Basis periods if accounting date is changed

The assessment of self-employed or partnerships profits is usually relatively straight-forward if the accounting date, to which annual 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 3 years of the business or in any year in which there is a change of basis period (due to a change of accounting date).

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

If your accounting date in 2018 to 2019 is more than 12 months after the end of the basis period for 2017 to 2018, your basis period is the period between the end of the basis period for 2017 to 2018 and the new accounting date.

For example, your basis period for 2017 to 2018 ended on 31 May 2017 and the new accounting date is 31 August 2018 – your basis period is the 15-month period 1 June 2017 to 31 August 2018.

If your accounting date in 2018 to 2019 is less than 12 months after the end of the basis period for 2017 to 2018, your basis period is the 12 months ending on the new accounting date.

For example, your basis period for 2017 to 2018 ended on 31 December 2017 and the new accounting date is 31 July 2018 – your basis period is the 12-month period 1 August 2017 to 31 July 2018.

When the cash basis scheme may not be suitable

The cash basis scheme helps many sole traders and other unincorporated businesses who benefit from a simpler way of managing their financial affairs. The scheme is not open to limited companies and limited liability partnerships. The scheme allows qualifying businesses to use the cash basis when recording income and expenditure. However, some small businesses are more suited to using the cash basis than others.

If a business falls within any of the following categories, the cash basis may not be the best option:

  • want to claim interest or bank charges of more than £500 as an expense
  • run a business that is more complex, e.g. have high levels of stock
  • need to obtain finance for the business – a bank could ask to see accounts drawn up using traditional accounting to see what the business owes and is due before agreeing a loan
  • have losses that the owner wants to offset against other taxable income (sideways loss relief)

In a nutshell, the scheme is most suitable for straight forward businesses especially those that provide services. Businesses must have a turnover of £150,000 or less to join the scheme and can continue using the scheme until the business turnover reaches £300,000.

Self-employed – setting off losses

There are a number of tax reliefs available for self-employed taxpayers that make a loss carrying on their trade, profession or vocation (collectively referred to as a ‘trade’) and for their share of trading losses in any partnerships.

For the 2019-20 tax year, trade losses can be relieved in a number of ways. This includes the following:

  • By using the loss to reduce income for the year ended 5 April 2019 and / or 5 April 2018. If there are still further trade losses remaining (after your income has been reduced to nil) then you may be able to set-off all or part of the remaining loss against chargeable gains.
  • A claim can also be made for losses made in the first 4 years of trade known as early trade losses relief. Taxpayers need to look at the earliest year first (i.e. 2015-16) and use any remaining loss in 2016-17 and then in 2017-18. This relief is not available if you started your trade before 6 April 2015. The time limit for making claims for 2018 to 2019 losses is 31 January 2021.
  • Taxpayers can also carry forward any loss against future profits of the same trade or income from the company (where you transfer your trade to a company in exchange for shares in that company), or post cessation receipts.
  • Terminal loss relief is available for businesses that suffer a loss in the last 12 months of trade of a business.  Terminal loss relief allows for the carry back of any trading losses that occur in the final 12 months of trading to be set off against profits made during the businesses final tax year or any or all of the previous three tax years.

There is an overall cap on certain Income Tax reliefs. The cap is set at 25% of income or £50,000, whichever is the greater.

Property and Trading Income Allowance

Two separate £1,000 tax allowances for property and trading income were introduced in April 2017. If you have both types of income highlighted below then you can get a £1,000 allowance for each.

The £1,000 exemptions from tax apply to:

  • If you make up to £1,000 from self-employment, casual services or hiring personal equipment. This is known as the trading allowance.
  • The first £1,000 of miscellaneous income for income from property. For example, from renting a driveway. This is known as the property allowance. The allowance is not available on income from letting your own home where a separate relief may be available using the Rent a Room Scheme.

Where each respective allowance covers all the individual’s relevant income (before expenses) the income is tax-free and does not have to be declared. Taxpayers with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. There are restrictions if the income or rents are generated by dealings with companies or partnerships of which the recipient is a participator or partner.

If you are considering if you can claim these allowances, please let us know and we can investigate for you.

Rules on waiving income or donating to charities

HMRC has published a new press release that provides some advice for people choosing to give up their income to support their business or donate to charity during the Coronavirus (COVID-19) pandemic.

Employers, directors and employees have several options to support a business or employer, including:

  • Waiving their salary or bonuses before they are paid. A ‘waiver of remuneration’ happens when an employee gives up rights to remuneration and gets nothing in return. If an employee and employer agree to a reduction in the employee’s remuneration before they are paid, for example to support company cashflow during the pandemic, then no Income Tax or National Insurance contributions (NICs) will be due on the amount given up.
  • Waiving the right to any dividends. This can be actioned by directors or other shareholders, including employees. a Deed of Waiver must be formally executed, dated and signed by shareholders and witnessed and returned to the company. The waiver must be in place before the right to receive a dividend arises.
  • Giving salary or dividends back to their employer after they have been paid. It is not possible to claim back the Income Tax and NICs that would already have been deducted from the salary or bonuses on payment.

There are also options to donate to charities. The Payroll Giving scheme allows employees to make a tax free donation to charity directly from their pay if their employer runs a payroll giving scheme which has been approved by HMRC.

Gift Aid Donations allow charities and community amateur sports to claim 25p worth of tax relief on every pound donated. Higher rate or additional rate taxpayer can claim additional tax relief on the difference between the basic rate and their highest rate of tax.

