Specialist Property Landlords Service

From April 2022, HMRC’s guidance was changed to reflect their new stance on the VAT treatment of early termination fees, compensation, and dilapidation payments. This means that payments that were previously considered to be outside the scope of VAT are now considered to be subject to VAT.

This factsheet covers the issue of whether supplies are within the scope of VAT, not whether VAT should be charged. Property supplies are generally VAT-exempt, although it is possible to opt to tax a property, in which case supplies of that property are standard-rated.

The general rule

The key test to consider is whether goods or services are being provided in return for a consideration (usually a payment). This is known a “reciprocity” between the supplier and the customer. If the reciprocity exists, the transaction is subject to VAT.

Previously, HMRC considered payments described as “compensation” or “damages” to be outside the scope of VAT on the basis that there was no reciprocity. However, because of numerous court rulings, such payments are deemed to be subject to VAT, particularly if they are provided for in a contract.

Early termination of a contract

A contract may provide for the tenant to pay fees in the event of terminating a contract early, as in the case of lease surrenders. Such fees may be described as “early termination fees”, “compensation” or “liquidated damages”.

If the tenant of a vatable commercial property wishes to vacate the property before the end of the lease and is obligated to pay an early termination fee, the payment will be subject to VAT. This is because it is a payment being made in return for a service provided by the landlord. The service, in this case, is the right to use the property, even if the tenant does not wish to do so.

When the contract does not provide for early termination

When early termination fees are paid and the initial contract did not provide for those fees, the fees are still subject to VAT. This was shown in a VAT tribunal involving Lloyds Bank, which found that the landlord had made a supply by granting and exercising an option to terminate the lease in return for Lloyds making a payment and vacating the premises.

It’s worth noting HMRC’s position regarding reverse surrenders. Reverse surrenders are when the landlord pays the tenant in order to terminate a lease early. In this case a supply is being made by the tenant and it will be either VAT-exempt or standard-rated depending on whether the tenant has opted to tax their interest in the property.

Dilapidation payments

Dilapidation payments, which exist to ensure the landlord is not out of pocket if the premises are not returned in the agreed condition at the end of the lease, are considered by HMRC to be outside the scope of VAT.

Generally, this is because dilapidation payments not inevitable at the beginning of the lease and are made so the landlord can return the property to its original condition. There is no reciprocity in this situation because the landlord has not received anything. HMRC say however, that they may depart from this view if in individual cases they find evidence of value shifting from rent to dilapidation payment to avoid accounting for VAT.

Further reading
HMRC’s VAT Supply and Consideration manual gives further examples – see VATSC05910, VATSC05920 and VATSC05930.

In this fact sheet, we’ll outline how Making Tax Digital (MTD) for income tax self assessment (ITSA) affects landlords. We’ll also consider the recent government communication in which a delay to MTD was announced.

What is MTD?

Under MTD for ITSA, businesses, self-employed individuals, and landlords will keep digital records and send a quarterly summary of their business income and expenses to HMRC using MTD-compatible software. In response, they will receive an estimated tax calculation based on the information provided to help them budget for their tax. At the end of the year, they can add any non-business information and finalise their tax affairs.

Implementation and thresholds

In December 2023, the government announced that the implementation of MTD for ITSA would be phased in from April 2026. Previously, MTD had been due to start from April 2024. The phased implementation will work as follows:

From April 2026: self-employed individuals and landlords with an income of more than £50,000 will be required to keep digital records and provide quarterly updates of their income and expenditure to HMRC through MTD-compatible software.

From April 2027: self-employed individuals and landlords with an income of between £30,000 and £50,000 will need to comply with the MTD rules.

These thresholds are new; prior to the December 2023 announcement the threshold for MTD was set to be £10,000.

At this point, it is unclear if those with income below £30,000 will be mandated to comply with the MTD rules.

Keeping digital records

Under the MTD rules, business records must be kept in software that meets HMRC’s specifications.
If you have more than one business (for example, if you are a landlord and a builder), you must meet the requirements for each business.
This means you must keep separate records and make separate submissions for each business.
All properties that are:

• in the UK are treated as one ‘UK property business’.
• outside of the UK are treated as one ‘overseas property business’.

