FAQ

The company must be registered with Companies House. In addition, a company must prepare statutory accounts in the format prescribed by the Companies Acts, and those accounts must be filed with Companies House.

Further, a company must complete a Confirmation Statement each year, and it must notify Companies House of certain developments, such as the appointment of new directors. The company’s accounts etc., may be viewed on GOV. The UK by members of the public. 

The company must submit an annual tax return to HMRC, including supporting calculations. In addition, the shareholder records any income received from the company on his/her personal tax return.

The sole trader must register with HMRC and, from then on, submit a tax return each year. For small businesses, only three figures need to be returned to HMRC: income, expenses and profit/loss. Also, it is possible to calculate the tax liability by reference to cash received and paid out.

The partnership should have a formal Partnership Agreement setting out the basis on which the partnership will exist. An annual tax return is required in respect of the partnership. The partner records his/her share of the partnership’s profits or losses – as set out in the partnership’s tax return -  in their tax return.

For these purposes, an LLP is treated in much the same way as a company (see across). A partner in an LLP records his/her share of the LLP’s profits/losses in their tax return.

Pros

The company pays a lower rate of tax on profits. This could mean higher after-tax profits to invest in the business.

Tax relief for finance costs for residential property is restricted to individuals but not companies.

A company has limited liability. The individual has unlimited liability, putting everything they own on the line, including their home.

Cons

Additional tax may be payable where profits are withdrawn from the company, including on the property sale.

Where an existing property is to be transferred to the company, a charge to capital gains tax and stamp duty land tax could arise.

Using a company means more paperwork, more time spent on administrative tasks, and more money spent on accountancy fees.

Recent tax changes have made some landlords question if they would be better off using a limited company to hold their rental property. Under this scenario, SPV means a particular purpose vehicle, i.e. the company would own the property, receive the rent and pay the bills. The individual would own the shares in the company, perhaps withdrawing profits as salary or dividends. A company could be used to buy new properties, or existing properties could be transferred to the company.

Suppose you are a Landlord receiving rent from long-term tenants or an income from the commercial letting of furnished holiday accommodation. In that case, there are many taxation rules you need to consider. In some instances, other types of income will be received, which may or may not be an income of the property business. Special rules apply with regard to capital expenditure, finance costs, e.g. interest paid on borrowing to fund the purchase of the property and premium paid and received. We can assist you with managing your various rental accounts, filing expenses and completing tax returns and registrations.

A statutory exemption for trivial benefits in kind costing less than £50 was introduced on 6 April 2016. The exemption sets out a number of conditions that must be met for a benefit in kind to be exempt.

What are the conditions to qualify?

No more than £50 per benefit (or an average of £50 if the benefit is provided to a group of employees);

Not in the form of cash or a cash voucher (gift vouchers, e.g., for a shop, are allowed);

No entitlement to the benefit as part of the employee’s contract (including salary sacrifice schemes);

Not provided in recognition of a particular work-related service or employment duty.

Directors

Qualifying trivial benefits in kind provided to directors and other office holders of close companies will be subject to an annual cap of £300. Where the director’s or other office holder’s family or household member is also an employee of the company, they will be subject to a £300 cap in their own right.

What kind of payments are allowed?

The type of benefits that are allowed as trivial include:

Taking a group of employees out for a meal to celebrate a birthday;

Buying each employee a Christmas present;

Flowers on the birth of a new baby.

What kind of payments are not allowed?

The type of benefits that do not qualify as trivial benefits include:

Providing a working lunch for employees (because this is related to their particular employment service);

Gifts, incentives or events related to performance targets or results;

Gifts, incentives or events in relation to employment services, e.g., team-building events;

Taxis when employees work late.

Exemption

Benefits in kind that qualify for the exemption will not incur a charge to income tax nor liability for National Insurance contributions and will not need to be reported to HMRC. If any of these conditions are not satisfied, then the whole amount of the benefit, not just the excess over £50, is taxed in the normal way, subject to any other exemptions or allowable deductions.

Companies may seek to expand their operations/sales overseas in a number of ways. Some first, ‘exploratory’ steps might include advertising, or visits by home-based sales representatives; moving on to use of locally based sales representatives or distributorships, or ‘partnership/joint venture’ with a local business.

A more substantive presence overseas may, at an appropriate stage, be considered desirable. This can, broadly, be achieved by acquisition of an existing business or by establishing a new operation.

The chosen approach as between all the above may be dictated by local regulatory, commercial and practical requirements. For example, the ‘joint venture’ approach noted above may be seen as the most realistic approach to ‘doing business’ in a particular market.

