Abolition of FHL regime

Abolition of FHL regime

If you own property classed as a furnished holiday let (FHL) for tax purposes, then it’s vital that you’re aware of the planned abolition of its favourable tax treatment from 6th April 2025 (1 April 2025 for companies).  

Although new legislation is yet to be drafted, we can expect short-term and long-term residential lets to receive the same tax treatment, meaning that it will no longer be tax-advantaged to commercially let your property for a series of short periods. This comes as the government plans to ‘level the playing field’ between ownership of short-term and long-term lets, with the overall goal of helping people to live in their local area. 

Reminder of the current regime 

At the moment, your FHL benefits from the following tax treatment: 

  • Being able to fully deduct interest incurred on mortgage borrowings from taxable profits. 
  • The availability of a number of capital gains tax reliefs, including business asset disposal relief, rollover relief and business asset holdover relief.  
  • Capital allowances for items such as furniture, equipment and fixtures. 
  • Classing profits as earnings for pension purposes, allowing tax-advantaged contributions.

Uncertainties regarding the new regime 

Without any legislation regarding the changes, right now we have more questions than answers. Some of the key areas of uncertainty are as follows: 

  • Will there be any transitional provisions regarding capital allowances? Without such provisions there would be a balancing charge giving rise to a tax liability when the current regime ends. 
  • What will happen to existing FHL losses, which under current legislation, can only be used against future FHL profits? 
  • Will HMRC give a clear definition of ‘trading’? Getting rid of FHLs means there’s much more of a gulf between a rental property and a B&B. 
  • In the budget it was announced that anti forestalling rules in relation to capital gains tax relief would apply from 6 March 2024. We do not know yet if this will apply to all or just some of the existing capital gains tax reliefs. 
  • Will the current regime regarding business rates and FHLs remain, or will all FHLs become liable to pay council tax instead? This would have an adverse effect on owners currently liable to business rates but qualify for small business relief.

How can you prepare for the changes? 

Firstly, the key preparation for the abolition of the FHL tax regime, is to understand how owning and letting the property will impact your personal finances without the tax-advantaged rules. Secondly, it would be valuable to consider what options are available to you, for example it may be beneficial to incorporate or perhaps accelerate expenditure on items such as furniture, fixtures or equipment to the 2024/25 tax year. Although when considering any planning it would be necessary to wait for draft legislation before any action is taken. 

How can we support? 

If you own a furnished holiday letting, we want to help you navigate the changes that will arise when the tax regime is abolished on 6th April 2025. In the meantime, as the new legislation is announced, we can help you to weigh up available options and consider the most tax efficient routes to take.

Please don’t hesitate to get in touch for further assistance. 

Business Basics: Setting up a Limited Company

Business Basics: Setting up a Limited Company

Welcome to our comprehensive guide on establishing a limited company in the UK; we’re here to illuminate each step with clarity and precision. 

In today’s fast-paced business landscape, forming a limited company can offer unparalleled advantages in terms of liability protection, tax efficiency, and credibility. 

However, navigating the incorporation process can seem daunting without proper guidance. So, stay with us as we highlight the intricacies of company formation, empowering you to lay a robust foundation for your business aspirations in the UK market. 

What is a Limited Company?

A limited company is a type of business structure where the liability of its members or shareholders is limited to the amount of money they invest in the company. Additionally, the limited company structure is a separate legal entity from its owners, allowing you to enter into contracts, own assets, and conduct business in your own name. 

Why Choose a Limited Company?

The main advantage of a limited company lies with limited liability. Essentially, it separates you from your business, meaning that as a company director, your liability is limited to the value of your shares in the business. Therefore, if the company is at risk of bankruptcy or legal action, your personal assets would be protected. This is one of the reasons why operating as a limited company may be more favourable, particularly if your business brings a level of risk that may not be covered by your insurance.  

The 6 steps for setting up a Limited Company

If you have choosing to operate as a limited company is right for your business, we have broken down the steps to start your journey below! 

1. Choosing your company name 

Make sure the name you have chosen is available and complies with company names rules 

2. Choose director/s  

You must appoint at least one director, which may include yourself, but you may also choose to have multiple directors. Directors work together to make decisions for the company, adhere to regulations, and bear the responsibility for tasks such as filling accounts and ensuring corporation tax compliance.  

3. Decide on who the shareholders/guarantors are 

A limited company must have at least one shareholder (where limited by shares) or one guarantor (where limited by guarantee). A director can hold shares which can be divided among other directors, should you choose to have multiple. Additionally, a shareholder that holds more than 25% of the shares constitutes as a ‘person of significant control (PSC) which we advise to identify in this step of the process.  

