There is a lot of preparation involved in setting up a business, and costs will be incurred, which may be substantial. Before it is able to start trading, a business may incur expenditure on items such as:

• acquiring premises;
• recruiting staff;
• buying stock;
• setting up website;
• IT costs;
• advertising and marketing; and
• travel and subsistence.

These costs relate to a business, albeit one which has yet to start.

Relief for expenses

Once a business is up and running, relief is given for revenue expenses which are incurred wholly and exclusively for the purposes of the business.

Where the expenses are incurred in setting the business up, relief is available under the pre-trading expenses rules. These allow relief for expenses that were incurred in the seven years prior to the commencement of the trade to the extent that the expenses are revenue expenses which are incurred wholly and exclusively for the purposes of the trade. In this way, the pre-trading expenses rules allow relief for expenses which 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.

Example

Lucy opens a shop selling cards and gifts on 1 October 2021. Prior to opening the shop, she incurred expenses as follows in 2021:

• rent — £2,000;
• staff costs — £4,000;
• stock — £20,000;
• travel expenses — £850;
• advertising — £3,000
• shop fittings — £12,000
• laptop — £500.

Under the pre-trading rules, the rent, staff costs, travel expenses and advertising costs are treated as if they were incurred on 1 October 2021. They are deducted in calculating her profits for her first accounting period.

Stock

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.

Capital expenditure A similar rule to the pre-trading expenses rules applies for capital allowance purposes. Items purchased prior to the commencement of trade where the expenditure is qualifying expenditure for capital allowance purposes are eligible for capital allowances – the qualifying expenditure is treated as if it were incurred on the first day of trading.

The VAT is a simplified scheme that can save work. Instead of working out the VAT that you need to pay over to HMRC by deducting input VAT from output VAT, you pay a fixed percentage of your VAT-inclusive turnover. The percentage depends on the nature of your business.

Who can join?

To be eligible to join the VAT flat rate scheme you must be a VAT-registered business and expect your VAT taxable turnover to be £150,000 or less. This is the total of everything that you sell that is not exempt from VAT, exclusive of VAT. You cannot re-join the scheme if you have left it in the last 12 months.

Once in the scheme, you must leave if your turnover in the last 12 months was more than £230,000 including VAT, or you expect your turnover in the next 30 days alone to be more than £230,000 (including VAT).

Working out your VAT

The flat rate percentage depends on the nature of your business. The percentages applying to different business sectors can be found on the Gov.uk website. The percentages allow for input VAT recovery and are less than the rate of VAT charged.

You receive a discount of 1% from your flat-rate percentage for the first year that you are in the scheme.

The VAT that your need to pay to HMRC for a quarter is simply the fixed rate percentage as applied to your VAT-inclusive turnover.

Example

Molly runs a beauty business. Her annual turnover (excluding VAT) is £90,000. In a particular VAT quarter, her VAT inclusive turnover is £32,400. The flat rate percentage for her sector – hairdressing and other beauty treatments – is 13%. Consequently, she must pay HMRC VAT of £4,212 for the quarter. She does not need to keep records of her input VAT or work out the difference between VAT charged and VAT suffered in the quarter.

Limited cost businesses

Special rules apply to business that do not buy many goods – known as limited cost businesses. These are business where goods are less than either 2% of turnover or £1,000 a year.

Limited cost businesses must use a higher rate of 16.5% to work out the VAT that they pay over to HMRC, regardless of the sector in which they operate.

Is the scheme worthwhile?

The scheme will save work, but this may come at a cost if the amount that you would pay using the normal rules is less than the amount determined using the fixed rate percentage. There is no substitute to doing the sums.

The flat rate percentage for limited cost businesses of 16.5% of VAT-inclusive turnover is equivalent to 19.8% of net turnover, leaving little margin for input VAT recovery as 99% of the VAT charged at 20% must be paid over to HMRC. This may be problematic for a business that spends little on goods but incurs VAT on services and items such as fuel and promotional items, which are excluded from the calculation. Again, to assess whether the scheme is worthwhile, there is no substitute for doing the sums.

If your company is no longer trading and does not have any other income, you can tell HMRC that it is dormant. This will relieve you of the need to file a company tax return or pay corporation tax. However, while your company still exists, even if it is no longer trading, you will still need to file annual accounts and a confirmation statement with Companies House.