Double tax treaties

Check any applicable Double tax treaty for its impact on taxing rights in the UK and in the relevant overseas country.

Local requirements

Don’t forget local registrations, both corporate/regulatory, and for all applicable taxes: these might include corporate registration formalities (the equivalent of the UK’s Companies Registry), and  for employment taxes, VAT or other sales taxes.        

In short, cryptoassets are a type of electronic cash that is not managed by a central bank or government and therefore are not underwritten in any way. Instead, they use secure technology (digital ledger technology) to record who owns what and to make payments between users.

Examples include Bitcoin and Litecoin. Ethereum. These are examples of a type of cryptoasset known as an ‘exchange token’ (see glossary). However, there are other types.

What are the reasons for acquiring crypto?

Cryptoassets can be used as a means of payment (hence ‘cryptocurrency’, which is another way of referring to them). However, currently, it is slower and more expensive to pay with cryptocurrency than more conventional currencies such as sterling or US dollars, and it is not generally accepted as a means of payment for, e.g. weekly grocery shopping. Therefore, cryptocurrencies are most frequently used to purchase other cryptocurrencies.

Cryptoassets are most frequently held as investments by people who expect their value to rise. However, historically the value of crypto assets has been very volatile. Therefore, this warning has been issued by the Financial Conduct Authority:

Cryptoassets are considered very high-risk, speculative purchases. If you buy crypto assets, you should be prepared to lose all your money. We have also received many reports of scams involving crypto assets.

How are they acquired and traded?

They can be acquired by ‘mining’ – for example, Bitcoin. Bitcoin miners check for transactions on the network to see if they are valid using very powerful computers. If they are able to validate transactions, they record them on a public log and are paid for doing this in new bitcoins. However, because of the costs (both hardware and (high) running costs), it is increasingly difficult to make money this way.

More commonly, individuals acquire and trade crypto assets via a crypto asset exchange. Examples of such exchanges are Coinbase, Binance, Kraken and Gemini. In addition, crypto assets can be acquired using sterling or other fiat currency (see glossary).

Some businesses may also raise finance via an ‘Initial Coin Offering’ (ICO) by issuing project-specific crypto assets in exchange for either other cryptoassets or fiat currency.

Cryptoassets can also be traded via peer-to-peer transactions.

Glossary of terms

Airdrop

An airdrop is when an individual receives an allocation of cryptoasset tokens – for example, as part of a marketing or advertising campaign – in which case there is no cost. However, it is possible that the recipient may be required to do something in return (e.g. provision of services).

Blockchain

The term blockchain is often used interchangeably with DLT, but it refers to a specific way of structuring data within a distributed ledger. It uses a growing list of records (blocks) that are linked together using cryptography.

Blockchain forks

As cryptoassets are not controlled by a central body but operate by consensus between users, there may be occasions where a consensus cannot be reached, and a number of users decide to do something differently, creating a ‘fork’ in the distributed ledger. A ‘soft’ fork updates the protocol and is intended for all users. A ‘hard’ fork often results in new crypto assets or tokens coming into existence.

Cryptoasset exchange

A cryptoasset or cryptocurrency exchange (or digital currency exchange or crypto exchange) is a business that allows customers to trade cryptocurrencies for other assets, including fiat currency or other cryptocurrencies.

Distributed ledger technology (DLT)

Distributed ledger technology is a digital system that records details of transactions in multiple places at the same time. There is no central data store or administrative centre. Instead, the ledger records all previous transactions within the network.

Exchange tokens

Exchange tokens are a type of cryptoasset that may be used as a form of payment and can be exchanged for other currencies, products and services, although they are increasingly being purchased as an investment. They can be traded on exchanges or via peer-to-peer transactions.

Fiat currency

Fiat currency is a government-backed currency such as sterling or the US dollar.

Mining activities

A distributed ledger depends on a consensus system. The most well-known system is ‘proof of work’, where the right to add an entry to a ledger is only available to the first person to solve a complex cryptographic puzzle. The successful person is normally rewarded by an allocation of new cryptoasset tokens and a right to transaction fees – this is known as mining, and the activities involved in searching for the solution are mining activities.

Public and private keys

A private key is a sophisticated form of cryptography that allows users to access their crypto assets held at a public address. The public key is mathematically generated from the private key and is used to encrypt data, but only the private key can be used to decrypt it. Users are issued with a private and public key when first initiating a transaction.

Security tokens

Security tokens are a type of cryptoasset that provides the holder with particular rights or interests in a business, such as ownership or entitlement to share in profits.

Stablecoin

Stablecoins are a type of cryptoasset pegged to something considered to have a stable value, such as the US dollar.

