Five month delay to introduction of the Domestic Reverse Charge for VAT

HMRC have announced a further five month delay to the introduction of the Domestic Reverse Charge for VAT, due to the impact of COVID-19.

On Friday 5 June 2020, HMRC issued Revenue and Customs Brief 7 (2020) announcing that the introduction of the Domestic Reverse Charge for construction services will be delayed for a further period of 5 months, until 1 March 2021, due to the impact of COVID-19 on the construction sector.

Whilst the introduction is delayed, HMRC again confirmed they remain committed to the introduction of the reverse charge. In the intervening period, HMRC will focus additional resource on identifying and tackling existing perpetrators of fraud in the sector.

Given the additional delay, it would appear less likely that HMRC will be sympathetic to businesses failing to get ready for the changes, for example by adapting their accounting systems etc.  It is therefore important businesses use the additional time to better prepare for the changes as a light touch approach by HMRC is less likely now.

Contact us

For more information please contact Hydeam Sulton, Head of VAT and Indirect Tax, on 0191 226 8351.

Could sale and leaseback of your commercial property be the answer to your cashflow concerns?

As we continue to stumble through lockdown, several trends have appeared across markets, with business owners looking at a range of options to support cashflow during a period of much reduced trading.

The latest trend is property sale and leaseback, with Topps Tiles being a notable business who have recently executed a transaction of this nature.

This is an arrangement whereby businesses who own their trading premises can sell that asset to an investor and then enter into a long term lease arrangement with the purchaser. Such a move has an immediate cash flow boost as the proceeds of any such sale are paid directly to the business making the sale, less any debt which may exist which uses that asset as security.

Such an arrangement also has the benefit of a long term lease which ensures that the property asset remains available for use across the lease term, with the lease then set at an agreed price. Property investors will look for strong counterparts who can demonstrate an ability to trade profitability across the envisaged lease term and tend to be drawn towards higher value assets in ‘good’ locations, with consideration given as to how easily the asset could be repositioned toward a new tenant in future years.

Positioning for such a transaction and finding a suitable financier is not easy but could well be useful for businesses as we continue through 2020.

Contact us

We can assist with a review of your assets, your financial performance and make introductions should this be a strategy which you would like to explore.

For further advice, please contact Lee Humble at lee.humble@taitwalker.co.uk.

Disposing of Property – from April 2020

Currently, when UK residential property is disposed of, a UK taxpayer declares any capital gain made on their self-assessment tax return. The Capital Gains Tax (CGT) is due to be paid on or before the 31 January following the end of the relevant tax year e.g. a sale of a property in May 2018 would need declared on the 2018/19 tax return and the CGT due by 31 January 2020.

Since 2015, non-residents have had to inform HMRC within 30 days of a residential property sale and pay the tax at the same time.

Changes to the rules

From April 2020, all disposals of UK residential property will need to be reported and the CGT paid within 30 days of completion. A return must be made to declare the sale and calculate the tax due. If there is no gain made, or the gain is covered by exemptions or losses, no return will be required. Once a return has been made, including the estimated CGT paid, the taxpayer must file a self-assessment tax return. This has to include the property gain, by the usual deadline. The CGT already paid will be deducted when the total CGT is calculated.

There have also been changes to the reporting requirements of non-resident individuals. Instead of only having to report residential sales, they must now report sales of all property including commercial. The tax will also need to be paid within the 30 day deadline.

Getting the tax right

CGT is calculated at either 18% or 28% depending on the other income of a taxpayer. It also depends on the income tax rate bands they have available. Therefore, it is important to understand tax and be able to calculate the estimated CGT due.

Understating the CGT could result in cashflow issues. For example, an individual thinks they have paid all of the CGT, but discover they owe an additional amount of CGT when they file their tax return. This could be up to 22 months after the sale. Similarly, overstating the tax will mean that the taxpayer will need to wait until they file their self-assessment tax return to receive a refund.

How we can help

This is a brief overview of the new rules and you should seek expert advice if you have any queries. MHA Tait Walker can calculate the CGT due and submit a return on your behalf.

One of our fellow MHA member firms, MHA Macintyre Hudson, have released a blog on Capital Gains Tax planning, which you may find really useful.

Please contact Laura Dickson or Dorothy Johnston for more information or to discuss your requirements.

