If you are an employee and you personally incur expenses in carrying out your job, you may be able to claim tax relief for those expenses. Relief is only available for expenses that you must incur, rather than those that you choose to incur, and the expenses must be incurred wholly, necessarily and exclusively in performing the duties of your job. Relief is not available for expenses that you incur to enable you to be able to do your job, such as childcare costs, nor it is available for private costs. Separate tests apply to travel expenses – relief is available for business travel but not private travel, which includes the ordinary commute.

Typical expenses

Although the expenses that an employee may incur will vary depending on the nature of their job, popular expenses for which claims may be made include travel costs, additional costs of working from home, professional fees and subscriptions, work clothing and tools and equipment.

Travel expenses

If you have to travel for your job and your employer does not meet the cost of the associated travel expenses, you may be able to claim a deduction. Typical travel expenses include public transport costs, parking fees, congestion charges and tolls and, where you travel by car, mileage costs. For most expenses the deduction is the amount that you spent. If you use your own car, you can claim a mileage allowance of 45p per mile for the first 10,000 business miles in the tax year, and 25p per mile thereafter. If your employees pays you an allowance, but it less than the approved rates, you can claim a deduction for the difference. If you have a company car, you can claim a deduction for fuel based on HMRC’s advisory fuel costs. If you do not want to use the flat rates, you can instead claim a deduction based on the actual costs, but this will involve more work.

In the event that you have to stay away overnight, you can claim the cost of any overnight accommodation and food and drink.

Working from home

If you are required to work from home, you can claim a fixed rate deduction of £6 per week (£26 per month) for additional household costs incurred as a result of working from home. If preferred, you can claim the actual amount of extra costs that you have incurred from working from home, but you will need bills and receipts to support your claim.

Professional fees and subscriptions

If you have to pay a professional fee to be able to do your job and you meet the cost yourself, you can claim a deduction. You can also claim a deduction for any subscriptions that you pay to approved professional bodies or learned societies that are on HMRC’s list.

Work clothing and tools

If you are required to wear specialist clothing to do your job, you may be able to claim the cost of cleaning, repairing or replacing that clothing. However, you are not allowed a deduction for the initial cost.

Similarly, you can claim a deduction for the cost of replacing or repairing any small tools that you need to do your job and which you provide yourself, but not the initial cost of those tools.

Making the claim

If you need to complete a self-assessment tax return (which may be the case if you also have income from employment or investment income), you can make the claim in your tax return.

If you do not need to complete a tax return, you can either make the claim online or by post on form P87.

Online claims can be made using the online service on the Gov.uk website. You will need to sign in using your Government ID and password. You can make a claim for multiple tax years, and also for up to five different jobs. It is advisable to make sure that you have all the information that you need before starting the claim. Once you have made the claim, you will be given a reference number which you can use to track the progress of the claim.

You can also make a claim by post on form P87, which is available on the Gov.uk website. Again claims can be made for multiple tax years and also for up to five jobs. From 7 May 2022, HMRC will only accept postal claims on form P87; previously claims could be made by letter.

Although the National Insurance rates and thresholds for 2022/23 had already been set, at the time of the Spring Statement in March 2022, the Chancellor announced increases in the primary threshold which would align the starting point for National Insurance with the personal allowance from 6 July 2022. However, as the increase does not take effect until part way through the 2022/23 tax year, the two not fully aligned until 2023/24. The lower profit limit for Class 4 contributions was also increased.

Employees

Employees pay primary Class 1 National Insurance contributions on their earnings to the extent that these exceed the primary threshold. For 2022/23, contributions are payable at the main rate of 13.25% on earnings between the primary threshold and the upper earnings limit, and at the additional rate of 3.25% on earnings in excess of the upper earnings limit. Employees are treated as having paid contributions at a notional zero rate on earnings between the lower earnings limit and the primary threshold. This has the effect of ensuring that the year is a qualifying year for state pension purpose if the employee has earnings at least equal to 52 times the weekly lower earnings limit.

The lower earnings limit is £123 per week (£533 per month; £6,396 per year) and the upper earnings limit is set at £967 per week (£4,189 per month; £50,270 per year) for 2022/23.

