For some time, taxpayers within Self Assessment have been able to set up a Time to Pay arrangement online, allowing them to pay their tax bill in instalments if they cannot pay it in full and on time. The facility to set up their own Time to Pay arrangement has now been extended to VAT-registered businesses.

Setting up a VAT payment plan online

If you operate a VAT-registered business and you are struggling to pay the VAT that you owe, rather than having to contact HMRC to set up a Time to Pay agreement, you may now be able to do it yourself online. A Time to Pay agreement will enable you to pay the VAT that you owe in instalments. Payments are collected via direct debit.

You will be able to use the online self-serve facility if the following conditions are met:

• you have filed your last VAT return;
• the amount that you owe is £20,000 or less;
• you are within 28 days of the payment deadline;
• you do not have any other payment plans or debts with HMRC; and
• you plan to pay what you owe within six months.

However, you cannot use the online service if you use the VAT cash accounting scheme or if you use the VAT annual accounting scheme. You are also unable to use the online service if you make VAT payments on account.

To set up a payment plan online, you will need to sign into your Government Gateway account. As you need to set up a direct debit to collect the payments, this is something you must do yourself. While an adviser can guide you, they cannot do it on your behalf.

Unable to self-serve

If you are not eligible to use the online service and are struggling to pay your VAT bill, you may still be able to agree an instalment plan with HMRC. However, to do so you will need to contact HMRC by calling the VAT payment service on 0300 200 3831.

If you are self-employed, the way in which your profits are taxed is changing. As a result of this, you only have a limited window in which to claim relief for any profits which have been taxed twice.

Basis period reform

For 2022/23 and earlier tax years, self-employed individuals, whether sole traders or partners in a partnership, were taxed on a current year basis. This meant that you were taxed on the profits for the accounting period that ended in the tax year. However, from 2024/25, you will be taxed on the profits for the tax year. If you prepare your accounts to 31 March or 1 to 5 April, this is deemed to be equivalent to the tax year. However, if you prepare your accounts to another date, you will need to apportion the profits from two accounting periods to arrive at the profits for the tax year.

To move from the current year basis to the tax year basis, the 2023/24 tax year is a transition year. If your accounting date does not correspond to the tax year (or is not treated as corresponding to the tax year), you will be taxed on more than 12 months’ profits in 2023/24. The profits taxed are those for the 12 months from the end of your 2022/23 basis period, plus those for the remainder of the 2023/24 tax year, less any overlap relief. For example, if your prepare your accounts to 30 September, in 2023/24 you will be assessed on the profits for the year to 30 September 2023 plus the profits from 1 October 2023 to 5 April 2024, less any overlap relief. The profits from 1 October 2023 to 5 April 2024 are the transition profits. These profits, less any overlap relief, are spread over five tax years from 2023/24, unless you elect otherwise.

Overlap relief

Overlap profits are profits that are taxed twice. This may occur either in the early years of a business or on a change of accounting date. Under the current year basis, relief for overlap profits (overlap relief) was given on cessation or in a tax year in which there was a change of accounting date and as a result more than 12 months’ profits were taxed in that year.

If you have overlap profits in respect of which relief has not been claimed, the last chance to do this is for the 2023/24 tax year. Relief will normally be claimed against the transition profits for that year.

Overlap relief must be claimed in your 2023/24 tax return, which must be filed by 31 January 2025.

Determining your overlap profits

To claim overlap relief, you will need to know what your overlap profits are. This may not be a number that you have easily to hand, particularly if you started your business many years ago.

HMRC are launching an online form which can be used to submit requests for details about overlap relief.  At the time of writing, it was expected that the service would be available from 11 September 2023. They will only be able to provide information on overlap relief if the figures are recorded in their systems, taken from tax returns that you submitted previously. If the information was not provided to HMRC in your tax returns, HMRC will be unable to provide it. When making a request for overlap relief information, you need to supply some details about your business to HMRC.

You can make a request for information on your overlap profits ahead of the launch of the online form. If you choose to do this, you will need to supply the following information:

• your name;
• your National Insurance number or your Unique Taxpayer Reference (UTR);
• a name or description of your business, or both;
• whether you operate as a sole trader or are in a partnership;
• the date that you commenced as a sole trader or the date of commencement of the partnership, as applicable;
• the start and end date of the most recent accounting period; and
• the year(s) in which the accounting date changed, if relevant.