Utility tokens

Utility tokens are a type of crypto asset normally issued by a business or group of businesses that commit to accepting the tokens as payment for goods or services. They may also be traded on exchanges or in peer-to-peer transactions.

Wallets

A cryptoasset wallet is a user interface where the private key is stored.

‘Residence’ and ‘domicile’ affect the liability to income tax, capital gains tax (CGT) and inheritance tax.

Moving from the UK to live, or to live and work, overseas, an individual may cease to be a UK resident. Still, other than in the (possible) case of those emigrating permanently, it is unlikely they would also stop to be UK domiciled.

Residence – an annual test

‘Residence’ must be determined for each tax year. There is a ‘step-by-step’ statutory residence test (SRT) for individuals: this has introduced greater certainty for taxpayers (though the test can remain challenging to apply in some cases).

Split year treatment

The SRT does, however, provide the possibility of ‘split-year treatment in certain cases for those leaving the UK part-way through a tax year. In such cases, an individual will be taxed as a UK resident for part of the tax year in question and as a non-resident for the other.

For individuals moving overseas part way through a tax year and who would otherwise be treated under the SRT as UK residents for the entirety of the tax year, there are three circumstances in which split-year treatment applies:

• Starting full-time work overseas;
• Partner of someone starting full-time work overseas;
• Ceasing to have a home in the UK.

Individuals are born with a ‘domicile of origin’, but this may be displaced by a ‘domicile of choice’ if the individual (aged 16 or more) takes up residence in another country with the settled intention to reside there permanently or indefinitely.

Individuals who are UK-domiciled, and who move from the UK to live, or to live and work, overseas, would – albeit they become resident in another country - normally remain UK-domiciled.

Taking on an employee can be a significant moment in the life of a business.

Having decided to employ a member of staff you need to:

Carefully word the contract of employment to ensure that the worker is an employee (and not self-employed or simply a ‘worker’).

Decide how much you’re going to pay your new member of staff (ensuring that it’s at least the National Minimum Wage).

Check the employee has the right to work in the UK.

Check if you need to apply for a criminal records check (sometimes referred to as a DBS check or previously a CRB check).

Get Employers’ Liability insurance.

Register as an employer with HMRC.

Enrol for PAYE Online or, if automatically enrolled because you registered with HMRC online, activate your account.

Set up and run a payroll.

Provide the employee with a written statement of employment particulars on their start date.

Check if you need to automatically enrol the employee into a workplace pension scheme.

A person who provides work to an individual is responsible for correctly establishing the employment status of the worker. For tax and National Insurance contribution (NIC) purposes, that means deciding whether the worker is an employee or self-employed.

Why employment status matters

An individual’s employment status affects the amount of tax and NICs they pay, how they pay them, their employment rights, and, if applicable, their employer’s responsibilities.

If an employer incorrectly treats an employee as self-employed, it can cost the employer (or sometimes the employee) a lot of money to put things right.

An individual can have one employment status for tax and NICs purposes and a different one for employment law purposes. For example, taxi drivers in the ‘gig economy’ may be self-employed for tax and NICs purposes but be classified as a ‘worker’ for employment law purposes and, as such would be entitled to some employment rights.

Establishing an individual’s employment status for tax

There is no comprehensive definition in law to decide whether an individual is an employee or self-employed for tax purposes. An individual’s employment status is established by weighing up all the relevant facts and looking at the overall picture on the balance of probabilities. The factors to be considered are derived from case law.

HMRC’s CEST tool

HMRC provide an online tool called Check Employment Status for Tax

www.gov.uk/guidance/check-employment-status-for-tax

that can be used by either the worker or the engager in relation to a particular contract to establish whether the worker is employed or self-employed for tax purposes. As explained in the notes on the GOV.UK website, if the tool is used correctly and in good faith, HMRC will accept the result it gives. It can be used whether or not the IR35 rules are under consideration. As the tool’s name makes clear, it is for tax (and NICs) decisions. An Employment Tribunal will not necessarily reach the same conclusion in relation to employment law.

An individual can use the online Check your Income Tax for the current year

www.gov.uk/check-income-tax-current-year

and also tell HMRC if they think the tax code is wrong.

Alternatively, an individual can telephone HMRC on 0300 200 3300 (+44 135 535 9022 from outside the UK) or textphone HMRC on 0300 200 3319. They will need to have their National Insurance number to hand when they phone.

Agents can sign in through the Government Gateway to query clients’ tax codes using the PAYE Coding Notice query form

www.tax.service.gov.uk/shortforms/form/P2

An individual will usually receive a coding notice (form P2) from HMRC. Alternatively, an individual can also find their code in their personal tax account

www.gov.uk/personal-tax-account

In either case, there will be details of how the code has been calculated. An individual’s payslip will show the tax code being used by their employer, but not how it has been calculated.

