Can you claim the Employment Allowance for 2021/22?
Can you claim the Employment Allowance for 2021/22?
The Employment Allowance is a National Insurance allowance that enables eligible employers to reduce their employers’ (secondary) Class 1 National Insurance bill by up to £4,000. However, not all employers can benefit – there are some important exclusions.
Eligible employers
To qualify for the Employment Allowance, the employer’s Class 1 National Insurance liabilities for 2020/21 must be less than £100,000. Where the employer is part of a group, the £100,000 limit applies to the group as a whole, not the individual group companies.
The Employment Allowance is not available to companies where the sole employee is also a director. This rules out most personal companies. However, family companies with more than one employee are able to claim.
There are other exclusions too, for example, employers who employ someone for personal, household and domestic work unless the worker is a care or support worker.
Amount of the allowance
The Employment Allowance is set at the lower of £4,000 and the employer’s secondary Class 1 National Insurance liability for the year. Once claimed it is set against the employer’s Class 1 liability until it is used up.
Example
A Ltd is eligible for the Employment Allowance. Its secondary Class 1 National Insurance liability is £1,500 a month. It claimed the Employment Allowance at the start of the 2021/22 tax year. The allowance is used as follows:
Month 1: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £2,500 (£4,000 – £1,500) is carried forward.
Month 2: £1,500 of the Employment Allowance is set against the liability for the month of £1,500, leaving nothing to pay. The remaining Employment Allowance of £500 (£2,500 – £1,500) is carried forward.
Month 3: The remaining £500 of the Employment Allowance is set against the liability for the month of £1,500, leaving £1,000 to pay. The Employment Allowance has now been used in full.
Months 4 to 12: The Employment Allowance has been used in full, so the employer’s Class 1 National Insurance liability for the month of £1,500 is payable in full.
Claiming the allowance
The Employment Allowance is not given automatically and must be claimed each year. This can be done through the payroll software, or via HMRC’s Basic PAYE Tools if the payroll software does not have an Employment Payment Summary (EPS) feature.
Although claims can be made at any time in the tax year, the earlier the claim is made, the earlier the employer will start benefiting from the Employment Allowance.
Claims can also be made retrospectively for the previous four tax years if the employer was eligible for the Employment Allowance, but did not claim it.
Restart Grants and Recovery Loans
Restart Grants and Recovery Loans
As lockdown restrictions are eased, businesses may need help to re-open and to recover from the impact of the pandemic. Depending on the nature of the business, they may be eligible for a Restart Grant or a Recovery Loan.
Restart Grants
The Restart Grant Scheme provides support to help business that were required to close to re-open as lockdown restrictions are eased. The grants are available to businesses in non-essential retail and businesses in the hospitality, accommodation, leisure, personal care and gym sectors.
The grants are available from 1 April 2021 and must be claimed from the local council. Applications can be made on the relevant council’s website.
To qualify, a business must:
- be based in England;
- pay rates; and
- be trading on 1 April 2021.
Non-essential retail business can apply for a Restart Grant of up to £6,000, whereas businesses in the hospitality, accommodation, leisure, personal care and gym sectors can apply for a Restart Grant of up to £18,000. Local councils will use their discretion to determine whether a business is eligible for a grant.
Recovery Loan Scheme
The Recovery Loan Scheme is designed to provide access to finance for UK businesses as they recover from the impact of the Covid-19 pandemic. Businesses of any size can apply for loans under the scheme, and can benefit from a loan or overdraft of between £25,001 and £10 million per business or asset finance of between £1,000 and £10 million per business. However, the amount offered and the terms are at the discretion of the lender.
To encourage lenders to participate, the Government guarantee 80% of the finance to the lender; however, the borrower remains liable for 100% of the debt.
A business can apply for a Recovery Loan if it is trading in the UK. Applicants will need to demonstrate that their business:
- would be viable were it not for the pandemic;
- has been adversely impacted by the pandemic; and
- is not in collective insolvency proceedings.