Property Blog Series: Episode 3 – Owning personally or through a company

The second blog in our property series looked at tax accounting and allowable expenses.

We now look at owning the property personally or through a corporate structure.

What is the difference between the different ownership routes?

Owning a buy to let property is straight forward for tax if you own it personally, you will pay Income Tax on the profits of that property business at your marginal rate of tax.  The current Income Tax rate are 0%, 20%, 40% and 45% depending on your other income, as discussed in the first blog of the property series.

Owning the property via a corporate structure means the company suffers Corporation Tax on the rental profits.  The current Corporate Tax rate is 19% and this will reduce to 17% in April 2020. You do not pay Income Tax on the profits of the rental business until you take income from the company.  Income taken from a company will be salary or dividends.

Profits are kept in the company and Income Tax is only suffered when income is taken from the company, therefore it can be a good tax strategy to leave the profits in the company until you require them at a time your marginal tax rate is lower i.e. in retirement or a break in income.

Separate legal entity

A company is a separate legal entity to you, meaning that typically you aren’t personally responsible for the company’s debts.  In the eyes of the law your finances and your company’s finances are distinct from each other. However, it is possible to become liable for the debts of the company if you provide personal guarantees in relation to the liabilities and debts of the company (and so personal guarantees should be entered into with caution).  

What are the costs of running a limited company?

A limited company needs to be registered with Companies House and accounts filed each year.  Corporation tax returns also need filed.  Other running costs may include paperwork for dividends paid as well as payroll management.

A lot of running costs are tax deductible when calculating the profits of the company.

An example of tax savings

Owning personally

Mr Smith owns a buy to let property, the rental income is £20,000 with expenses incurred of £2,000 and mortgage interest of £1,000.

Mr Smith also has employment income of £35,000.  He is currently a basic rate taxpayer and has £15,000 of his basic rate band left to use before he pays tax at the higher rate.

The tax due on the property profit is:

Rental income£20,000
Less expenses(£2,000)
Less mortgage interest(£250)
Profit£17,750

The Income Tax due on the property Income is therefore:

£15,000@ basic rate of 20%£3,000
£2,750@ higher rate of 40%£1,100
£4,100
Less 75% mortgage interest basic rate credit(£150)
Total Income Tax due£3,950

Owning via a company

Mr Smith Ltd owns the buy to let property, the rental income is £20,000 with expenses incurred of £2,000 and mortgage interest of £1,000.

Mr Smith is the director and shareholder and does not take any profits from the company as he has his salary of £35,000.

The previous example showed the mortgage interest restricted, as discussed in the second blog of the property series.  The key difference here is that the mortgage interest is fully allowable by the company and is not restricted.

The Corporation Tax is:

Rental income£20,000
Less expenses(£2,000)
Less mortgage interest(£1,000)
Profit£17,000
Corporate Tax @ 19%£3,230

You will see that the tax saving here is £720 and this will increase further when the Corporation Tax rate reduces to 17% in 2020.  The tax savings would increase if Mr Smith’s salary increased and more of his rental profits were taxed at a higher rate of Income Tax.

If Mr Smith earned £50,000 salary, the Income Tax would be £6,950 and the Corporation Tax would be £3,230 making the tax saving £3,720.  As you can see, the higher your own marginal rate of tax is means higher tax savings if the company own the property and you did not take any income from the company.

Which option is best for me?

It can be advantageous for tax and legal protection if a property is held in a company.  However, depending on the level of income you take from the company, as well as the admin costs incurred for running the company, it may not be beneficial for tax in your situation.

If your plan is to build up a portfolio of properties, doing so within a company may well be the most cost effective route in the long run.   However if you only ever intend to have one or two properties and the rental income is not substantial, then the costs of a company could outweigh the benefits. 

We recommend you take professional guidance when making a decision on ownership and MHA Tait Walker will happily assist you with this.

Need extra help?

At MHA Tait Walker we have a range of specialists in this area who can answer any queries you may have and help you make the correct decision.  Please contact Ryan Keltie on 0191 285 0321 or email ryan.keltie@taitwalker.co.uk

Other episodes in this series

Episode 1 – Considering purchasing a rental property?
Episode 2 – Property ownership

Property Blog Series: Episode 2 – Property Ownership

Accounting for your property

The first blog in our property series looked at tax considerations of running a property business and your personal filing requirements as a landlord. 

We will now look at the accounting for your property business and allowable expenses for tax.

