What is the herd basis?

There are special rules which can apply to farmers and market gardeners that prepare their accounts on an accruals basis. This includes special rules for farmers’ averaging relief, dealing with losses and the treatment of compensation for compulsory slaughter.

The special rules also refer to the use of the herd basis. The herd basis is a special method of working out profits or losses which may be used by people who keep production livestock. Usually, farm animals are treated as trading stock. However, under the herd basis a herd or flock of production animals is excluded from trading stock and treated, in most but not all circumstances, like a capital asset.

Any farmer that wishes to use the herd basis must elect to do so. Where a herd basis election is in force, the treatment for the purpose of calculating farming profits of the herd or herds covered by the election is governed by special rules. The herd basis rule can also apply where animals are jointly owned, for example, in some share-farming arrangements.

Planning note

These special rules do not apply to farmers and market gardeners who work out their profits using the cash basis of accounting rather than the accruals basis. If you would like more information about this scheme, and how it may benefit your tax position, please call for a consultation. 

What to consider when employing family, young people and volunteers

When a new employee is added to the payroll it is the employers’ responsibility to ensure they meet the employees’ rights and deduct the correct amount of tax from their salary. This includes any employees who are family members.

HMRC’s guidance is clear that if you hire family members you must:

  • avoid special treatment in terms of pay, promotion and working conditions
  • make sure tax and National Insurance contributions are still paid
  • follow working time regulations for younger family members
  • have employer’s liability insurance that covers any young family members
  • check if you need to provide them with a workplace pension scheme

Planning notes

It is possible to employ young people if they are 13 or over but there are special rules about how long they can work and what jobs they can undertake. Young workers and apprentices have different rates from adult workers for the National Minimum Wage.

The rules are different if you take on volunteers or voluntary staff, but the employer is still responsible for health and safety and must give inductions and training in the tasks they’re instructed to do.

Salary sacrifice examples of tax consequences

The tax and NIC advantages of certain benefits provided as part of a salary sacrifice arrangement were removed from 6 April 2017. The new rules effectively remove the Income Tax and employer NIC advantages of certain benefits provided as part of salary sacrifice arrangements such as mobile phones and workplace parking.

When the changes were introduced it was confirmed that all arrangements in place before April 2017 will be protected for up to a year. This means that current contracts that remain under the pre-2017 rules will fall under the new rules from April 2018. The April 2018 deadline is extended until April 2021 for cars with CO2 emissions above 75g/km, accommodation and school fees.

The changes to the salary sacrifice rules are complex. We have reproduced below three examples of typical consequences published on the HMRC website:

Salary Salary sacrificed Non cash benefit received Consequence
£350 per week £50 of that salary Childcare voucher to the same value  Only £300 is subject to tax and NICs, childcare vouchers are exempt from both tax and Class 1 NICs up to a limit of £55 per week.
£350 per week  £100 of that salary Childcare vouchers to the same value £295 is subject to tax and NICs – PAYE is operated on the £250 cash component, childcare vouchers are exempt from both tax and Class 1 NICs up to a limit of £55 per week, £45 is reported as a non-cash benefit at the end of the tax year using forms P11D or P9D.
£5,000 bonus £5,000 £5,000 employer contribution to registered pension scheme  No employment Income Tax or NICs charge to the employee – the full amount is invested in the pension fund.

Planning note

The following benefits are not currently affected by the new rules:

  • Employer provided pensions and pensions advice;
  • Childcare vouchers;
  • Employer provided childcare or workplace nurseries;
  • Bicycles and cyclist safety equipment including cycle to work schemes, and
  • Ultra-low emission cars, below 75g/km.

Projects that count as R & D for tax purposes

Research and development (R&D) tax credits were introduced for small and medium sized enterprises (SMEs) in 2000 and for large companies in 2002. R&D credits are a corporation tax relief to encourage innovation and enterprise within the UK economy.

Small and medium-sized enterprises (SME) can claim SME R&D tax deductions totalling 230% of any qualifying R&D expenditure (from 1 April 2015). It is also possible to claim a tax credit if the company is loss making.