The primary threshold was initially set at £190 per week (£823 per month; £9,880 per year). These thresholds now only apply from 6 April 2022 to 5 July 2022. From 6 July 2022, the primary threshold is aligned with the personal allowance, and from 6 July 2022 to 5 April 2023 is set at £242 per week (£1,048 per month; £12,570 per year). As the increase takes effect three months after the start of the 2022/23 tax year, the annual primary threshold for 2022/23 is £11,908. This will be of relevance to directors with an annual earnings period. The increase in the thresholds does not affect any liability for primary contributions for any tax week commencing before 6 July 2022.

As a result of the increase in the primary threshold, employees will pay less National Insurance from July onwards. There is no change to the secondary thresholds.

Case study

Imogen is paid £2,000 per month.

For April to June 2022 inclusive, she pays primary contributions of £155.95 per month (13.25% (£2,000 – £823)).

However, from July 2022, her monthly primary contributions fall to £126.14 (13.25% (£2,000 – £1,048)).

The increase in the primary threshold means that from July she is £29.81 better off each month.

Employment allowance

The employment allowance reduces the secondary contributions payable by the employer. The allowance is set at £5,000 for 2022/23, having been increased by £1,000 following the Spring Statement. Eligible employers should remember to claim the allowance.

The self-employed

The starting point for Class 4 contributions is aligned with the primary threshold for Class 1 purposes. To keep the alignment in light of the increase to the primary threshold from July 2022, the lower profits limit for 2022/23 has been increased from £9,880 to £11,908. The increase applies from 6 April 2022.

When you start a business, you will need to incur costs before you are able to start trading. Did you know that you are able to claim tax relief for these?

Relief is available for unincorporated businesses for income tax purposes and also for companies for corporation tax purposes.

Typically, you may need to incur expenses securing business premises and kitting them out, on buying stock, on recruiting staff, on setting up a website, on IT and on marketing the business.

In the same way that relief is given for business expenses incurred once the business is up and running, relief is also available for those incurred before the business commenced.

The relief

The general rule is that relief is available for business expenses that are incurred wholly and exclusively for the purposes of the business. Relief is available for revenue expenses regardless of whether the cash basis or the accruals basis is used. However, the way in which the relief is given for capital expenditure depends on the way in which the accounts are prepared – where the cash basis is used, capital expenditure can be deducted in accordance with the cash basis capital expenditure rules. Otherwise, relief may be available in the form of capital allowances.

The pre-trading relief rules allow relief for expenses that were incurred in the seven years prior to the commencement of the trade to the extent that the expenses would have been deductible had the expenditure been incurred once the business was up and running. Pre-trading expenses are treated as if they were incurred on the day on the first day of trading, and are deducted in computing the profits for the first period of account.

No deduction is given for the cost of stock under the pre-trading expenses rules. Stock purchased prior to commencement will form opening stock, and relief against profits will be given for stock sold in the first accounting period.

Where the expenditure is capital in nature and qualifies for capital allowances, allowances are given as if the expenditure was incurred on the first day of trading.

Case Study

Tilly opens a tea shop and starts trading on 1 May 2022. She operates as an unincorporated business.

In the nine months prior to opening the business, she incurs the following expenses:

• rent — £1,000;
• staff costs — £2,000;
• stock — £4,000;
• travel expenses — £850;
• advertising — £3,000
• website — £1,200
• shop fittings — £12,000
• laptop — £500.

Under the pre-trading rules, the rent, staff costs, travel expenses, website, and advertising costs are treated as if they were incurred on 1 May 2022. They are deducted in calculating her profits for her first accounting period.

If she prepares her accounts under the cash basis, she can also claim a deduction for the laptop. If the accruals basis is used, she can claim capital allowances (including the annual investment allowance): the expenditure is treated as incurred on 1 May 2022.

Relief for the cost of the stock is given in the first accounting period.

To help companies realising losses as a result of the Covid-19 pandemic, the loss relief rules were amended to provide for an extended carry-back window. Where companies are making a claim for relief under the extended carry-back rules, the claim can be made online rather than waiting until the company tax return is filed.

Extended relief

Under the normal rules, a company that incurs a trading loss can set that loss against total profits of the same accounting period. Where the loss is not relieved in this way, it can either be carried back and set against total profits of the previous 12 month period, as long as the company was carrying on a trade in that period, or carried forward and set against future profits of the company. If the company ceases trading, a claim for terminal loss relief can be made, allowing the loss to be set against profits of the previous three years.