Where the sole purpose of the provision of a landline is to enable an employee to perform their duties, and there is no significant private use by the employee, there should be no income tax implications for the employee. However, HMRC set out the following conditions for the income tax exemption to apply (these are arguably stricter than the legislation):

• there is a clear business need for the employer to provide the employee with a telephone, for instance, if making and receiving telephone calls from the home are vital and central parts of the employee's duties;
• the employer has procedures to monitor, control and minimise the cost to him of private use;
• the employer has no intention of rewarding the employee.

HMRC consider that the exemption is likely to apply to landlines provided for:

• ministers of religion, where there is a need for contact with their parishioners and congregations 24 hours a day;
• teleworkers, where a telephone line at home is provided for remote computer working or telephone business; and
• employees such as ‘live-in’ care workers in residential homes for the elderly or disabled or hospices, whose daily duties may require contact with the emergency services or the relatives of those they care for.

The contract between the employee and the telephone company

If the employer reimburses the employee for the cost of business telephone calls that the employee has incurred, this should be exempt from income tax, provided the employee incurs an additional cost. Where there is no additional cost for the employee (for example, where the employee’s telephone package is for a fixed sum covering both line rental and calls), the exemption will not apply.

If the employee bears the cost of business telephone calls and is not reimbursed, HMRC accepts that the employee should be able to claim a deduction where the cost of business calls is identifiable. No deduction will be possible where the employee’s telephone package is for a fixed sum covering both line rental and calls. No deduction is permitted for line rental unless, exceptionally, there is a genuine business need for the employee to have a second phone line that is used exclusively for business calls.

The rules concerning the tax treatment of mobile phones vary depending on whether the contract is between the mobile phone company and the employer or the employee. Where the contract is between the mobile phone company and the employee, the rules differ depending on whether the employer reimburses the cost or not.

The contract between the employer and the mobile phone company

There is an exemption for the provision by an employer of a mobile phone for an employee, irrespective of the level of private use. The exemption applies to one phone per employee.

The exemption also covers vouchers or credit tokens provided explicitly for an employer-supplied mobile phone. However, the exemption does not extend to top-up vouchers that can be used on any phone or where an employer pays an employee’s private mobile phone bill.

The provision of a mobile phone may also be exempt under the rules for the provision of accommodation, supplies or services used in employment duties where it is provided solely for business use, and any private use is not significant. This exemption is not limited to one mobile phone per employee. It might be useful for internationally mobile employees in order to take advantage of the best tariffs in each country. However, employers would need to consider how to monitor and limit private use.

The contract between the employee and the mobile phone company

If the employer reimburses the employee for the cost of business calls that the employee has incurred, this should be exempt from income tax, provided the employee incurs an additional cost. Where there is no additional cost for the employee (for example, where the employee’s mobile package is for a fixed sum covering both line rental and calls), the exemption will not apply.

If the employee bears the cost of business calls and is not reimbursed, HMRC accepts that the employee should be able to claim a deduction where the cost of business calls is identifiable. No deduction will be possible where the employee’s mobile package is for a fixed sum covering both line rental and calls.

Summary of the steps in calculating the tax due when an employee leaves employment

Establish the facts: Why is the employment end? Is this genuine redundancy?

Establish the timings: When will the employment end? When was the employee given notice? What is the employee’s notice period?

Identify the elements that will be paid or provided in connection with the termination of the employment: Find the total value of the termination package that the employee will receive.

Exclude any employer’s pension contribution: Employer pension contributions are free of PAYE income tax and NICs. However, if the employee’s annual or lifetime pensions allowance is exceeded, any tax due is accounted for through the Self Assessment Tax Return.

Identify the items that would be taxable regardless of the ending of the employment. Subtract the value of these items from the running total and apply PAYE income tax and Class 1 NICs as normal.

Identify the amount of statutory redundancy pay: Subtract the value of the statutory redundancy pay from the running total. Statutory redundancy pay is free of PAYE income tax and NICs.

Calculate the PENP.

Operate PAYE income tax and Class 1 NICs on the lesser of the PENP or the remaining total.

Apply the balance of the £30,000 exemption to the remaining amount so that amount is tax and NICs-free: To find the value of the balance of the exemption, subtract the amount of the statutory redundancy pay from £30,000. The result is the balance of the exemption.

The figure (if any) that is left is subject to both PAYE income tax and Class 1A (employer only) NICs. Use the RTI system to notify HMRC of the amounts due. Then, pay them with the employer’s monthly PAYE.

