Expenses incurred by employees are generally the responsibility of the employer.

Quite often, however, employees have to bear the cost themselves when travelling for work, having meals and even providing clothes, which in most cases are not tax deductible.

What employment expenses qualify for tax relief in the UK?

Work-related travel

Having to travel to a different location from the workplace is an essential travel expense. The commute to and from the location will be tax-deductible.

Clothing

This could be for any ‘specialist’ or protective work clothes which are not paid for by the employer – these are known as flat rate expenses.

You cannot usually claim for buying tools and specialist clothing, but you can claim for their upkeep, for example, repairing, cleaning or replacing them.

You may be able to claim a standard £60 allowance per year for the cost of upkeep and replacement of specialist or protective clothing. The tax reduction you get is usually 20 per cent of the allowance.

Subsistence costs

Accommodation and upkeep are tax-deductible when an employee is away from home on work trips.

Professional subscriptions

Professional organizations’ subscriptions may also qualify for tax relief. However, the subscription should be related to your job and be made to a professional association authorized by HMRC.

Working from home

Working from home became commonplace during the pandemic.

Employers can make tax and NIC-free payments to an employee in respect of reasonable additional costs incurred for working at home, for example, gas, electricity, telephone and internet.

However, HMRC allows a tax and NIC-free flat rate reimbursement of up to £6 a week without providing evidence of extra costs. Anything above that will require receipts or bills as evidence.

The tax relief works by taking off the amount from your employment income, reducing the taxable income and the tax you have to pay.

This has led to coining the phrase ‘tax deductible’ or ‘allowable’ expenses. You may have to claim to obtain this tax relief.

Link: What if I incur expenses in relation to my job?

New measures have been introduced for the even-handed treatment of spouses and civil partners who are in the process of separation, divorce or dissolution.

The new legislation clarifies Capital Gains Tax (CGT) rules that apply to transfers of assets between spouses and civil partners, giving them up to three years in which to make no-gain or no-loss transfers of assets between themselves when they cease to live together, and unlimited time if the assets are the subject of a formal divorce agreement.

The new measure gives those who are separating more time to transfer assets between themselves without incurring a CGT charge.

The legislation also ensures that a partner who retains an interest in the former matrimonial home be given an option to claim Private Residence Relief (PRR) when it is sold.

These changes apply to disposals that occur on or after 6 April 2023.

Link: Capital Gains Tax: separation and divorce

HM Revenue & Customs (HMRC) has increased the interest rate applied to late tax payments following the latest hike in the Bank of England base rate.

The late payment interest rate increased to 4.25 per cent from 23 August – the highest rate since the height of the financial crisis in January 2009.

It will put further pressure on those struggling to pay their tax bills in the face of the cost-of-living crisis.

Late payment interest is payable on late tax bills, including:

• Income Tax
• National Insurance contributions
• Capital Gains Tax
• Stamp Duty Land Tax

The Corporation Tax pay and file rate also increased to 4.25 per cent.

What is HMRC repayment interest?

If your company or organisation pays too much Corporation Tax, HMRC will repay what you have overpaid and may also pay you interest on it.

The repayment interest rate has increased for the first time since 29 September 2009 to 0.75 per cent, up from 0.5 per cent.

Interest rates set in legislation

HMRC interest rates are set in legislation and are linked to the Bank of England base rate, so the rise is automatically triggered.

The Bank of England voted in favour of the 0.5 percentage point increase early in August.

Link: HMRC interest rates for late and early payments

Ask anyone who either uses their vehicle for business reasons, or puts fuel in a company car, and you will soon realise business mileage can be a confusing topic.

It’s important to know that if you fall into either of these two categories, you might be able to claim tax relief for business mileage.

HM Revenue & Customs’ (HMRC) business mileage rates have stayed the same for the past 12 years, and currently stand at:

• 45p for the first 10,000 miles
• 25p for each business mile above the 10,000-mile threshold.

What’s more, being clear on what HMRC defines as business mileage will save you time when you claim back what you are entitled to.

HMRC currently defines business mileage as any travel that you do whilst doing your job. This can also be extended to cover travel made to a temporary workplace.

There are, however, certain caveats to this definition where relief isn’t available. These include:

• Normal travel between your home and permanent place of work
• Any travelling you conduct privately.

Even though the business mileage rates outlined above are HMRC’s standard, employers do not need to use these rates when paying business mileage and they could choose to set their own rates.

There is a provision for employees to claim the difference at the end of each tax year where a company mileage rate is lower than HMRC’s. However, if your employer pays a higher rate of mileage than the HMRC standard, this will be subject to tax.

You must keep accurate records of all the mileage, dates, and details of your business travel, as you will need this information if you want to claim Mileage Allowance Relief.

HM Revenue & Customs (HMRC) has announced plans to offer a recurring direct debit to employers as part of their wider payment modernisation programme.

