Q. I've just been told I'm being made redundant by my employer, but they have agreed to a significant settlement agreement. My employment will continue for three months and after that they've agreed to pay one month of salary (still on the payroll in that time) and then the equivalent of four months of my salary (tax free), which equates to £32,450. How much in the way of tax will I be hit with?
A: There are a few things to think about here when working out any tax liability in the circumstances of a redundancy payment. Firstly, you'll remain on payroll and work for three months, from what you've said. So, you will carry on paying tax and National Insurance in the usual way on those three months of salary payments. Nothing changes there. That's also the case for the one month of salary at the end of your termination that you mentioned. You'll also pay tax and National Insurance on any holiday pay and bonuses.
You haven't mentioned entering into a restrictive covenant (meaning you can't work for a competitor or have contact with customers for a period of time after you leave). However, if that did apply in your case, tax and NI would also apply to payments you receive for agreeing to enter a restrictive covenant. If you get any payments in lieu of working your notice period, those will also be subject to tax and NI.
Moving on to the 'severance' payment or lump sum (£32,450) that you say your employer has agreed to pay. The good news is that most of this covered by a tax-free amount of £30,000. That figure includes statutory redundancy, additional severance or enhanced redundancy (the bit which is most applicable to you) and other non-cash benefits (for example, a company car) you keep after leaving. So, in your case, only £2,450 will be applicable for taxation.
Q. A business colleague has recently recommended I look into how I set off my trade loss against my general income. This is not something I was aware of previously. I've been trading for six years. I made a loss of £20,000 in the year ending 30/9/22 (my accounts are made up to end of September each year). My total income for 2022-23 was £30k but just £10k in the previous year.
A: You will have options to look at under the Income Tax Act 2007 (ITA 2007). The alternatives, under 64 of the act, allow for the loss of £20k to be relieved. Alternatively, you could choose to set £10k against 2021-22 and £10k against 2022-23.
You could choose to set all your losses of £20k against your whole income for 2022-23. To decide on the best option, let's compare the general income in the year of the loss and preceding year.
Your £10k income for 2021-22 is already covered by the £12,570 tax-free personal allowance. But the general income you had of £30k for the next year is above that same allowance.
So, on that basis you are unlikely to benefit by carrying the £20k loss back to 21-22 - as your income fell below the personal allowance and you had no tax liability for that year. But you could benefit by using the loss against your income for 2022-23 - i.e. against the £30k. You would inevitably lose some of your personal allowance but would have any tax deducted that year either refunded or set off.
We should clarify here also that when we talk about 'general income', that means the whole income for all sources of income chargeable to income tax for the tax year. And it's also important to state there must be no partial claims - any claim must be for the full amount of the loss made.
Q. I'm a resident in England but I'm buying a house in Scotland and will be splitting my time between the two - both in terms of work (where we have a new office opening in Glasgow) and for family time. What are the tax implications, and will I become classified as a Scottish taxpayer?
A: For both Wales and Scotland, there are devolved powers regarding income tax, and this can be a tricky area. In your case, it's not clear exactly how you will divide your time and it sounds like you are not totally sure yourself yet - and things may change during the following tax year, too. However, there are a number of tests to apply here that will help you to understand if you will be counted as a Scottish taxpayer.
HMRC points out that a key test to apply is whether you have a 'close connection' to Scotland. That would mean either you have a single place of residence - and that is located in Scotland.
If, as in your case, someone has more than one place of residence, the 'main place' would be in Scotland “for at least as much of the tax year as it has been in each other part of the UK.”
If the tests above can't determine the answer, then something called 'day counting' applies. It seems that you won't yet know how many days you're going to be in Scotland compared to those in England. However, to illustrate this as clearly as we can, let's look at an example used by ICAS, a global professional membership organisation and business network for Chartered Accountants. They point out that if Mr Smith spends 120 days in Scotland, and 90 days travelling in England, 55 days in Northern Ireland and 100 days travelling in Wales, he is still a Scottish taxpayer, even though he has spent more time outside of Scotland than in it.
The important thing for you to note is that you may need to keep a close, accurate record of where you spend your time day-to-day.