Deal with any P11D reporting and notification of post-termination benefits.

The company pays corporation tax (CT) on its profits as they are earned. The current rate of corporation tax is 19%.

The second layer of tax is payable when the business owner withdraws some or all of the after-CT profits from the company. Again, there is a degree of flexibility regarding how and when the profits are paid to the business owner. This can give the limited company an advantage over the sole trader/partnership.

The sole trader pays income tax and Class 4 NICs in respect of their profits as they are earned. As a rough guide, the combined rates of tax and NICs for profits of non-Scottish-taxpayers are:

• £11,908 to £12,570 – 10.25%;
• £12,570 to £50,270 – 30.25%;
• £50,270 to £150,000 – 43.25%,
• and above £150,000 is 48.25%.

The partner pays income tax and Class 4 NICs in respect of their share of the partnership's profits. This is on the same basis as the sole trader. This is also the case for the partner in an LLP.

Individuals who move overseas and cease to be UK residents for tax purposes will in principle cease to be subject to UK tax on income (other than in respect of certain UK source income). Note that non-resident individuals are generally exempted from UK tax on UK dividends and savings income.

Similarly, such non-resident individuals will in principle cease to be chargeable to UK tax on gains (other than gains on the disposal of certain UK real estate.

Conversely, they may become residents in another country and therefore chargeable to tax in that other country on their income and/or gains.

It will be important to consider what UK tax filings will be required in any case where the move overseas results in a cessation of UK residence (and similarly what local tax filings may be required in the new country of residence).

Individuals who become only ‘ temporarily non-resident’ will or may be liable to UK taxes on certain UK income and gains which arise during the period of non-residence. Such liability arises in the ‘ year of return

In the case of an individual who is UK domiciled, they will remain liable to UK inheritance tax on their worldwide estate, notwithstanding cessation of UK residence.

Double tax treaties

In leaving the UK, an individual may become a resident for tax purposes in another country under local laws. This is important because ‘residence’ elsewhere (particularly alongside a ‘cessation’ of UK residence) will determine whether the individual will be able to access the benefits or be subject to the limitations of any Double Tax treaty between that other country and the UK.

Since a company is a separate legal ‘person’ from the director, and even if the individual owns the entire company, they remain separate legal persons. The company’s funds are not the director’s money. Director’s transactions with the company are being recorded on DLA.  

When the company’s cash flow is a consideration, directors may leave their net earnings or dividends in a loan account with the company, extracting them only when needed. Whilst that account remains in credit there are no tax consequences when drawings are made from it, as PAYE and NICs should already have been applied at the time the earnings were credited to the account and any dividends will be separately included in the director’s personal tax return. But overdrawing brings several issues. It is therefore important that an ongoing record is kept of each director’s drawings and the positive or negative balance of that director’s loan account with the company. It is not sufficient to draw up a statement of the account after the end of the tax year in order to establish whether a P11D entry is required. By that time, it is too late to deal correctly with some of the issues - including the operation of payroll.

When a director overdraws on their company loan account in anticipation of a future payment of salary or a bonus, it should be treated as a payment of earnings at the time it is drawn. Therefore the gross withdrawal should be made as a payroll item with the director receiving the net amount after PAYE and Class 1 NICs have been deducted. Employer’s NICs are also due, and normal RTI rules for notification and payment to HMRC apply.

If the company has a history of clearing a director’s loan account with a dividend once it is certain that there are distributable reserves to do this, then the overdraft can be regarded as an advance of that dividend rather than a payment of earnings, so that no PAYE or NICs are due. It is prudent to show that intention in the company records at the time of the withdrawal to make clear the distinction between an advance of pay (taxable and NIC-able) and a loan in anticipation of future dividend (not taxable or NIC-able). Of course, the dividend needs to be both included in the director’s taxable income for the year when completing their self-assessment tax return and also correctly minuted in the company’s records.

For many traders, the attraction of using a limited company will be perceived tax savings. Companies pay corporation tax on their profits at the rate of 19%. Compare this with the unincorporated business, where the sole trader or partner pays income tax up to 45% and Class 4 NICs at up to 9%.

Using a company can give some flexibility as to when amounts are taxed. For example, a shareholder in an owner-managed business may wish to restrict the amount they extract from the company to avoid paying income tax at a higher or additional rate, to avoid the high-income child benefit charge or to avoid the high-income restriction on the personal allowance.

Using a limited company may make it easier to involve family members or others in the ownership of the business, as shares in the company can be issued.

Several reliefs are restricted to companies; for example, Research and Development (R&D) tax relief. Where a small or medium-sized company carries on qualifying R&D, they are entitled to an additional deduction of 130% of qualifying expenditure in calculating their profits.