It is important to be aware that the rules for claiming R&D tax relief are very generous and that from a tax point of view many business activities can qualify for relief rather than just those involved in very specific scientific type research.

To qualify for R&D relief you need to explain to HMRC how a project:

  • looked for an advance in science and technology;
  • had to overcome uncertainty;
  • tried to overcome this uncertainty;
  • couldn’t be easily worked out by a professional in the field.

R&D tax relief can be used by companies that are developing new or improved systems, processes, services or products in the areas of technology or science. The R&D project in question must relate to the company’s trade and can be used by an existing company or by new start-ups.

Planning note

Small companies that haven’t claimed R&D before and have an annual turnover of less than £2 million and less than 50 employees can apply for Advance Assurance. This allows small companies to be able to be sure they can claim R&D tax credits before embarking on significant expenditure. Once accepted, HMRC will allow claims without further enquiries for the first 3 accounting periods of claiming R&D relief.

If you undertaking R&D and have not claimed this relief in the past, please call for more information.

Buying a rental property?

The removal of the 10% wear and tear allowance that allowed landlords to reduce the tax they paid on furnished property lets (after the end of the 2015-16 tax year) was a significant loss for many landlords. The 10% deduction was available to landlords regardless of whether furnishings in their property were replaced or not.

The wear and tear allowance was replaced by the replacement of domestic Item relief. The relief only allows landlords the ability to claim tax relief when they actually replace furniture, furnishings, appliances and kitchenware.

Landlords must also ensure they keep a record of any capital expenditure which has been incurred on an investment property.

This is important to remember when purchasing a new investment property that care is taken to ensure that any domestic items that are bought with the property are listed and valued in the contract. This would then mean that relief would be available when these items are replaced. In addition, it may be possible to reduce the stamp duty payable.

Planning note

The replacement of domestic item relief is available for the cost of domestic items such as movable furniture, household appliances, kitchenware and furnishings such as curtains and carpets. There is also an important distinction between deciding whether or not a new item represents a replacement or an improvement. Where the new item is an improvement of the old item the allowable deduction is limited to the cost of purchasing an equivalent of the original item. To be clear, there is no relief available for the initial cost of domestic items purchased for a new or existing rental property.

For more information regarding this relief please call.

A reminder of ways you can pay tax due

Last week we confirmed that as from 13 January 2018, HMRC will not accept personal credit cards for payment of tax or penalties. We have listed below the payment options you still have available to you:

  • Electronic payment. HMRC’s preferred method of payment is by electronic bank transfer using Faster Payments, CHAPS or BACS. In order to make a payment electronically you will need your 11-character payment reference when you pay. This reference is made up of your 10-digit Unique Taxpayer Reference (UTR) followed by the letter ‘K’. This should not be confused with your National Insurance number or other ID numbers as payments with the wrong reference number can be delayed. The correct number can be found on your HMRC online account. You can also pay by direct debit but you will need to make a separate payment each time to HMRC
  • Pay at your bank. This option is only possible if you still receive paper statements from HRMC and have the paying-in slip HMRC sent you. If you do you can pay by cash or cheque (including your reference number) at your bank or building society. HMRC will accept your payment on the date you make it, and not the date it reaches their account (as long as you pay from Monday to Friday).
  • Debit or credit card online. It is still possible to pay with a personal debit card online or to use a company credit card which must be linked to a business bank account. However, when it comes to making personal tax payments care should be taken where an employer pays a debt that an employee owes to a third party. 
  • Cheque payments. HMRC accepts cheques made payable to ‘HM Revenue and Customs only’ followed by your UTR number. You should allow 3 working days for your payment to reach HMRC.
  • Budget payment plan. There is also an option to set up a budget payment plan if you prefer to make regular payments in advance.
  • Post office. HMRC removed the option of making a payment through a Post Office on 15 December 2017.