The last thing to mention is that if you are classified as a Scottish taxpayer, that status applies for a whole tax year; you can't be a Scottish taxpayer for part of a tax year.
Q. The turnover of my business has been no higher than £75,000 over a 12-month period since we started but has now crept up to £92,000. It reached this point on 5 December 2023. What do I need to do about VAT registration?
A:
Once your total VAT taxable turnover for the last 12 months goes above the threshold (£85,000), you must register for VAT with HMRC. Although you can voluntarily register for VAT if you're below this amount, it doesn't sound as if your business has taken that approach previously.
But now your turnover is at £92,000, you need to register with HMRC within 30 days of the end of the month that you went over the threshold. According to HMRC: "Your effective date of registration is the first day of the second month after you go over the threshold."
So, in your case, it means you will need to have registered by 31 January 2024 and your effective registration date will be 1 February 2024.
For any business which realises it's going to go over the £85,000 mark in the next 30 days, you have to register by the end of that period. So, in that example, say your company (previously not VAT-registered) brings in a new £150,000 deal on 1 January, with payment coming to you within that same month. You would have to register by 30 January.
Lastly, just to clarify what HMRC defines as turnover. It says this is "the total value of everything you sell that is not exempt from VAT."
Q. I have recently started a carpet fitting business but I'm not sure what the rules on the Construction Industry Scheme (CIS) mean for me? I'm the only employee at the moment. Do I have to register?
A:
It is mandatory for constructors to register for the CIS. However, there are a number of exceptions. You will not need to register if you only do certain jobs. And, usefully for you in your case, carpet fitting is one example.
Carpet fitting would come under the category of "finishing " under the scheme. That is work which 'renders complete' or 'finishes off' any construction operations, according to the Government's website. But HMRC says of carpet fitting that it is "the only ".
Statement of Practice 12 (1981) "provides that carpet fitting (but no other floor covering) is regarded as excluded from the scheme. However, if carpet fitting is part of a mixed contract, then all the contract comes within the scheme."
Other examples of exceptions in the CIS where you do not have to register if you only do certain jobs include:
- architecture and surveying
- scaffolding hire (with no labour)
- making materials used in construction including plant and machinery
- delivering materials
- work on construction sites that's clearly not construction - for example, running a canteen
Q. I'm considering starting a scheme for my employees where they can hire a bicycle as an extra staff benefit. Will this be exempt from tax on employment income?
A: Yes, this new scheme you're thinking of offering would be exempt if certain conditions are met. These are:
- All staff are offered the chance to hire the bikes
- Employees must use the bike primarily for what HMRC describes as 'qualifying journeys'
It's not just the hire of the bikes that counts within these rules; equipment is also allowed. As is providing a voucher for either hiring a bicycle or related equipment. Electrically assisted pedal cycles (EAPCs) are also covered by the exemption.
Q. In June 2023, you said that it wasn't free of tax if the employer reimbursed an employee when recharging their electric car from home - but it is if we allow them to recharge at the workplace. We have a workplace EV charger and reimburse the employees who use their own at home. Have HMRC thought again on why the tax treatment differs?
A: Thankfully, HMRC have recognised (at last) they need to bring their guidance into line and make both charging at the workplace and at home free of tax. They have updated their Employment Income Manual (page 23900) to say this and there is a nice flowchart which confirms there is no tax due where an employer reimburses the employee for the cost of electricity to charge their company car at home. The same applies with National Insurance. Do make sure you keep records to demonstrate to HMRC you have only reimbursed for the charging of a company electric vehicle.
Q. We are a new company and looking to use the VAT Flat Rate Scheme from December 2023. Is this better than the 'normal' VAT for record keeping and VAT returns?
A: The Flat Rate Scheme is a simpler method of working out your VAT because you will be calculating a net tax amount without reference to output tax and input tax. In that regard, the Scheme is simpler for you.
But there are eligibility conditions and you need to apply to HMRC to use the Scheme and you can't operate it until after you have approval. It is not right for all businesses and we recommend speaking to you accountant, especially if you are in your first year as the flat rate percentage can be reduced by 1%.
Q. The Chancellor announced that the National Living Wage would rise to £11 per hour in 2024. Do we know all the other rates yet so we can plan?
