HMRC notices

The cash basis scheme helps many sole traders and other unincorporated businesses 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.

You must have a turnover of £150,000 or less to join the scheme and you can continue using the scheme until your turnover reaches £300,000. However, some small businesses are more suited to using the case basis than others.

If you are using the cash basis scheme, then capital expenditure is usually treated as an allowable business expense with the following exceptions:

• The acquisition or disposal of a business or part of a business
• Education or training
• The provision, alteration or disposal of certain non-depreciating assets, assets not acquired or created for continuing use in the trade, land, non-qualifying intangible assets and certain financial assets.

In addition, if you buy a car you can claim the purchase as a Capital Allowance (but only if you’re not using simplified expenses to work out your business expenses for that vehicle).

A capital sum received by an individual in respect of the sale or relinquishment of income to be derived from his or her personal activities, can sometimes be treated as earned income and chargeable to Income Tax. If this is the case, the amount charged to Income Tax is not also charged to Capital Gains Tax.

The following conditions must all be present before the sale of income legislation can operate:

1. The individual must be carrying on an occupation wholly or partly in the UK.


2. Transactions or arrangements must have been affected putting some other person in a position to exploit the earnings capacity of that individual.


3. A ‘capital amount’ must have been obtained by the individual or for some other person, as part of, or in connection with, or in consequence of the transactions or arrangements.


4. The main object, or one of the main objects, of the transactions or arrangements must be the avoidance or reduction of liability to Income Tax.
   

The ‘badges of trade’ tests, whilst not conclusive, are used by HMRC to help determine whether an activity is a proper economic / business activity or merely a money-making side line to a hobby. Careful consideration needs to be given when deciding if a hobby has become a taxable activity.

It is clear from the significant amount of case law on this subject that a decision on whether there is a business activity is often not clear. In fact, both HMRC and the courts are of the opinion that it is important to look at the whole picture rather than looking at each ‘badge’ in isolation or even relying too heavily on the badges of trade at all. In some cases, taxpayers will seek to argue that their hobby is actually a trade in order to benefit from certain tax reliefs, usually related to utilising a trading loss.

HMRC will consider the following nine badges of trade as part of their overall investigation as to whether a hobby is actually a trade:

• Profit-seeking motive


• The number of transactions


• The nature of the asset


• Existence of similar trading transactions or interests


• Changes to the asset


• The way the sale was carried out


• The source of finance


• Interval of time between purchase and sale


• Method of acquisition

The introduction of the trading allowance in April 2017 allows taxpayers to make small amounts of money from their hobby. Even if HMRC consider that the activities in question are a trade, taxpayers can make up to £1,000 per year from their hobby tax-free.

According to HMRC’s published guidance there are special rules for the taxation of post-cessation receipts and expenses. These provisions apply to professions, vocations and trades.

Tax relief may be available for post-cessation expenses of a trade, although such expenses still have to satisfy the wholly and exclusively test and be revenue in nature to qualify for relief. In order to be an allowable post-cessation expense, the trade must have ceased, and the expense would, in the normal course of events, have been deductible in calculating trading profits. Post-cessation expenses must be set against post-cessation receipts arising in the same period, before any other method of relief can be considered.

There are a number of different ways in which post-cessation expenses can be relieved. Relief will depend on the person incurring the expenditure and the type of expenditure incurred.

An expense specifically relating to the cessation itself is not an allowable expense.

The Help to Save scheme for people on low incomes was officially launched in September 2018 and since then over 80,000 people have signed up. The scheme allows those in work entitled to Working Tax Credit and in receipt of Working Tax Credits or Child Tax Credits to save up to £50 a month for two years and receive a 50% government bonus.

The scheme is also open to UK residents who are claiming Universal Credit and have a household or individual income of at least £542.88 for their last monthly assessment period. Payments from Universal Credit are not considered to be part of household income.

Payments under the scheme can be made by standing order on a weekly, fortnightly, or monthly basis and one-off payments by debit card are also possible. Account holders will then be able to continue saving under the scheme for a further 2 years and receive another bonus. This could see those on low incomes receive a bonus of up to £1,200 on maximum savings of £2,400 for 4 years from the date the account is opened. After the 4 years the Help to Save account will be closed and savers will not be able to reopen it or open another Help to Save account. The account balances are expected to be rolled over into successor accounts.

There are no limits on how the savings can be spent but it is advised that the money will be saved for urgent costs. Money paid into the account can be withdrawn at any time, but this could affect the size of the bonus payment. HMRC has also launched a new tool in the HMRC app that lets savers set their own savings goals and personal reminders, to keep on track and maximise bonuses using the scheme.