Dormant for corporation tax

A company will normally be classed as dormant for corporation tax if:

• it has stopped trading and it does not have any other income;
• it is a new limited company which has not yet started to trade;
• it is an unincorporated association or club that owes less than £100; or
• it is a flat management company.

A company will not be dormant if it is buying, selling, renting property, advertising, employing anyone or receiving interest.

Tell HMRC

If you think that your company is dormant for corporation tax, you can use HMRC’s online service on the Gov.uk to inform HMRC of this. To use the service you will need:

• the company name;
• its 10-digit Unique Taxpayer Reference (UTR); and
• the date it stopped trading.

HMRC decide your company is dormant

You may get a letter from HMRC telling you that they have decided to treat your company as dormant.

Implications for corporation tax

Once you have told HMRC that your company is dormant (or they have decided to treat it as dormant) you will not need to pay corporation tax or file a company tax returns unless you receive a notice to file. Once you have filed a return showing the company to be dormant, you should not receive a further notice to file.

Companies House

Registering your company as dormant with HMRC does not relieve you of your Companies House obligations. Your obligations depend on whether the company is ‘dormant’ for Companies House. This is the case if you did not have any significant transactions in the year. Any filing fees paid to Companies House, penalties for late filed accounts or money paid for shares when the company was incorporated do not count as significant financial transactions. If your company is dormant for Companies House and also ‘small’, you can file dormant company accounts. You will need to file a confirmation statement too.

All individuals are entitled to an annual exempt amount for capital gains tax purposes. Net gains (chargeable gains less allowable losses) for the tax year are free of capital gain tax to the extent that they are covered by the annual exempt amount. For 2021/22, the annual exempt amount is set at £12,300.

Use it or lose it

As with the personal allowance for income tax purposes, the capital gains tax annual exempt amount is lost if it is not fully used in the tax year – it is not possible to carry forward any unused part of the 2021/22 annual exempt amount to 2022/23.

As the end of the tax year approaches, now is the time to review gains and losses in the tax year, and planned disposals, to assess whether it is beneficial to make further disposals in 2021/22.

Losses

Losses realised in a tax year must be set against any gains for the same tax year to arrive at net chargeable gains, before applying the annual exempt amount. You cannot preserve the losses by using the exempt amount against the chargeable gains. However, there is no need to use losses brought forward from earlier tax years before utilising the annual exempt amount.

For example, if in a tax year you realise a gain of £14,000 and a loss of £6,000, the net gains for the year are £8,000. These are sheltered entirely by the annual exempt amount of £12,300. It is not possible to set the annual exempt amount against the chargeable gain to reduce it to £1,700, then use only £1,700 of the loss, carrying the remaining £4,300 forward.

Married couples and civil partners

Married couples and civil partners can take advantage of the rule that allows them to transfer assets between them at a value that gives rise to neither a gain nor a loss (i.e. the transferor’s base cost). This effectively allows them to shift some or all of a gain from one spouse or civil partner to the other. This is useful to ensure both partner’s annual exempt amounts are utilised.

Year-end planning

Case study 1

Mark is planning to sell some shares in Spring 2022 and expects to realise a gain of £10,000. He has not made any disposals so far in 2021/22.

If he sell his shares prior to 6 April 2022, the disposal will fall in the 2021/22 tax year. As his annual exempt amount has not been used, this is available to shelter the gain. Making the disposal prior to 6 April 2022 leaves his annual exempt amount for 2022/23 available to set against any disposal in the 2022/23 tax year.

Case study 2

Duncan and Anthony are civil partners. Antony sold a painting in May 2021 realising a gain of £15,000. This utilised his annual exempt amount in full. He plans to sell another painting and expects to realise a gain of £10,000.

If Anthony sells the painting in 2021/22, he will pay capital gains tax on the gain. However, if he transfers the painting to Duncan prior to sale and Duncan sells the painting, the gain will be Duncan’s rather than Anthony’s and will be sheltered by his annual exempt amount, saving the couple capital gains tax.

The self-assessment tax return for 2020/21 must be filed online by midnight on 31 January 2022 if a late filing penalty is to be avoided. The exception to this is where a notice to file a return for 2020/21 was issued after 31 October 2021, in which case the filing deadline is three months from the date on which the notice to file was issued.