Businesses that meet the eligibility criteria can apply for a recovery loan, regardless of whether they also have a Bounce Back loan or a Coronavirus Business Interruption Loan. Under the scheme, no personal guarantees are taken on facilities up to £250,000, and a borrower’s principal private residence cannot be taken as security.
The scheme is due to run until 3 December 2021.
Directors’ loan accounts
A ‘Directors Loan Account’ (DLA) is an account in the company’s financial books that records all transactions between a director who is a participator (or another participator) and the company.
Transactions through the account include:
- a loan to the company from the director; or visa versa
- monies drawn by the director on account of salary, dividend or expenses
- director’s private bills paid for by the company
- company bills paid personally by the director
- shares issued on company incorporation but not paid for
Salary paid directly to a director under a contract is not recorded in the DLA as the monies will have been paid and therefore not owed by the company.
DLA in credit
When a company incorporates it is not unusual for directors to lend money to the business and this will show in the DLA as a ‘loan’ from the director to the company. As the DLA will be in credit, the director can draw on the credit balance at any time with no tax or National Insurance implications for either him/herself or the company. However, if the company pays interest on the loan, the director will be liable for tax on that interest, declaration being on the personal tax return. The company also needs to declare the payment to HMRC.
A DLA may also have a credit balance should salary or dividends be allocated to a director, but they do not draw payment. Non take-up may be for various reasons e.g. the company may be experiencing cash flow problems or the director may receive other income that might take him into higher rate tax and he does not want that to happen.
DLA in debit/overdrawn
Company
Invariably the DLA will be overdrawn throughout the accounting year as directors withdraw payments on account of dividends and expenses from the company bank account – each payment being recorded in the DLA. The directors may be liable to pay a benefits-in-kind tax charge if the outstanding balance on the director’s loan account is more than £10,000 at any point in the tax year. The company will be liable to Class 1A employers NIC.
At the end of the year, it is not unusual to find that insufficient profits have been generated to cover the amount that has been withdrawn, even after taking the salary and dividends into account, the net result being that the director will owe money to the company as the account will be overdrawn.
This overdraft must be repaid if there are to be no tax implications for both the director and the company. Should the loan exceed £15,000 and be made to a full-time working director whose interest in the company is more than 5% of the share capital then the loan needs to be repaid by the due date of payment of corporation tax (i.e. within nine months and one day of the accounting period). If this does not happen then the company is liable to a tax charge at 32.5% (a ‘section 455’ charge) on the outstanding loan at that date. If the loan is subsequently repaid after the charge has been paid then the tax is refunded (although not until nine months and one day after the end of the company’s accounting period in which the loan is repaid or reduced).
Director
Should the total of all outstanding loans from the company exceed £10,000 at any time during a tax year then the director is considered to have received a ‘benefit in kind’ from his employment. The charge is on the difference between the interest paid (if any) and interest payable at the ‘official rate’. The company will pay employers NIC on the charge and be required to declare the ‘benefit’ on the annual P11D form. HMRC is taking an increasingly dim view of such loans not least because remuneration or dividends are taxable as income when a loan is not. They will commonly ask for a detailed analysis of the DLA looking for such discrepancies as failure to notify liability to a section 455 charge. ‘Bed and breakfasting’ transactions (where the DLA loan is correctly repaid within the nine months stated but then the money is redrawn shortly after repayment through another separate loan) are also an area of interest as is failure by the company to apply PAYE at the correct time to bonuses credited to the DLA.
Reporting expenses and benefits for 2020/21
Reporting expenses and benefits for 2020/21
Employers who provided taxable expenses and benefits to employees during the 2020/21 tax year will need to report these to HMRC, on form P11D by 6 July 2021, unless the benefit or expense has been payrolled or is included within a PAYE Settlement Agreement. Benefits covered by an exemption do not need to be included.
Where taxable benefits have been provided, the employer must also file a P11D(b) by 6 July 2021. This is the employer’s declaration that all required P11Ds have been filed and also the statutory Class 1A amount.
Exempt benefit
The tax legislation contains a number of exemptions which remove a charge to tax. These may be specific to a particular benefit, such as those for mobile phones and workplace parking, or may be more general, such as the exemption for paid and reimbursed expenses, which applies if the employee would have been entitled to a tax deduction had they met the expense directly.