Relief for overlap profits that is not claimed in 2023/24 will be lost.

If you need to file a Self Assessment tax return for 2022/23, you have until midnight on 31 January 2024 in which to do this, as long as you file online. However, HMRC have been encouraging taxpayers to file their tax return early. Is this worthwhile and what are the benefits?

Due a tax refund?

If you think you might have paid too much tax in 2022/23, filing your tax return early will enable you to claim a refund sooner – you do not need to wait until January 2024. The money is arguably better in your bank account than in HMRC’s.

Better budgeting

Filing your tax return early will help you budget, and if you have tax to pay, give you more time to put funds aside to meet your tax bill. If your tax and Class 4 National Insurance bill for 2022/23 is more than £1,000, unless 80% of it is deducted at source, for example under PAYE, you will need to make payments on account for 2023/24. The first payment on account for 2023/24 is due by 31 January 2024, along with any balance remaining due for 2022/23 and any Class 2 National Insurance for that year. The second payment on account for 2023/24 is due by 31 July 2024. Each payment is 50% of your 2022/23 tax and Class 4 National Insurance liability.

Struggling to pay?

By filing your tax return early, you will know in advance what you owe. If you know you will struggle to meet your tax bills, you can set up a Time to Pay agreement to allow you to pay your bill in manageable instalments. You may be able to do this online.

Easier access to help

Although HMRC closed their Self Assessment helpline during the summer, it reopened on 4 September. HMRC helplines become very busy during January as the deadline approaches. Filing your return early will make it easier to access help from HMRC if you need it.

Peace of mind

Filing your tax return early will give you the peace of mind that comes from knowing that the job has been done. It also means that you won’t risk a late filing fee of £100 for missing the filing deadline.

If you have employees who use either their own car or a company car for business mileage, you can pay mileage allowances tax-free up to certain limit. However, if you pay more than the permitted amount, the excess is taxable and liable to Class 1 National Insurance.

The amount that you can pay tax-free depends on whether the employee uses their own car for business or has a company car.

Employees using their own car for business journeys

Where an employee undertakes business mileage in their own car, you can make tax-fee mileage payments up to the ‘approved amount’. This is simply the employee’s business mileage in their own car in the tax year multiplied by the approved rate. For cars and vans, the approved rate is 45p per mile for the first 10,000 business miles in the tax year and 25p per mile thereafter. So, if an employee drives 12,000 business miles in the tax year, you can make mileage payments of up to £5,000 tax-free (10,000 miles @ 45p per mile plus 2,000 miles @ 25p per mile).

Any excess over the approved amount is taxable. However, if you pay less than the approved amount (or do not pay mileage allowances), the employee can claim tax relief for the difference between the approved amount and the mileage payments received, if any.

The approved amounts are the maximum that can be paid tax-free. You cannot make higher payments tax-free even if the actual costs incurred by the employee exceed the approved amount.

You can also make mileage payments free of National Insurance. However, for National Insurance purposes, the 45p rate is used for all business mileage. Any amount paid in excess of this should be included in gross pay for National Insurance purposes.

Employees using a company car for business journeys

The approved rates do not apply where the employee has a company car. These rates include an element for insurance and depreciation as well as for fuel. Instead, HMRC publishes fuel-only rates (the advisory fuel rates) which can be used to make tax-free mileage payments to employees who use a company car for business mileage and who pay for their own fuel. The rates are published quarterly.

The rates applying from 1 June 2023 are as follows:

Engine size	Petrol	LPG
1,400cc or less	13p per mile	10p per mile
1,401 to 2,000cc	15p per mile	12p per mile
Over 2,000cc	23p per mile	18p per mile

Engine size	Diesel
1,600cc or less	12p per mile
1,601cc to 2,000cc	14p per mile
Over 2,000cc	18p per mile

If the employee has an electric company car, you can pay a rate of 9p per mile tax-free.

Payments up to the advisory rates can also be made free of National Insurance.

There are various reasons why HMRC may issue a tax penalty. You may receive a penalty if you file your tax return late, your tax return is inaccurate, you are late paying tax that you owe or you fail to keep accurate records.

If you do not agree with the penalty, you can appeal against it. The appeal route depends on whether the penalty relates to a direct tax, such as income tax, capital gains tax or corporation tax, or to an indirect tax, such as VAT.