4. Prepare company documents  

Your company must obtain and complete certain documents that show the formation of the company and how it is to be run. These include: 

  • The memorandum of association  
  • The articles of association  

Click here for more information in obtaining and completing these documents.  

5. Check what records you will need to keep 

You will need a full list of company and accounting records that you must keep. This includes records about the company itself such as directors, shareholders, and company secretaries along with internal votes and resolutions from shareholders.  

6. Register with Companies House  

Lastly, you must register your company’s official address and choose an SIC code which confirms what your company does. Additionally, you should register for corporation tax while completing this step.  

And there you have it! A full breakdown of what a limited company is and how to set it up. Choosing a trading option should not be a quick decision, however, and we encourage all businesses to consider each trading option in full and decide on what is most beneficial for your business. Our trading options article provides an overview of each option for you to consider.

What happens next? Check out our guide: Running a Limited Company, for an insight to the stages following incorporation.  

For further guidance, please get in contact with our Client Commercial Director, Fabrice Legris at fabricelegris@fiandertovell.co.uk 

Spring Budget Predictions 2024

Spring Budget Predictions 2024

Anticipation is building as the Spring budget announcement, scheduled for March 6th, draws nearer. Amidst rumours of a potential general election and uncertainty regarding Jeremy Hunt’s priorities, analysts are speculating on what the budget might entail.

While the exact focus remains unclear, there are several prevailing predictions circulating. From potential tax adjustments, to targeted spending initiatives, stakeholders are eager to see how the budget will impact various sectors of the economy.

As the nation speculates, we have put together our main predictions ahead of the Chancellors’ budget with a focus on tax cuts. However, with this being a possible election year, there could be some surprises.

Reduced Income Tax

There have been a plethora of reports hinting at a possible reduction to income tax ahead of a possible general election. It’s been suggested that income tax could be cut by as much as 2p with Conservatives indicating a commitment to reducing tax burdens.

Currently, income tax is levied at the rate of 20% within the basic rate band, 40% for those in the higher rate band, and a maximum additional rate of 45%. This would most likely mean 1-2% reduction into the basic rate of income tax.

An alternative would be to increase the thresholds for the higher rates. The 40% rate applies to income over £50,270, and this figure won’t change until April 2028. Therefore, inflation means more people are having to pay 40% each year. Reducing the number of people paying 40% may be better than cutting the overall tax rate, although it’s less of a headline-grabber and so may not be so attractive to the Chancellor.

One last thing is Child Benefit, which is clawed back for people earning over £50,000 by way of an extra tax. The way this is done has been widely criticised as unfair, and so there could be some help coming there.

Inheritance Tax

Recent news reports have suggested Inheritance Tax (IHT) will be reduced or even scrapped. According to existing regulations, IHT is imposed at a rate of 40% on assets or funds passed down to heirs exceeding the tax-free threshold of £325,000. In the latest available figures released by HMRC in 2020-21, approximately 27,000 estates were subject to IHT raising about £7 billion.

It’s worth mentioning, though, that these figures account for less than 4% of the total number of deaths recorded in the UK during that period. Getting rid of IHT would probably also have a knock-on effect on capital gains tax, as the two taxes are quite closely linked. This may mean it is dismissed in the budget, despite it being an unpopular tax, as the upheaval could affect a lot of people with only a small minority benefitting.

On the other hand, an increase in the level at which IHT is payable is perhaps overdue (it was last changed in 2007) and so this could be an obvious way for the Chancellor to be seen to act on IHT without radical changes to the system.

Fuel Duty

The temporary 5p reduction in fuel duty is set to expire on March 23rd, coinciding with the upcoming March 6th budget. There is speculation that the budget might extend the fuel duty cut and potentially address imminent inflationary increases in the duty.

However, Vehicle Excise Tax (VED) is expected to see an increase with inflation from April, a normal occurrence with every Spring Budget, which could see the 5p discount scrapped following pressure from environmentalist groups.

Pensions

It appears likely that there will be further discussions on pension reform aimed at securing improved outcomes for savers. This may include the introduction of a lifetime provider model to prevent individuals from accumulating numerous small pension pots as they navigate through multiple employers over their careers. This is unlikely to result in any immediate changes but should make it easier for individuals to manage their pension savings once a new system is up and running.

VAT Threshold

Many experts believe that increasing the registration threshold for VAT could have a favourable effect on economic growth. Certain businesses strategically limit their turnover to stay below the £85,000 threshold, thus avoiding the requirement to register for VAT.

Consequently, this threshold may be perceived as a hindrance to the expansion of UK businesses. Set at £85,000 since April 2017, an increase in the threshold appears quite possible.