Planning note

Taxpayers that make payments on account should be aware that the first payment on account for 2017-18 is due on 31 January 2018 together with any balancing payments due for 2016-17. There are penalties for late payment of tax due and we would strongly advise all our clients to ensure they meet these payment deadlines and leave sufficient time for the payment to reach HMRC by the close of play on 31 January 2018.

Can we claim for marketing, entertainment and subscription costs?

The self-employed are often concerned if an expense is allowable or not for tax purposes. In this article, we will briefly look at the rules for claiming marketing, entertainment and subscription costs.

Most marketing expenses are treated as allowable business expenses. This includes advertising in newspapers or directories, bulk mail advertising (mail shots), providing free samples and website costs.

The cost of entertaining clients, suppliers and customers or event hospitality in relation to the business is not treated as an allowable business expense.

Costs associated with ‘entertaining’ staff may be allowable if they relate to the welfare of your staff or for qualifying events such as a Christmas party. You cannot claim for carers or domestic help nor for subcontractors or others who are not employees.

Most subscriptions such as trade or professional journals or membership of trade or professional organisations are allowable once they relate to your business. However, payments to political parties and gym membership fees are excluded.

Planning note

Charitable donations are not an allowable business expense as they are not directly related to the running of your business. However, you may be able to claim for sponsorship payments if your business receives something related to the business in return.

Basic monthly tasks if you run your own payroll

One of the most time-consuming admin tasks associated with the running a small business can be dealing with the payroll.

Generally speaking, you can:

  • Run your own in-house payroll, or
  • Hire your accountant to do the work for you.

If you operate your own payroll, there are a multitude of tasks that must be completed each tax month. Tax months run from the 6th of one month to the 5th of the next.

This includes:

  • Using payroll software to record employees pay, deductions and National Insurance Contributions on or before each payday. You also need to consider other deductions such as pension contributions and student loan payments.
  • Producing payslips for employees. This may require different software.
  • Calculating any statutory pay such as maternity or sick pay.
  • Updating the system for new employees.
  • Reporting employees pay and deductions to HMRC by making a Full Payment Submission (FPS).
  • Calculating and paying HMRC all amounts due, by the 22nd (or the 19th if paying by post) of the month following the employees’ payday.  

There are penalties for late reporting and you must also comply with relevant legislation such as ensuring you are paying at least the minimum wage and keeping relevant records.

Planning note

If you are about to employ someone for the first-time or would like to consider what other options are available to manage your existing payroll, we would be happy to discuss how we can help. Alternatively, if you want to continue managing your payroll in-house, we can also advise on the best software packages to get the job done.

The end of credit card payment surcharges?

From 13 January 2018, it will become illegal for any business to charge a fee in addition to the advertised price of a transaction to consumers (widely known as surcharging). For example, a travel company charging more to use a credit card rather than a debit card or cash.

This change is being brought about by the introduction of the EU Second Payment Services Directive (PSDII) which the UK government is required to implement into UK law in order to meet its legal obligations and avoid infraction proceedings.

The reforms also include other changes to the way payments by debit and credit cards, direct debit, credit transfers, standing orders and other digital payments are transacted and is intended to promote competition in the financial services industry and provide more security for online transactions.

Unfortunately, it looks like these changes may not signal an end to booking fees and other similar charges. The PSDII legislation does not stop businesses charging a separate booking fee but the fee can only be charged if it is applied across all available payment methods. It also remains possible to levy a surcharge for payments by other methods such as cash or cheque but the amount must reflect the actual cost of dealing with this type of payment.

It has been widely reported in the press that many businesses including a leading online food delivery company has removed its credit card fee and introduced a new ‘service charge’ that applies to all payment methods. It will be interesting to see how the Government and Trading Standards will react if these new charges become commonplace.

Commercial transactions are not covered by the ban, but are subject to a prohibition on charging fees, this means the fee charged cannot exceed the actual cost of accepting the specified payment method. Some businesses may decide to stop accepting credit card payments altogether. Indeed, HMRC already confirmed some time ago that personal credit cards can no longer be used to settle a tax bill from 13 January 2018.