Direct tax penalties

If you receive a penalty in relation to a direct tax by post, the appeal letter will contain instructions on how to appeal and also a form which can be used. An appeal must be made within 30 days of the date on the penalty notice. If you miss the deadline, you must explain the reason for doing so to HMRC so that it can decide whether to consider your appeal.

Self Assessment Penalties

If you have received an automatic £100 penalty for missing the deadline for filing your Self Assessment tax return, you can appeal online by signing into your Government Gateway account. Alternatively, you can appeal by post. If you did not need to send a return, HMRC should cancel the penalty. If you submitted your return late and have a ‘reasonable excuse’ for doing so, HMRC may allow your appeal.

You will need to tell them what your reasonable excuse is. However, you should bear in mind that HMRC’s idea of a reasonable excuse may be different to yours. It will only accept serious events such as the death of a partner or close relative, a serious or life threatening illness or an unexpected hospital stay, delays related to a disability or mental illness that you have, service issues with HMRC’s online services, a computer or software failure while filing your return, a fire, flood or theft that prevented you from filing your return on time as valid reasons for late filing. HMRC may also accept that you had a reasonable excuse if, despite taking reasonable care, you misunderstood or were not aware of your obligations or relied on someone else to file your return and they did not. HMRC will expect you to send your return as soon as you are able once the reason for not filing it on time has been resolved.

If you need to appeal other self-assessment penalties, you should do this by post or on form SA370.

PAYE penalties

If you are an employer and you receive a PAYE penalty, you can log into your PAYE Online for Employers account and appeal using the ‘Appeal a penalty’ option. You will receive an immediate acknowledgement of your appeal.

Indirect tax penalties

If you are charged a penalty in relation to an indirect tax, for example, a VAT penalty, the penalty letter will offer you a review, which you can choose to accept. Alternatively, you can appeal to the tax tribunal.

Review by HMRC

If you are not happy with the outcome of an appeal against a direct tax penalty or you are issued with an indirect tax penalty, you can take up the offer for HMRC to review the penalty decision. The decision will be reviewed by someone who was not involved in the original decision. The review will normally take 45 days (although HMRC should tell you if it will take longer than this). HMRC will tell you the outcome of the review.

Appeal to the tax tribunal

If you disagree with the review decision or do not want to accept a review, you can appeal to the tax tribunal. Again, you have 30 days to lodge your appeal.

Alternative dispute resolution

If you have appealed to the Tax Tribunal, you can opt to use the Alternative Dispute Resolution procedure to resolve the dispute rather than it being heard by the Tax Tribunal. Under this route, a mediator will work with you and HMRC to find a solution.

Although the tax system contains an exemption for employer-provided eye tests and the glasses or contact lenses for display screen use, its availability is dependent on the associated conditions being met. When seeking to take advantage of the exemption, the method of provision is key. The tax consequences of an employer providing eye tests for employees are very different to those where an employer reimburses an employee for the cost of an eye test which they initially paid for – despite the end result (in that the employer ultimately meets the cost of the test) being the same.

The exemption

The exemption prevents a tax liability arising where an employee is provided with an eye and eyesight test or special corrective appliances that an eye and eyesight test show to be necessary. The corrective appliances must be for display screen equipment use only – if the employee needs glasses for reading or everyday use, these fall outside the scope of the exemption. The availability of the exemption is contingent on two conditions – condition A and condition B – being met.

Condition A is that the provision of the test or appliances is required by regulations made under the Health and Safety at Work etc. Act 1974. The law requires employers to arrange eye tests for display equipment users and provide glasses where needed for display equipment work only.

Condition B is that the tests and corrective appliances must be made available generally to those employees for whom the regulations necessitate their provision.

To comply with the health and safety legislation, it does not matter if the employer arranges the test with the optician and pays for it, the employee arranges it and the employer pays the optician on the employee’s behalf or the employee arranges it and pays for it and the employer reimburses the employee. However, from a tax perspective, all routes are not equal.

Employer arranges and pays for the test

Assuming the conditions are met, the exemption will apply if the employer arranges the test with the optician and pays for it – here the employer is providing the employee with an eye test. If corrective appliances are provided, the exemption will similarly apply as long as the employer arranges their provision and pays for them.