On the other hand, the UK has a higher threshold than most other countries with a VAT system, so there have been suggestions that it should come down, perhaps to the point where anyone with a full-time business needs to register (perhaps as low as £30,000). The argument here is that if everyone must register anyway, then no-one has a reason to stop growing. That might be a bit of a risky step for an election year, though.

We will be monitoring the Spring Budget announcement closely on 6th March and will release an update soon after. If you would like to discuss any tax related queries, please contact our Corporate Tax Director, Andrew Jackson, at andrewjackson@fiandertovell.co.uk

What does the so-called ‘Side Hustle Tax’ mean for you?

What does the so-called ‘Side Hustle Tax’ mean for you?

Earlier this month, HMRC introduced new rules for online marketplaces, requiring them to collect and report seller information and income to HMRC. Inevitably, this caused concerns amongst not only individuals with side hustles, but those who resell their ‘pre-loved’ items on platforms such as eBay, Depop and Vinted.  

Fear not though, as little has actually changed. If you have a second income stream (side hustle), your Self Assessment tax obligations remain the same. Similarly the rules regarding reselling second hand items have not changed either.  

However, there are some details that we feel side hustlers should be made aware of in order to avoid any tax dramas. In turn, it will be a good opportunity to refresh yourself on any tax obligations for a side hustle. So, stick with us while we break down the intricacies of tax for side hustlers.   

What is a Side Hustle?

A side-hustle is something you may do in your free time to earn some extra cash, for example selling second-hand vintage clothing. Whatever it may be, it is not your full-time job and just something you like to do part-time! 

The difference, however, is that the money you make from a side hustle is taxed differently to your full-time income from employment.  

Do I have to pay tax on my Side Hustle?

Well, this depends on what you are earning.  

Any earnings of less than £1000 within the tax year from your side hustle is not considered taxable income and you are liberated from the worries of Self-Assessment.  That’s £1000 of sales, not profit: if you spent £1000 on items that you then sell for £1500, that counts as £1500 of sales even though you’re only £500 better off. 

Also, a side hustle is something you’re doing to earn cash.  If you sell something on Vinted that you bought to wear then you’re not earning money, you’re just getting back a bit of what you paid for it. Therefore, if you’re simply reselling your unwanted items, then it’s unlikely that you will  have any ‘earnings’ to pay tax on. 

Unfortunately, if you are earning more than £1000 in your spare time, you will have to declare it. But don’t worry, we have you covered with a step-by-step guide on how to pay it.  

Remember that the platform you sell on will have told HMRC how much you’ve sold, so if you’re over the £1000 limit they’ll be expecting you to be in touch. 

How do I pay my Side Hustle Tax?

If you earn over £1000, you will need to file a Self Assessment tax return to declare your extra income.   

Income tax works on ‘tax years’ which runs from 6th April one year to 5th April the next (for complicated reasons involving Julius Caesar and the Pope – don’t ask!).  You need to keep records for each tax year, and if you need to do a tax return you have to notify HMRC by 5th October after the tax year ends (only for the first year). 

If you are registering for the first time, you will be required to follow the five step process below:

If you are registering for the first time, you will be required to follow the five step process below:

  1. Start by choosing your own business structure. You will normally be a sole-trader, unless you’ve set up a limited company or other business structure. These can have different advantages and disadvantages, so if you’re looking to grow your side hustle into a bigger business we’d advise you to do some research before deciding which best suits you.  
  2. Next, you will need to notify HMRC that you are self-employed which can be completed here 
  3. Once registered, you will need to . This is so HMRC can calculate your tax liabilities.  
  4. Following on, you will receive a Unique Taxpayer Reference (UTR) within 10 days of completing your self-assessment.  
  5. Utilise your UTR number to establish a government gateway account, enabling you to submit your tax returns online.

Your tax return for each year needs to be submitted by midnight on 31st January, which gives you nearly 10 months to work it all out. To avoid falling short of any unexpected tax obligations, please reach out to one of our team! 

And there you have it! You are ready to pay your taxes. Please be aware that not paying your side hustle tax may result in fines from HMRC. Additionally, late tax payments can raise interest which will accumulate to a higher sum. But don’t worry, we are here to help you with any concern you should have so please reach out to a member of our team for guidance.  

An introduction to the government’s consultation on tax compliance in the charity sector

An introduction to the government’s consultation on tax compliance in the charity sector

Did you know that in 2020 to 2021, charities and community amateur sports clubs (CASCs) received more than £5.5 billion in charitable reliefs? However, it has become clear that some of the tax relief rules for charities and CASCs do not work as intended, leading to non-compliance from illegitimate philanthropists.

