Paying wages to connected persons

The definition of a connected person for tax purposes includes certain relatives, trustees, partners and companies.

A person is connected with an individual if that person is

  • the individual’s spouse or civil partner
  • a relative of the individual
  • the spouse or civil partner of a relative of the individual
  • a relative of the individual’s spouse or civil partner
  • the spouse or civil partner of a relative of the individual’s spouse or civil partner.

The term 'relative' does not cover all family relationships. In particular, it does not include nephews, nieces, uncles and aunts.

When it comes to making a claim to deduct wages paid to relatives or connected persons, the reason for the payment must be wholly and exclusively for the purposes of the trade. If there is another reason (either in addition or instead), then the deduction will not be allowable. There have been a number of important cases that have looked at this issue including in relation to payments made to minor children and spouses.

Basis periods and change of accounting date

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.

What is reasonable care

The inaccuracy penalty system is intended to make penalties simpler to understand and more consistent across many taxes. HMRC has the power to significantly reduce the amount of penalties due. The largest reductions are for unprompted disclosures (as against prompted disclosures). The penalties also vary depending on the taxpayers’ behaviour. HMRC has 4 levels of behaviour ranging from taking reasonable care in dealing with errors to careless, deliberate or deliberate and concealed behaviour patterns.

There is no definition of taking reasonable care from a taxation standpoint. However, HMRC’s commentary in this area is helpful. HMRC accepts that 'reasonable care' cannot be identified without consideration of the particular person’s abilities and circumstances. HMRC recognises the wide range of abilities and circumstances of those persons completing returns or claims and accepts that what is necessary for each person to discharge that responsibility has to be viewed in the light of that person’s abilities and circumstances.

HMRC gives the example of not expecting the same level of knowledge or expertise from a self-employed, un-represented individual as we do from a large multinational company.

Exemptions from CGT

Capital Gains Tax (CGT) is a tax on the profit made on the disposal of an asset that has increased in value. Whilst most taxpayers are aware of their annual tax-free allowance (currently £12,000) and the exemption for the, qualifying, sale of the family home – there are other items that are exempt from CGT.

These include:

  • your car
  • personal possessions worth up to £6,000 each, such as jewellery, paintings or antiques
  • stocks and shares you hold in tax-free investment savings accounts, such as ISAs and PEPs
  • UK Government or 'gilt-edged' securities, for example, National Savings Certificates, Premium Bonds and loan stock issued by the Treasury
  • betting, lottery or pools winnings
  • personal injury compensation
  • foreign currency you bought for your own or your family's personal use outside the UK

So, if you are lucky enough to win the National Lottery this weekend, you won’t have to pay any CGT…

Please note:

None of the above exemptions apply when the gains arise from trading or business activities as distinct from occasional sales and disposals.

Top up your pension pots

You can claim tax relief for your private pension contributions. The current annual allowance for tax relief on pensions is £40,000. Remember, that there is now just 3 months left in the current tax year in which to maximise the amount of tax relief you can claim by topping up your pension pot.

There is a three-year carry forward rule that allows you to carry forward previous years unclaimed allowances. There is also a lifetime limit for tax relief on pension contributions. The limit is currently £1.055 million.

You can claim tax relief on private pension contributions worth up to 100% of your annual earnings, subject to the overriding limits. Higher rate tax relief is allowed.

This means that if you are:

  • A basic rate taxpayer you get 20% pension tax relief
  • A higher rate taxpayer you can claim 40% pension tax relief
  • An additional rate taxpayer you can claim 45% pension tax relief

The first 20% of tax relief is usually automatically applied by your employer with no further action required if you are a basic-rate taxpayer. If you are a higher rate or additional rate taxpayer, you can claim back any further reliefs on your Self-Assessment tax return.

The Income Tax rates are different in Scotland.

Take advantage of the Annual Investment Allowance

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.

Penalties for late filing of Self-Assessment tax returns

The 31 January is not just the final date for submission of your Self-Assessment tax return but also an important date for paying tax. It is the final payment deadline for any remaining tax due for the 2018-19 tax year and any payment on account due for 2019-20.

If you miss the filing deadline then you will be charged a £100 fixed penalty if your return is up to 3 months late, regardless of whether you owed tax or not.

If you do not file and pay before 1 May 2020, then you will face additional penalties and interest. A daily penalty of £10 per day, up to a maximum of £900 (90 days) will be charged from 1 May 2020. Further penalties then apply if your return is still outstanding for more than 6 months after the 31 January filing deadline. From 1 August 2020 you will be charged a penalty of the greater of £300 or 5% of the tax due. If your return still remains outstanding one year after the filing deadline, then further penalties will be charged from 1 February 2021.