Employee arranges the test and the employer pays

From a tax perspective, if the employee arranges the test and the employer pays for it on the employee’s behalf, the employer is settling an employee’s private bill rather than providing an eye test. The exemption only applies to the provision of an eye test or corrective appliances, not to the settling of a pecuniary liability. To avoid falling foul of this trap, the employer should arrange the test directly with the optician and pay the optician.

Employer reimburses the employee

In the event that the employee arranges and pays for an eye test and is reimbursed by the employer the exemption for eye tests is not in point as the employer is not providing an eye test. The exemption for paid and reimbursed expenses will only apply if the employee would be entitled to a tax deduction if they met the cost themselves. This is not the case here. Consequently, any reimbursement of the cost of an eye test or corrective appliances is taxable.

HMRC have sent out nudge ‘One to Many’ letters to taxpayers who they believe may have claimed Business Asset Disposal Relief (BADR) in excess of the £1 million lifetime limit.

Nature of the relief

Formerly known as Entrepreneurs’ Relief, BADR reduces the amount of capital gains tax that is payable where a person sells all or part of their business. Where the relief applies, capital gains tax is charged at the rate of 10% on all gains on qualifying assets up to the level of the lifetime allowance, currently set at £1 million.

To be eligible for the relief, you must meet the qualifying conditions for a period of two years up to the date on which you sell your business or, where the business is operated as a limited company, your shares in the company.

The letters

The letters have been sent to taxpayers who made claims for BADR relief in their 2021/22 Self-Assessment returns and who HMRC believes have claimed BADR in excess of the £1 million lifetime limit, either because the limit had already been reached prior to 2021/22 or because the claim made in the 2021/22 tax return took the value of lifetime claims over the limit.

Taxpayers who received a letter and who had claimed BADR to which they were not entitled had 30 days in which to amend their tax return. As a result of the amendment, it is likely more tax will be due – in the absence of the relief a higher rate taxpayer would pay capital gains tax at 20% on the gains rather than 10%.

Taxpayers who think that their claim is within the £1 million limit should contact HMRC and explain why they think this is the case.

Anyone who receives a nudge letter should address it – HMRC may instigate a compliance check if the taxpayer has not amended their return or contacted HMRC. If a response remains outstanding, this should be addressed as a matter of urgency.

Keep records

If you have claimed BADR, it is important than you keep a record of claims made. It is prudent to check future claims against the remaining limit to ensure that lifetime claims are within the lifetime limit.

If you make VATable supplies, you will need to register for VAT if your taxable turnover reaches the VAT registration threshold. The VAT registration threshold is set at £85,000.

The need to register for VAT is triggered if your VAT taxable turnover for the last 12 months exceeded £85,000 or if you expect your VAT taxable turnover to go over £85,000 in the next 30 days.

Taxable supplies

Taxable supplies for VAT purposes are supplies that are made in the UK and which are not exempt from VAT. This includes supplies liable at the zero rate of VAT, as well as those charged at the standard and reduced rates. You do not need to take account of exempt supplies when checking whether you need to register for VAT.

Voluntary registration

Registration is compulsory if your VAT taxable turnover meets either of the tests set out above.

However, if you make taxable supplies but your taxable turnover is below the VAT registration threshold, you can choose to register for VAT voluntarily. This will be beneficial if the value of your input VAT exceeds the value of your output VAT, allowing you to reclaim the difference from HMRC. This may be the case where the supplies that you make are predominantly zero-rated (for example, if you sell zero-rated food items or children’s clothes).

When to register

If your VAT taxable turnover in the last 12 months exceeded the VAT registration threshold of £85,000, you must register for VAT within 30 days of the end of the month in which your turnover for the previous 12 months went over £85,000. Your effective date of registration is the first day of the second month after the threshold has been breached.

Example

Molly’s VAT taxable turnover for the previous 12 months exceeded £85,000 on 2 August 2023. This is the first time that she has exceeded the VAT registration threshold. Molly must register for VAT by 30 September 2023 (30 days from the end of August 2023 – the month in which her turnover exceeded the threshold). Her VAT registration is effective from 1 October 2023.

If your VAT taxable turnover will exceed £85,000 in the next 30 days, you must register by the end of the 30-day period. Your effective date of registration is the date that you realised that this would be the case, not the end of the 30-day period.