At present, employers can only set up a direct debit to collect a single payment.

The launch of this service, slated for mid-September this year, will see a change to the employer’s liabilities and business tax account (BTA) screens.

A link will also be included that will enable client companies to mandate a direct debit instruction, which will authorise the tax authority to collect money directly from their bank account.

Much like any other direct debit mandate, employers will be able to view, amend, or cancel the direct debit via a “manage your direct debit” once it has been set up.

Along with this update, HMRC stated that it has been extending employer PAYE for agent online services to allow accountants and adviser to see payment records held by HMRC along with employer liabilities.

Link: Employer PAYE — new recurring Direct Debit functionality

A new study has revealed the cashflow struggles faced by small businesses across the UK, resulting in calls for Government action.

The research, conducted by Xero Small Business Insights and Accenture, discovered that the average UK small business experienced a “cash flow crunch” for more than four months every year.

A cash flow crunch is when monthly takings do not sufficiently cover outgoings.

This issue often comes hand in hand with late payments, which have worsened since the Covid-19 pandemic. Late payments are cited as one of the main reasons for a stunt in business growth.

Alex von Schirmeister, Xero’s Managing Director for Europe, the Middle East and Africa, said: “We are seeing big businesses purposely withholding cash from their small customers. We must move away from calling it ‘late payments’, which legitimises poor practice and lacks urgency. It’s time we labelled this ‘unapproved debt’.

“Given the steady post-pandemic resurgence in cash flow issues that we’re seeing in the UK, we urge the Government to help.”

According to the research, 23 per cent of small businesses experienced a cashflow crunch for over six months each year, with 94 per cent doing so no less than once during 2021.

Hospitality sector worst affected

Firms impacted most negatively were those in the hospitality sector, struggling to keep their heads above water with the introduction of Covid-19 restrictions.

As a result, most companies in the industry with negative cash flow peaked at 54 per cent in July 2020.

Link: Cash flow crunch continues to hamper UK small businesses

With fluctuating incomes and the costs of living hitting businesses and individuals alike, people who have never previously had any issue with paying tax bills on time may have found themselves passing the 31 July payment on account deadline without being able to pay what they owe.

If this is the position you find yourself in, what should you do?

Don’t bury your head in the sand!

The very worst thing you can do when you owe money to HM Revenue & Customs (HMRC) is to do nothing.

Failing to act will see interest and penalties increase rapidly, meaning you’ll have to find even more money to cover your debt, plus any interest or fines charged.

Do speak to HMRC

For Self-Assessment debts of up to £30,000, HMRC lets you set up an instalment plan online to pay off the debt in more manageable monthly payments.

You can do this here.

To be eligible, you must be within 60 days of the payment deadline and able to make the repayments within 12 months.

If that is not the case, then you should call HMRC on 0300 200 3822.

If you cannot access HMRC’s Time to Pay arrangements, you might be able to spread the cost of your bill with a tax-specific loan.

The Recovery Loan Scheme, which helped businesses throughout the pandemic, has been extended for a further two years.

Launched on 6 April 2021, the Recovery Loan Scheme (RLS) was one of several finance schemes available to struggling businesses.

It provided financial support to businesses across the UK as they recovered and grew following the Coronavirus pandemic.

Nearly £80 billion was lent to SMEs through these schemes, but only £1 billion of borrowing was made via the Recovery Loan Scheme.

Scheme supported 19,000 businesses

The RLS has supported almost 19,000 businesses with an average of £202,000 in support.

It could be used to finance any legitimate business purpose – including managing cash flow, investment and growth. However, you had to be able to afford to take out additional debt finance for these purposes.

It was thought the scheme would be replaced with a version called RLS2, but now the Government has decided to extend the original scheme with the addition of a personal guarantee from borrowers.

How will the scheme work?

Businesses will be able to apply for the latest version of the scheme in August. The £2 million maximum loan amount remains the same and the Government will underwrite 70 per cent of lender liabilities, at the individual borrower level, in return for a lender fee.

Business Secretary, Kwasi Kwarteng, said: ‘‘The extension of the recovery loan scheme will help ensure we continue to provide much-needed finance to thousands of small businesses across the country, while stimulating local communities, creating jobs and driving economic growth in the UK.”

Shevaun Haviland, director general of the British Chambers of Commerce, added: “The two-year extension to the recovery loan scheme will be a lifeline for many businesses facing a rising tide of costs. It is now essential that businesses in need of this extra support can access the scheme as quickly as possible.”

If you intend to make use of this extension to the Recovery Loan Scheme, then you must seek professional accounting advice beforehand to make sure you maximise your use of the funding.

Link: Further support for small businesses feeling the squeeze as £4.5 billion Recovery Loan Scheme extended

Corporation Tax (CT) rates are set to rise in the UK from 1 April 2023. From this date, the main rate of CT will increase to 25 per cent for all companies with taxable profits over £250,000.

