Income Tax

There used to be a form that had to be completed advising HMRC if you were returning to live in the UK from another country. Whilst this form was abolished some time ago, there are still various actions that you may need to take if you are returning to live and work in the UK.

In most cases, if you return to live in the UK you will be classed as resident in the UK and you will be required to pay UK tax on your UK income and gains and any foreign income and gains. Your exact liability to Income Tax will depend on whether you are a resident and / or ordinarily resident and / or domiciled in the UK. For example, you may not be liable to UK tax on foreign income and gains if your domicile remains outside of the UK. The domicile rules are complex, and you must ensure you consider your position if this might apply to you.

When you return to the UK, you will need to register for Self-Assessment if required to do so. For example, if you are self-employed or have income / gains from abroad to report to HMRC. You would not usually be required to register for Self-Assessment if you are returning to the UK to take up a job as an employee and don’t have any other income to report.

If you had moved abroad and returned to the UK after a period of less than 5 years (temporary non-residence), you may have to pay tax on certain income or gains made while you were non-resident. This doesn’t include wages or other employment income. If you were away from the UK for less than a full tax year then you will usually be liable to pay UK tax on any foreign income for the entire time you were away.

The start of the 2019-20 tax year marked a fundamental change to the way Income Tax is calculated for people who live in Wales. The new Welsh rates of Income Tax (WRIT) is payable on the non-savings and non-dividend income of those defined as Welsh taxpayers.

The definition of a Welsh taxpayer is generally decided on the question of where the taxpayer lives. It should be noted that in order to be a Welsh taxpayer, an individual must be a UK resident for tax purposes – an individual who is not UK tax resident cannot be a Welsh taxpayer.

An individual will be a Welsh taxpayer, for a given tax year, if they satisfy any of the following three tests:

1. They are a Welsh parliamentarian
2. They have a 'close connection' to Wales through either:
   (i) Having only a single 'place of residence', which is in Wales; or
   (ii) Where they have more than one 'place of residence', having their 'main place of residence' in Wales for at least as much of the tax year as it has been in each other part of the UK
3. Where no 'close connection' to Wales or any other part of the UK exists (either, because it is not possible to identify any place of residence or a main residence) – through day counting.

For the current tax year, the rates of Income Tax paid by Welsh taxpayers will continue to be the same as those paid by English and Northern Irish taxpayers. This is because the Welsh Government has set the Welsh rates at the same level as in England and Northern Ireland for 2019-20.

The Scottish rate of Income Tax (SRIT) commenced on 6 April 2016 and is administered by HMRC on behalf of the Scottish Government. The SRIT is payable on the non-savings and non-dividend income of those defined as Scottish taxpayers. This means that Scottish taxpayers who also have savings and dividend income, need to consider the UK rates as well as the Scottish rates when calculating their Income Tax bill.

Scottish taxpayer status applies for a whole tax year. It is not possible to be a Scottish taxpayer for part of a tax year. The definition of a Scottish taxpayer is generally focused on the question of whether the taxpayer has a 'close connection' with Scotland or elsewhere in the UK.  The idea of being treated as a Scottish taxpayer is not based on nationalist identity, location of work or the source of a person’s income e.g. receiving a salary from a Scottish business.

For the vast majority of individuals, the question of whether or not they are defined as a Scottish taxpayer is a simple one – they either live in Scotland and are a Scottish taxpayer or live elsewhere in the UK and are not a Scottish taxpayer.

More specifically, an individual will be defined a Scottish taxpayer if they satisfy any of the following tests:

1. They are a Scottish Parliamentarian
2. They have a 'close connection' to Scotland, through either:
   i) having only a single 'place of residence', which is in Scotland; or
   ii) where they have more than one 'place of residence', having their 'main place of residence' in Scotland for at least as much of the tax year as it has been in any one other part of the UK.
3. Where no 'close connection' to Scotland (or any other part of the UK) exists (either through it not being possible to identify any place of residence or a main residence) – then place of residence will be decided by day counting.

There will always be cases where a taxpayer's status is not so clear cut. HMRC’s technical guidance looks at relevant case law and includes examples where a taxpayer has more than one residence either side of the border.

