Income Tax

The cash basis scheme helps sole traders and other unincorporated businesses benefit from a simpler way of managing their financial affairs. The scheme was extended to landlords from April 2017. The scheme is not open to limited companies and limited liability partnerships. The entry threshold for the cash basis scheme is £150,000 and you can stay in the scheme until your business turnover reaches £300,000.

Unlike other taxpayers that need to opt-in to use the scheme, the legislation assumes that landlords will use the cash basis as the default method of calculation. A landlord can still elect to opt out of the scheme, in which case they can continue to use generally accepted accounting practice (GAAP) to calculate their taxable profits. Landlords are also required to continue using GAAP if their rental receipts are in excess of the £300,000 scheme threshold.

The cash basis scheme allows landlords to use the cash basis when recording income and expenditure i.e. recording the flow of money from and to the business based on actual money flows. Traditional accounting uses the accruals basis i.e. income and expenditure is recorded when a bill is received, or a customer is invoiced.

A new press release by HMRC has highlighted that 2,616 taxpayers took the time to file their tax return online on Christmas Day with a further 8,465 taxpayers completing their tax returns on Boxing Day. More than 11 million taxpayers are expected to complete a 2017-18 self assessment tax return this year.

Taxpayers are reminded that the deadline for submitting the 2017-18 self assessment tax returns online is 31 January 2019. Taxpayers should also be aware that payment of any tax due should also be made by this date. This includes both the payment of any balance of self assessment liability for the 2017-18, plus any payment on account due for the current 2018-19 tax year. There are penalties for late filings and late payment.

HMRC’s Director General for Customer Services, Angela MacDonald, said:

‘This year, more than 2,600 taxpayers chose to file their returns on Christmas Day.Whether you fit it in while cooking the Christmas turkey, or after the kids have gone to bed, or after the Queen’s Speech, our online service is available for you to file your tax return at a time that suits you.’

Any taxpayers that are filing online for the first time should ensure that they register to use HMRC’s self assessment online service as soon as possible. Once registered an activation code will be sent by mail. This process can take up to 10 working days.

We would encourage taxpayers to complete their tax return as early as possible to avoid the last-minute stress as the 31 January 2019 filing date looms. Last year, over 750,000 taxpayers didn’t submit their tax returns until the final filing day of 31 January.

The 31 January 2019 is not just the final date for submission of your self assessment tax return but also an important date for payment of tax due. This is the final payment deadline for any remaining tax due for the 2017-18 tax year. In addition, the 31 January 2019 is also the payment date for any Capital Gains Tax due in relation to the 2017-18 tax year and the due date for the first payment on account for 2018-19.

Taxpayers that do not have the necessary available funds to make these payments should be pro-active and contact HMRC as soon as possible. Pretending the problem does not exist will not make the problem go away and can only make matters worse.

Taxpayers will need to contact HMRC to apply to make a payment plan and seek to agree a way forward. This can be done by contacting the Business Payment Support Service (BPSS). The BPSS was first launched back in 2008 and is available to all taxpayers (not just businesses). The purpose of the service is to provide support to those experiencing a wide range of tax problems.

The services offered by the BPSS depend on individual circumstances but can include:

• agreeing instalment arrangements
• suspending any debt collection proceedings
• reviewing penalties for missing statutory deadlines
• reducing any payments on account
• agreeing to defer payments due to short-term cash flow difficulties

The BPSS will review the issues raised and look sympathetically at providing a practical solution. HMRC will usually not charge additional late payment surcharges in relation to specific arrangements made using the BPSS.

For high earning taxpayers, the personal allowance is gradually reduced by £1 for every £2 of adjusted net income that exceeds £100,000 irrespective of age. Adjusted net income is total taxable income before any personal allowances, less certain tax reliefs such as trading losses and certain charitable donations and pension contributions.

This means that for the current tax year, an adjusted net income between £100,000 and £123,700 creates an effective marginal rate of tax of around 60% for tax payers. Taxpayers whose income sits within this band, should consider if planning opportunities are available to them to avoid this personal allowance trap. This can include giving gifts to charity, increasing pension contributions, and participating in certain investment schemes. These strategies also apply to higher rate and additional rate taxpayers looking to reduce their tax bills.

Planning note

For example, a higher rate or additional rate taxpayer who wants to reduce their tax bill for the last tax year, could decide to make a gift to charity in the current tax year and then elect to carry back the contribution to 2017-18. A request to carry back the donation, must be made before or at the same time as the 2017-18 Self-Assessment return is completed. The deadline for filing a paper tax return has now passed, but the online deadline of 31 January 2019 means that for taxpayers who have not yet filed their 2017-18 return, there is still time to act.

In general, there is no Capital Gains Tax (CGT) on a property which has been used as the main family residence. This relief from CGT is commonly known as ‘private residence relief’. However, where all or part of the home has been rented out, the entitlement to relief may be affected. Home owners that let all or part of their house may not benefit from the full private residence relief but can benefit from lettings relief. 

The maximum amount of letting relief due is the lower of:

• £40,000
• the amount of Private Residence Relief due
• the amount of gain you’ve made on the let part of the property

The letting exemption can be a valuable exemption but is only available on a property that has been a taxpayers main residence.