The Enterprise Investment Scheme (EIS) is designed to encourage new equity investment in trading companies and provides the investor with generous tax relief.

Like it or not - perception - many people prefer to deal with a limited company as opposed to an individual, believing that the limited company is more likely to be an established business with more resources. It may also be the case that the trader sees value in being a limited company director.

The liability of a shareholder in a limited company is limited to the amount invested by that individual in the company's share capital. This protects the shareholder's other assets – for example, their home -  in the event that the company is wound-up.

The benefits of limited liability may be reduced where the shareholder is required to give a personal guarantee to a company creditor (for example, a bank in respect of borrowing by the company).

For the sole trader, there is no barrier between the individual's business affairs and their private affairs. This means that the individual's non-business assets may be at risk if the individual's business fails or experiences difficulties.

The partner is in a similar position as a sole trader as the partner is jointly liable with the other partner(s) for the partnership's debts. However, it is possible to limit the individual's liability, for example, by using a Limited Liability Partnership (LLP).

What is a gift? A gift is something you give without receiving anything in exchange. For example, you may choose to give a customer a bottle of wine at Christmas. As you are not obliged to give the wine, and the customer is not required to give you anything in return, this is a gift.

How are gifts treated? The starting position is that no tax relief may be claimed for contributions. This means that you cannot deduct the cost of the gift when you calculate your taxable income.

However, there are circumstances in which you may claim tax relief for the cost of gifts that you make. These are as follows:

• Where the recipient is an employee of the business (unless you give gifts to others and the gifts to employees are incidental to the gifts to others). Note: for more expensive gifts this may give rise to a tax liability for the employee.

• Where you give away samples of items that you sell in the business.

• The gift meets all of the following conditions:
  • it has an advertisement for the company on it;
  • it isn’t food, drink, tobacco or a voucher exchangeable for goods;

and the total cost of items given to the person in the period is £50 or less.

Lucy has a successful social media business. She wants to send her clients a gift to celebrate her first ten years in business. The options are a bottle of wine and a mug printed with an advertisement for the business. The total cost under both options is £1,000.

If she gives the wine, she will not be able to claim tax relief for her gift. However, if she gives the mug, she will be able to deduct the cost of the mugs from her taxable profits. This will save income tax and Class 4 NICs £432.50 (at the combined rate of 43.25%).

In summary, giving the wine will cost her £1,000 but giving the mugs will cost £567.50.

Businesses normally prepare accounts and calculate their profits using the accruals basis. Most small unincorporated businesses can instead elect to calculate their profits for tax purposes on a cash basis.

If a business elects to use the cash basis, they record income when they get it and expenses when they pay them. The cash basis is generally simpler to use than the accruals basis, but there are particular rules to consider which could mean that the cash basis is not beneficial.

Eligibility for using the cash basis

To be able to start using the cash basis a business must:

• be unincorporated and either a sole trader or a partnership consisting only of individuals; and
• have receipts in the accounting period of less than £150,000 (£300,000 for universal credit claimants).

If an individual has more than one business, they must use the cash basis for all their businesses and the combined turnover from their businesses must be less than £150,000.

Remaining on the cash basis

Once a business has elected to calculate its profits on a cash basis it has to remain in it until either:

• its receipts in an accounting period exceed £300,000; or
• there is a change in circumstances making it more appropriate for its profits to be calculated on the accruals basis.

Businesses that cannot use the cash basis

These businesses cannot use the cash basis:

• companies;
• limited liability partnerships;
• partnerships with a non-individual partner during the basis period;
• Lloyds underwriters;
• farming businesses with a current herd basis election;
• farming and creative businesses with a profits averaging election;
• businesses that have claimed business premises renovation allowances within the previous seven years;
• businesses that carry on a mineral extraction trade;
• businesses that have claimed research and development allowances on assets they still own.

The rules concerning the tax treatment of a broadband connection vary depending on whether the contract is between the broadband provider and the employer or the employee. Where the contract is between the broadband provider and the employee, the rules differ depending on whether the employer reimburses the cost or not.

The contract between the employer and the broadband provider

Where an employer subscribes for broadband service, HMRC accepts that this is exempt from income tax for the employee where:

• the provision is made solely for work purposes;
• there is no separate billing or record of access calls;
• no breakdown is possible between work and private calls; and
• private use is not significant (and does not affect the cost of the package).

The contract between the employee and the broadband provider

If the employer reimburses the employee for broadband costs that the employee has incurred, this will only be exempt from income tax if the employee incurs an additional cost (e.g. subscribing for broadband service for the first time). Where there is no additional cost for the employee, the reimbursement will not be exempt.