Any remaining tax and National Insurance for 2020/21 must also be paid by midnight on 31 January 2022. This is also the deadline for making the first payment on account of the 2021/22 liability.

Requirement to make payments on account

You will need to make payments on account for 2021/22 if your tax and Class 4 National Insurance liability for 2020/21 was at least £1,000, unless you paid at least 80% of what you owe under deduction at source, for example, under PAYE.

Calculating the payment on account

When calculating your payments on account for 2021/22, the starting point is your tax and Class 4 National Insurance liability for 2020/21. It is assumed that the liability remains roughly constant year on year. Consequently, the payments made on account will collect an amount equal to the previous year’s liability.

Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability. Class 2 National Insurance contributions are not taken into account in working out payments on account.

Payments on account are due by 31 January in the tax year and by 31 July after the tax year; 2021/22 payments on account must be paid by 31 January 2022 and 31 July 2022.

Where the eventual liability is more than that paid on account, the balance must be paid by 31 January after the end of the tax year, together with any Class 2 National Insurance due for the year. If the liability has fallen, the excess can be offset against future liabilities (for example, payments on account for the following year) or, where this is not possible, refunded.

Option to reduce payments on account

If you think that your liability for 2021/22 will be lower than for 2020/21, you can opt to reduce your payments on account. This may be the case if, for example, you have lost a key customer or are struggling to recruit staff or secure supplies.

There are various ways in which you can tell HMRC that you want to reduce your payments on account. This can be done by signing into your online personal tax account and using the ‘reduce payments on account’ option or by completing form SA303 and sending it to HMRC. You can also tell HMRC that you want to reduce your payments on account in the ‘other information’ box on the self-assessment tax return. You will need to specify what you want to pay and the reason for the reduction.

However, beware of reducing the payments on accounts below that which you will eventually owe – while this may help your cashflow temporarily, you will be charged interest on the difference between what you should have paid and what you have paid.

Not all types of income are equal from a tax perspective, and savings income enjoys dedicated allowances, tax rates and reliefs which allow a taxpayer to enjoy some or all of their savings income tax-free.

Personal allowance

The personal allowance for both 2021/22 and 2022/23 is set at £12,570. Any savings income that is sheltered by the personal allowance can be enjoyed tax-free.

Personal savings allowance

Taxpayers who pay tax at the basic or higher rates of tax also receive a dedicated savings allowance – the personal savings allowance. For both 2021/22 and 2022/23 this is set at £1,000 for basic rate taxpayers and at £500 for additional rate taxpayers. The personal savings allowance is available in addition to the personal allowance.

Taxpayers who pay tax at the additional rate do not benefit from a personal savings allowance.

The personal savings allowance is available to shelter interest from bank and building society accounts, saving and credit union accounts, unit trusts, investment trusts and open-ended investment companies, peer-to-peer lending, trust funds, payment protection insurance, Government or company bonds, life annuity payments and some life insurance contracts. Interest from tax-free savings accounts does not count towards the allowance.

Savings starting rate

Individuals whose non-saving income is low may also benefit from the special starting rate of tax on savings income of up to £5,000. This is set at 0%, meaning savings income which falls within the starting rate band is received tax-free.

The availability of the savings starting rate depends on the amount of taxable non-savings income that a person receives in a tax year – the more non-savings income that a person has, such as employment income or a pension, the less they are able to benefit from the savings zero rate.

If a person has non-savings income of £12,570 or less, their income will be covered by their personal allowance. Where this is the case, they will be able to benefit from the full savings starting rate band of £5,000, and receive savings income of £5,000 tax-free in addition to any savings covered by their savings or personal allowance or received from tax-free accounts, such as ISAs. Where the personal allowance is not used in full, any unused personal allowance can be set against savings income, increasing the amount of savings income that can be received tax-free.

Where a person has other income in excess of the personal allowance, this will eat into the savings starting rate. If the taxable income (i.e. income in excess of the personal allowance) is less than £5,000 (as will be the case where non-savings income is between £12,570 and £17,570), the savings starting rate band is reduced by the amount of the taxable non-savings income. This is illustrated by the following example.

Example

Elsie receives a pension of £14,000 a year. She also has savings income of £7,000 a year.