A: Jeremy Hunt made the announcement at the Conservative Party Conference in October 2023 that the National Living Wage would increase to ' at least £11 an hour ' from April 2024. This is not the exact value and you should not take any action. The rates are advised to the Government by the Low Pay Commission which the Government comments on at the Autumn Statement (in November 2023).
We don't have the full story yet I'm afraid but will bring it to you when we know.
Q. We have a new employee who did not present a P45 and did not complete the Starter Checklist. Which FPS starter declaration and tax code should we use?
A: HMRC’s guidance in the PAYE Manual says that the starter declaration must be C and the tax code to use is 0T on a week 1 / month 1 basis. Starter declaration C, essentially, sets the employee up on HMRC’s systems with a secondary record, simply because HMRC do not know whether this is a primary employment or a second employment. Tax code 0T W1 / M1 means that the employee is not entitled to any personal allowances.
Use HMRC’s ‘ Work out your new employee's tax code ’ tool for confirmation. Failure to return the starter checklist is an all-too-common event and the employer should do everything they possibly can to get the checklist completed prior to the employee’s first payday.
Q. A client did not tell us that they were eligible for the Employment Allowance in tax year 2023/24 (despite us asking for confirmation!). After the July payrun, they did tell us. Can we indicate to HMRC that they are eligible even though the tax year is well underway?
A: Yes! Employers can claim the Employment Allowance going back 4 tax years, though only 1 through the payroll. Simply, in the next payrun, tick the Employment Allowance claim indicator in your software for the next submission of the Employer Payment Summary (EPS) and HMRC will apply the Allowance for the whole of the current tax year. The employer, though, will only notice that you have done this when they look at the National Insurance liability in the next payrun.
Do check the eligibility criteria on Gov.UK. Not all employers are eligible (and you will need to indicate their business sector on the EPS as well).
Q. We have an employee who is taking unpaid parental leave in September for 2 weeks. This is so that he can be with the child as they settle into their new school. The employee has told us that he took unpaid parental leave at his previous employment. Do we need to take this into account?
A: Unpaid parental leave is one of those employment rights that does impact payroll, as it means we must adjust their earnings for the pay period. Therefore, this is a relevant question and you are right to query this, as not all employers know the eligibility criteria. The employee is entitled to 18 weeks for each child up to the age of 18, taken in weekly blocks capped at 4 weeks per year. Yet, the entitlement is per child , not per employment.
So, yes, you do need to consider the unpaid parental leave taken at a previous employment to ensure the employee does not exceed their statutory entitlement (the 18 weeks per child up to their 18th birthday).
Q. I quit my job in July 2022 and became self-employed from September 2022. I started to pay class 2 NIC for my self-employed trade with effect from 1 September. Will the 2022/23 count as a qualifying year towards my state pension?
A: Probably not as you will not have paid NIC for every week of the year. But you need to check your NIC record on your personal tax account ( www.gov.uk/personal-tax-account ) once you have submitted your tax return for 2022/23. Do this as soon as possible. You will then be able to pay class 2 NIC for any missing weeks, once you know how big the gap is.
Q. I have applied to register my café business for VAT from 1 July, but the VAT number hasn't arrived. What should I show on invoices from that date?
A:
- You should charge your customers the basic price plus 20% VAT from 1 July, but you can't show the VAT amount separately on the invoice. As you are a retail business, and your individual invoices are likely to be £250 or less (including VAT) you are not required to issue full VAT invoices. You should issue simplified VAT invoices, which must include the following:
- Your business name and address
- VAT registration number (say 'VAT number applied for' until you get it)
- date of the sale
- description of the goods or services supplied;
- total amount payable including VAT;
- for each rate of VAT chargeable, the gross amount payable including VAT; and
- the VAT rate applicable.
Q. My building business is winding down as I prepare to retire. I want to close my company, which has gross payment status for the Construction Industry Scheme (CIS) and carry on any further work as an individual sole trader. Will the CIS gross payment status carry over into my sole trader business?
A: When a sole trader builder incorporates their business their CIS gross payment status (if they have that) carries over into the new company. As your company is entirely owned by you, and you are the only director, HMRC will view you as a sole trader and your company, as a continuing business for CIS purposes. So, the CIS gross payment status should carry on into your self-employed trade.