You can appeal against any penalties that have been issued and HMRC has said that they will treat those with genuine excuses, leniently. However, you need to act fast and the excuse must be genuine and HMRC can of course ask for evidence to support any claim. An appeal must usually be made within 30 days of receipt of the penalty.

If you do not have the necessary funds to make payment you should be pro-active and contact HMRC as soon as possible. Pretending the problem does not exist will not make the problem go away and will likely make matters worse.

Implications of the General Election result for employment law

With the Conservative Party having won a majority in the General Election 2019, this has the following implications for employment law reform:

Manifesto commitments

The Conservative Party’s manifesto promised various measures, including:

  • Creating a new single enforcement body and “cracking down” on any employer abusing employment law
  • Ensuring that workers have the right to request a more predictable contract (this was already promised in the Good Work Plan) and “other reasonable protections” 
  • Increasing the national living wage (NLW) to two-thirds of average earnings (currently forecast at £10.50 an hour) and widening its reach to workers over the age of 21 from April 2024
  • Encouraging flexible working and consulting on making it the default position unless employers have good reasons not to allow it
  • Legislating to allow parents to take extended leave for neonatal care
  • Looking at ways to make it easier for fathers to take paternity leave
  • Extending the entitlement to leave for unpaid carers to one week
  • Introducing a “firmer and fairer” Australian-style points-based immigration system.

Changes already potentially in the pipeline

  • IR35 – important changes to IR35 for medium and large private sector end users are due to take effect from 6 April 2020. However, during the course of the election campaign, the Conservative Party stated that it would review these proposed changes ahead of their planned introduction
  • A number of consultations closed during 2019 and now await either a government response or possible implementing legislation. These include consultations on: reforming family-related leave and pay; measures to address one-sided flexibility, including a new right for workers to reasonable notice of their working hours, with compensation for short or no notice shift cancellation; requiring employers with 250 or more employees to publish their family-related leave and pay and flexible working policies on their website; reforming statutory sick pay (SSP); introducing a new right for non-disabled employees to request workplace modifications on health grounds; introducing mandatory ethnicity pay reporting; and strengthening sexual harassment and equality protection

The government has also already committed to implementing the following changes to legislation when Parliamentary time allows:

  • Extending the redundancy protection period during which an employee on maternity leave must be offered suitable alternative employment in priority to other potentially redundant employees, to cover the period from when she informs her employer that she is pregnant until six months after her return to work from maternity leave
  • Prohibiting non-disclosure agreements (NDAs) being used to prevent disclosures being made to the police or to regulated health, care or legal professionals, ensuring the limitations of NDAs are clearly set out in employment contracts and settlement agreements, and extending the requirement for independent legal advice on settlement agreements to include the limitations of any NDAs.

Giving away a home before death

The majority of gifts made during a person's life, including gifting away a home, are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'. These gifts or transfers achieve their potential of becoming exempt from Inheritance Tax if the taxpayer survives for more than seven years after making the gift. There is a tapered relief available if the donor dies between three and seven years after the gift is made.

HMRC’s guidance suggests that if the person gifting the home wants to continue living in the property after giving it away, they need to:

  • pay rent to the new owner at the going rate (for similar local rental properties)
  • pay their share of the bills
  • live there for at least 7 years

However, the rules are different if the person making the gift retains some 'enjoyment' of the gift made. This could apply if a person gave their house away to their children but continued to live in the home rent-free. Under these circumstances, the taxman would contend that the gift falls under the heading of a gift with reservation of benefit and the 'gift' would remain subject to Inheritance Tax even if the taxpayer dies more than 7 years after the transfer.

Overview of foreign income taxation

Income Tax is generally payable on taxable income received by individuals including earnings from employment, earnings from self-employment, pensions income, interest on most savings, dividend income, rental income and trust income. The tax rules for foreign income can be very complex.

However, as a general rule if you are resident in the UK you need to pay UK Income Tax on your foreign income, such as:

  • wages if you work abroad
  • foreign investments and savings interest
  • rental income on overseas property
  • income from pensions held overseas

Foreign income is defined as any income from outside England, Scotland, Wales and Northern Ireland. The Channel Islands and the Isle of Man are classed as foreign.

If you are non-UK resident, you do not usually have to pay UK tax on your foreign income. There are special rules if you work both in the UK and abroad. The rules become even more complicated when looking at the liability to UK Income Tax for non-domiciles spending a substantial amount of time in the UK.