Her personal allowance is set against her pension, reducing her taxable pension income to £1,430.

As this is less than £5,000, her savings starting rate band is reduced by her taxable non savings income of £1,430 to £3,570.

Consequently, the first £3,570 of Elsie’s savings income will benefit from the starting savings zero rate, while the next £1,000 will be sheltered by her personal savings allowance.

The remaining £2,430 (£7,000 – £3,570 – £1,000) will be taxed at the basic rate of 20%.

The starting savings rate band is eliminated in its entirety where a person has taxable non-savings income of £5,000 or above. This will be the case where they have non-savings income of at least £17,570.

Tax-free savings of £18,570

A person who receives the basic personal allowance and only receives savings income can enjoy savings income of up to £18,570 a year tax-free (in addition to any savings income from tax-free savings account). This is made up of the personal allowance of £12,570, the savings starting rate band of £5,000 and the personal savings allowance of £1,000.

This figure will be higher if the person has the marriage allowance (worth an additional £1260) or receives the married couple’s allowance (available where at least one spouse or civil partner was born before 6 April 1935).

Tax-free savings In addition to the above, a person can enjoy savings income from tax-free savings accounts tax-free. Interest on ISAs and some National Savings and Investment accounts is free of tax.

Last year, the Covid-19 pandemic and national lockdown took Christmas parties (other than virtual ones) off the agenda. This year, they may be a temptation to make up for lost time. How can you celebrate the festive season without triggering a tax liability in the process?

Limited tax exemption

There is a limited tax exemption for annual parties and functions, which can be used to ensure that no benefit in kind tax charge arises in respect of the provision of the Christmas party. However, as with all exemptions, there are conditions to be met. The exemption applies equally to virtual parties as to ‘real life’ events.

Function must be annual

The exemption only applies to annual functions. If you hold a Christmas party every year (Covid-19 restrictions aside), the exemption will be available. If, however, you decide to hold a one-off event, the resulting benefit will be taxable.

£150 per head limit

The exemption only applies if the cost of the function is not more than £150 per head. This is the total cost of the function (including VAT) divided by the number of people attending (guests as well as employees). If the cost per head is more than £150, the full amount is taxable, not just the excess over £150. If the employee brings a guest, the taxable benefit is the cost of the employee’s attendance at the event, and also that of their guest.

If you hold more than one annual function each year, you can use the £150 per head limit to achieve the best outcome. Remember that it can only be used to shelter ‘whole’ functions – it is not a tax-free allowance. In working out the best possible use of the exemption, you will need to consider the impact that guests will have on the amount that would be taxable in the absence of the exemption. The exemption is better used to cover an event costing £30 per head where the employee can bring a guest than one costing £40 per head which is for employees only. If the exemption is not available, the taxable amount for the former for attendance by both the employee and their guest is £60 (2 x £30), whereas for the latter, it is only £40.

Taxable benefit? Use a PSA

If you are not able to benefit from the exemption for your Christmas party, but want to preserve employee goodwill, you may wish to meet the associated tax liability by including the benefit within a PAYE Settlement Agreement.

The hospitality and leisure industry were particularly hard hit by the effects of the Covid-19 pandemic and associated lockdowns. To help the industry recover they benefitted from a reduced rate of VAT of 5% from 15 July 2020 until 30 September 2021.

As a temporary measure, a new reduced rate of VAT of 12.5% applies from 1 October 2021 until 31 March 2022.

The rate will revert to the standard rate of 20% from 1 April 2022.

Supplies benefitting from the reduced rate

The following supplies, which benefitted from the reduced rate of 5% until 30 September 2021, will also benefit from the new reduced rate of 12.5% from 1 October 2021 to 31 March 2022.

1. Food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs.
2. Hot takeaway food and hot takeaway non-alcoholic beverages.
3. Sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities.
4. Admission to cultural attractions that do not already benefit from the cultural VAT exemption, such as theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and other similar cultural events and facilities.

Where an admission to an attraction is within the existing cultural VAT exemption, this takes precedence over the reduced rate.

If you are self-employed and you received Covid-19 support payments during the pandemic, you may need to report these on your self-assessment tax return.

If you are an employee and you were furloughed and received furlough grants under the Coronavirus Job Retention Scheme, these were liable to tax under PAYE and liable to National Insurance as for normal salary and wages payments and are included in the figure on your P60.