In the software, you’ll need to create records of each of your business transactions, as close to the transaction date as possible. Each quarter, the software will add together the totals for each income and expense category and send this information to HMRC. If you wish to make accounting or tax adjustments to the quarterly information, you can, but it won’t be mandatory. Instead, any adjustments and claims for tax reliefs can be made at the end of the year when you finalise the data.

Benefits of digitalisation

The delay to MTD’s implementation was welcomed by many, but it is worth considering moving to digital record keeping before 2026. Digital record keeping means that you don’t need to keep as much paperwork, and you’ll be able to access real-time information about your business. If these benefits interest you, please speak to us about the software options available.

Holiday lets are a great investment and offer several benefits including Capital Gains Tax relief and capital allowances for furniture and fixtures. However, there are strict letting conditions, and if you intend to stay in the property for part of the year, this could mean that the property no longer qualifies as a holiday let.

Let’s take a look at some taxes that might become payable by staying in your holiday let. These do not apply if you do not stay in the property.

ATED

Annual Tax on Enveloped Dwellings (ATED) is a tax that companies must pay if their UK residential property value exceeds £500,000. The tax is payable by companies that own such a dwelling and the amount of tax payable depends on the property’s value.

You will need to complete an annual ATED return if the property is  located in the UK, is considered a ‘dwelling’ (a sufficiently self-contained unit), is valued at more than £500,000 and is owned completely or partly by a company, partnership or collective investment scheme.

The chargeable amounts for the 2022/23 tax year are as follows:

Benefit in Kind

Benefits in kind (BIK) are benefits that directors or employees receive from their company that are not included in their salary. This may include property and living accommodation benefits.

If a company purchased a holiday let for its director(s), you should check how much tax you will need to pay and for how much of the year it applies. You can find a detailed example below.

Example

An HMRC example of a BIK case can be found in EIM11421. To sum up, a UK company purchases a flat in France for £200,000. The market rental price for the property would be £500 per week during the 6-month skiing season and £100 per week during the rest of the year. A husband and wife who are both directors of the company use the flat for holidays 4 weeks per year (3 weeks during ski season and 1 week during the slow season). The sole reason the property was bought was as a holiday home for the couple and it has only been used as such.

Because the flat was habitable for the entire year, HMRC would seek a benefit measured on availability for the whole year (even though they only use it for 4 weeks).

Therefore, a cash equivalent for the tax year, under Section 106 ITEPA 2003, would be £15,600. This is calculated as 6 months of ski season at £500/week (£13,000) and 6 months off-season at £100/week (£2,600).

If the property was personally owned, different tax rules would apply and the bill would be significantly lower.

Please contact us if you would like to know more about ATED and any exemptions that may apply. We can advise you on the best (and most tax-effective) way to proceed.

There are several considerations to take into account when deciding whether or not to set up a limited company for your HMO or buy-to-let business. Some key factors to consider are the level of personal liability you’re willing to accept, the tax implications, compliance requirements and mortgage relief. 

The benefits of setting up a limited company

If you’re operating as an Unincorporated property investor, you’ll be personally liable for any debts or losses incurred by the business. This means that your personal assets, such as your home, could be at risk if the business fails. A limited company offers limited liability protection, which means that you’re only liable for the debts of the company up to the amount you have invested. 

The introduction of Clause 24 is another motivator to set up a limited company. This restriction was implemented in 2017 to reduce the amount of mortgage interest that can be claimed as a cost against residential property letting. It was introduced gradually, and as of 2021, the interest costs are now disallowed and replaced with the Finance Cost Allowance. For higher rate taxpayers this has a major impact. However, this does not apply to limited companies. Companies will continue to claim 100% of interest.