If the employee meets the cost of subscribing for broadband and is not reimbursed by their employer, employees are unlikely to be able to claim a deduction. This is because unless there is an identifiable cost relating to business use, no deduction can be claimed.

Normal tax code

Tax codes are normally made up of a combination of letters (prefix or suffix) and numbers. Most tax codes start with several numbers and end with a single letter. The letter does not have any bearing on the calculation of an individual’s tax - it is simply a way for HMRC to group and identify particular types of taxpayer. The number represents the individual’s tax-free amount. This is calculated as:

• the individual’s annual tax-free personal allowance;
• reduced to take into account untaxed income from other sources (e.g. from a part-time job, state pension or rental income), taxable social security benefits and coded-out tax underpayments from earlier years;
• increased for other tax-free allowances, such as blind person’s allowance or employment expenses; and
• with the last digit removed.

Letter What it means

L - The individual is entitled to the standard tax-free personal allowance

M - The individual’s spouse or civil partner has transferred 10% of their personal allowance to them (i.e. the individual benefits  from the marriage allowance)

N - The individual has transferred 10% of their personal allowance to their spouse or civil partner (i.e. the individual’s spouse or civil partner benefits from the marriage allowance)

T - The individual’s personal allowance is calculated other than as above, e.g. the individual is entitled to a reduced personal allowance because their income is more than £100,000

A tax code starting with C denotes that the individual is taxed using the Welsh tax rates. A tax code starting with S denotes that the individual’s income is taxed using the Scottish tax rates.

Special tax codes

Code - What it means

K - Tax codes with K at the beginning mean that the reductions from an individual’s personal allowance are higher than their allowances. K codes add an amount to gross pay to reach gross taxable pay, although no more than 50% of an individual’s gross taxable pay/pension can be deducted as tax  

BR - All income from this employment/pension is taxed at the basic rate (20% for 2022-23) for England and Northern Ireland. Commonly used for a second job or pension

CBR - All income from this employment/pension is taxed at the Welsh basic rate (20% for 2022-23). Commonly used for a second job or pension

SBR - All income from this employment/pension is taxed at the Scottish basic rate (20% for 2022-23). Commonly used for a second job or pension

D0 - All income from this employment/pension is taxed at the higher rate for England and Northern Ireland (40% for 2022-23). Commonly used for a second job or pension

CD0 - All income is taxed at the Welsh higher rate (40% for 2022-23). Commonly used for a second job or pension

SD0 - All income from this employment/pension is taxed at the Scottish intermediate rate (21% for 2022-23). Commonly used for a second job or pension

D1 - All income from this employment/pension is taxed at the England and Northern Ireland additional rate (45% for 2022-23). Commonly used for a second job or pension

CD1 - All income is taxed at the Welsh additional rate (45% for 2022-23). Commonly used for a second job or pension

SD1 - All income from this employment/pension is taxed at the Scottish higher rate (41% for 2022-23). Commonly used for a second job or pension

SD2 - All income from this employment/pension is taxed at the Scottish top rate (46% for 2022-23). Commonly used for a second job or pension

NT - No tax is deducted from income from this employment/pension

0T - All income from this employment/pension is taxed at the appropriate England and Northern Ireland rates. This code may be used where an individual’s personal allowance has been used up or the individual has started a new job and their employer does not have the details needed to use the standard emergency code               

C0T - All income from this employment/pension is taxed at the appropriate Welsh rates. This code may be used where an individual’s personal allowance has been used up or where a person has started a new job and their employer does not have the details needed to use the standard emergency code

S0T - All income from this employment/pension is taxed at the appropriate Scottish rates. This code may be used where an individual’s personal allowance has been used up or where a person has started a new job and their employer does not have the details needed to use the standard emergency code

1257L - This is the 2022-23 emergency tax code. Tax is paid on income above the basic personal allowance. The code is used temporarily while HMRC determine the correct code. The code may be used if the individual has started: a new job, employment after being self-employed; or getting company benefits or the state pension

W1 - Generally tax codes are operated cumulatively, but W1 in a tax code requires that the tax code is operated as though every week was the first week of the tax year

M1 - Generally tax codes are operated cumulatively, but M1 in a tax code requires that the tax code is operated as though every month was the first month of the tax year

Summary of key factors to be considered:

In the case of establishing a new operation, the choice is essentially between a branch (permanent establishment) and a local subsidiary. Both routes contemplate a substantive physical presence, with the engagement of local staff or contractors.

The potential tax advantages of a branch are or include:

• The ease of (early years’) loss relief against UK profits;
• The relative ease of ‘incorporating’ the branch business into a local subsidiary at a later date, if desired.

