NLW and NMW, Averaging for authors, Agent authorisation

Last week, following the news that the John Lewis Partnership has fallen foul of the National Minimum Wage rules, we explained how to check that your clients are paying their workers enough. We also took a look at the averaging rules for authors and literary artists. Finally, we explored the agent authorisation process and the different authorisation routes available.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

NLW and NMW – employer beware

The John Lewis Partnership has a reputation as an excellent employer, but the news has recently come to light that after adopting `pay averaging’ arrangements they have unintentionally fallen foul of the National Minimum Wage regulations as the payments for some `pay reference periods’ had fallen below the minimum wage.

So what is a `pay reference’ period and what do clients need to be aware of in order to comply with the rules?

Briefly, employers are required to pay `workers’ aged 25 and over the National Living Wage (NLW), set at £7.50 per hour from 1 April 2017. Younger workers must be paid the National Minimum Wage (NMW) appropriate to their age. The worker must be paid at least the minimum wage, on average, for the time worked in the pay reference period. The pay reference period is normally determined by the frequency by which the employee is paid, so weekly for weekly paid employees or monthly for monthly-paid employees. Crucially, the pay reference period cannot be more than 31 days.

The NLW and NMW are worked out as an hourly rate, even if the worker is not paid by the hour. Different checking procedures apply depending whether the worker is paid by the hour, paid an annual salary, paid by what they produce (piece or output work) or paid in other ways (unmeasured work).

Where the worker is paid hourly, it is simply a case of checking what the worker is paid in the reference period against what he would be paid at the NLW/NMW for that period.


In May 2017, Susan (aged 43) works 140 hours. She must be paid at least £1,050 (140 hours at the NLW of £7.50 per hour).

Where a worker is paid an annual salary, the basic annual hours in the worker’s contract are divided by the number of times the worker is paid each year (so by 12 where the worker is paid monthly). The minimum pay for each pay period is found by multiplying the average hours for the pay period by the minimum wage appropriate to the employee’s age. So a monthly paid worker age 27 contracted to work 1980 hours a year must be paid at least £1,237.50 a month (1980/12 x £7.50).

It is important that clients understand how to work out the minimum wage for the type of work that their workers do and have checks in place to check that this is being paid for each and every pay reference period.

Employee expenses, Tax deducted by banks, Donations by a company

Some clients may have already sent you their tax papers for 2016/17, so last week we examined two issues that crop up on relatively simple tax returns; employee expenses and tax deducted by banks. We also had a quick reminder of what donations a company is permitted to make and whether they are tax deductible.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

Tax deducted by banks

Since 6 April 2016 interest paid by most deposit takers: banks, building societies and NS&I, should be have been paid without tax deducted. This doesn’t mean you can ignore the interest certificates issued by deposit takers, as the interest must be declared on the taxpayer’s SA return.

The interest is taxable, if it is not paid out of an ISA account, but in most cases the tax rate will be 0%. This zero rate applies where the interest is covered by the taxpayer’s personal savings allowance of £1,000 (£500 for higher rate taxpayers), or their savings rate band of £5,000. Additional rate taxpayers are not entitled to a savings allowance.

It’s worth noting that many PAYE codes for 2016/17 and 2017/18 have not taken account of the available personal savings allowance or savings rate band, and have incorrectly set the taxpayer’s personal allowance against estimated amounts of interest received. Such taxpayers should be due a tax repayment if the personal allowance could have been set against taxed employment income.

Look closely at the bank interest certificates, as those issued in respect of payments into “reward” current accounts may have basic rate tax deducted for 2016/17. The “reward” paid by the bank is not interest, so it can’t be paid gross, and it is not covered by the personal savings allowance or the savings rate band. The reward is an annual payment and it should be declared on the tax return under “other income”, with the tax deducted also reported. A higher rate or additional rate taxpayer will have more tax to pay on such a “reward”.

Confusingly cash-back payments are not “rewards” and are not interest either. They do not have to be reported on the tax return if the cash-back is paid in respect of a personal account. However, if the cash-back is received on a business bank account (which is unlikely), it should be declared as part of the trading receipts (see BIM100210). The bank concerned should issue guidance as to the tax treatment of its current account rewards or cash-backs.