On 27th April 2023, the government opened the consultation, Charities Tax Compliance, that aims to help determine the impact of any changes to tax relief rules, ensuring that charities and CASCs are spared unnecessary bureaucracy, but also allowing HMRC to effectively monitor the sector.

In order to receive reliefs, charities and CASCs are already obligated by HMRC to undertake certain actions, such as completing a tax return where necessary, pay any taxes and duties they owe, and operate with compliance to all the requirements of a charity. However, within the consultation, the following issues will be reviewed:
• preventing donors from obtaining a financial benefit from their donation
• preventing abuse of the charitable investment rules
• closing a gap in non-charitable expenditure rules
• sanctioning charities that do not meet their Filing and Payment Obligations.

With this in mind, we thought we would share an introduction to intended topics for discussion in the Charities Tax Compliance consultation.

Preventing donors from obtaining a financial benefit from their donation

This section of the consultation delves into The Tainted Charity Donation rules. These apply where a donor enters into an arrangement with a charity or a CASC that gives them, or someone else involved, a financial advantage in return for the donation. The Tainted Charity Donation rules are in place to prevent circular transactions, demonstrated in the diagram below:

A flowchart showing the following captions: An individual donates money to charity - arrow - The individual obtains a tax relief on the donation - arrow - They then receive a benefit back from the charity - arrow back to first caption.

The Tainted Charity Donation rules are based on a purpose test, with three conditions that must be met for a donation to be considered tainted:

Condition A – The donation to the charity and arrangements entered into by the donor are connected.

Condition B – The main purpose of entering into the arrangements is for the donor, or someone connected to the donor, to receive a financial advantage directly or indirectly from the charity.

Condition C – The donation isn’t made by a qualifying charity-owned company or relevant housing provider linked with the charity to which the donation is made.

These complex rules, however, make it difficult to identify all instances of tainted donations. The consultation outlines three potential options to update the rules for tainted donations, which include: replacing the rule altogether, removing, or amending Condition B. These changes would still allow charities to thank donors for their giving, with modest gifts in line with the existing donor benefit rules.

Preventing abuse of the charitable investment rules

The charitable investment rules are in place to enable charities to invest excess funds to yield a financial return. In turn, this allows them to advance the organisation’s charitable aims without treating the investment as non-charitable expenditure and restricting their tax exemptions. Sometimes, individuals manipulate the charitable investment rules to make an investment through a charity to benefit others; for example purchasing an asset to be used by trustees at no benefit to the charity. HMRC aims to manage the charitable investment rules in a way that facilitates funding for charities but makes it more difficult to abuse the system. The consultation lays out plans to require charities to be able to justify investments and demonstrate how they benefit the charity, should HMRC have cause to ask.

Closing a gap in non-charitable expenditure rules

When a charity incurs non-charitable expenditure, they lose the tax exemption on the equivalent amount of their income, and a tax charge is raised against their attributable income and gains. Attributable income and gains refers to the type of income or gain that is eligible for tax relief, and includes:

  • Gift Aid donations
  • payroll giving donations
  • income such as rental income
  • interest received
  • profits from a charity’s primary purpose trading activity
  • capital gains.

However, distinguishing between attributable income and gains, and a charity’s available income and gains can act as a blocker when HMRC requires the relief to be returned for non-charitable expenditure. To combat this, amongst other options, HMRC is considering a review of the definition of attributable income and gains so that it considers which types of income become chargeable following non-charitable expenditure.

Sanctioning charities that do not meet their filing and payment obligations

Although charities should submit annual tax returns to HMRC, they acknowledge that many are run by volunteers, and therefore struggle to balance administrative requirements alongside their charitable mission. To accommodate this, most charities are only required to file a tax return every three years. Some still fail to fulfil this requirement, yet expect their Gift Aid claims to be paid. Alongside being unfair to the charities who fulfil their duties, it also means that there is a risk of charities who do not qualify receiving reliefs.

To overcome this and improve compliance, HMRC is considering the sanction of withholding payments of Gift Aid and disapplying other tax reliefs from charities that have fallen behind on their reporting and filing obligations. It’s hoped that this will encourage charities to fulfil their obligations, so that they can still access the tax reliefs they are entitled to.

 

The consultation will run for a total of 12 weeks until 20 July 2023, and responses can be sent by email to charitypolicy.taxteam@hmrc.gov.uk.

At Fiander Tovell we act for many charities of varying sizes. If you would like further advice about the tax compliance of a charity that you are involved with, please do not hesitate to get in touch Adam Buse at adambuse@fiandertovell.co.uk.

You can find more of the latest accounting and tax updates here.