline for making a reimbursement is normally the 6 July 2019. There are exceptions to this such as paying back private costs made on a company credit card. In these cases, the employee has to 'make good' the benefit before 1 June following the end of the tax year in which the benefit was provided.

Why keeping to these deadlines is important?

Employees can still make payments after 6 July 2019, but by doing so will not reduce the taxable value of the benefit in kind. This means the benefit will still be taxable and liable for National Insurance contributions and cannot be adjusted by the employer.

Tax Diary June/July 2019

1 June 2019 – Due date for Corporation Tax due for the year ended 31 August 2018.

19 June 2019 – PAYE and NIC deductions due for month ended 5 June 2019. (If you pay your tax electronically the due date is 22 June 2019)

19 June 2019 – Filing deadline for the CIS300 monthly return for the month ended 5 June 2019. 

19 June 2019 – CIS tax deducted for the month ended 5 June 2019 is payable by today.

1 July 2019 – Due date for Corporation Tax due for the year ended 30 September 2018.

6 July 2019 – Complete and submit forms P11D return of benefits and expenses and P11D(b) return of Class 1A NICs.

19 July 2019 – Pay Class 1A NICs (by the 22 July 2019 if paid electronically).

19 July 2019 – PAYE and NIC deductions due for month ended 5 July 2019. (If you pay your tax electronically the due date is 22 July 2019)

19 July 2019 – Filing deadline for the CIS300 monthly return for the month ended 5 July 2019. 

19 July 2019 – CIS tax deducted for the month ended 5 July 2019 is payable by today.

Seed Enterprise Investment Scheme

The SEIS provides for extensive Income Tax and Capital Gains Tax (CGT) breaks for investors and this greatly encourages much needed seed capital in new businesses. The SEIS is most valuable for taxpayers who can fully benefit from the tax reliefs on offer.

For investors the main benefits of the scheme are as follows:

  • Income Tax relief worth 50% of the amount invested to qualifying individual investors on a maximum annual investment of £100,000.
  • A 50% exemption from CGT on gains reinvested within the scope of the SEIS. The maximum gain to be relieved is capped at £100,000 and the relief will be withdrawn if the SEIS relief is ultimately withdrawn.
  • There is a 100% exemption from CGT on the sale of shares more than three years after the date on which they were issued.
  • An SEIS investment will normally qualify for 100% relief from Inheritance Tax where the usual conditions are met.

The availability of both Income Tax and CGT relief has made the SEIS a very popular scheme. The reliefs are only available where there is sufficient liability against which to set the relief. Under certain circumstances, small business owners can also use the scheme to invest in their own businesses. Of course, investors must consider the importance of picking a good company to invest in and carry out proper due diligence. 

There are a number of conditions which must be met in order to invest in the scheme. For example, the scheme can only be used to invest in small companies i.e. companies with gross assets of no more than £200,000 and with less than full-time equivalent 25 employees. A company can raise a maximum of £150,000 through the SEIS but can go on to use other schemes such as the EIS to raise further funds.

Companies eligible for Group Relief

Corporation Tax relief may be available when a company or organisation makes a trading loss. Companies that are eligible for Group Relief can transfer losses and certain other deficits to companies within the same group by means of Group or Consortium Relief. The use of Group Relief allows losses arising in the accounting period to be surrendered to a group company for that period. In addition, losses that arose on or after 1 April 2017 and are carried forward to a later accounting period may be surrendered as Group Relief for carried-forward losses.

Companies attempting to either surrender or claim losses for Group Relief or Group Relief for carried forward losses must meet the required conditions.  For companies to be members of the same group, one company must be a 75% subsidiary of the other, or both must be 75% subsidiaries of a third company. The definition of '75% subsidiary' requires one company to have direct or indirect beneficial ownership of at least 75% of the ordinary share capital in another. There are also further qualifying tests that may apply for Group Relief purposes.