Example

On 6 August 2023, Paul agreed a contract for £120,000 to provide services in August 2023. He will be paid on 30 August 2023. He realised on 6 August that his turnover will go over £85,000 in the next 30 days. He must register by 5 September 2023. His registration is effective from 6 August 2023.

How to register

You can register for VAT online via the gov.uk website. You can also ask your agent to register on your behalf.

The Employment (Allocation of Tips) Act2023 sets out a new legal framework for the fair allocation of tips. A new Code of Practice is to be introduced and employers will have a legal obligation to adhere to the Code. It will set out the principles of fairness and transparency and will reflect the different ways in which tips are reasonably collected by employers and distributed to workers.

Tips, gratuities and service charges

A customer may pay extra as a tip, a service charge or a gratuity. A tip or gratuity is a voluntary payment that the customer has no obligation to pay. Increasingly, restaurants are adding a service charge to the bill. If it is made clear that there is no obligation on the customer to pay the service charge, it is a voluntary service charge. If the customer must pay it, the charge is a mandatory service charge.

The tax and National Insurance consequences depend on the nature of the payment and how it is made and distributed.

Tips made directly to the staff

A customer may give a tip direct to a worker or leave the tip on the table at the end of a meal. Tips given directly to workers are liable for tax. It is the responsibility of the worker to tell HMRC about the tips that they receive, either by completing a Self-Assessment tax return or via their personal tax account. HMRC will usually collect the associated tax via an adjustment to the employee’s PAYE code. There is no National Insurance to pay on tips given direct to a worker.

Employer shares out the tips

In a situation where the employer initially collects all the tips, irrespective of whether they are made in cash or paid by card, and distributes them to the employees, the amounts distributed must be paid through the payroll and included in gross pay for tax and for National Insurance. The amounts are liable to both tax and National Insurance.

Troncs

A tronc is an arrangement for sharing tips. A tronc is run by a troncmaster and the troncmaster is responsible for operating PAYE and National Insurance on the distributed tips. The tronc will have its own PAYE scheme for this purpose, which must be run independently from the employer’s PAYE scheme.

Tips and the NMW

A worker is entitled to be paid at least the National Living Wage (NLW) or National Minimum Wage (NMW) for their age. Amounts paid to workers in respect of tips, gratuities or service charges do not count towards the minimum wage – the worker must be paid these in addition to the NLW or NMW.

The tax system contains a number of exemptions, some of which are more useful than others. One of the more valuable exemptions is that for mobile telephones. As long as the associated conditions are met, an employee can use an employer-provided mobile phone for private use without being taxed on the associated benefit. However, there are some pitfalls to avoid.

Provision of the phone

The exemption applies where an employee is provided with a mobile phone ‘without any transfer of property in it’. This means that the legal ownership of the phone must not be transferred to the employee.

The method of provision is also key. The exemption will only apply if the contract is between the mobile phone provider and the employer. If the employer chooses to purchase the handset outright, they must retain ownership of it; the airtime contract must be between the employer and the mobile phone provider.

From a tax position, the outcome is different if the employee contracts with the mobile phone company and the employer pays the bill on the employee’s behalf. Here the employer is meeting a personal bill of the employee rather than providing the employee with a mobile phone. As a result, the mobile phone exemption does not apply and the amount paid on the employee’s behalf is taxable and liable to Class 1 National Insurance.

Likewise, if the employee initially meets the cost of the phone and/or the airtime and this is later reimbursed by the employer the mobile phone exemption does not apply as the employee is not being provided with the use of a phone. The exemption for paid and reimbursed expenses does not apply either if the phone is used privately, as the employee would not be entitled to a deduction should they meet the cost personally.

Although at first sight it may seem that the same result is obtained in each case – the employee has the private use of a phone the cost of which is met by the employer – the tax consequences are very different. It is essential that the employer provides the phone and contracts with the mobile phone provider for the exemption to apply.

One phone per employee

The exemption is limited to one phone for private use per employee. Where the employee also has a phone which can only be used for business calls, the exemption remains available for a phone which can be used privately. There is no tax charge if the phone is only available for business calls and is only used for business calls –the business phone is ignored for the purposes of the exemption.

Beware salary sacrifice

The exemption does not apply where the phone is made available under a salary sacrifice or other optional remuneration arrangement.