IHT residential nil rate band, SDLT on death, Mortgage references

Perhaps it is the draining effect of the General Election campaign, but last week our thoughts turned to death and taxes. The new residential nil rate band for inheritance tax came into effect on 6 April 2017, and HMRC have released detailed guidance. Where a couple own their home as tenants in common, this can create a SDLT on a transfer following the death one owner. Finally, we had some tips on how to handle requests for mortgage references.

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device)

SDLT on death

Stamp duty land tax (SDLT) is currently payable by purchasers of property located in England, Wales and Northern Ireland. This article does not apply to properties Scotland, which has its own property law, and the land and buildings transaction tax (LBTT).

Where freehold residential property is jointly owned, it may be held in two ways: as joint tenants, where each person holds an undivided share, or as tenants in common, where each person hold a defined share, such as 40% and 60%. “Joint tenants” is the default, which conveyancing solicitors prefer, and it has the advantage that when one of the owners dies the other owner automatically acquires ownership of the entire property.

“Tenants in common” can form part of an IHT plan, as the owners may chose to leave their share in the property to a third person. Investment properties may be held in this way, so the joint owners can be taxed on the profits in relation to their beneficial interest in the property, rather than on a 50:50 split. Although a married couple/ civil partners need to declare the split of ownership on form 17, and submit that declaration to HMRC.

The rates of SDLT were increased on 1 April 2016 to include a 3% supplement on the entire value where an additional residential property is acquired for £40,000 or more. An individual is treated as acquiring an additional property if he already holds a major interest in a residential property which is worth £40,000 or more, which is not subject to a lease which has more than 21 years to run.

Say Fred and Ginger own their home as tenants in common. Fred dies and does not leave his share in the property to Ginger. Fred’s executors agree to sell Fred’s share in the property to Ginger for £80,000. Ginger already owns a major interest in a property (her own home), so the acquisition of another interest in a residential property meets the conditions for the 3% SDLT charge to apply. It is irrelevant that the interest Ginger acquires is in the property which she already partly owns.

When reviewing IHT planning for clients consider this SDLT trap

What’s not happening, PAYE codes, Paper tax returns

We normally warn you about imminent changes in tax law and practice, but this week we have to tell you about several things which may not be happen, although the start date for the change has already passed. We also have news of an upheaval in PAYE codes, and provide a reminder of which SA tax returns can’t be submitted online.

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device)

Paper tax returns

Every year there are a number of circumstances in which a taxpayer’s SA tax return will not be accepted by HMRC’s systems as valid, and so it must be submitted in paper form. These circumstances are listed by HMRC as exclusions for online filing, see link below.

This year there are more exclusions than usual because the HMRC software has not been written with the flexibility to match the tax law, and as a result a correct tax calculation performed by third party software will be rejected as incorrect by HMRC. Alternatively, if the third-party software has replicated HMRC’s errors, the SA tax return will be accepted but the tax calculation will be incorrect.

The key issue is that tax law allows the personal allowance to be allocated in any way which is beneficial to the taxpayer. Traditionally this allowance has been allocated against income in the order of; non-savings, savings and then dividend, but for 2016/17 that may not be the most advantageous allocation. For example, it may be beneficial to set the personal allowance against dividends first leaving savings income within the saving rate band.

We explained two of these new exclusions in our newsletter on 30 March 2017. There also is a third new circumstance where the HMRC systems will reject the tax return:

Where the taxpayer’s non-savings/savings/dividend income amounts to less than £11,000 plus savings rate band (£5000), but the taxpayer also has a chargeable event gain. HMRC’s software incorrectly extends the basic rate band by the SSR of £5,000, but that is actually part of the basic rate band.

If your client has an unusual mix of savings income, and very little earned income, you should check the list of exclusions for online filing to see if a paper tax return will be required.

Early tax returns, PAYE penalties and information, Deceased estates

Last week we explained why you should not rush to submit 2016/17 tax returns, in case they are not needed. We had an update on HMRC’s position concerning PAYE penalties, and on providing pay details over the phone. Finally, we referenced an extended concession for income received by estates of deceased persons, and new probate charges to look out for.

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device)

Early tax returns

We told you about the new HMRC power to raise a “simple assessment” in our newsletter on 3 November 2016. HMRC has still not published guidance on how to deal with such assessments, but they will shortly issue the first simple assessments for 2016/17.