If you do set up a company for the reason of Clause 24, it’s important to recognise that it would be beneficial to set up a separate company for each property investment. This will simplify your taxes, allow you to sell shares at 0.5% Stamp Duty (instead of selling the property), and make Inheritance Tax Planning simpler. In addition, Capital Gains Tax will be 8% lower on selling shares and based on the net asset value of the company (allowing the offset of borrowing).

Another tax advantage of setting up a company is that you’ll no longer have to pay income tax on your profits. However, you will have to pay corporation tax which is currently at 19% but is set to increase to 25% from 2023. Therefore, if you’re in the 40% tax band, a company could significantly reduce your bill. 

Single property companies are better if you want to shop around for borrowing, as the lender can take a charge over the property and debenture over the company.

The drawbacks of setting up a limited company

Some drawbacks of setting up a limited company as an HMO or buy-to-let landlord include:

• Limited mortgage deals: There are not many mortgage providers that lend to companies, so your choice will be restricted.
• Disclosure: Companies have to publicly disclose details about their business, including the registered address, date of incorporation and current officers. This may deter some landlords. 
• Transferring properties into the company: If you already own a property and wish to transfer it to a limited company, you need to go through the standard sale and purchase procedures. All standard taxes will be payable.

If you have one property, then it may be better for you to continue as an Unincorporated property investor. However, if you’re near the tax threshold of £50,000 or plan to expand your portfolio, then it’s worth considering setting up a limited company.

How to set up a company

HMRC offers a step-by-step guide to walk you through the process. You can register online or via post and you’ll be registered for Corporation Tax simultaneously. Alternatively, if you would like us to set up a company on your behalf please get in touch.

Property management companies let properties they do not own and are responsible for their day-to-day operations and repairs. It is an industry that has grown exponentially in the past decade due to low startup costs, huge housing demand and the potential for large profits.

All property management services are VATable if the company reaches the VAT threshold or voluntarily registers.

Property management companies receive the majority of their income from the fees they charge to the property owners. They can then offset their business expenses from their income, for instance, office costs and insurance.
Control accounts
Since property management companies do not own the properties they manage, they will need to keep their client accounts in separate ‘control accounts’ on the balance sheet.

A control account is a summary account that shows the overall balance of a specific category. For property management companies, this may include:

Rent from tenants
Maintenance Costs
Management Fees

Once the fees and management costs have been deducted from the rent received, the net amount is then passed along to the property owner.

It is essential to maintain your control accounts and to reconcile them on a monthly basis (if applicable). This will help to ensure that the company’s financial position is accurate and up to date.

In addition, the control account can be used to track the performance of the company’s properties. For example, if a property is not generating enough income to cover its expenses, this will be reflected in the control account. As a result, control accounts are essential tools in this type of business.
Separating accounts
Property management companies should also consider separating their own bank accounts and ledgers from their client accounts.

This way, you’ll keep your business administration costs separate from the income and expenses relating to your managed properties.

Keeping these accounts separate will give a clear picture of where the company’s money is coming from and going to. It will also make it easier to track expenses and budget for future needs. Therefore, it is advantageous to have separate accounts for service and administrative operations.

There is different software available that can help property management companies manage their business and accounting. Feel free to reach out to us for recommendations.

Revenue recognition often causes confusion among contractors and subcontractors, but it is essential to get it right to avoid HMRC investigations. Construction contracts can often span several months and reporting periods. Let’s take a look at how construction workers should recognise revenue.

Work in progress

Work in progress (WIP) is a way of recording income before a job has been invoiced. Since income and corresponding expenses often don’t occur in the same period, it’s important to recognise the progress of contracts within a reporting period or tax year, if applicable.

When you can reliably estimate how much money you will earn from a contract, you should recognize that income as it becomes available. This means that if you have completed most of the work but have not yet been paid, you should still count that income in your financial reports.

In other words, it should be recognised gradually, based on the stage of completion of the transaction at the end of the reporting period.

According to The International Accounting Standard IAS 18, the transaction can be estimated reliably when all the following conditions are met:

• The amount of revenue can be measured reliably.
• It is probable that the economic benefits associated with the transaction will flow to the seller.
• The stage of completion of the transaction at the end of the reporting period can be measured reliably.
• The costs incurred to date for the transaction and the costs to complete the transaction can be measured reliably.

