As long as HMRC can be satisfied that a business is being run on a commercial basis with a view to making a profit, they will usually allow taxpayers to claim tax relief for a trading loss in one tax year against other taxable income (for example PAYE income or a pension) from the same year, or the preceding year. This can be quite beneficial as the claimant can choose which year to claim the losses against. However, HMRC will usually restrict loss relief claimed by individuals who carry on a trade but spend an average of less than ten hours a week on commercial activities.
The provisions for tax relief on business losses can be particularly useful in the early years of trading. Broadly, this is because a loss incurred in any of the first four tax years of a new business may be carried back against total income of the three previous tax years, starting with the earliest year. Therefore, if tax has been paid in any of the previous three years, the taxpayer should be entitled to a repayment of tax, which may be especially welcome in those often difficult first few years of running a business.
The rules for this carry back stipulate that the maximum amount of the loss must be offset each year – it is not permissible to offset just a proportion of the loss in order to spread the loss across three years to take advantage of beneficial tax rates. Again, relief will not be available unless the taxpayer was trading on a commercial basis with a view to making a profit within a reasonable timescale. In practice, this requirement may be difficult to prove in the case of a new business and the taxpayer may need a viable business plan to support a claim.
Cap on relief
A cap now restricts certain previously unlimited income tax reliefs that may be deducted from income. Trade loss relief against general income, and early trade losses relief, as outlined above, are two areas where this restriction might apply. The cap is set at £50,000 or 25% of income, whichever is greater. ‘Income’ for the purposes of the cap is calculated as ‘total income liable to income tax’. This figure is then adjusted to include charitable donations made via payroll giving and to exclude pension contributions – the adjustment is designed to create a level playing field between those whose deductions are made before they pay income tax, and those whose deductions are made after tax. The result, known as ‘adjusted total income’, will be the measure of income for the purpose of the cap.
The cap applies to the year of the claim and any earlier or later years in which the relief claimed is allocated against total income. The limit does not apply to relief that is offset against profits from the same trade or property business.
No need to lose out
Where a loss is made in a tax year, but the trader does not have any other income against which it can be set, the loss can be carried forward indefinitely and used to reduce the first available profits of the same business in subsequent years.
Finally, losses arising from a business may be set off against any chargeable capital gains. Relief may be claimed for the tax year of the loss and/or the previous tax year. However, the trading loss first has to be used against any other income the taxpayer may have for the year of the claim (for example, against earnings from employment) in priority to any capital gains.
Employees with a company car are taxed – often quite heavily – for the privilege. The charge is on the benefit which the employee derives from being able to use their company car for private journeys.
The amount charged to tax is a percentage of the ‘list price’ of the car – known as the ‘appropriate percentage’. The percentage depends on the level of the car’s CO2 emissions. A supplement applies to diesel cars. For 2019/20, as for 2018/19, the supplement is set at 4%. However, the application of the diesel supplement cannot take the percentage of the price charged to tax above the maximum charge of 37%. Consequently, the diesel supplement has no practical effect where emissions are 170g/km or above as the maximum charge already applies.
The nature of the diesel supplement was reformed from 6 April 2018. From that date it applies to cars propelled solely by diesel (not hybrids) which do not meet the Real Driving Emissions 2 (RDE2) standard. The supplement is levied both on diesel cars which are registered on or after 1 January 1998 which do not have a registered Nitrogen Oxide (NOx) emissions value, and also on diesel cars registered on or after that date which have a NOx level that exceeds that permitted by the RDE2 standard.
Checking whether the supplement applies
So, how can employers tell whether the diesel supplement applies?