The recipients are likely to be pensioners who receive a state pension which is not covered by their personal allowance, and hence have a small tax liability. Normally the only way to assess this tax is to complete an SA tax return. Completing these returns are stressful for the taxpayer, and viewed unnecessary, as HMRC should already know the level of the individual’s state pension.

For 2016/17 HMRC has issued notices to file a tax return to pensioners in this position. However, in May 2017 HMRC will issue simple assessments to pensioners who have a tax liability in respect of their state pension, and who have no other income. HMRC will write to those taxpayers informing them that they do not have to submit an SA tax return for 2016/17 after all.

Our advice is to hold-off completing the SA tax returns for pensioners with simple tax affairs until the end of May, and tell those clients to look out for further letters from HMRC.

VAT: Expenses and benefits, Tax-free childcare, Reclaiming the SDLT supplement

Last week we take a look at the requirements for reporting expenses and benefits to HMRC for the 2016/17 tax year. We also examined the new Childcare Choices website and the options for tax-free childcare in 2017 and beyond. Finally, we explained how to claim back the stamp duty land tax supplement where a former main residence is sold subsequent to the purchase of a new home.

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device)

Reclaiming the SDLT supplement

Since 1 April 2016 a stamp duty land tax supplement has been payable on the purchase of second and subsequent residential properties costing more than £40,000. Generally, the supplement is not payable where the main residence is replaced, even if the purchaser ends up with more than one residential property after the purchases has completed. However, where the new main residence is purchased before the former main residence is sold, the supplement is payable initially. However, as long as the sale of the old main residence is completed within three years of the purchase of the new home, the supplement can be reclaimed.

So, what is the procedure for this and what time limits apply?

The repayment can be claimed either online or by post on form SDLT16, which can be completed online and printed off. The SDLT reference for the purchase is required. The claim must be made by the later of three months from the date of completion of the sale of the former residence or 12 months from the filing date of the SDLT return (which is 30 days from the completion of the purchase). It is important these deadlines are not missed or the opportunity to reclaim the supplement will be lost.

VAT: bad debt relief, CGT: irrecoverable loans, Trading and property allowances

Last week we examined two situations in which tax relief for non-payment of debts or loans, can be claimed, or not. The answers are not obvious. We also examined the two new reliefs which came into force on 1 April, for sundry trading income, and income from property. The tax system is not getting any simpler!

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device)

Trading and property allowances

As part of his 2016 Budget, George Osborne announced two new flat rate allowances of £1,000 each, which apply to sundry trading and property income from 6 April 2017. Unfortunately, there is very little guidance about these new allowances on We have linked to what there is below.

There is already a property allowance in the form of rent-a-room relief, now worth up to £7,500 per year. However, the new £1,000 property allowance cannot apply to property which qualifies for rent-a-room relief. So an individual can’t claim a tax exemption of £8,500 per year for letting a room in his own home.

However, the same taxpayer can claim £7,500 rent-a-room relief for letting a room to a lodger, and a further £1,000 for letting his driveway as a parking space. The income from letting the driveway doesn’t qualify for rent-a-room relief as the area must be let as residential accommodation to fall under rent-a-room relief.

The other £1,000 trading income allowance covers gross sundry income which could be from a trade, but also from providing services or hiring assets. The taxpayer can choose to deduct the allowance from his gross takings and pay tax on the balance without taking account of tax deductible expenses, or calculate his taxable income in the normal way and ignore the allowance.

Say Jade earns £1,200 from selling the jewellery she makes in her spare time. She can deduct the trading allowance of £1,000 and pay tax on £200, or deduct the cost of the materials which total £1,150, and pay tax on £50.

Neither of the new property or trading allowances can be set against income the taxpayer receives through a partnership, or from his own company, or from a company that employs him or his family members


Tax returns for 2016/17, Tax avoidance schemes, Off-plan purchases

We have some shocking news about tax computations for the 2016/17 personal SA tax returns. We also pass on warnings from HMRC about two tax avoidance schemes which are circulating. Finally, we present some timely tips for advising clients who have bought properties off-plan.

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device)

Off-plan purchases

When a taxpayer purchases a newly constructed property, he may put down a deposit to reserve the property before it is finished, or even started. This is referred to as buying “off-plan”.