Q. I have just received a bonus payment of £100 from the Nationwide Building Society. Do I need to pay tax on this?
A: This bonus payment from the Nationwide is treated as normal bank interest for tax purposes, so it is taxable. However, in most cases it will be covered by your savings allowance of £1,000 (£500 for higher rate taxpayers). Taxpayers who pay income tax at 45% on savings do not benefit from a savings allowance, so they will have to pay £45 in tax on this bonus.
You will need to include this bonus in your 2023/24 tax return, if you normally complete one.
Q. My company regularly pays expenses on my behalf which I later reimburse the company for, I have a variable outstanding debt with the company during the year. I‘ve read that if the total of that debt exceeds £10,000 at any point the company has to pay NIC at 13.8% on the entire amount. Is that correct?
A: The company has to pay NIC at 13.8% on the value of the deemed interest on the outstanding debt, which is treated as a taxable benefit for you, assuming you don‘t actually pay any interest on that debt.
While the total debt is less than £10,000 for the entire tax year there is no taxable benefit. However, when debt exceeds £10,000 for any part of the tax year the nominal interest needs to be calculated at the official rate (average 2% for 2022/23). This calculation should be based on the average debt across the tax year, or by calculating the precise balance for each day.
If the debt was £9,000 on 6 April 2022 and rose to £12,000 by 5 April 2023, the average debt balance for 2022/23 would be £10,500. The deemed interest for 2022/23 would be: (2% x 10,500) = £210.00. As a 40% taxpayer you would pay tax of £84 on this benefit. The company would pay NIC at 13.8% on £210.00 = £28.98.
Q. An employee has been on maternity leave for several months and as a small company I have reclaimed the statutory maternity pay (SMP), but HMRC hasn‘t repaid this amount in full. Why could this be?
A: The PAYE system is set up to collect tax and other payroll deductions. When an employer is due a refund that sum is first off-set against the PAYE due to be paid over every month or quarter. Rather than pay back the balance of the refund to the employer, HMRC hang on to it to set it against future tax/ NIC liabilities.
If you look in your business tax account under the PAYE section and click on payments made, it should show an unallocated credit, which will be the balance of the SMP owing. You can ask HMRC to pay that sum to you, but that will involve phoning the employer helpline.
Q. The payroll for my business has increased during 2022/23, so the employer's NIC bill topped £100,000 for the first time. Does this mean I can't claim the Employer's Allowance for 2023/24? Is there anything I can net off against the NIC liability to bring it down below the £100,000 threshold?
A: You are correct that you will not be able to claim the Employer's Allowance of £5,000 for 2023/24 as your employer's NIC liability for the previous tax year (2022/23) has equalled or exceeded £100,000. There is no mechanism for setting off any other liability to reduce the total of the Employer's NIC for this calculation. However, you shouldn't include any employer's NIC on "deemed payments" to contractors caught by the off-payroll working rule.
Q. Can I invest £100,000 on behalf of my company in a new savings account designed for individuals, to take advantage of a higher interest rate? I plan to return the capital plus all interest directly to the company's account.
A: You can do this, but you need to be honest with the bank that the company is the ultimate owner of the funds, and you are acting as a nominee for the company for that account. Transfer the money directly from the company's account into the new savings account and do not mix it with any private savings.
The company's board of directors should document what is happening to the funds and approve the transfer. This needs to be made clear that the transfer is not a loan to yourself as an individual. Taking a loan from your company that remains outstanding for more than 9 months after the company's year-end will trigger a Section 455 tax corporation charge, and a beneficial loan charge for you personally.
Q. My father died suddenly so his sole-trader business ceased at that point. I am the executor of his Will and I appointed a solicitor to collect the debts due on his outstanding sales invoices after his death. The business was taxed on a cash basis. How should I account for the sales income and expenses received after the business ceased?
A: As your late father used the cash basis all the business expenditures paid out and sales income received before his death should be reported on his personal tax return drawn up to the date of death.
The cash received for the business after the date of death should be reported by you as executor of the estate on a tax return for the estate. The costs of collecting those sales debts are deductible against that sales income.