The 12-month carry-back window was extended to three years in respect of losses for accounting periods ending between 1 April 2020 and 31 March 2022. Where a loss is carried back under the extended rules, it must first be set against profits of a more recent year before it is set against profits of an earlier year. The amount that can be relieved under the carry-back provisions is capped at £2,000,000 for all accounting periods ending in the period from 1 April 2020 to 31 March 2021. A separate cap of £2,000,000 applies to losses of accounting periods ending between 1 April 2021 and 31 March 2022. The claim is limited to trading losses (and excludes capital losses). Losses which are carried back one year under the usual rules are not subject to the £2,000,000 cap – it only applies to losses carried back two or three years.

Making a claim under the extended carry back rules can be very beneficial and may generate a much-needed tax repayment for companies facing cash flow difficulties as a result of the impact of the Covid-19 pandemic.

Making the claim

As with the usual carry back claim, the claim can be made in the company tax return. This must be filed no later than 12 months from the date on which the accounting period ends.

However, there is also an option to make a claim for extended loss relief online. This can be done on the Gov.uk website.

Making an online claim can be advantageous as it can speed up the repayment. The claim can be made as soon as the loss-making accounting period has ended – there is no need to wait until the company tax return is filed.

Case Study

Food Ltd runs a small restaurant and bar. The company prepares accounts to 31 March each year. It was badly affected by the pandemic, realising a loss of £60,000 for the year to 31 March 2021 and a loss of £35,000 for the year to 31 March 2022.

Prior to the pandemic, it had made profits as follows:

• Year to 31 March 2020: profit £50,000.
• Year to 31 March 2019: profit £80,000
• Year to 31 March 2018: profit £40,000

The company makes a claim under the normal rules to carry back £50,000 of the loss of the year to 31 March 2021 to the previous year (the year to 31 March 2020), and makes a claim under the extended rules to carry the remaining loss of £10,000 back against the profits of the year to 31 March 2019, reducing them to £70,000. The combined claims generate a tax repayment of £11,400 (£60,000 @ 19%).

The company cannot carry the loss of £35,000 for the year to 31 March 2022 back one year -as there are no profits for the year to 31 March 2021. It makes a claim under the extended carry-back rules. As the profits for the year to 31 March 2020 have been eliminated by a previous claim, the company can carry the loss of £35,000 and set it against the remaining profits of £70,000 for the year to 31 March 2019 (the earliest year to which the loss can be carried back). This reduces the profits of that year to £35,000, and generates a repayment of £6,650 (£35,000 @ 19%).

The claim can be made online from 1 April 2022 onwards.

A lot of time and paperwork can be saved by claiming expenses using the simplified rates, rather than recording and deducting actual costs. However, if the deduction is considerably higher using actual costs, the additional time investment may be worthwhile. Given current high cost of fuel, where mileage is high, a deduction based on actual costs may be preferable.

Use of the simplified rates is optional and is available to sole traders and partnerships that do not have any corporate partners.

Motor vehicles

Businesses can claim a fixed rate per business mile deduction for the vehicle expenses. The fixed rate deduction covers the cost of buying, running and maintaining the vehicle (including the cost of fuel, oil, servicing, repairs, insurance, VED and MOT). The fixed rates per mile are as follows:

Type of vehicle	Flat rate per business mile
Cars and goods vehicles: First 10,000 miles Subsequent business miles	45p per mile 25p per mile
Motorcycles	24p per mile

Once a business elects to use the flat rates, they must continue to do so while the vehicle remains in the business. Capital allowances cannot be claimed where the simplified rates are used and if capital allowances have been claimed in respect of the vehicle in question, it is not possible to use the flat rates.

Use of home

It is also possible to claim a fixed rate deduction for the use of home for the purposes of the business. The flat rate provides an allowance for additional household running incurred as a result,  and covers the additional costs of cleaning, heat, light, power, telephone, broadband etc.

The deduction is based on the total number of business hours spent working in the home on core business activities in the month and is as follows:

Number of hours spent on core business activities	Flat rate per month
25 or more	£10
51 or more	£18
101 or more	£26

Core business activities are providing goods or services, maintaining business records, marketing and obtaining new business.