If it’s not possible to reliably measure the outcome of a job, then you can only recognise revenue up to the amount of money that was spent to provide the service.

Determining the stage of completion

Although there are no set rules for calculating the stage of completion of a project, some common methods include:

• Comparing the costs incurred to date to the total contract cost.
• Comparing the services performed to date to the total services to be performed.
• Surveys of work performed.

It would be beneficial to prepare a Cost Value Reconciliation (CVR) or Cost Value Comparison (CVC) report to show the value of the work completed to date as well as the profit.

Example

For example, a contractor has a job worth £200,000. The estimated total budget is £150,000. If the costs incurred to date are £30,000, the contractor will divide the costs incurred by the estimated budget (£30,000/£150,000 = 0.2). Therefore, the percentage of the job completed is 20%.

By multiplying the percentage of the job completed by the contract amount (0.2 x £200,000), the amount that should have been billed to date is £40,000.

This is one way to calculate the stage of completion. If you would like to learn more about this, please contact us.

Many business owners have made the mistake of purchasing business supplies in their own name rather than the business’s name. Or if you have multiple companies, the purchase invoice may be directed at the incorrect company.

However, in the eyes of HMRC, invoices that are not directed to the correct company may be invalid for reclaiming VAT.

As a general rule, you should always ensure that if you are purchasing business supplies, the invoice states the correct business name.

Supplies to employees

Business owners can reclaim input tax on supplies to employees in certain circumstances. Supplies to employees include expenses such as fuel, accommodation and meals.

To reclaim input tax on supplies to employees, the supply must be paid for by the employer for the purpose of the business.

For instance, you can reclaim input tax on fuel expenses to a work site. However, you should not claim fuel expenses that are not work-related.

Simplified VAT invoices

When the total amount due on a business’s invoice is under £250, they can issue a simplified invoice. Simplified invoices do not need to include the customer’s name and address.

You can reclaim input tax with a simplified invoice as long as it includes all of the mandatory information:

• The supplier details
• An invoice number
• The tax point (the transaction date)
• A description of the products/ services sold
• The VAT rate(s)
• The total (gross) amount due

If the simplified invoice is above £250 or does not include the mandatory information, you must contact the supplier as soon as possible. Make sure you document your attempts of getting a valid invoice in case HMRC ask for it.

Reclaiming VAT without a valid invoice

If you do not have any luck obtaining a valid invoice, there are other ways that you can prove the sale to HMRC.

You will need to prove to HMRC that:

1. There has been an actual supply of goods and/or services to your business.
2. Your business received the goods and/or services.
3. You have some form of documentary evidence to support the claim.

Any additional documentation would be helpful to your claim – including contracts, purchase orders, email correspondence, bank statements, etc.

The information you provide will be reviewed by HMRC staff who will have the final decision on whether or not your deduction request is approved.

Most Construction Industry Scheme (CIS) documentation only refers to contractors and subcontractors. However, there are other classifications in the case that your job doesn’t entirely fit into one of those categories.

This fact sheet explains the differences between property developers and property investors and how they are categorised for CIS tax purposes.

What is a property developer?

A property developer is described as an individual or entity that constructs new buildings, renovates existing buildings or takes part in other civil engineering works.

Property developers are considered ‘mainstream contractors’ for CIS purposes.

Mainstream contractors must register with the CIS if they hire subcontractors to carry out construction work, or if they have spent more than £3 million on construction in the 12 months since their first payment.

Mainstream contractors are also responsible for deducting a portion of each subcontractor’s pay and transferring the amount to HMRC, as well as submitting monthly CIS returns.

What is a property investor?

A property investment business isn’t the same as a property developer. A property investor buys or sells buildings for capital gain or rental purposes.

A property investment business has a number of properties it needs to prepare before letting. Minor refurbishments are generally required in order for those buildings to be suitable enough to let.

