In setting up a trade it is inevitable that expenses will be incurred before the trade actually commences. Expenses may be incurred on acquiring premises and kitting them out, on buying stock, on office supplies, on professional advice, on marketing, on software, on setting up a website, on legal fees and suchlike. These can mount up, so it is important to secure tax relief where possible. Relief for pre-trading expenses is available to both unincorporated business and companies.

Relief is only available to the person (individual or company) who incurred the expenditure and commenced the trade.

Revenue expenses

The general rule is that revenue expenses incurred in the seven years prior to the date on which the trade starts are deductible if they would be so deductible had the expense been incurred once the trade had commenced. The usual rules to determine whether an expense is deductible apply (i.e., whether it is revenue in nature and incurred wholly and exclusively for the purposes of the business). To give effect to the relief, the pre-trading expenses are treated as if they were incurred on the first day of trading and deducted in calculating the profits for the first accounting period.

Capital expenses

Relief for capital expenses depends on whether the accounts are prepared on the cash basis or not. Where the cash basis is used, if the expense is one that would be deductible under the cash basis capital expenditure rules, as with revenue expenses, the expense is treated as incurred on the first day of trading and deducted in calculating the profits for the first accounting period.

However, if relief would be given through the capital allowances system, capital allowances are available for the pre-trading expenditure, the expenditure being treated as if it had been incurred on the first day of trading.

HMRC are sending one-to-many ‘nudge’ letters to taxpayers who included an invalid claim for gift hold-over relief in their 2021/22 tax return. This may be because a separate claim form was not included with the return, or the claim form was included but not signed. If you receive such a letter, it is important that you do not ignore it – without a valid claim, HMRC will require any capital gains tax due to be paid now rather than deferred.

What is gift hold-over relief?

Gift hold-over relief is a useful capital gains tax business relief that allows the capital gains tax due on a gift to be deferred by ‘holding over’ the gain, reducing the transferee’s base cost by the amount of the held-over gain. The relief is often used to aid succession planning.

Eligible gifts

The relief is available for:

• gifts of business assets used for the purpose of a trade or profession carried on by an individual as a sole trader or as a partner in a partnership, by an individual’s personal company or by a member of a trading group where the holding company is the individual’s personal company;
• gifts of unlisted shares and securities in a trading company or the holding company of a trading group where the individual owns at least 5% of the shares (for trustees, the holding must be at least 25%);
• gifts of land deemed to be agricultural land for inheritance tax purposes;
• assets the disposal of which is a chargeable transfer for inheritance tax and not a potentially exempt transfer; and
• certain gifts that are exempt from inheritance tax, such as a gift from a trust for bereaved minors.

Mechanics of the relief

As a gift by its very nature is not made at arm’s length, any gain arising on disposal is calculated by reference to the market value of the asset rather than the proceeds, if any. For an outright gift, the full gain (calculated using the market value as the consideration) can be held over. The transferee’s base cost is the market value as reduced by the held-over gain.

Example

Bill gives his son James his workshop, which cost £50,000. At the time of the gift, the market value was £140,000. The gain is £90,000, which Bill and James agree to hold over. James’ base cost is £50,000 – the market value of £140,000 less the held-over gain of £90,000.

If the transferor receives some proceeds, the gain computed by reference to the actual proceeds is immediately chargeable. However, the difference between the market value and the proceeds can be held over.

Example

Elizabeth sells her studio to her daughter Dawn for £40,000. It cost her £30,000 and has a market value of £75,000. They claim hold-over relief. The £10,000 difference between the proceeds (£40,000) and the original cost (£30,000) is immediately chargeable. However, the remainder of the gain (the difference between the market value and the proceeds) of £35,000 is held over. Dawn’s base cost is £40,000 (£75,000 – £35,000).

Joint claim

The claim must be made jointly by the transferor and the transferee on the dedicated claim form. It must be signed by both parties.

Dealing with the letter

If you receive a nudge letter you should send HMRC a valid claim form signed by both parties or, if the gift is not eligible for the relief, amend your tax return to remove the claim.

If you have unrelieved overlap profits, you will not be able to claim relief for those profits after 2023/24. Overlap profits are profits that have been assessed twice – either in the early years of a business or on a change of accounting date.

From 2024/25, unincorporated businesses will be taxed on the profits for the tax year regardless of the date to which they prepare their accounts. Where the accounting period does not correspond with the tax year, the profits from two accounting periods will be apportioned to arrive at the profits for the tax year. As a result, profits are only ever taxed once, removing the problem of overlap profits.