Diesel cars which meet the level of NOx emissions permitted by Euro standard 6d meet the RDE2 standard. Consequently, they are exempt from the entire diesel supplement. For cars that are manufactured after September 2018, employers can use the Vehicle Enquiry Service (see https://vehicleenquiry.service.gov.uk/) to identify whether a particular car meets the Euro 6d standard – the employer simply needs to enter the registration number of the car into the tool to find information on the vehicle, including its Euro status. Cars that are shown as meeting Euro status 6AJ, 6AL, 6AM, 6AN, 6AO, 6AP, 6AQ or 6AR meet Euro standard 6d and are therefore exempt from the diesel supplement. Where the car was registered on or after 1 September 2018, this information is also shown on the vehicle registration document, V5C.
From 6 April 2019 onwards, employers should use fuel type F (rather than A as previously) when reporting the allocation of a diesel car meeting the Euro 6d standard to HMRC on Form P46(Car) or when payrolling the benefit.
Cars that do not meet the Euro 6d standard are subject to the diesel supplement. HMRC advise that very few, if any, diesel cars were exempt from the diesel supplement in 2018/19.
Alan is allocated a company car registered in 2015. The car has CO2 emissions of 120g/km. It does not meet the Euro 6d standard. The diesel supplement applies and the appropriate percentage is increased by 4% from 28% (the percentage applying for 2019/20 to petrol cars with CO2 emissions of 120g/km) to 32%.
Louise is allocated a new diesel company car on 6 April 2019. The V5C shows that the car has CO2 emissions of 120g/km and that it meets Euro Status 6d. The diesel supplement does not apply and the tax charge for 2019/20 is based on the appropriate percentage of 28% for cars with CO2 emissions of 120g/km.
The deadline for filing the 2017/18 self-assessment tax return of 31 January 2019 has now passed. You filed your return on time and paid the tax that you thought was due, but you know realise that you have made a mistake. Is it too late to correct it, and if not, how do you go about it?
A tax return can be amended once it is filed – but you only have 12 months from the filing deadline in which to file an amended return. This means that you have until 31 January 2020 to file an amended 2016/17 return where it was filed online. However, if you have found a mistake in your return for 2017/18 or an earlier year, it is no longer possible to file an amended return. Instead, you will need to write to HMRC telling them about the error and advising them of the correct figures.
Correcting the return
If you are in still in time to file an amended return (for example, you want to amend your 2017/18 tax return), the mechanism for amending the return depends on whether you filed online or whether you filed a paper return.
If you filed your return online, you can amend your return online too. To do this, you need to log into your HMRC online account and select the self-assessment from the home ‘at a glance’ page. Under the heading of ‘returns’ it will tell you that you have completed your self-assessment return for the 2017/18 tax year, and provide a number of options, including an option to ‘Amend Self-Assessment return for year 2017 to 2018’. Selecting this option, provides a number of options for amending the already-submitted return, asking the taxpayer if they would like to:
add a new section to your submitted return;
amend figures already submitted;
delete a section from your submitted return;
add/delete a section and/or amend a figure; or
return to tax return options.
From there it is simply a case of selecting the appropriate option, amending the return to show the correct figures and filing the amended return.
If the return was filed using a commercial software package, check whether is facilitates the filing of amended returns. If this is not possible, contact HMRC.
Where a paper return has been filed, the 12-month amendment window runs to 31 October after the filing deadline (as an earlier deadline applies to paper returns). To amend a paper return, download a new return, complete it correctly, and send it to HMRC.
Pay more tax or claim a refund
Amending your tax return will also change the amount of tax you owe. If it is more, you will need to pay this, plus interest (which runs from the due date of 31 January after the end of the tax year). If your tax bill goes down as a result of the amendment, you can claim a refund – but remember you only have four years from the end of the tax year to which it relates in which to do so.
Under the self-assessment system, a taxpayer is required to make payments on account – advance payments towards the eventual tax and National Insurance liability – where the previous year’s self-assessment bill was £1,000 or more, unless more than 80% of the tax liability is deducted at source, for example, under PAYE.
The self-assessment return for the 2017/18 tax year was due by 31 January 2019. It is the tax liability for 2017/18 which determines whether payments on account are due for 2018/19, and where they are, the amount of those payments.