Case study

Betty is a dog groomer. She provides a mobile service and also works from home. In 2022/23 she spent 60 hours a month working in her home on core business activities and she drove 15,000 business miles.

To save the work involved in determining the actual additional costs, she claims flat rate deductions in respect of the use of her car and her business use of home.

For the car she claims a deduction of £5,750 being 10,000 miles at 45p per mile (£4,500) plus 5,000 miles at 25p per mile (£1,250).

For use of her home she claims a deduction of £18 per month – an annual deduction of £216.

Claiming fixed rate deductions saves the time and effort of keeping records of actual costs and calculating the deductible amount.

Employers who provided their employees with taxable expenses and benefits  in 2021/22 need to report these to HMRC by 6 July 2022, unless they have been payrolled or included within a PAYE Settlement Agreement.

Taxable expenses and benefits should be reported to HMRC on form P11D. A P11D is needed for each employee for whom benefits and expenses need to be notified to HMRC. A P11D(b) is also needed. This is the employer’s declaration that all required P11Ds have been filed, and also the Class 1A National Insurance return. A P11D(b) must be filed even if all benefits have been payrolled as payrolled benefits must be taken into account when working out the Class 1A National Insurance liability.

Filing options

Employers can file their P11Ds and P11D(b) returns electronically or in paper format. HMRC encourage electronic filing and for most employers this will be the preferred option. However, the electronic filing options are reduced this year as HMRC have decommissioned their Online End of Year Expenses and Benefits Service and consequently it cannot be used to file 2021/22 returns. However, employers can instead use HMRC’s PAYE Online Service, or file using commercial software package.

PAYE Online

HMRC’s PAYE Online service can be used by employers to undertake a number of tasks, such as accessing tax codes and notices about employees, checking what they owe HMRC, paying bills, checking their payment history and appealing a penalty. It can also be used to file expenses and benefits returns. However, it can only be used to file returns for up to 500 employees. Employers who need to make more than 500 submissions will need to file using a commercial software package.

To use the PAYE Online service to file expenses and benefits returns, employers must be registered to use the service and will need to log on via their Government Gateway account. Employers who are not yet registered and who wish to use the service to file their 2021/22 expenses and benefits returns should allow sufficient time to register and submit their returns by the 6 July 2022 deadline.

HMRC stress that the service should be straightforward to use; however, employers who encounter problems can either use the help function or contact HMRC’s Online Services Helpdesk,  via the webchat facility or by phone on 0300 200 3600.

Commercial software packages

Employers can also file online via their expenses and benefits software package. Where they need to make more than 500 submissions, they must use a commercial software package to file online. Employers needing assistance should contact their software provider.

Paper returns

It is not mandatory to file P11Ds and the P11D(b) online; paper returns can still be filed. However, this is only likely to be an option for employers who only have a few returns to file.

Nothing to file this year? Employers who have no returns to file this year but who have been sent a P11D(b) of a notification to one file will need to make a nil declaration online on the Gov.uk website. This is important as a penalty may be charged otherwise.

For 2022/23 only, the rates of Class 1 (employer and employee) National Insurance contributions are increased by 1.25 percentage points, along with the rates of Class 1A, Class 1B and Class 4 contributions. The NIC increases are a temporary increase pending the introduction of the Health and Social Care Levy from 6 April 2023. The levy will raise ring-fenced funds for health and adult social care; the 2022/23 temporary increases in National Insurance contributions will do likewise. The rates are due to revert to their 2021/22 levels from 6 April 2023 when the new levy comes into effect.

Employer and employee rates for 2022/23

As a result of the temporary NIC increases, for 2022/23, the main rate of primary contribution (payable on earnings that fall between the primary threshold (£190 per week; £823 per month; £9,880 per year) and the upper secondary threshold (£967 per week; £4,189 per month; £50,270 per year)) is set at 13.25% and the additional primary rate (payable on earnings in excess of the upper earnings limit) is set at 3.25%.

Employers will pay secondary contributions at the rate of 15.05% on earnings in excess of the secondary threshold (set at £175 per week; £758 per month; £9,100 per year). Where an upper secondary threshold applies, employers will pay secondary contributions on contributions at 15.05% above the relevant secondary threshold (£967 per week; £4,189 per month; £50,270 per year where the employee is under the age of 21, an apprentice under the age of 25 or an armed forces veteran in the first year of their first civilian employment since leaving the armed forces and £481 per week; £2,083 per month; £25,000 per year where the employee is a new Freeport employee). The 1.25% increase does not apply to earnings charged at the zero rate.