There are also a number of temporary Covid-19 specific exemptions that apply for the 2020/21 tax year. These include the provision or reimbursement of Covid-19 antigen tests and reimbursed homeworking equipment (such as a computer) to enable the employee to work at home during the pandemic if the equipment would be exempt if made available by the employer.
Remember, exemptions are only available if the associated conditions are met. However, care must be taken here where provision is made under a salary sacrifice arrangement and the alternative valuation rules apply as this may negate the exemption.
Taxable amount
The amount on which the employee is taxed is usually the cash equivalent value. This is calculated in accordance with the benefit-specific rules where these exists, as is the case for company cars, vans, living accommodation and employment-related loans. Where there is not a benefit-specific rule, the cash equivalent is determined in accordance with the general rule. This is the cost to the employer, less any amount made good by the employee. Amounts made good are only deducted where the employee makes good by 6 July 2021.
If the benefit is provided under an optional remuneration arrangement (OpRA), such as a salary sacrifice arrangement, the alternative valuation rules are used to calculate the taxable amount, unless the benefit is one which is specifically excluded from the ambit of those rules (such as childcare vouchers, pension provision and advice, employer-provided cycles and low-emission cars (l75g/km or less) or within the transitional rules for 2020/21. Under the alternative rules, the taxable amount is the salary foregone or cash alternative offered where this is more than the cash equivalent value.
HMRC produce worksheets which can be used to calculate the taxable amount for some benefits. These can be found on the Gov.uk website.
Reporting options
There are various options for filing P11Ds and P11D(b):
• using a payroll software package;
• using HMRC’s Online End of Year Expenses and Benefits Service;
• using HMRC’s PAYE Online Service; or
• filing paper forms.
Whichever method is used, the forms must be filed by 6 July 2021. Employees must be given a copy of their P11D or details of their taxable benefits by the same date.
Any associated employer-only Class 1A National Insurance must be paid by 22 July 2021 if paid electronically, or by 19 July 2021 if paid by cheque.
Reduced rate of VAT
Reduced rate of VAT
To help the hospitality and leisure industry recover from the impact of the first national lockdown, a reduced rate of VAT of 5% was introduced for a limited period from 15 July 2020. The reduced rate of VAT was originally to apply until 12 January 2021. However, in September last year, the Chancellor announced that it would remain at 5% until 30 March 2021.
By the time of the Spring 2021 Budget on 3 March 2021, the hospitality and leisure sectors were suffering the effects of further lockdowns. To provide more help to this sector, the period for which the reduced the temporary 5% rate of VAT will apply has been further extended until 30 September 2021. From 1 October 2021, a new reduced rate of VAT of 12.5% will apply until 31 March 2022. The rate will revert to the standard rate of 20% from 1 April 2022.
Affected supplies
The following supplies will benefit from the reduced rate of 5% until 30 September 2021 and the new reduced rate of 12.5% from 1 October 2021 to 31 March 2022.
- Food and non-alcoholic beverages sold for on-premises consumption, for example, in restaurants, cafes and pubs.
- Hot takeaway food and hot takeaway non-alcoholic beverages.
- Sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities.
- 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.
Super-deduction for capital expenditure
Super-deduction for capital expenditure
To encourage companies to invest, enhanced capital allowances are available for expenditure incurred within a limited two-year window. As an alternative to the annual investment allowance (AIA), companies will be able to benefit from either a super-deduction or a new first-year allowance, depending on whether the expenditure is on assets that would qualify for main rate capital allowance or for special rate capital allowances.
Super-deduction
The super-deduction will allow companies to claim capital allowances of 130% for expenditure on new assets that would otherwise qualify for main rate (18%) plant and machinery capital allowances where the expenditure is incurred in the period from 1 April 2021 to 31 March 2023. The super-deduction does not apply where the contract for the asset was entered into prior to 3 March 2021 (Budget Day), even if the expenditure is incurred in the qualifying two-year period. Plant and machinery which is purchased under Hire Purchase or similar contracts must meet additional conditions in order to qualify for the super-deduction.