The current year basis (under which the profits taxed for the tax year are those for the accounting period ending in that tax year) came to an end in 2022/23. Under the current year basis, relief for overlap profits was given either on a change of accounting date which resulted in more than 12 months’ profits being taxed in a tax year, or on cessation.

The 2023/24 tax year is a transitional year moving from the current year basis to the tax year basis. The profits for that year are those from the end of the accounting date in 2022/23 to the accounting date ending in 2023/24 (the standard part) plus those from the end of that period to 5 April 2024 (the transition part). Any unrelieved overlap profits can be deducted from the transition profits.

If relief for remaining overlap profits is not claimed for 2023/24, it will be lost.

Establishing overlap profits

On 11 September 2023, HMRC launched an online service to help unincorporated businesses establish their overlap profits available for relief. The service is available on the Gov.uk website at www.gov.uk/guidance/get-your-overlap-relief-figure.

You may be able to make a claim for overlap relief for 2023/24 if:

• your accounting date does not align with the tax year (i.e., it is not a date between 31 March and 5 April inclusive);
• you changed your accounting date to align with the tax year but did not claim relief for overlap profits on the change of accounting date; or
• you changed your accounting date in 2023/24to align with the tax year.

You may also be able to claim overlap relief in 2023/24 if you stopped trading in that year.

It may be that you are able to find your overlap profits from your previous tax returns, entered as ‘Overlap Profit Carried Forward’ on either the self-employment pages (SA103) or the partnership pages (SA104).

If you cannot find your overlap relief figure, you can use the online service to establish your overlap profits – but only if you provided this information in a previous return.

Using the service

To use the service, you will need to sign in with your Government Gateway user ID and password for Self Assessment. Your agent can also use the service on your behalf.

You will need to provide the following information, so it is advisable to ensure that you have it to hand before you start:

• your name;
• the name of your business or a description of it;
• your business address;
• your unique taxpayer reference;
• details of whether your business is a sole trader or a partnership;
• the date that your business started or you became a partner in the partnership (you can provide the starting tax year if you are unsure of the exact date);
• the most recent period of account or basis period used by your business; and
• if you have changed your accounting date, the year or years of the change.

You will also be asked for your contact details and whether you would like a response by email or by letter.

After providing your information you will receive a confirmation email or letter containing your submission reference. HMRC will generally aim to provide details of your overlap relief within three weeks. However, for complex cases, it may take longer.

The High-Income Child Benefit Charge (HICBC) is a tax charge that claws back child benefit where the claimant or his or her partner have adjusted net income of at least £50,000. Where both parties have income in excess of this, the charge is levied on the partner with the highest income.

The charge is equal to 1% of the child benefit paid for the tax year for every £100 by which adjusted net income exceeds £50,000. Once adjusted net income reaches £60,000, the charge is equal to the child benefit for the tax year.

To avoid receiving a benefit that has to be paid back, a couple may elect not to receive the benefit. However, it is important to claim it to access the associated National Insurance credits, particularly where the claimant’s income is not sufficient for the year to be a qualifying year for state pension purposes.

Check who is the claimant

For child benefit purposes, the claimant may not be the person who actually receives the child benefit – HMRC regard the claimant as the person who signs the claim form. The claimant can elect for the benefit to be paid to someone else, for example, a husband may complete the form and sign it, but elect for the child benefit in respect of their child to be paid to his wife. While a couple remain together, this may not matter. However, if a couple separate, it is important to be clear which partner is the claimant to avoid unnecessary and unexpected tax charges.

The Meades case

A recent case highlighted the importance of checking child benefit claims on separation.

In 2021, HMRC issued Mr Meades with an amendment to his 2019/20 tax return on the basis that he was liable for the HICBC for that year.

Mr Meades married his former wife in 2010. In 2012, he claimed child benefit in respect of their child, electing for the benefit to be paid to his ex-wife (the child’s mother). The couple separated in July 2017 and the marriage was dissolved on 4 April 2019. Mr Meades provided financial support to his former wife and met household bills. Mr Meades remarried in November 2019. He lived with his new wife as a married couple throughout 2019/20.

The couple did not revise their child benefit claim on separation. Consequently, Mr Meades remained the claimant. As he provided financial support for his child, he was entitled to claim the benefit. The tribunal found that HMRC were right to assess him for the HICBC for 2019/20 as he was the claimant and his income exceeded £50,000. It did not matter that the benefit was paid to his ex-wife.