Each payment on account is 50% of the previous year’s self-assessment tax and, for the self-employed, Class 4 National Insurance liability. Class 2 National Insurance, while payable under the self-assessment system, is not taken into account in working out the payments on account.
Where they are due, payments on account must be made by 31 January in the tax year and 31 July after the end of the tax year. Any final adjustment is made by 31 January after the tax year once the self-assessment return has been made, with any balance for the year being due by that date. Where the eventual liability is less than the payments made on account, the excess is refunded or set against the following year’s payments on account. However, HMRC may hold back the repayment where tax liabilities will fall due within the next 45 days until those liabilities have been paid.
Reduce your payments on account
If you know that your tax liability for the current year is going to be less than the previous year, you can apply to reduce your payments on account. This may be the case if you have suffered a downturn in trade or lost a major customer. If this is known at the time you file your self-assessment return, you can do this at the outset before you make the first payment on account. Alternatively, it can be done later in the year, for example once the accounting period has come to an end and the profit figure is known.
An application to reduce payments on account can be made online via the personal tax account.
Holly had a self-assessment tax and Class 4 National Insurance liability of £1,800 for 2017/18. Based on this, she is liable to make payments on account of £900 for 2018/19 by 31 January 2019 and 31 July 2019.
Holly prepares accounts to 31 March each year. She prepares her accounts to 31 March 2019 in April 2019, calculating that her tax and Class 4 National Insurance liability for 2018/19 is £1,400. As a result, she applies to reduce each payment on account to £700.
As she has already paid the first payment on account of £900, she claims a refund of £200. She makes the second (reduced) payment on account of £700 by 31 July 2019.
By 31 January 2020, she must pay her Class 2 National Insurance liability for 2018/19, together with the first payment on account of £700 for 2019/20 (being 50% of her 2018/19 liability).
Beware of reducing the payments on account too much as interest will be charged on any shortfall between the payments made and 50% of the actual liability.
Unless rental income is less than £1,000, landlords must declare it to HMRC and pay tax on any profit made by the property rental business.
The profit can be calculated by deducting allowable expenses from rental and other income of the property business. However, where it is beneficial to do so, the landlord can claim the property allowance of £1,000 and deduct this instead of actual expenses. This will work in the landlord’s favour where actual expenses are less than £1,000 (unless there is a loss to preserve).
To calculate profits (or losses) accurately, the landlord must keep records.
For all properties in the property rental business, a record should be kept of:
The dates on which the property was let;
Rental income received;
Any income from services provided to tenants (for example if the landlord undertakes maintenance or repairs and bills the tenants for this); and
Any other income, for example from the sale of domestic goods for which replacement relief is claimed.
The landlord should also keep supporting documentation, such as rent books, invoices and bank statements.
The landlord will also need to keep a record of expenses. Expenses can be claimed to the extent that they relate wholly and exclusively to the letting out of the property. Examples of expenses which typically may be incurred by a landlord include:
Wages of staff
Repairs and maintenance
Replacing domestic items
The landlord should keep a record of all expenses incurred, and also supporting documentation, such as invoices, agents’ statements, bank statements, receipts, etc.
Where the property allowance is claimed instead, the landlord does not need to keep records of actual expenses. However, it is useful to do so in order to check whether claiming the allowance is beneficial, and also from a business perspective.
Method of keeping records
At the moment, the landlord can keep their records in the way that best suits them. They may prefer to use a software package designed for this purpose, a general accounting package or spreadsheets. Alternatively, they may prefer to keep manual records. What matters at this point is that adequate records are kept and will stand up to HMRC scrutiny if need be.
Looking ahead to Making Tax Digital
When Making Tax Digital for income tax purposes is rolled out to landlords, they will need to keep digital records and upload information up to HMRC quarterly via a digital account. The start date has yet to be announced, but at the time of the 2019 Spring Statement the Chancellor confirmed that it would not be introduced from 2020.