Calculating taxable property income (gross rents less allowable deductions) is not as straightforward as it may at first appear. A common mistake made is assuming that everything spent in connection with the rental property is an allowable expense. However, the correct treatment is far less straightforward.

 We will start with the less tricky areas. Here are typical expenses to see in residential property accounts:

• Agents commission
• Property Insurance
• Accountancy and Legal fees
• Advertising the property for use
• Repairs and maintenance
• Travel in connection with the property
• Finance costs (for specific details on this see our article Property Series -Relief for Finance Costs)
• Replacements of domestic items

 This is not an exhaustive list, just a simple summary of typical expenses. The two areas that can cause the most trouble are Replacements of domestic items and Repairs.

Repairs

 Things can become more tricky when it comes to determining the difference between repairs and improvements. Repairs will be an allowance expense when calculating the taxable income. Improvements will typically add value to the property and in most cases will be treated as a capital expense. Provided the improvement is still in existence when the property is sold the expense would reduce the capital gain.

  Consider the following example. A boiler breaks down and an engineer is called out to service and repair it. This would be a straightforward expense in calculating taxable income. What if the boiler couldn't be repaired and needed replacing, would this be deductible from income or a capital expense? Before you say yes or no let's consider a little more as this is where is can become even tricker. If the boiler is replace to a similar specification (no substantial upgrade is made) then it will be considered as a deductible expense. On the other hand if the landlord took the opportunity to install a significantly upgraded boiler or even change the system then an improvement has been made to the property and the expense would become capital and taken into account if and when the property is sold.

   Another consideration is for newly acquired properties. If they are purchased in a run down state will the costs of refurbishing it be a deductible expense for future rental income? Again it won’t be a simple yes or no. The answer will be guided by the condition the property was in. A property may be dated and a bit tatty but in a suitable condition for habitation and everyday living. On the other hand if the property was in such a poor condition that would prevent it being realistically used as a home the associated costs would be capital in nature and not deductible against rental income. To support any decisions to claim repair and refurbishment costs incurred before letting income is received it would be sensible to take detailed pictures of the entire property to demonstrate it's actual condition.

  An additional consideration would be works required to bring a property up to minimum EPC ratings prior to letting. Careful consideration should be given to identify if these expenses would come under repairs or fall into improvements.  

Replacements of domestic items

 For those involved with residential letting income for many years you may well remember the wear and tear allowance. This was available for properties let fully furnished. An allowance to cover these costs was 10% of gross rents (minus a few costs in certain situations). This allowance was scrapped some years ago. Now a deduction can be claimed for replacing domestic items (furniture, white goods and ovens etc.). The key word is replacement. The initial cost of such items is not a deductible expense. So when a property is first acquired or it is first furnished the costs associated with domestic items should not be included as an expense. Future replacements can qualify however care should still be taken. The replacement should be to a similar standard. If the new item is a substantial upgrade the allowable cost is limited to what it would have cost to replace the item to a similar standard.

  We hope you have found this article helpful. A key takeaway point should be don't rush to make a decision on whether an item can be claimed as an expense. Take the time to ask a few questions, consider the context and once you have made the decision keep a record justifying the approach. If you would like to see how we can assist you do this and give piece of mind please give us a call or send us a message.

 Furnished Holiday Lets (FHL) have a slightly different tax treatment to residential property income. Although many aspects will be similar certain advantages come from being treated as an FHL. Because of this it's not just a matter of choice but the designation must be earned.

  To qualify as a FHL the property must be:

•  let with a view to making a profit (this for example would prevent someone trying to subsidize their family vacation property with only minor lettings or restricted to family and friends making a token contribution of costs).
• The occupants are allowed to use the furniture and items are sufficient for everyday living.
• The property meets the annual availability tests and minimum of 105 days actually let on commercial terms.

 The benefit of being treated as an FHL is the ability to claim capital allowances, which for residential letting income are not available. Care should be taken as the use of capital allowances does not extend to structures and buildings allowance. In reality most capital allowances will be items of machinery and furniture used in the property. 