Property investors are considered ‘deemed contractors’ for CIS purposes if they spend over £3 million on construction in a 12 month period.

Deemed contractors include property investors, local authorities and housing associations. They generally do not carry out construction work but have exceeded the £3 million threshold on construction work in the 12 months since their first payment.

It’s important to monitor your construction expenses if you think you’re likely to become a deemed contractor.

The scheme must be applied for any work done on property that is:

• not used by the business for business purposes
• for sale or to let
• is held as an investment

Property investors do not need to apply for the CIS if the construction expenditure is solely for their business property, for instance, an office.

Deemed contractors follow similar rules as mainstream contractors. They must register for the CIS, verify each subcontractor, make deductions from subcontractors’ paychecks and submit monthly returns to HMRC.

With the Rent a Room Scheme, you can earn up to £7,500 per year tax-free from letting out furnished accommodation in your home.

Although the name suggests renting a single room, you can actually rent out as much of your home as you’d like.

If you share the income with your partner or anyone else, then the threshold is halved. In other words, each person would get a £3,750 tax exemption.

Who can use the scheme?

You are able to opt-in to the scheme if:

• you rent a furnished room to a lodger
• you run a guest house, B&B or other letting activity that amounts to a trade

You do not need to own the property, however, if you’re renting, you will need to get permission from your landlord to sublet.

Who can’t use the scheme?

As with most HMRC schemes, there are strict eligibility rules. You cannot use the Rent a Room Scheme if the accommodation is:

• not part of your main home when you rent it
• unfurnished
• used as an office or for business purposes
• in your UK home and is rented while you live abroad
• converted into separate flats

How do I claim the £7,500 tax exemption?

If you earn less than £7,500 per year from letting the room(s), then the tax exemption is automatic and you don’t pay any tax on your profit.

If the gross profits are above £7,500 per year, you must complete a Self Assessment tax return. In this case, you can choose to either:

1. Pay tax on your actual profit:
Your actual profit is your total receipts minus any expenses and capital allowances.

2. Pay tax on the amount exceeding the £7,500 limit:
Your taxable profit would be your gross profit minus £7,500. If you choose this method, you cannot subtract expenses or capital allowances.

It would be beneficial to calculate your profits using both methods and choose whichever method produces the lowest amount.

HMRC will automatically use your actual profit to calculate how much you owe. If you would prefer to pay tax on the amount exceeding the £7,500 limit, then you will need to contact HMRC.

The rules for income from assets jointly owned by married couples can be tricky. There are a few things to take into consideration in order to make the transfer as tax-efficient and compliant as possible.

HMRC have outlined specific anti-avoidance rules to tackle situations where they consider you may be shifting income purely for the sake of saving tax. It’s important to ensure that you’re following the rules.

If only an income stream (for instance, rental income) is transferred to your spouse, and you continue to retain an interest in the capital value of the property, then you (the transferor) will continue to be taxed on the income.

If you would like to transfer the income and the tax obligation to your spouse, then you will also need to transfer an equal proportion of capital interest.

For example, if you would like to transfer 75% of the rental income to your spouse, a 75% interest in the capital value of the property must be transferred as well.

HMRC automatically taxes rental income at an equal fifty-fifty basis for married couples. If you wish to be taxed at a different (unequal) split, you must complete Form 17 on the HMRC website. Form 17 is used to declare an unequal interest for jointly owned property. It must be completed within 60 days of making the transfer and you need to resubmit the form any time there is a change in the allocation of interest. If this is not done, then your interest will automatically revert back to a 50/50 split.

Transfers and taxes

Luckily, you do not pay Capital Gains Tax (CGT) on transfers of capital assets between spouses, as long as you were not separated at the time of the transfer and it was not a business-related transaction.

However, Stamp Duty Land Tax (SDLT) is still payable on transfers of property between spouses if the amount transferred is over the SDLT threshold, which is currently £125,000.

For example, let’s say you own a property and have an outstanding mortgage of £300,000. If you were to transfer 50% of the property to your spouse, your spouse also takes on 50% of the mortgage (£150,000).