There are special rules in place when a limited company gives to a charity. This can include Corporation Tax relief for qualifying donations made to registered charities or community amateur sports clubs (CASC), as well as Capital Allowances for giving away equipment that has been used by a company.

However, the rules are different if the company is given something in return for making a donation, such as tickets for an event.

Donation amount	Maximum value of benefit that is acceptable
Up to £100	25% of the donation
£101 – £1,000	£25
£1,001 and over	5% of the donation (up to a maximum of £2,500)

These rules apply to benefits given to any person or company connected with your company, including close relatives.

Charity sponsorship payments are different from donations because the company gets something related to the business in return. A company can deduct sponsorship payments from its business profits before it pays tax by treating them as business expenses.

Payments qualify as business expenses if the charity:

• publicly supports the company’s goods or services


• has links from their website to the company’s


• permits them to sell their goods or services at the charity’s events or premises


• allows the company to use their logo in company’s printed material.

HMRC has now written to over 145,000 VAT-registered businesses across the UK with a Brexit update. The letters explain changes to customs, excise and VAT in the event that the UK leaves the EU without a deal, and what businesses can do to prepare. There are a number of different versions of the letters some of which are specific to the circumstances of businesses in Northern Ireland.

If the UK leaves the EU without a deal then UK businesses will be responsible for making customs declarations. HMRC is encouraging businesses that trade with the EU to ensure they register for a UK Economic Operator Registration and Identification (EORI) number. This identification number will be required even if the business appoints a customs agent to assist in making customs declarations.

HMRC is also introducing a new Transitional Simplified Procedures (TSP) for customs, to make importing easier for the initial period after the UK leaves the EU, should there be no deal. The TSP will allow businesses to transport goods from the EU into the UK without having to make a full customs declaration at the border and postpone paying any import duties.

The procedures outlined above do not currently apply to importing or exporting goods between Northern Ireland and Ireland. The government continues to stress that it will do everything possible to avoid a hard border between Northern Ireland and Ireland whatever the circumstances of a ‘no deal’ Brexit.

The Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.

In order for investors to be able to claim EIS tax reliefs, the company which issues the shares has to meet a number of rules regarding the kind of company it is, the amount of money it can raise, how and when that money must be employed for the purposes of the trade, and the trading activities carried on.

The amount of Income Tax relief for individual investors in the EIS is 30%, and the maximum annual amount that an individual can invest through the EIS is £1 million. The generous tax allowances are designed to off-set the fact that making investments in these types of companies can carry a high-risk. 

There is an Income Tax relief restriction that effectively denies EIS relief for connected parties. This measure is in place partly to ensure that the scheme attracts outside investors. The legislation defines associates as including business partners, trustees of any settlement of which the investor is a settlor or beneficiary, and relatives. Relatives are defined as spouses and civil partners, parents and grandparents, children and grandchildren. This means, for example, that parents could not invest in their children’s businesses. 

However, the list of associates does not include ‘family’ members such as brothers and sisters, aunts and uncles, nephews and nieces, unmarried partners and in-laws. This leaves some scope to attract investment from one’s extended family.

The Furnished Holiday Let (FHL) rules, allow holiday lettings of properties that meet certain conditions to be treated as a trade for some specific tax purposes.

In order to qualify as a furnished holiday letting, the following criteria need to be met:

• The property must be let on a commercial basis with a view to the realisation of profits. Second homes or properties that are only let occasionally or to family and friends do not qualify.
• The property must be located in the UK, or in a country within the EEA.
• The property must be available for commercial letting at commercial rates for at least 30 weeks (210 days) per year.
• The property must be let for at least 15 weeks (105 days) per year and home owners should be able to demonstrate the income from these lettings. 
• The property must not be used for more than 155 days for longer term occupation (i.e. a continuous period of more than 31 days).
• Where there are a number of furnished holiday lettings properties in a business, it is possible to average the days of lettings for the purposes of qualifying for the 15 weeks threshold. This is called an averaging election.

There is a special period of grace election which allows homeowners to treat a year as a qualifying year for the purposes of the furnished holiday let rules, where they genuinely intended to meet the occupancy threshold but were unable to do so subject to a number of qualifying conditions.

In any other cases, where the qualifying conditions are not met the normal property income rules apply. Trading losses from a furnished holiday lettings business can only be set off against qualifying future FHL profits.

Planning note

This is a good time to review your actual occupancy in the current tax year and if necessary, look for further bookings before the end of the current tax year. This should be done to ensure that you have met the minimum qualifying requirements and to benefit from the special FHL tax rules. If you need help crunching the numbers, please call.