Where an accounting period straddles 1 April 2023, the rate of deduction is apportioned based on the number of days in the accounting period falling before 1 April 2023 and the number of days in the accounting period falling on or after this date.
The effect of the super-deduction is that for every £100 of expenditure on qualifying assets in the qualifying period, the company can claim capital allowances of £130 when computing taxable profits. This gives an effective rate of relief of 24.7% (130% x 19%).
Where an asset which has benefited from the super-deduction has been sold, disposal receipts are treated as balancing charges rather than being taken to pools. A factor of 1.3 is applied to the disposal receipt when calculating the balancing charge.
Companies wishing to benefit from the super-deduction should plan the timing of investments in qualifying assets so that the expenditure is incurred in the qualifying two-year period. Where significant investment is planned after 1 April 2023, consideration could be given to accelerating the investment to benefit from the super-deduction.
A company does not have to claim the super-deduction. Where the company is loss-making or profits are low, it may wish to claim writing down allowances instead or tailor the claim to reduce the profit to nil. Likewise, if the plan is to sell the asset in a few years, it may be preferable to claim writing down allowances rather than suffer the balancing charge on the disposal.
New first-year allowance
A new first-year allowance of 50% is available for expenditure on most new plant and machinery that would otherwise qualify for special rate writing down allowances of 6% where the expenditure is incurred in the period 1 April 2021 to 31 March 2023. As with the super-deduction, it is only available to companies.
This is an alternative to the annual investment allowance, which gives a deduction of 100%. However, the first-year allowance may be beneficial where the AIA limit has already been reached.
Further grants for the self-employed
Further grants for the self-employed
The Self-Employment Income Support Scheme (SEISS) has provided grant support for self-employed individuals whose business has been adversely affected by the Covid-19 pandemic. An extension to the scheme was announced at the time of the 2021 Budget. As a result, it will continue to provide support until September 2021.
Three grants have already been made under the scheme. As a result of the extension, a further two grants will be available. In addition, individuals who started trading in 2019/20 may now be eligible to claim.
Fourth grant
The fourth grant covers the period from February to April 2021 and is based on 80% of three months’ average trading profits. The amount of the grant is capped at £7,500. It is paid out in a single instalment.
To be eligible, the trader must have filed his or her 2019/20 self-assessment tax return and traded in 2020/21. Only traders whose trading profit is not more than £50,000 in 2019/20 or, where trading profit exceeds this level in 2019/20, not more than £50,000 on average over the period from 2016/17 to 2019/20 can benefit from the grant. In addition, income from self-employment must account for at least 50% of the individual’s total income.
To qualify for the grant, the trader must either:
- be trading currently but demand has fallen as a result of the impact of the Covid-19 pandemic; or
- have been trading but is unable to do so temporarily as a result of the Covid-19 pandemic.
The trader must also declare that:
- they intend to continue trading; and
- they reasonably believe that there will be a significant reduction in their trading profits due to reduced business activity, capacity, demand or inability to trade due to Coronavirus.
Claims for the fourth grant can be made online from late April 2021 until 31 May 2021.
Fifth grant
The fifth and final grant will cover the period from May to September 2021. The amount of this grant depends on the extent by turnover has fallen as a result of the Covid-19 pandemic.
Traders who have suffered a reduction in turnover of at least 30% will be eligible for a grant worth 80% of three months’ average trading profits capped at £7,500. A smaller grant worth 30% of three months’ average trading profits capped at £2,850 will be available to traders who turnover has fallen as a result of coronavirus but where the reduction in turnover is less than 30%.
Newly self-employed When the SEISS was originally launched, only those traders who had filed their 2018/19 tax return by 23 April 2020 could claim. As the filing date for the 2019/20 tax return of 31 January 2021 has now passed, individuals who commenced trading in 2019/20 and who have been adversely affected by the Covid-19 pandemic can claim the fourth and fifth grants under the scheme provided that they had filed their 2019/20 self-assessment return by midnight on 2 March 2021. They will also need to meet the other eligibility conditions.