The potential tax advantages of a local subsidiary are or include:

• Potentially sheltering profits at lower rates of tax if the local rate of corporation tax is lower than the UK rate (note, however, this same result can effectively be achieved in the case of a branch by making the election for ‘branch tax exemption’);
• That it may be easier to determine what activities will be carried on by the subsidiary as a distinct legal entity and what income and expense will accrue in the subsidiary (which in part will be a function of prices charged for the supply of goods and services between subsidiary and parent).

Other relevant issues

Other areas for attention in determining the approach to ‘branch or local subsidiary’ include:

• Raising finance and the deductibility of costs of such finance;
• Transfer pricing (where goods or services are to be sold or provided by the UK ‘parent’ to the overseas branch or local subsidiary);
• The possible impact of Controlled foreign companies (CFC) and diverted profits tax (DPT) regimes.

What is R&D?

A company engages in R&D (research and development) when it seeks to achieve an advance in science or technology.

When most people hear ‘R&D’ they think of a lab and test tubes but it goes further than this. For example, work to improve a product or a process can be R&D. The government’s statistics show that a wide range of businesses make successful claims for R&D tax relief. The manufacturing sector accounts for more claims than any other industry sector.

For many companies, R&D is a normal part of their business – they just haven’t thought of it in that way before.

How does the relief work?

The government wants companies to innovate. To encourage them to do this, it provides a number of generous tax reliefs.

For a small and medium-sized company (SME), every £100 of R&D expenditure attracts tax relief of £230.  This reduces the company’s Corporation Tax bill by roughly £44. Through tax relief, the government funds almost half of the company’s R&D spend.

If the SME is loss making, it can surrender the R&D part of its loss to HMRC in return for a cash payment. From 1 April 2021 a cap will apply to the cash payment based on the SME’s PAYE and NIC liabilities.

What types of expenditure qualify for tax relief?

The most common type of qualifying expenditure is the salary paid to employees actively engaged in R&D. This includes associated costs such as employer’s National Insurance Contributions and pension contributions.

If the company uses agency workers or sub-contractors then the amounts paid for their services count too. Other qualifying expenditure includes software and consumables.

How do I claim the relief?

You claim R&D tax relief through the company’s Corporation Tax Return for the period in which it incurred the expenditure.

The company has two years from the end of the accounting period in which to make the claim. For example, for expenditure incurred in the accounting period ended 31 December 2020, the company has until 31 December 2022 to claim R&D tax relief.

Leveraging AI in 2024: Top 3 Ways Small Businesses Can Benefit

 As your trusted accounting partner, we are dedicated to offering more than just financial management; we aim to guide you through integrating cutting-edge technology into your business strategies. In 2024, artificial intelligence (AI) offers a unique chance for small businesses to enhance efficiency, improve customer interactions, and maintain a competitive edge in a digital-forward market. Here are three AI strategies tailored for UK-based businesses to transform your operations this year.

1. Automate Repetitive Tasks

Leveraging AI to automate repetitive administrative tasks can significantly boost your team's productivity, allowing them to focus on more value-driven activities. For instance, Dext, along with QuickBooks Online and Xero, offers advanced AI capabilities to streamline financial processes like receipt tracking, transaction entries, and expense management. These tools are particularly effective in minimizing errors and ensuring compliance with UK tax regulations.

• Dext: Accounting Automation Software for Businesses | Dext UK
• QuickBooks Online: Accounting Software for Limited Companies | QuickBooks UK (intuit.com)
• Xero: Why Choose Xero for Your Small Business | Xero UK

2. Enhance Social Media Engagement

AI can also revolutionize how you manage and optimize your social media presence, crucial for maintaining visibility in the UK's vibrant digital marketplace. Tools like Buffer and Hootsuite use AI to analyze user engagement data, suggest optimal posting schedules, and curate content that resonates with your specific audience. These platforms help ensure that your social media efforts are as effective as possible, driving better engagement and increasing brand awareness.

• Buffer: Buffer for Social Media Management
• Hootsuite: Hootsuite Advanced Insights

3. Build and Optimize Your Website

In today’s digital age, a compelling online presence is vital, especially for UK small businesses aiming to expand their reach. AI-powered website builders like Wix and Squarespace simplify the process of creating and maintaining a professional website. These platforms provide AI-driven tools for design, layout, and SEO optimization, making it easier to establish a strong online presence that appeals to both local and global customers.

• Wix: Wix AI Website Builder
• Squarespace: Squarespace Intelligent Builder

Embracing AI in your small business operations can lead to substantial improvements in productivity, customer engagement, and your overall online presence.