Lessons

On separation, it is advisable to review child benefit claims to check who is the claimant. Mr Meades would not have been liable for the HICBC after he separated from his ex-wife had she been the claimant as he would have been neither the claimant nor the claimant’s partner. Had the couple reviewed their claim and realised this, Mr Meades could have ended his claim and a new claim could have been made by the child’s mother. This would have prevented him from being liable to the charge. It would also have prevented Mr Meades’ new partner from a potential liability to the charge in respect of the benefit paid to his ex-wife, which would have been the case had her income been both more than £50,000 and higher than that of Mr Meades – as they lived together as a married couple throughout 2019/20, she was potentially liable for the charge as the claimant’s partner.

Workers are entitled to be paid the National Living Wage (NLW) or Minimum Wage (NMW) for their age. Employers who fail to do this run the risk of financial penalties and of being ‘named and shamed’. To help employers avoid mistakes, HMRC have produced a checklist of 18 common errors. These are listed below.

Common error 1

Making deductions or taking payments from workers for items or expenses connected with their job which reduce the worker’s pay below the statutory minimum.

Common error 2

Making wage deductions or taking payments from workers for the employer’s own use or benefit where the employer is free to use the money for their own benefit, and making the deduction or taking the benefit reduces the worker’s pay below the statutory minimum.

Common error 3

Failure to pay for additional time added on to a worker’s shift, for example, team handovers between shifts or time spent passing through security checks on entry and exit.

Common error 4

Failure to pay a worker for any time during their shift when they are at the workplace and are required to be available for work, even if no work is being provided at that time.

Common error 5

Failure to pay a worker for travelling time.

Common error 6

Failure to pay the worker for time spent training

Common error 7

Failure to pay the worker sufficient money for time worked during a sleep-in shift.

Common error 8

Incorrectly applying the minimum wage accommodation offset when living accommodation is provided to the worker by the employer.

Common error 9

Paying the NMW apprentice rate to a worker who is not a genuine apprentice.

Common error 10

Paying the NMW apprentice rate before a worker starts their apprenticeship or after it ends.

Common error 11

Continuing to pay the NMW apprentice rate to an apprentice who is aged 19 or over or when they have completed the first year of their apprenticeship.

Common error 12

Failing to pay an apprentice for the time that they have spent training or studying as part of their apprenticeship.

Common error 13

Failure to apply the annual increases to the NLW and NMW which take effect from 1 April each year.

Common error 14

Failing to increase the rate paid when a worker moves into the NLW or a higher NMW age bracket. Age-related increases apply when a worker turns 18, 21 or 23.

Common error 15

Including an element of pay that does not count towards the NMW (such as tips) when checking whether workers have been paid at least the NLW/NMW for their age.

Common error 16

Failing to pay the NLW/NMW to a person on work experience or to an intern when they are entitled to it.

Common error 17

Failing to take account of excess hours worked by salaried staff which reduce the worker’s pay below the statutory minimum.

Common error 18

Failure to distinguish between different types of worker (e.g., salaried, time, output or unmeasured) and to calculate the NLW/NMW accordingly.

The end of a business will not necessarily mean that no further expenses are incurred. Where expenses are incurred after the business has ceased, tax relief may be available.

Allowable post-cessation expenses

An expense will be an allowable post-cessation expense if:

• the business has ceased; and
• the expense would have been deductible in calculating the trading profits had it been incurred prior to cessation.

This means that the ‘wholly and exclusively’ test must be met and, unless the cash basis is used and the expense is a capital expense for which a deduction is allowed under the cash basis, revenue in nature.

If the expense only partially relates to the business, a deduction is available for the business portion if that can be determined. If apportionment is not possible, no deduction is forthcoming.

Relief is not available for expenses that relate to the cessation itself.

Examples of post-cessation expenses include the cost of remedying defective work and associated legal and professional costs and the cost of collecting debts relating to the trade.

Method of relief

There are four ways in which a post-cessation expense can be relieved:

• as a deduction from post-cessation receipts;
• as a loss set against total income;
• as a loss deducted from chargeable gains; or
• against future post-cessation receipts.

Relief is given in the above order.

Method 1 – deduction from post-cessation receipts

Where there are post-cessation receipts in the same period from the same trade, relief for allowable post-cessation expenses must be given as a deduction from those receipts before considering other methods of relief.