Employers will also pay Class 1A and Class 1B National Insurance contributions at 15.05% for 2022/23.

Identifying increases on the payslip

In the December 2021 issue of their Employer Bulletin HMRC asked employers to include a message for employees on all payslips between 6 April 2022 and 5 April 2023 to explain that their increased National Insurance contributions are being used to meet health and social care costs. They instructed that the payslip message should read ‘1.25% uplift in NIC funds NHS, health & social care’.

HMRC reiterated this request in the February 2022 issue of Employer Bulletin. The article notes that while HMRC have been in contact with payroll software providers to request that they include it in their software packages, they realise that some employers will need to amend payslips directly in order to include this message. HMRC will also be sending out emails to employers to remind them to include this message.

Under Making Tax Digital (MTD) for VAT, VAT-registered traders must keep electronic records and file their VAT returns electronically using software that is compatible with MTD for VAT. Prior to 1 April 2022, MTD for VAT was only mandatory for VAT-registered traders whose turnover for VAT purposes was above the VAT registration threshold of £85,000. VAT-registered traders whose turnover was below the VAT registration threshold could choose whether to join or not.

Extension to all VAT-registered traders

MTD for VAT is extended from 1 April 2022 to all registered traders. VAT-registered traders whose turnover is below the VAT registration threshold of £85,000 and who have not already joined MTD for VAT must do so from the start of their first VAT accounting period beginning on or after 1 April 2022.

Example

John is a VAT-registered trader with turnover for VAT purposes of £50,000. His VAT quarters run to 31 January, 30 April, 31 July and 31 October. He has not yet joined MTD for VAT.

John must start complying with MTD for VAT from 1 May 2022. This is the first day of the VAT quarter to 31 July 2022 and the first day of his first VAT accounting period that begins on or after 1 April 2022.

He must file the return for the period by 7 September 2022 using MTD-compatible software.

Need to register

Traders who are joining MTD for VAT from 1 April 2022 will need to sign up. They can do this via their Government Gateway Account. Alternatively, if they want to use an agent to submit their returns on their behalf, their agent can sign them up, but will need authorisation from the trader  to do so.

Traders who pay by direct debit should avoid signing up too close to the return deadline as they may end up paying their VAT twice. The window to avoid is the period from seven days before the return is due until five days after the return is due.

Electronic records

Under MTD for VAT, the trader must keep their VAT records electronically. This can be done via a software package. Alternatively, spreadsheets can be used. However, where spreadsheets are used, these must be linked to the return – figures should not be entered manually.

Return software

VAT returns must be filed using software that is compatible for MTD for VAT. HMRC publish details of software packages that can be used (see www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat). However, it should be noted that HMRC do not recommend particular products. Traders should find a product that they are happy with in advance of the deadline

Worth de-registering?

Traders whose turnover is under the VAT registration threshold may wish to review whether, in light of the need to comply with MTD for VAT, it remains beneficial to be VAT-registered.

Plastic packaging tax is a new tax that comes into effect from 1 April 2022. The tax has a green agenda – its aim is to reduce the amount of plastic packaging that does not contain at least 30% recycled plastic.

Liability

The tax applies to packaging that it predominantly plastic by weight and which does not contain at least 30% recycled plastic by weight. It is levied on those who manufacture or import plastic packaging. The tax arises when the packaging component is finished, or where it is imported, when it is imported.

However, to ensure that the administrative burden is not disproportionate, it only applies to those who manufacture or import at least 10 tonnes of plastic packaging within the scope of the tax each year. Guidance on what constitutes plastic packaging for the purposes of the tax can be found on the Gov.uk website (see https://www.gov.uk/guidance/work-out-which-packaging-is-subject-to-plastic-packaging-tax).

Where the tax applies, it is charged at the rate of £200 per tonne.