 One of the biggest benefits is when claiming finance costs. Whereas residential property finance costs are restricted ( see our post Property Series - Relief for Finance Costs) they are not restricted for FHL activity. If a individual is in receipt of both residential and FHL income the structuring of finance costs should be closely examined to ensure the most beneficial tax relief is achieved.

 If you would like help in reviewing your property income and determining if your activity qualifies as FHL income please give us a call or send a message.  

 Income from residential property letting would typically be taxed as investment income. The income and expenditure would be reported on the UK Property pages of the Tax Return.

 What difference does it make? Investment income is not subject to National Insurance (Class 2 & 4) whereas trading income is. For those with other sources of income this will be an excellent outcome as it reduces the tax due. For example say Frank has employed income of £18,000 and rental income after deducting expenses of £16,000 per year. If he included this on the Self-Employed pages of his Tax Return it would be taxed as trading income. The combined tax and National Insurance payable would be approx. £3,673. Whereas if the amounts were reported correctly on the UK Property pages the tax would be £3,200. A saving of £473 for getting the classification right and reporting on the correct pages.

  This is a great outcome for Frank. But what if Frank didn’t have any employed income and as a result no credit towards his qualifying years of National Insurance contributions, supporting future state pension entitlement amongst other things? If he wanted to avoid paying class 3 contributions could he report the property income as trading income in order to pay a little class 2 & 4 National Insurance? In this example Frank would not be entitled to pay class 2 National Insurance voluntarily. If an enquiry were opened into his Tax Return a correcting adjustment could be made and the credit to NI lost.

 In order to qualify to pay class 2 National Insurance voluntarily activities involved would need to go beyond what is usually required of being a landlord. A strong support is actively looking for new properties to add to the rental portfolio to expand the business.

 If you have letting income and would like to see how we can help you please give us a call or send us a message.

 Mortgage relief is an even bigger issue now interest rates are soaring. A Common pitfall is seeing people claim all mortgage payments including the capital repayment element

 Many with rental properties will have associated mortgages. Some will be interest only while others include capital repayment. When preparing property income and expenditure accounts and completing the UK Property pages of the Tax Return what should be considered?

 Firstly mortgage interest is taken into account. However, the method of relief has changed in recent years in order to prevent tax relief on finance costs exceeding basic rate tax. In order to achieve this mortgage interest needs to be identified and entered in the specific box for residential property finance. This will ensure the correct tax treatment. While entering the finance costs in the wrong box won't affect the final tax calculation of a basic rate taxpayer the impact on a higher or additional rate taxpayer can be significant. For example, a higher rate taxpayer with mortgage interest of £6,000 per year should only receive tax relief at 20%, £1,200. If the amount were entered in the wrong box tax relief of £2,400 would be given. While the idea of 'accidently' achieving an additional £1,200 of tax relief may be appealing the potential for penalties and interest in addition to repaying amounts owed can quickly add up.

 With interest rates rising and tax bands being frozen more landlords will be pulled into higher rates of tax and finance costs will represent a significant expense. Ensuring these are reported correctly is essential.

 A common pitfall when speaking with landlords who complete their own property reporting is in connection with mortgages which include a capital repayment element (rather than just interest only). They will happily tell you they don't have any tax to pay on rental income after deducting their mortgage repayments. Unless they have a shockingly high interest rate and strangely low rent charge alarm bells start to ring. It is important to remember the capital element of a mortgage repayment is not a deductible cost for letting income. Just how much of an error could this create on a small letting income?

 Imagine the individual had employment income and paid tax at the higher rate, they also entered the mortgage repayments in the wrong box so it wasn't treated as residential property finance.

 The actual tax bill should be £3,960. If this mistake was repeated for just a few years and then detected the amount due to HM Revenue & Customs could easily be over £20K when penalties and interest are added.