Grants are taxable
Grants received under the SEIS are taxable and must be taken into account in working out the taxable profits for the year in which the grant is received.
CIS compliance for property developers
CIS compliance for property developers
The Construction Industry Scheme (CIS) is a scheme whereby contractors of building firms are required to deduct tax at source from payments made to sub-contractors working for them. Some sub-contractors are entitled to be paid without any tax deduction, others at 30% as per HMRC’s instructions but the majority have 20% tax withheld before payment. The scheme requires registration as a contractor and administration in the form of monthly submissions; the penalties for non and/or late submission can be severe.
Definitions
The definition of ‘contractor’ is widely drawn – HMRC’s Construction Industry Scheme guide CIS 340 defines a (mainstream) contractor as ‘a business or other concern that pays subcontractors for construction work. Contractors may be construction companies and building firms, but may also be … many other businesses.‘
The definition of ‘construction work’ is again widely drawn to include the construction, alteration, repair, extension, demolition or dismantling of buildings and/or work – although there are exceptions. A business set up to undertake such construction work is obviously required to operate the scheme as would a property developer undertaking a trading business in construction of properties being developed for sale (even if just on one property). Private householders paying for work on their own homes will never fall within the CIS regime’s scope.
Buying property as an investment
In comparison, someone who buys and rents out property typically does so as an investment; this would appear to be confirmed as under section 12080 of The Construction Industry Scheme Reform Manual it states that:
“A ‘property investment business’ is not the same thing as a ‘property developer’. A property investment business acquires and disposes of buildings for capital gain or uses the buildings for rental.“
However, a problem arises when an investor landlord buys a property, doing it up intending to keep it as a rental property – is that person now a developer and thereforecaught under the CIS rules? HMRC confirm that this is the case as further on in the CIS manual it states that:
“Where a business that is ordinarily a property investor, undertakes activities attributed to those of ‘property development’, they will be considered a mainstream contractor [caught for CIS] during the period of that development”.
Therefore, the investor now becomes a developer liable to register as a contractor under the CIS regime even if just one property is renovated.
Wider scope for the CIS scheme The system goes further because even where the landlord is predominantly a property investor and therefore not a construction business (e.g. a restaurant chain), they are deemed to be a contractor and subject to the CIS regime if they spend more than £1 million a year, on average, for three years on ‘construction operations’ (e.g. repairs, construction of extensions etc), on their premises or investment properties. There is a slight ‘let out’ in that such businesses can ignore expenditure on property such as offices or warehouses used by the business itself.
Some businesses commission construction firms to undertake work for them but if the work is for the business’s own premises, used for that business, then the business itself is not obliged to register or act as a CIS contractor.
‘De minimus’ limit
There is a ‘de minimus’ limit in that on application, HMRC can authorise deemed contractors not to apply the scheme to small contracts for construction operations amounting to less than £1,000, excluding the cost of materials however this arrangement does not apply to mainstream contractors.
Personal and family companies – Optimal salary for 2021/22
Personal and family companies – Optimal salary for 2021/22
A popular profit extraction strategy for shareholders in personal and family companies is to pay a small salary and to extract further profits as dividends. The optimal salary will depend on whether the employment allowance is available to shelter any employer’s National Insurance liability that may arise.
Preserving pension entitlement
One of the main advantages of paying a small salary is to ensure that the year remains a qualifying year for state pension and contributory benefit purposes. To qualify for a full state pension on retirement, an individual needs 35 qualifying years.
For the year to be a qualifying year, earnings must be at least equal to the lower earnings limit. A director has an annual earnings limit, and for 2021/22, the annual lower earnings limit is set at £6,240. Where the shareholder is not a director, earnings for each earnings period must be at least equal to the lower earnings limit. For 2021/22, the weekly and monthly thresholds are, respectively, £120 and £520.
Contributions are payable by the employee at a notional zero rate on earnings between the lower earnings limit and the primary thresholds. The employee starts paying contributions once earnings exceed the primary threshold.
Optimal salary – Employment allowance is not available
The employment allowance is not available to companies where the sole employee is also a director. This means that personal companies will generally be unable to claim the allowance.