Method 2 – against total income

Where there are no post-cessation receipts in the same period, if the post-cessation expenses are incurred by someone subject to income tax (i.e., by an unincorporated business rather than by a company), the post-cessation expenses can be set against the total income of the same tax year.

Method 3 – against capital gains

To the extent that the post-cessation expenses exceed the individual’s total income, they can be set against any chargeable gains of the same tax year.

Method 4 – against future post-cessation receipts

If it is not possible to relieve the post-cessation receipts under methods 1 to 3, they can be carried forward and set against any future post-cessation receipts from the same trade.

Post-cessation expenses incurred by persons subject to income tax cannot be set against bad or doubtful debts paid after cessation or against a trading receipt that relates to post-cessation expenditure.

Post-cessation receipts

Receipts received after the business ceased are taxable if they would have been taxable had they been received when the business was trading.

An election can be made to carry back receipts received within six years of cessation to the date of cessation. Where such an election is made, the receipts are treated as if they were received on the date of cessation.

If you have a company that is dormant and you have filed your company tax return showing that no tax is due, you may think that there is nothing further you need to do as regards the lack of corporation tax due. After all, you have filed a return which shows that you have nothing to pay.

However, that may not be the end of the story. You may receive a letter from HMRC reminding you when the corporation tax for the period is due. The letter will also inform you that if you do not owe any corporation tax, you should tell HMRC as soon as possible. Arguably, you have already done this by filing your return and corporation tax computation. The letter advises that if you do not tell HMRC that no corporation tax is due, you will continue to receive reminders about paying.

To tell HMRC that no corporation tax is due, and put a stop to payment reminder letters, you need to visit the Gov.uk website at www.gov.uk/pay-corporation-tax and select ‘tell HMRC no amount is due’. It is then simply a case of clicking on the ‘nil to pay form’ and entering your 17-digit corporation tax reference, which can be found on the letter. This will be your 10-digit unique taxpayer reference for your company, plus additional digits and letters which indicate the period in question, for example, 1234005678A00101A. It is important that this is entered correctly.

When is a company dormant?

Your company may be dormant if it is not trading and has no other income, for example, from investments. It may also be dormant if it is a new company which has yet to start trading. If you think your company is dormant, you can tell HMRC online (see www.gov.uk/tell-hmrc-your-company-is-dormant-for-corporation-tax). If you cannot use the online form, you can also tell HMRC by post or by phone.

If you have had a notice to deliver a company tax return, you will need to do this. This will show HMRC that your company is dormant. Once you have told HMRC that your company is dormant, you will not need to file further company tax returns unless you receive a notice to file.

HMRC may also write to you to tell you that they have decided to treat your company as dormant and that you don’t have to pay corporation tax or file company tax returns.

However, you must continue to file confirmation statements and accounts with Companies House. If your company qualifies as ‘small’, you can file dormant company accounts. A company is regarded as dormant by Companies House if there are no significant financial transactions in the year. Filing fees paid to Companies House, penalties for late filing of accounts or money paid for shares when the company was incorporated do not count as significant transactions.

Owners of personal and family companies frequently pay themselves a small salary and extract further profits as dividends. To utilise the unused personal and dividend allowances of other family members, an alphabet share structure (whereby each shareholder has their own class of shares, e.g. A ordinary shares, B ordinary shares, etc.) provides the flexibility to tailor dividend payments to the circumstances of the shareholder.

Minor children also benefit from a personal allowance (set at £12,570 for 2023/24) and a dividend allowance (set at £1,000 for 2023/24). On the face of it, it can be beneficial to pay dividends to minor children to utilise their allowances. However, where shares are gifted by a parent to a child, the associated dividends are treated for tax purposes as dividend income of the parent rather than the child where they exceed £100 a year.

HMRC have recently become aware of a dividend diversion scheme which is marketed as a tax planning option to fund education fees. HMRC are of the view that the arrangements do not work.

The scheme

The scheme in question seeks to avoid tax by allowing the director shareholders to divert dividend income from themselves to their minor children. In a bid to avoid being caught by the settlements legislation, the arrangement works as follows.