  We hope you have found this article useful. If you have letting income and would like to see how we can help you and give piece of mind please give us a call or send us a message.

 Rent a room relief can provide a helpful simplification when a lodger is taken in. Some will be surprised to think of a tax implication when renting a spare room to a lodger but the income is considered as Residential Property Income.

 The relief provides an allowances of £7,500 per year. If gross rental income is less than this amount, no reporting to HM Revenue & Customs is required. Given this would allow for a room to be let at £625 per month it will be relatively helpful to many. Also if the gross rent is more than the allowance it will still be helpful as it can effectively act like a flat rate expense. For example a room let for £700 per month would yield £8,400 per year. Using the Rent a Room Relief the taxable income would be reduced to £900.

 There are some requirements to qualify for the relief

• The accommodation must be furnished
• The room must be let in your main residence
• There is no other taxable income resulting from the property. For example if an unfurnished room was also let then they would not be eligible to claim the relief, even for just the furnished element.

 It is also important to remember the relief is per property, not per room or per owner. For example a married couple letting a room would each have an allowance of £3,750.

 Care should be taken to ensure the rental income is calculated accurately. Total rent would also include additional payments made by a lodger for services such as laundry and meals. These would need to be factored in when deciding if the allowance removes any requirement to report the income to HM Revenue & Customs or determining the taxable surplus.

 We hope you have found this article useful. If you have letting income and would like to see how we can help you and give piece of mind please give us a call or send us a message.

 As a businesses grows and the workload becomes too much for one person some form of help will be needed. The options tend to boil down to taking on an employee or engaging subcontractors. Each business will have different factors that influence which option to aim for. Typically subcontractors are the goal as it reduces commitment and complexity. It also tends to provide a positive tax outcome for both the contractor and the subcontractor….and it's because of this that HMRC take an interest. They will want to ensure the correct status has been applied and in turn tax paid in line with this. If errors are made they can be costly resulting in backdated assessments to when the error began with penalties and interest potentially charged on top. Very quickly this can run into thousands.

  So how do you know if someone is an employee or a subcontractor? A number of points will be looked at. A few examples are:

• Regularity of work
• The obligation to accept or provide work
• If the individual can profit from managing the work well
• Whether they provide their own equipment
• How integrated they are with the main business.

(There are considerably more points that would need to be reviewed but this is a helpful starting point).

Regularity - the more frequently the subcontractor is engaged the greater the risk can become. Even if it's just one day per week. If this continues week after week for a prolonged period of time the situation should be looked at carefully. You'll often hear people say "it's easy to get round this, just don’t use the subcontractor for a few weeks or a month". In reality this is very unlikely to fixed the issue if a pattern of employment has already been established. It's essential to consider each and every case and it's unique facts.

Obligation to accept or provide work - This is known as 'mutuality of obligation'. When you think of an employee, they are expected to turn up for work and complete the work assigned to them. Likewise the employer is expected to provide work (along with payment). Whereas self-employment is much more flexible. In genuine subcontractor arrangements the main contractor is under no obligation to offer work and equally the subcontractor is under no obligation to accept it. When reviewing this area it's important to distinguish between efforts to maintain good business relationships and obligation. For example a subcontractor may inform a particular contractor that they will be unavailable for certain periods of time, such a when their own work is busy or they will be away. This is done out of curtesy to allow the main contractor to plan their work and make other arrangements. On the other hand if the contractor expected the subcontractor to request specific dates to be away and even attempted to limit these they are imposing obligations to accept work, indicating employment.  

Ability to profit (and suffer losses) - Self-employed individuals should be able to profit from the good management of their work or suffer a loss if things don't go well. On the other hand an employee paid an hourly rate for 8 hours per day will get the same regardless of how quickly (or slowly) they complete the work. A self-employed individual has the ability to quote a price for a job and this will be paid regardless of the hours taken. Understandably once a subcontractor is engaged this can complicate things as different industries will have different practices and even the nature of the work can affect what is the most commercially realistic way to price / pay. Arrangements should be looked at closely to understand if they would support self-employed status.