Grants under the Self-Employment Income Support Scheme

If you received a grant from HMRC under the Self-Employment Income Support Scheme (SEISS), you will need to report this in the dedicated Self-Employment Income Support Grant box on the self-assessment return. The exact reporting mechanism will depend on whether you complete the full self-employment pages (SA103S) or the short pages (SA103S). If you are a member of a partnership, you will need to report the grants on the relevant partnership pages.

SEISS grants are taxable in the tax year in which they are received. This rule applies regardless of the period to which you prepare your accounts. Consequently, grants received between 6 April 2020 and 5 April 2021 (Grants 1, 2 and 3) will need to go on the 2020/21 self-assessment tax return.

If you complete the short self-employment pages, your SEISS grants should be entered in box 27.1. If you complete the full self-employment pages, your SEISS grants should be entered in box 70.1.

Other taxable support payments

If you received other taxable Covid-19 support payments, these too will need to be reported on your 2020/21 self-assessment tax return. This may include Coronavirus Business Support Grants from your local authority or devolved Administration, such as those payable under the Small Business Grant Fund, the Retail, Hospitality and Leisure Grant Fund and the Local Authority Discretionary Grant Fund, or payments under the Eat Out To Help Out Scheme. Test and trace self-isolation payments are also taxable, and need to be reported too.

If you complete the short self-employment pages, taxable Covid-19 payments other than SEISS grants, are reported in box 10, while on the full self-employment pages, the relevant box is box 16.

Payments that do not need to be reported

Money received from loans, such as loans made under the Bounce Back Loan Scheme or other Coronavirus loan schemes does not need to be reported on your tax return. Likewise, you do not need to report any welfare payments received from the council, such as council tax payments or housing benefit.

Childcare costs can be very expensive and any help is welcomed, particularly where you can benefit from that help tax-free. There are various routes by which this is possible.

Government tax-free top-up scheme

Under the Government scheme, you can open an online account and deposit money which is used to pay for your childcare. For every £8 that you deposit in the account, the Government will add a further £2, to a maximum of £2,000 per child per year. The maximum top-up is doubled to £4,000 for disabled children. This top-up is tax-free.

The money in the account can only be used to pay for approved childcare, such as childminders, nurseries, nannies, after-school clubs and play schemes. The childcare provider must be signed up to the scheme.

To benefit from the scheme, you (and your partner if you have one) must be working or on statutory leave, and you must expect to earn at least the National Living or Minimum Wage for your age for 16 hours a week on average over the next three months. At the current NLW, this is £1,853.28. You can also use the scheme if you are self-employed.

You cannot benefit from the top-up scheme if you, or your partner, earn more than £100,000 a year.

Workplace nurseries

If your employer provides you with a place in a workplace nursery, you can enjoy the benefit of this tax-free, as long as conditions governing the tax exemption for workplace nurseries are met. There is no financial limit on the tax-free benefit.

The exemption remains available if the benefit of a place in a workplace nursery is made available under a salary sacrifice scheme.

Employer-supported care

Employer-supported care is childcare provided by someone where the contract is between the employer and the childcare provider, and the employer meets the costs. The benefit is tax-free up to your exempt amount.

You have one exempt amount, which applies to both employer-supported care and employer-provided childcare vouchers. This is £55 per week if you joined the scheme before 6 April 2011. If you joined the scheme after this date but on or before 4 October 2018, the exempt amount depends on your marginal rate of tax. It is £55 per week if you are a basic rate taxpayer, £28 per week if you are a higher rate taxpayer and £25 per week if you are an additional rate taxpayer.

If you joined such a scheme on or before 4 October 2018, you can continue benefitting from the exemption as long as your employer continues to provide the care. However, the exemption is lost if you sign up for the Government tax-free scheme.

The exemption remains available if the care is provided under a salary sacrifice scheme.

Employer-provided childcare vouchers

The tax exemption for employer-provided childcare vouchers operates in a similar way to that for employer supported childcare and shares the same tax-exempt amount. To benefit, you must have joined the scheme on or before 4 October 2018. However, you cannot benefit from the exemption and also the Government tax-free scheme.

The exemption remains available if the care is provided under a salary sacrifice scheme.