Claiming tax relief on work-related expenses

Employees who need to buy substantial equipment to use as part of their employment may be able to claim tax relief based on the initial cost. In most cases you can claim tax relief on the full cost of this type of equipment as it usually qualifies for a type of capital allowance called annual investment allowance. Any tax relief would be reduced if the employer provides a contribution towards buying the item.

The way to claim tax relief depends on the amount that is being claimed. HMRC provides the following information on making a claim:

Claims up to £2,500

You should make your claim:

  • using a Self-Assessment tax return if you already fill one in
  • online or by printing and posting form P87 if you don’t already fill in a tax return
  • by phone if you’ve had a successful claim in a previous year and your expenses are less than £1,000 (or £2,500 for professional fees and subscriptions)

Claims over £2,500

  • You can only claim using a Self-Assessment tax return. You need to register if you don’t already fill one in.

There are different rules for employees who use their own uniforms, work clothing and tools for work. It is possible to claim for the cost of repairing or replacing small tools you need to do your job as an employee (for example, scissors or an electric drill), or cleaning, repairing or replacing specialist clothing (for example, a uniform or safety boots). A claim for valid purchases can be made against receipts or as a 'flat rate deduction'. However, an employee cannot make claim relief on the initial cost of buying small tools or clothing for work.

Lost your job? What to do…

If you lost your job after 28 February 2020, your previous employer could have agreed to re-hire you and then place you on furlough. However, there is no compulsion on the part of your ex-employer to do this and many firms have been reluctant to make such a move.

You may also have been disadvantaged if you lost your job before the 28 February 2020 deadline or started a new job or were not on the PAYE payroll of a new employer on or before 19 March 2020.

The jobs market is obviously limited at the moment with large numbers of people looking for work. However, there are still opportunities in industries that have extra work available due to Coronavirus.

If you have lost your job, you may be able to access Universal Credit. You can also ask for an advance payment if you do not have enough money to live on whilst waiting for benefit payments.

Guidance from the Department for Work and Pensions says that you might also be able to:

  • apply for 'new style' Employment and Support Allowance, if you have a disability or health condition that affects how much you can work
  • apply online for 'new style' Jobseeker’s Allowance

You do not need to go into a Jobcentre Plus office to apply or get a payment.

Student and postgraduate loans

If you had a student loan and have finished your studies and entered the workforce you must begin to make loan repayments from the April after you have finished your studies or when your income begins to exceed the annual threshold. The annual threshold amounts increased to £19,390 for plan 1 and to £26,575 for plan 2 from 6 April 2020.

The terms of loan repayment for courses of study started before 01 September 2012 are referred to as 'Plan 1', and those started after 01 September 2012, are referred to as 'Plan 2'. Repayments are deducted at a rate of 9% of income over the threshold. The threshold for postgraduate loans is £21,000 (2020-21) and repayments are deducted at a rate of 6%

The loans are also subject to varying levels of interest. The interest rates for Plan 2 repayments are based on the Retail Prices Index plus a variable rate dependent on income. The interest rates for Plan 1 repayments are significantly lower than for Plan 2 repayments.

Student Loans are part of the government’s financial support package for students in higher education in the UK. They are available to help students meet their expenses while they are studying. It is HMRC’s responsibility to collect repayments if you are working in the UK. The Student Loans Company (SLC) is responsible for collecting the loans of borrowers outside the UK tax system.

Tax overpaid on savings

The R40 form Claim for repayment of tax deducted from savings and investments is available on the GOV.UK website. Individuals who have paid too much tax on interest can use the R40 form to claim back any overpaid tax. The form and associated guidance have been updated for the 2020-21 tax year.

Claims can be backdated for up to four years after the end of the tax year. This means that claims can still be made for overpaid interest dating back to the 2016-17 tax year ending 5 April 2017. The deadline for making claims for the 2016-17 tax year is 5 April 2021.

The personal savings allowance provides for an exemption of up to £1,000 of a basic rate taxpayer’s savings income, and up to £500 of a higher rate taxpayer’s savings income. The PSA is not available to additional rate (45%) income taxpayers i.e. those earning over £150,000.

Banks and building societies no longer deduct 20% tax on savings interest. However, form R40 can still be used to claim back tax overpaid on savings.

Let property disclosure campaign

The Let Property Campaign provides landlords who have undeclared income from residential property lettings in the UK or abroad with an opportunity to regularise their affairs by disclosing any outstanding liabilities whether due to misunderstanding the tax rules or because of deliberate tax evasion.

The campaign was launched in September 2013 and does not currently have an end date. Landlords who do not avail of the opportunity and are targeted by HMRC, can face penalties of up to 100% of the tax due together with possible criminal prosecution. HMRC’s guidance on the scope of the campaign has been updated. The campaign is an opportunity open to all residential property landlords with undisclosed taxes. The campaign is not suitable for those letting out non-residential properties.

Taxpayers that come forward will benefit from better terms and lower penalties for making a disclosure. Landlords that make an accurate voluntary disclosure are likely to face a maximum penalty of 0%, 10% or 20% depending on the circumstance in addition to the tax and interest due. There are higher penalties for offshore liabilities.

There are three main stages to taking part in the campaign, notifying HMRC that you wish to take part, preparing an actual disclosure and making a formal offer together with payment. The campaign is open to all individual landlords renting out residential property. This includes landlords with multiple properties and single rentals as well as specialist landlords with student or workforce rentals. HMRC’s guidance has recently been updated to reflect the start of the new tax year.