   Required to provide equipment -  Employees would rarely be expected to provide their own equipment to carry out the work they have been employed for. The employer would provided them with the necessary equipment and tools. On the other hand self-employed individuals would be expected to provided their own equipment. Could you imagine getting a tradesman in to do some work on your house and they turn up asking where the tools are. Or booking a taxi and they ask to use your car. In a similar way if a subcontractor is required to provide their own equipment this would indicate genuine self-employment. On the other hand if they turn up, use the contractors tools, equipment and vehicle this would contribute to the risk of them being classified by HMRC as an employee.

   Integrated into the business - This can result from a number of things but ultimately you want to consider how the person is viewed by other employees (if there are any) and customers. For example in an office environment if they have their own desk, possibly a dedicated phone line and are invited to work social events you would considered them very well integrated. This would indicate they are an employee. In other examples it could be how they are introduced to customers and if they are expected to wear your businesses branding etc.

 These are just a few examples of areas to consider. When looking at the status of subcontractors it is important to look at the entire picture. It would be unusual for the decision to be made entirely by any single factor. Then with good planning appropriate measures can be put in place to minimize the risk of subcontractors being reclassified as employees, bringing with it backdated tax assessments along with penalties and interest.

 If you would like to discuss how we can assist you in evaluating risks in this area of your business please give us a call or send a message.

Contact (wbaccountant.co.uk)  

 It was all the way back in 2015 that MTD was announced as the end of the tax return. 8 years later income tax remains untouched by MTD. It quickly morphed into Making Tax Digital for VAT. This took effect from April 2019. After more delays April 2024 was fixed as a date by which most sole-traders would need to begin reporting quarterly and meeting the specific record keeping requirements.

Where are we now? If you were eagerly following the news on this topic then December 19, 2022, was a big day for you. It was announced the requirements would be bumped back to 2026. No doubt most were happy to hear this. However, now that it's over 2 years away who is actually planning for it?

 Before the announcement in December 2022 many were concerned about implementing the record keeping requirements. Partly due to uncertainty over the software required but for others it would require a massive change in record keeping. Going from what could be described as traditional methods to digital record keeping.  

 It's important to remember these issues haven't gone away, they have just been kicked down the road. What can individuals and businesses do now? It's worth taking a little time now to review how you are keeping business records and if some adjustments to the process would leave you in a better position when MTD is finally brought in.

  If you would like to discuss how WB Accountant can assist you with record keeping and tax compliance please give us a call.

First things first, what is Making Tax Digital for Self-Assessment( MTD for ITSA)? Put simply it is the requirement to keep digital business records.

Essentially keeping a digital analysis of income and expenditure in a format capable of meeting the reporting requirements. The actual receipts themselves do not need to be stored digitally, although if they are scanned it can save space and make it easier to access them. Sole traders are required to keep business records for five years from 31 January following end of the tax year they relate to. Ever been tempted to bin the records early? Failing to keep records for the statutory period can incur a penalty of up to £3,000 for each tax year.

Most will already be recording transactions digitally and may only require minimal adjustments to comply with MTD for ITSA. There will still be some who prefer to add up the receipts and scribble the numbers on a sheet of paper ready for the accountant to prepare a Tax Return. Unfortunately this will not be an option once MTD for ITSA comes in (unless you are exempt from MTD for ITSA, read on to learn more).

The biggest change affecting all will be the requirement to file quarterly reports to HM Revenue & Customs rather than just the annual Tax Return. In addition an end of year summary will also be required to finalize claims, elections and other tax matters. What if you have multiple sources of income? Then multiple reports will be required each quarter. For example a sole trader who also receives rental income would have two reports to submit every quarter.

Each quarterly reporting period will have it's own deadline and penalties for missing deadlines will apply.