What income do I need to declare?

To determine your taxable profits on which you will be taxed, it is important to understand tax accounting.  When accounting for property income and expenses you will likely be required to use the ‘cash basis’ method rather than the previously required ‘accruals basis’ method. 

  • Cash basis means that you account for income received and expenses paid in the tax year regardless of the period they relate to. 
  • The accruals method requires you to account for income and expenses due, but not necessarily paid, in the tax year i.e. rent due in March 2019 but not actually paid until May 2019 would be taxable in the 2018/19 tax year.  Therefore it is necessary to recognise money owed and owing (debtors and creditors) and expenses relating to different accounting periods.

All landlords need to use the cash basis, unless you make an election to use the alternative method, or you meet certain conditions. For example, if rents are more than £150,000 or the property business is carried out by a company or a partnership. Cashflow and expenses should be considered when decided to make an election to use the alternative method.

MHA Tait Walker can provide more information on the conditions if required.

What expenses can I claim?

When you work out your taxable rental profit, you can deduct allowable expenses from your rental income. The expenses must be wholly and exclusively for the purpose of renting out the property so you can’t claim for personal expenses.

Anything of a capital nature i.e. putting a new roof on the property, is not allowable either. The main deciding factor in determining if an expense is capital is if it is a ‘like for like’ replacement or an enhancement to the property.

Capital expenditure can be a contentious area; something one person deems to be an improvement may actually be allowable for income tax. A good example of this would be a new kitchen to replace an old kitchen. The materials may appear to be an enhancement or improvement, but this is merely because of modern equipment used where there is no alternative. If the new kitchen is of the same standard, size and layout as the old kitchen, the incurred costs will likely all be allowable. If you were extending the kitchen and upgrading the style then this would likely be capital expenditure and not allowable for income tax.

Capital costs will be taken in to account when the capital gain is realised on the sale of the property.

Types of expenses

Maintenance & Repairs 

Maintenance and repair expenditure are typically the most common expenditure, and the definition of a repair is simply restoring an asset back to its original condition. This can sometimes mean replacing items. For example, replacing a broken door, this would be classed as an allowable maintenance and repair cost.

A point to note is should you have a landlord insurance policy in place covering the cost of some repairs to the property, expenses can only be claimed on additional repairs not covered by your insurance. 

Replacement of domestic items relief 

‘Replacement of domestic items’ relief replaced the ‘wear & tear’ allowance and is available to all landlords of residential property, regardless of whether their property is furnished or not (previously you could only claim ‘wear & tear’ on furnished lettings). It applies to moveable furniture, furnishings, kitchenware and household appliances, and allows you to claim a deduction against your tax liability equivalent to the cost of the replaced item. 

Mortgage Interest Relief Restriction 

On 6th April 2017, HMRC introduced new restrictions on mortgage interest relief on residential properties. As an individual landlord, mortgage interest is now restricted to basic rate (20%) income tax reducer and this will be phased in over four years from April 2017 as follows:

Year% of costs deducted from profits% of costs available as a basic rate deduction
2017/1875%25%
2018/1950%50%
2019/2025%75%
2020/21100%

This has had a major impact on the tax landscape and the way investors are now approaching this change. 

Legal and professional costs

Accountancy fees relating to the property business can be claimed as an expense against your rental income.

Insurance costs

Insurance policies relating to the property business are allowable against income.

This list is not exhaustive, so please contact us if you are concerned about claiming other expenses.

Contact us

At MHA Tait Walker, we have vast expertise and specialists in this area who can answer any queries you may have and help you make the correct decision. Please contact Ryan Keltie on 0191 285 0321 or email ryan.keltie@taitwalker.co.uk.

Other episodes in this series

Episode 1 – Considering purchasing a rental property?
Episode 3 – Owning personally or through a company



Real Estate Matters – Issue 13

Issue 13 of our Construction & Real Estate newsletter series with MHA is available now! We have worked with MHA to provide a national outlook on the issues facing the construction and real estate sectors.

Issue 13 contains articles on the following:

  • Recent UK property tax changes
  • VAT Domestic Reverse Charge
  • Employment status and off-payroll workers
  • Minimum Energy Efficiency Standards
  • Tenants fees
  • House price growth

Key information

Some key information is outlined in the publication:

MHA Real Estate Matters – Issue 13

Please click below to view the full publication.