For 2021/22, the primary threshold is set at £9,558 (£184 per week/£797 per month) and the secondary threshold is set at £8,840 (£170 per week, £737 per month).
Although the maximum salary that can be paid without paying any National Insurance is one equal to the secondary threshold of £8,840 for 2021/22, it is beneficial to pay a higher salary equal to the primary threshold of £9,568. Employer’s National Insurance will be payable on the salary to the extent that it exceeds £8,840 at a cost of £100.46 (13.8% (£9,568 – £8,840)), however, this is outweighed by the corporation tax deduction at 19% on the additional salary and the employer’s NIC.
Once the primary threshold is reached, employee contributions are payable at 12%. At this point, the combined National Insurance cost of 25.8% (13.8% + 12%) is more than the corporation tax saving and paying a salary in excess of the primary threshold is not worthwhile.
Thus, where the employment allowance is not available, the optimal salary is equal to the primary threshold for 2021/22 of £9,568 (£184 per week, £797 per month).
Optimal salary – Employment allowance is available In a family company scenario, the employment allowance will be available if there is more than one employee on the payroll. As long as the employment allowance is available to shelter the employer’s National Insurance that would otherwise arise, the optimal salary is one equal to the personal allowance, set at £12,570 for 2021/22. No National Insurance is payable until the primary threshold is reached. Above this level, employee National
Insurance is payable at the rate of 12%. However, the additional salary saves corporation tax at 19%. However, once the personal allowance has been used, tax at 20% is payable as well as employee’s National Insurance of 12%, which exceed the corporation tax deduction of 19%. Thus, where the employment allowance is available, the optimal salary for 2021/22 is one equal to the personal allowance of £12,570 (£242 per week, £1,048 per month).
Tenant in common v joint tenants – What is the difference and does it matter?
Under English law, there are two ways in which property can be owned jointly – as tenants in common or as joint tenants. The way in which the property is owned can have tax implications.
Tenants in common
Where a property is purchased as tenants in common, each owner owns a specified share of the property. There is no requirement that the ownership shares are equal. Each person’s share will normally reflect their contribution to the purchase price of the property. As tenants in common own a specified share of a property, they can sell their share independently. On death, their share passes to their estate to be distributed in accordance with the terms of their will.
Where property is owned jointly by unrelated persons, it is often owned as tenants in common. However, it may also be beneficial for married couples and civil partners to hold property in this way, particularly if the property is let.
Joint tenants
Where a property is owned as joint tenants, the owners together own all of the property equally. Any transfer of ownership needs to be signed by all parties, and as all parties have an equal interest in the property. Any sale proceeds are split equally. Under the survivorship rules, should one joint tenant die, the property passes automatically to the surviving tenant(s), and becomes wholly owned by them.
Tax considerations
If the property is let out, the income split for tax purposes depends on whether the joint owners are married or in a civil partnership or not. Where they are not, the income is usually split in accordance with their underlying shares, but the joint owners have the option to agree any income split among themselves.
However, where the property is owned by spouses or civil partners, each is taxed on 50% of the income, regardless of how it is owned. If this is not beneficial and the property is owned as tenants in common in unequal shares, the couple can make an election on form 17 for the income to be taxed in accordance with their actual ownership shares. These can be changed by taking advantage of the no gain/no loss capital gains tax rules to effect a more beneficial income split. However, where the property is owned as joint tenants, the only permissible income split is 50:50. Where a 50:50 split does not give the best result, consider owning the property as tenants in common.
For capital gains tax purposes, where the property is owned as joint tenants, the gain will be split equally between the joint tenants. However, any gain arising on a property owned as tenants in common will be allocated and taxed in accordance with each owner’s share. Each tenant in common can also sell their share independently of a sale of the property as a whole.
On death, where a joint tenant dies, the property automatically passes to the surviving tenant(s). However, where a property is owned as tenants in common, each owner can pass on their own share – it does not go to the other automatically. Their share forms part of their estate.
Plan ahead
When buying a property, consider the tax implications when deciding whether to own a property as joint tenants or tenants in common.