The contract to purchase the property is normally not completed until the property is finished, and at that time the balance of the purchase price must be paid. If the taxpayer can’t pay the balance when requested, he loses the right to complete the contract and acquire the property.

This is what happened to Mr Hardy, who paid a deposit of £72,000 for an apartment in central London, but due to cash-flow problems could not raise the balance of the purchase price when required. He claimed that his lost deposit was a capital loss.

The First-Tier and the Upper-Tier tax tribunals disagreed. Hardy did not acquire an asset when he paid his deposit, and neither did he acquire a contractual right as the contract did not permit him to assign his right to buy the property. His real loss was thus a tax nothing.

However, HMRC do have their cake and eat it on this issue when the taxpayer is a non-resident buying a residential property. In that case, if the taxpayer does dispose of his right to buy the property off-plan, that disposal is subject to non-resident CGT. Also, the start date for any apportionment of a residential period starts from the acquisition of the off-plan right, not from the completion of the property.

Our CGT experts can help with this tricky area.

Deregister for VAT, IR35 for public sector contracts, Penalty notices

Our most recent email contained tips on how to manage a smooth withdrawal from VAT for those clients who are only VAT registered in order to take advantage of that scheme. Clients who have contracts for services with public sector bodies need advice about the new IR35 rules, so we examined the HMRC guidance in this area. Finally, we shared a warning about inaccurate penalty notices.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

Penalty notices

HMRC has a number of legacy computer systems, which don’t always talk to each other effectively. This has caused problems with class 2 NIC liabilities disappearing from taxpayers’ records, as we reported in our newsletter on 8 December 2016.

A work around invented by HMRC staff is to issue a temporary NI number for the taxpayer, so class 2 NIC can be paid alongside his SA income tax liability. However, in some cases the temporary NI number has triggered the creation of a duplicate UTR number for the taxpayer.

When the taxpayer’s 2015/16 tax return was submitted only one of their UTR numbers recorded the receipt of that return, so the HMRC computer has issued a late filing penalty for the other duplicate UTR number. What a mess! Your only option is to appeal against the incorrect penalty notice.

The HMRC computer also has its calendar in a knot. The £100 late filing notices for 2015/16 SA returns should have been dated 22 February, but were actually dated 15 February, and did not arrive with taxpayers until early March. If you have only just received a penalty notice for your client, you can submit a late appeal. A mistake by HMRC in the detail of the penalty notice – such as with the issue date, should be accepted as a reasonable excuse of making a late appeal.

Budget fallout, MTD timetable, Employment status tool

The recent Budget contained three announcements which will impact small businesses from April 2018 concerning; national insurance (since amended), the dividend allowance, and MTD reporting. Our most recent email covered all three points in more detail. We also shared news of HMRC’s relaunched employment status tool. It’s not as useful as it might be.

`Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

Employment status tool

For the last 17 years, individuals who provide their own services through an intermediary, and the businesses who engage them, have struggled with the intermediaries legislation known as IR35. The key issue is how to determine whether a particular engagement is within the IR35 rules.

From 6 April 2017 the burden of deciding whether the worker is caught by IR35 falls on engagers in the public sector, rather than the personal service company. Engagers in the private sector are not affected for now.

To help the public sector body make this decision HMRC has produced a new employment status service (ESS) tool. This is an enhanced version of the employment status indicator (ESI), which could not be used for IR35 checking purposes.

The new ESS tool can be used by the any of the parties to the contract; the worker, the agency or the engager. It’s use not restricted to contracts involving a public body.

The ESS will provide one of three answers:

  • inside the IR35 legislation
  • outside the IR35 legislation
  • unable to determine the tax status of this engagement

The third option is not much use to anyone. However, the first two answers may be helpful as HMRC has promised to be bound by the decision of the tool, if accurate information was provided when answering the ESS questions.

The problem is that the ESS tool itself is not very accurate in its analysis. It doesn’t cope with the situation where the worker has multiple concurrent customers. It also doesn’t question how the work is done, which is a key indicator of whether the engager controls the worker. The ESS tool also fails to address the question of mutuality of obligations between the worker and engager.

The use of the ESS tool is anonymous, so you can test it without fear of your answers being recorded on an HMRC file with your name on it. If you get the desired result, record that alongside the questions you submitted. If you don’t get the desired result, and you are not a public body, ask our employment status experts for a more nuanced opinion.