The tax relief on finance costs used to buy investment properties is being gradually restricted to the basic rate of tax. The full finance costs restriction will be in place from 6 April 2020. This means that from next April, all finance costs will be disallowed as expenses and any relief will be restricted to a basic rate tax credit.

Finance costs include interest on:

• mortgages,
• loans – including loans to buy furnishings
• overdrafts as well as alternative finance sources

Costs also include mortgage fees.

The new rules have been gradually phased in since April 2017. If you are a residential property landlord, you are likely to have faced higher tax bills as the relief on finance charges has been restricted. These changes have significantly affected the tax paid by many higher rate and additional rate taxpayers and particularly those with high levels of borrowing.

The amount of tax relief available for finance costs is currently restricted to 25% as an expense and the remainder as a basic rate tax credit. From 2020-21, there will be no additional relief on finance costs for higher rate taxpayers.

The gradual increase in taxable income – as finance costs are disallowed as expenses – could also push landlords’ income into the higher rate Income Tax bands. Also, landlords may lose all or part of their personal allowance if this recalculation of taxable income is greater than £100,000.

The finance cost restrictions apply if you are a UK resident individual that lets residential properties in the UK or overseas, a non-UK resident individual that lets residential properties in the UK, involved with a partnership that lets properties or if you are a trustee or beneficiary of a trust liable for Income Tax on the property profits.

Landlords of furnished holiday lettings are not affected by the restriction on finance costs.

Planning note

Landlords reading this reminder would be advised to rework their property rental business plans as the changes for owners with high levels of borrowing could be prohibitive. Please call if you need our help.

A basis period is the time period for which the self-employed or partnerships pay tax in each tax year. The general rule is that the profits for a tax year are those arising in the period of 12 months ending with the accounting date in that year. The use of basis periods ensure that taxable profits are allocated to the correct accounting period. The general rule will always apply to a continuing trade using the same accounting date each year from Year 3 onwards.

However, different rules apply under the following circumstances:

• For the early years after trading commenced;
• For a year in which there is no accounting date;
• For the year of cessation;
• Where there is a change of accounting date.

These rules ensure that there are no gaps in the periods for which profit is taxed (the basis period for the tax year) but there may be overlaps. The issue of overlap profits can happen in the first 2 or 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. Overlap relief is a mandatory deduction and can be used to reduce the profits on the final tax return when the business ceases trading or if the accounting period subsequently changes.

You must notify HMRC of certain changes to family life. For example, a change in your child’s or your family’s circumstances. This is to ensure that the correct amount of Child Benefit is paid in respect of your children.

You must tell HMRC if your child:

• starts paid work for 24 hours a week or more
• will live away from you for either 8 weeks in a row or more than 56 days in a 16-week period
• will go abroad permanently or for more than 12 weeks
• moves to or from Northern Ireland
• will be in hospital or residential care for more than 12 weeks
• dies
• changes their name
• changes their gender
• goes missing
• gets married, forms a civil partnership or starts to live with a partner
• starts getting certain benefits
• goes to prison for more than 8 weeks

The weekly rates of Child Benefit for the only or eldest child in a family is currently £20.70 and the weekly rate for all other children is £13.70. These rates are fixed until April 2020. If you are currently receiving Child Benefit it is important to be aware that HMRC usually stops paying Child Benefit on the 31 August following your child’s 16th Birthday. However, under qualifying circumstances, the Child Benefit payment can continue until a child reaches their 20th birthday if they stay in approved education or training.

You also need to tell HMRC if your earnings change and you become liable to the High Income Child Benefit charge. The charge applies to higher rate taxpayers whose income exceeds £50,000 in a tax year and who are in receipt of Child Benefit. The charge either reduces or removes the financial benefit of receiving Child Benefit. Where both partners have an income that exceeds £50,000, the charge applies to the partner with the highest income. If your income is above £60,000, the amount of the charge will equal the amount of Child Benefit received.

The 2018-19 tax return deadline for taxpayers who continue to submit paper Self-Assessment returns is 31 October 2019. Late submission of a Self-Assessment return will become liable to a £100 late filing penalty. The penalty usually applies even if there is no liability or if any tax due is paid in full by 31 January 2020.