There will also be a small profits rate for companies with taxable profits of £50,000 or less of 19 per cent, while businesses that fall between these two thresholds will effectively be taxed at 25 per cent, but enjoy a marginal relief based on their specific level of profitability.

Although the future of the Corporation Tax rise is currently up in the air due to pledges made during the Conservative Party leadership contest, it is worth considering what impact this change could have on group companies.

Under the changes to CT, the existing 51 per cent group company test will be replaced by associated company rules.

These rules will determine whether a group should be deemed a large company (taxable profits in an accounting period between £1.5 and £20 million), or a very large company (profits in excess of £20 million) and should make payments through instalments due to this association.

Association is determined according to whether a company has been connected with another company for the 12 preceding months and, whether either, one company has control of the other or both companies are under the control of the same person or group of persons.

These rules apply to a company’s worldwide associations, regardless of their tax residency. However, the associated company rules don’t apply where a company is:

• Dormant
• A passive holding company
• Not substantially dependent on another company.

A potential pitfall

This change affects how companies make CT payments, which could affect cash flow.

If a group company is within the associated company rules, then it can continue to make quarterly instalment payments in the 7th, 10th 13th and 16th months of the accounting period.

Whereas, if this change deems them “non-large” and takes them out of the instalment regime, CT will be due nine months and one day after the end of the accounting period.

The overall impact of this is that the first tax instalment payment for the next accounting period will be due before the tax has been paid in respect of the previous year, creating an unexpected charge.

With this being the case, careful advanced planning is required to make sure cash flow is not adversely affected by this complex change.

Link: Corporation Tax Rise

Unincorporated businesses, including sole traders, the self-employed and trading partnerships, will be taxed on profits generated in the 12 months to 5 April each year from 2024/25.

This is a significant change to taxation, which removes the basis period rules and prevents the creation of further overlap relief in a new system known as the ‘tax year basis’.

These changes were meant to be brought in a year earlier but were delayed by the Government in September 2021 to give those businesses affected more time to prepare.

Now the clock is ticking once again on these changes and unincorporated businesses must start preparing now.

The basis period system

Unincorporated businesses are not required by law to produce accounts by a particular date, meaning they can choose any accounting date they like.

Instead, they are currently taxed on profits or losses arising in the accounting period for the 12 months ending with the accounting date which falls in the tax year, known as the ‘current year basis’.

For example, an accounting period ending on 31 December 2022 would be taxed on profits arising in the 2022 calendar year, rather than the 2022/23 tax year.

As a result of this, an unincorporated business’s profit or loss for a tax year is usually the profit or loss for the year up to the accounting date in the tax year, called the ‘basis period’.

However, specific rules do determine the basis period during the early years of trading.

Where the accounting end date is not 5 April or 31 March, which is the equivalent of 5 April for the first three years of trade, the rules can create overlapping basis periods.

This creates a tax charge on profits twice and generates ‘overlap relief’, which is received when the unincorporated business eventually ceases trading.

The new tax year basis

The latest reforms will change the basis period for all unincorporated businesses to the end of the tax year (5 April) from 2024/25, regardless of their current accounting period.

This will create the need for interim arrangements for businesses that do not currently have year-ends falling between 31 March and 5 April each year.

These businesses will potentially face a single, higher tax bill from their profits arising in the year-end falling in the 2023/24 tax year to 5 April 2024.

According to HM Revenue & Customs (HMRC), businesses with a different accounting period end date to the end of the tax year:

• Will need to apportion profits/losses
• May need to use provisional figures in their tax returns
• The statutory rule that deems 31 March to be the 5 April in the first three years of a trade would be extended to apply to all years.

Despite the changeover, reliefs, allowances and tax band thresholds will remain unchanged and will not be pro-rated.

As a result, some taxpayers could move into higher tax bands, while also reducing their ability to benefit from various annual reliefs and allowances during the transition year.

Businesses with year ends not aligned with the tax year will also have a much shorter time between when they generate profits and when tax is due, which could have cash flow implications.

What help is available? 

HMRC is still considering an election to allow businesses with higher profits, due to the change, to spread those additional profits equally over five years. The tax authority will also provide ‘Time to Pay’ arrangements for those needing to spread the costs further.

Businesses can also use all overlap relief accrued when they began trading during the transition year (2023/24) to soften the blow. This would mean that businesses in this position will only have tax to pay on 12 months’ profits.

However, overlap relief dates back to the first year a business traded, when it is likely to have been much less profitable.

Due to the introduction of these rules, new businesses will not generate overlap relief from 2024/25 and there will be no special rules required for starting or ceasing trading or for a change in the accounting period end date.

For the many unincorporated businesses that already have year-ends aligning with the tax year, nothing will change.

However, for those with year-ends that are not synchronised with the tax year, there are several considerations and careful tax planning may be necessary.

Link: Basis period reform