Worked example:

• You used 60% of your house as your home and let out the other 40%.
• You sell the property, making a gain of £60,000.
• You’re entitled to Private Residence Relief of £36,000 on the part used as your home (60% of the £60,000 gain).
• The remaining gain on the part of your home that’s been let is £24,000.

The maximum Letting Relief due is £24,000 as this is the lower of:

• £40,000
• £36,000 (the Private Residence Relief due)
• £24,000 (the gain on the part of the property that’s been let)

There’s no Capital Gains Tax to pay – the gain of £60,000 is covered by the £36,000 Private Residence Relief and the £24,000 Letting Relief. Remember that the letting exemption can be a valuable exemption but is only available on a property that has been a taxpayer’s main residence. It is not available on a ‘buy to let’ or other investment property in which a taxpayer never lived.

There is a £1,000 tax allowances for miscellaneous trading income that has been available to taxpayers since April 2017. This is known as the trading allowance. The income raised from these kinds of ventures is usually supplemental to a taxpayer’s main income, but this is not always the case.

The exemption from tax applies to taxpayers who have trading income of up to £1,000 from:

• self-employment
• casual services, for example, babysitting or gardening
• hiring personal equipment, for example, power tools.

Where this £1,000 allowance covers all the individual’s relevant income (before expenses), the income is tax-free and does not have to be declared to HMRC.

You must tell HMRC if you have:

• gross trading income over £1,000
• other gross income over £1,000 up to £2,500
• other income over £2,500

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 is also a separate £1,000 allowance for miscellaneous income from property. For example, for renting a driveway. This is known as the property allowance.

HRMC has written to two million taxpayers in Wales concerning the introduction of the Welsh rates of Income Tax (WRIT) from 6 April 2019. The WRIT will be payable on the non-savings and non-dividend income of those defined as Welsh taxpayers and WRIT taxpayers will receive a new tax code, starting with C for Cymru. A proportion of the revenue from the Welsh rates of Income Tax will go to the Welsh Government.

To effect this change the UK government will reduce each of the 3 rates of Income Tax – basic, higher and additional rate – paid by Welsh taxpayers by 10p from next April. Each year, the Welsh Government will then decide the 3 Welsh rates of Income Tax (the Welsh basic rate; the Welsh higher rate; and the Welsh additional rate), which will be added to the reduced UK rates. The combination of reduced UK rates plus the Welsh rates will determine the overall rate of Income Tax paid by Welsh taxpayers. The WRIT will be administered by HMRC on behalf of the Welsh Government.

The Welsh Government has proposed to set the Welsh rates of Income Tax at 10p for 2019-20. This means that the rates of Income Tax paid by Welsh taxpayers, would continue to be the same as those paid by English and Northern Irish taxpayers at least for the first year. As the Welsh rates of Income Tax are not a discrete tax they continue to be covered by existing UK double taxation agreements.

The definition of a Welsh taxpayer is generally focused on the question of where a taxpayer lives. If the taxpayer has one place of residence or a main residence in Wales, then they will be defined as a Welsh taxpayer.

Employees who use their own money to buy things they need for their job can sometimes claim tax relief for the associated costs. It is usually only possible to claim tax relief for the cost of items used solely for their work.

There is no tax relief available if your employer pays you back in full for an item you have bought for work. In addition, you cannot claim tax relief if your employer has provided you with a suitable item, but you want a different or upgraded model. For example, you are provided with a mobile phone for your work, but you want to use a newer and more advanced model and pay for this yourself.

A claim for valid purchases can be made against receipts or as a ‘flat rate deduction’. The flat rate deductions are set amounts that HMRC has agreed are typically spent each year by employees in different occupations. They range from £60 to £140 depending on listed occupations. If your occupation isn’t listed, you may still be able to claim a standard annual amount of £60 in tax relief.

This means that basic rate taxpayers can claim back £12 (20% x £60) and higher rate taxpayers £24 (40% x £60) per year, and claims can usually be backdated for up to 4 years. If you work in one of the listed occupations, you could claim back even more.

Employees may also be able to claim tax relief for using their own vehicles, travel expenses, professional fees and for buying equipment to use as part of their employment. The rules can be complex, and we can of course help ascertain what tax relief may be available based on your circumstances.

The coding threshold entitles taxpayers to have tax underpayments collected via their tax code, provided they are in employment or in receipt of a UK-based pension. The coding process applies to certain debts such as Self-Assessment liabilities, tax credit overpayments and outstanding Class 2 NIC contributions. Instead of paying off debts in a lump sum, money is collected in equal monthly instalments over the tax year.

The amount of debt that can be coded out ranges from £3,000 to £17,000 based on a graduated scale. This is a different limit to that for paying your Self Assessment bill where the amount owed must be less than £3,000. The maximum coding out allowance only applies to taxpayers with earnings exceeding £90,000.

The full breakdown is as follows:

Earnings	Coding out limit
Less than £30k	£3k
£30k to £39,999.99	£5k
£40k to £49,999.99	£7k
£50k to £59,999.99	£9k
£60k to £69,999.99	£11k
£70k to £79,999.99	£13k
£80k to £89,999.99	£15k
£90k or more	£17k

Taxpayers with underpayments in the tax year 2017-18, have until 30 December 2018 to file their Self-Assessment returns in order to have the monies collected in the 2019-20 tax year starting on 6 April 2019.