1. A company issues a new class of shares which usually entitles the owner of the shares to certain dividends and voting rights.
2. A person other than the company owner, such as a grandparent of the minor child or a sibling of the company owner, purchases the new shares for an amount significantly below their market value.
3. That person gifts the shares to a trust or declares a trust over the shares for the benefit of the company owner’s children.
4. The purchaser of the new shares or the company owner votes for a substantial dividend payment in respect of the new class of shares.
5. The dividend is paid to the trustees of the trust.
6. As beneficiaries of the trust, the company owner’s children are entitled to the dividend.

HMRC are of the view that the arrangements are caught by the settlements legislation and do not work. The effect of the arrangements is to divert dividend income from the company owner to his/her minor children and as such the income will be taxed as that of the company owner rather than as that of the minor child.

Similar arrangements may also fall foul of the settlements legislation.

As an employer, you can pay your employees tax-free mileage payments where they use either their own car or a company car for business journeys. However, the rates that you can pay tax-free depend on whether the car is the employee’s own or a company car and, where the employee drives a company car, the engine size of the car and the fuel that it uses. It is important that you use the correct rates to avoid landing the employee with an unwanted tax bill.

Employees using their own cars

Where an employee uses their own car for business journeys, you can pay mileage payments tax-free up to the approved amount. For tax (but not National Insurance), the approved amount is calculated for the tax year as a whole by multiplying the employee’s business mileage for the year by the approved rate set by HMRC. For cars and vans, the approved rate is 45p per mile for the first 10,000 business miles and 25p per mile for any subsequent business miles. This means that if an employee drives 12,000 business miles in the tax year, you can make mileage payments of up to £5,000 tax-free.

If you pay less than this, or do not make mileage payments, the employee can claim a tax deduction for the difference between the approved amount and the amount you pay, if any.

You can also make tax-free mileage payments if an employee uses a motorbike or bicycle for business journeys. The approved rates are set at 24p per mile for motorcycles and at 20p per mile for bicycles.

For National Insurance purposes, the 45p rate for cars and vans is NIC-free regardless of the employee’s annual business mileage.

The approved rates are the maximum you can pay tax-free, even if the actual costs are higher. Anything in excess of the approved rates is taxable.

Employees driving company cars

Where an employee has a company car but meets the costs of their own fuel, the mileage payments that can be made tax-free are lower than for employees using their own car for business.

HMRC publish advisory fuel rates quarterly which are the maximum amounts that can be paid tax-free where an employee uses a company car for business journeys. The rates change on 1 March, 1 June, 1 September and 1 December. Different rates are set for diesel cars, petrol cars and cars running on LPG. The correct rate also depends on the engine size of the car. HMRC also set an advisory fuel rate for electric cars.

The following rates apply from 1 September 2023.

Engine size	Petrol – rate per mile	LPG – rate per mile
1,400cc or less	13p	10p
1,401cc to 2,000cc	16p	12p
Over 2,000cc	25p	19p

Engine size	Diesel – rate per mile
1,600cc or less	12p
1,601cc to 2,000cc	14p
Over 2,000cc	19p

From 1 September 2023, you can also make a payment of 10p per mile where the employee drives a fully electric company car.

The tax legislation contains a number of exemptions which allow benefits in kind to be provided to employees without a tax charge arising. Some of the exemptions are more useful than others. One of the more valuable ones is that for mobile telephones.

The exemption enables you to provide one mobile phone to an employee for their use. However, it only applies if there is no transfer of property – you must retain ownership of the phone. The exemption covers the provision of the phone for the employee’s use, plus the cost of private calls and data usage.

More than one phone

The exemption is limited to the provision of one phone per employee. If the employee is provided with second or further phones for private use, or if phones are provided to members of their family for private use, the additional phones represent a taxable benefit. The tax charge is calculated in accordance with the rules for making an asset available for an employee’s private use.

Business use exemption

If an employee is provided with a second phone for business use only, and the employee does not use that phone for private use, there will no tax charge in respect of that phone. Consequently, the employee can be provided with one phone for private use (or business and private use) and one phone for business use without a tax liability arising. However, if the employee is provided with two phones both of which can be used for business and private use, the exemption will only apply to one of them, whereas the other will be taxable. Thus, if the employee is to be given the use of two phones, it is beneficial from a tax perspective to restrict the use of one of them to business use only. Any incidental private use of a business-only phone is disregarded.

Beware salary sacrifice

Do not be tempted to use a salary sacrifice arrangement to provide an employee with the use of a mobile phone for private use as this will result in the exemption being lost. Instead, the employee will be taxed by reference to the amount of salary given up in exchange for the phone.