Registering

Manufacturers and importers who are liable for the tax will need to register with HMRC from 1 April 2022. This can be done online. A business must register when they have manufactured or imported 10 or more tonnes of plastic packaging within the scope of the tax, or if they plan to do so in the next 30 days. Therefore, when determining whether a liability to register arises, it is necessary to look both backwards and forwards. As the tax only applies from 1 April 2022, in the first year of the tax, there is no need to look back before 1 April 2022.

Where the threshold of 10 tonnes in the previous 12 months is reached, the liability to register arises from the first day of the month following that in which the threshold was reached. Registration must be done within 30 days.

Example

A business manufactures 4 tonnes of plastic packaging containing less than 30% recycled plastic each month. By 30 June 2022, they have manufactured 12 tonnes of packaging since 1 April 2022. As the 10 tonne threshold has been exceeded on 30 June 2022, the liability to register arises on 1 July 2022. The business must register by 30 July 2022.

Where a business expects to exceed the 10 tonne threshold in the next 30 days, the requirement to register arises from the date that the business expects to be liable to register. Again, the business must register within 30 days.

Example

A business normally manufactures 2 tonnes of plastic packaging a month. On 4 May 2022 it receives an order for 15 tonnes of plastic packaging that contains less than 30% recycled plastic. The liability to register arises on 4 May 2022 and the business must register by 2 June 2022.

Planning tips The tax is payable by the manufacturer or importer, not by the end user. However, depending on price sensitivity, they may be able to pass the cost on. As the tax only applies where the plastic packaging does not contain at least 30% recycled plastic, increasing the recycled element to at least 30% will remove liability of the tax. Likewise, moving away from plastic packaging so that the 10 tonne threshold is not breached will also take a business outside the tax, increasing its green credentials in the process.

The Employment Allowance is a National Insurance allowance that eligible employers can claim and set against their secondary Class 1 National Insurance liability.

The allowance is set at £4,000 for 2021/22 (capped at the employer’s secondary National Insurance liability for the year where this is lower).

Can you claim it?

Not all employers are able to claim it. At the lower end of the scale, it is not available to companies where the sole employee is also a director. This means that most personal companies cannot benefit. However, a company with more than one employee or one where the sole employee is not a director can benefit from the allowance.

It should be noted here that HMRC guidance stipulates that the allowance is not available if there is only one employee ‘paid above the National Insurance secondary threshold’ and that employee is also a director. However, there is no requirement in the legislation for employees to be paid above the secondary threshold to be counted, and the allowance is (in accordance with the legislation) available unless all the payments of earnings in the year are made to the same person and that person is a director. Thus, companies with at least two employees at some point in the tax year should be eligible for the allowance.

At the other end of the spectrum, companies whose Class 1 National Insurance liability for the previous tax year is £100,000 or more do not qualify for the allowance.

Impact of claim on optimal salary

The availability or otherwise of the employment allowance determines the optimal salary level in a family company scenario. Assuming that the personal allowance is not used elsewhere, for 2021/22, the optimal salary where the employment allowance is not available is one equal to the primary threshold of £9,568. However, where the employment allowance is available, the optimal salary for 2021/22 is equal to the personal allowance of £12,570.

Not too late to claim

The employment allowance has to be claimed through the payroll. If a claim has not yet been made for 2021/22 it is not too late.

In a family company scenario where the alternative arrangements are used for National Insurance (such that NIC is assessed each pay period as for other employees, rather than on an annual basis), it may be easier to pay the director a salary equal to the secondary threshold of £737 per month for the first 11 months of the tax year. This prevents the need to pay any National Insurance over to HMRC. If the company is eligible to claim the employment allowance, they can claim it in March and make a final payment for the tax year of £4,463 to take pay up to £12,570, the level of the personal allowance for 2021/22 (£12,570 – (11 x £737) = £4,463). There will be some primary Class 1 National Insurance on earnings for the year above the primary threshold of £9,568 The primary NIC bill is £360.24 ((£12,570 – £9,568) @12%). However, this is offset by the corporation tax savings on the higher salary at 19%.

The allowance can be claimed after the end of the year if a claim is overlooked. In this situation, you can ask HMRC to use it to pay other tax that the company may owe, including VAT and corporation tax if you do not owe any PAYE and National Insurance. If you have no tax to pay, you can ask for a refund.

You cannot carry forward any unused amount of the allowance to later tax years. If your secondary NIC bill is less than £4,000, the employment allowance is capped at this level.