Why might it be a good time to consider a bookkeeper? The simple answer is the added burden will be minimized. Often people like to set aside a day or two per year to get their records in order (typically over the Christmas period when there is little work to do). If we're honest it is a job that get's put off until the deadline is looming. Now this task will be 4 times a year with a much shorter deadline. With the increased potential to miss filing deadlines. Just passing receipts and records to a bookkeeper to sort, evaluate, classify and record should be much less daunting and save considerable time.

 WB Accountant can help you meet your MTD for ITSA requirements and minimize the impact this will have on your time. We can categorize and record your expenses from receipts and business bank statements. The receipts will be scanned and at the end of each quarter you would be presented with a digital package of records and receipts. Not only would this meet your MTD for ITSA requirements but also satisfy the requirement to keep supporting business records for a six year period without having boxes of receipts taking up space. Remember, failing to keep records can incur a penalty of up to £3,000 for each failure.  

 When will these changes come in? Self-employed traders and landlords will be required to comply with MTD for ITSA from 6th April 2024, with a filing deadline of 5th August 2024.

Partnerships will get an extra year having to comply from April 2025.

In addition to saving you time, using a bookkeeper will ensure quality records are kept. These will enhance the accuracy of tax reporting reducing the risk of claiming a deduction for expenses which do not qualify for tax purposes whilst ensuring legitimate expenditure is not missed and items are classified correctly. If you would like to discuss how WB Accountant can assist you plan for and meet your MTD for ITSA requirements please give us a call or send a message.

When it comes to calculating motor expenses there are a couple of methods available. What are they and what are the benefits or drawbacks of each method? Could careful planning reduce your income tax bill?

Method 1 - Actual cost

As suggested by the name the actual cost method looks at costs incurred. These would include the purchase of the vehicle (claimed by capital allowances at the appropriate rate) and running costs (fuel, insurance, maintenance etc.) If the vehicle is used partly for business and partly for private use a fair split should be made to determine how much of the overall cost is a business expense.

Method 2 - Mileage basis

Under the mileage basis a flat rate expense is claimed for miles driven (these must be wholly and exclusively for business purposes). No consideration is given for any running expense and importantly no capital allowances are available on the purchase of the vehicle. These are all factored into the mileage allowance. This is one of the most common errors people make with the mileage basis, incorrectly claiming capital allowances and mileage.

How does it look in numbers?

We will say Jane purchases a car for £22,000 for use in her sole trade business and personal use. The split is 60% business 40% private. She averages 16,000 miles in total per year.

Allowing for private use adjustment her expense under actual cost are:

Under the mileage basis her business expense would be:

 Based on this example the claim made under the mileage basis is more valuable and would result in a combined tax & NI saving over the 5 years of approx. £2,000 for a basic rate tax payer.

Typically as a car ages the running costs will increase with higher maintenance costs year on year. A vital point to consider when choosing which method to use is that you cannot switch once capital allowances have been claimed or the mileage basis used. The only opportunity to change methods will be when the vehicle is disposed of and a new vehicle brought into business use.

The mileage basis reduces record keeping as no receipts are needed at all. However detailed mileage logs will be needed to support claims made. A work diary showing appointments and locations will help support and record this.

The risk with the mileage basis is the potential for large maintenance bills which could result in actual costs exceeding deductible costs. The mileage allowance has not been adjusted for some time and does not take account of fluctuating fuel costs or your vehicles fuel efficiency. If you drive a vehicle with excellent miles per gallon this will be a positive when considering the mileage basis. If fuel costs drop again this will enhance the value in a mileage based claim.

From these few points it is clear to see there is no easy answer. Ever vehicle and circumstance should be looked at closely on a case by case basis to achieve the best possible result.

 Note - The current mileage rates available are:

Car & Van

 - 45p per mile (>10,000)

 - 25p per mile (<10,000)

Motorcycle

- 25p per mile (no mileage limit)

Bicycle

- 20p per mile (no mileage limit)

Options to change?