We would recommend that anyone still submitting paper tax returns consider the benefits of submitting the returns electronically and therefore benefit from an additional three months (until 31 January 2020) in which to submit a return.

Taxpayers with certain underpayments in the 2018-19 tax year can elect to have this amount collected via their tax code (in 2020-21), provided they are in employment or in receipt of a UK-based pension. The coding applies to certain debts and the amount of debt that can be coded out ranges from £3,000 to £17,000 based on a graduated scale. The maximum coding out allowance applies to taxpayers with earnings exceeding £90,000.

Daily penalties of £10 per day will also take effect if the tax return is still outstanding three months after the filing date up to a maximum of £900. If the return remains outstanding, further, higher penalties will be charged from six months and twelve months.

Taxpayers that received a letter informing them that they have to submit a paper return after 30 July 2019, have an extended deadline which runs for three months from the date they received the letter to submit a paper return.

There are simplified arrangements in place for the self-employed (and some partnerships) to claim a fixed rate deduction for certain expenses where there is a mix of business and private use. The simplified expenses regime is not available to limited companies or business partnerships involving a limited company.

The fixed rate deduction can be used instead of working out the actual costs of buying and running your vehicle, e.g. insurance, repairs, servicing, fuel. The use of the simplified flat rates is entirely optional. However, once a decision is made to use the simplification for a specific vehicle, this must continue to be used for a vehicle as long as that vehicle is used for business purposes.

Under simplified expenses, the following flat rates per mile available.

• Cars and goods vehicles first 10,000 miles 45p
• Cars and goods vehicles after 10,000 miles 25p
• Motorcycles 24p

The number of people in the vehicle does not affect the rates above. The rates are only available for journeys, or any identifiable part or proportion of a journey, that are wholly and exclusively for business purposes. For example, travel from home to work is not a qualifying journey.

The self-employed can continue to claim for other costs not covered by the flat rate for mileage such as parking, tolls, and congestion fees as well as other separate travel expenses such as train journeys.

If a taxpayer is self-employed and running a business from home, there are simplified expense rules available for claiming a fixed rate deduction for certain expenses where there is a mix of business and private use. The simplified expenses rules are not available to limited companies or business partnerships involving a limited company.

The use of the flat rate expenses for core business activities carried out from the home eliminates the need to calculate the proportion of personal and business use for certain bills in the home; usually, this applies to various utility bills. Instead, a monthly deduction is allowable. The use of the simplified expenses regime is optional, and businesses can claim the trade proportion of actual costs.

The current monthly rates are based on the business use of the home as follows:

• 25 or more hours worked per month can claim £10.00
• 51 or more hours worked per month can claim £18.00
• 101 or more hours worked per month can claim £26.00

There is no issue if the number of hours worked varies from month to month as different amounts can be claimed for each month. The minimum number of hours worked in any month must be 25 or more. The flat rate doesn’t include telephone or internet expenses and the business proportion of these bills can be claimed by working out the actual costs. In addition, use of the flat rate deduction for household running costs does not prohibit a separate proportional deduction for fixed costs such as council tax, insurance and mortgage interest.

The dividend tax allowance was introduced in April 2016. It replaced the old dividend tax credit with an annual £5,000 dividend allowance with tax payable on dividends received over this amount. The tax-free dividend allowance was reduced to £2,000 with effect from 6 April 2018.

The tax rate for dividends received in excess of the dividend tax allowance are taxed at:

• 7.5% for basic rate taxpayers,
• 32.5% for higher rate taxpayers, and
• 38.1% for additional rate taxpayers.

It should be noted that dividends falling within your Personal Allowance, do not count towards your dividend allowance and you may pay tax at more than one rate.

If you receive up to £10,000 in dividends, you can ask HMRC to change your tax code and the tax due will be taken from your wages or pension or you can enter the dividends on your Self-Assessment tax return. You do not need to notify HMRC if the dividends you receive are within your dividend allowance for the tax year.

If you have received over £10,000 in dividends, you will need to complete a Self-Assessment tax return. If you do not usually send a tax return, you need to register by 5 October following the tax year you had the income.