SDLT is charged on the amount of “consideration” given. In this case, £150,000 of “consideration” has been transferred, which is above the SDLT threshold.

Based on the current SDLT rates, your spouse would pay 0% on the first £125,000 and 2% on the remaining £25,000. This comes to an SDLT payable of £500.

Other considerations

If the investment property was previously your main residence, please be advised that you may lose private residence relief.

A transfer of ownership doesn’t mean you need to transfer the legal title. However, it would be beneficial to write an agreement about how the property is transferred to satisfy HMRC.

More than half of all limited companies registered in the UK are considered micro-entities.

Micro-entity accounts are becoming increasingly popular among property investors as they save both time and money compared to full annual accounts.

What is a micro-entity?

A business is considered a micro-entity if it meets at least 2 of the following conditions:

• a turnover less than £632,000
• less than £316,000 of assets on its balance sheet
• less than 10 employees

There are certain companies that cannot qualify as micro-entities, including charities, credit institutions, and investment undertakings.

The majority of property investment companies are not investment undertakings. Investment undertakings have shareholders with no involvement in the operation of the business or have multiple properties in the same company. Please contact us if you would like to learn more about this.

The benefits of micro-entity accounts

If your company is a micro-entity, you can prepare simpler accounts, benefit from exemptions and you will only be required to send a simplified balance sheet to Companies House.

The main advantages of micro-entity accounts for property investors include:

• Preparing a simplified balance sheet and profit and loss account.
• Accounting notes aren’t required.
• Only the balance sheet needs to be submitted to Companies House.
• You must use historical cost rather than fair value.
• Directors’ reports aren’t required.

Fair value vs. historical cost

If you’re a property investor filing full accounts, you must report property values at their fair value. This means that you must accurately report how much you think the property is worth. You may not want to do this if you’re planning to sell the property, as this might hinder negotiations.

On the other hand, with micro-entity accounts, you cannot use fair value and instead have to use the historical cost which most property investors will prefer.

Historical cost is the original value of the property at the time it was purchased.

How to file micro-entity accounts

You can file your accounts with HMRC and Companies House at the same time from the HMRC website.

Even if you’re familiar with preparing a balance sheet or P&L, micro-entity accounts can be complex as the abridged version requires different information than the full version. Please contact us if you would like our help preparing your accounts.

Residential rent is a VAT exempt supply, however, serviced accommodation is treated as holiday accommodation and is subject to VAT.

This fact sheet explores the VAT obligations of serviced accommodation businesses.

VAT registration

As a holiday accommodation business, you cannot charge VAT unless you are registered for VAT. You are only required to register for VAT if your VAT taxable turnover exceeds £85,000 in any 12 month period.

Your VAT taxable turnover is the total value of your taxable sales. In other words, your total sales minus any VAT-exempt items.

If your accommodation business reaches the £85,000 threshold, you can register for VAT on the HMRC website. The process is fairly straightforward, just make sure you have details like your turnover, business activity and bank information at hand.

After registering, you will receive your VAT registration certificate within 30 working days. It would also be beneficial to update your booking and invoice systems to

ensure that you’re charging the correct amount of VAT on your sales. Please contact us if you would like further information about this.

VAT Flat Rate Scheme

If your serviced accommodation business is required to register for VAT, it would be beneficial to check whether your business can make use of the Flat Rate Scheme (FRS).

The FRS is designed to simplify VAT reporting for small businesses with a turnover of less than £150,000, saving you time completing tax returns.

Rather than calculating the exact amount of VAT from the quarter, you’ll instead pay a fixed percentage of your annual turnover.

The current flat rate for serviced accommodation is 5.5% but is expected to rise to 10.5% from April 2022.

VAT on deposits

Most deposits are considered advanced payments. Therefore, whenever you receive a deposit, you must account for the VAT in your next VAT Return.

If you need to refund a deposit, you can reclaim the VAT on your next return.

VAT on cancellation charges

If your business charges cancellation fees, these are considered compensation and VAT is not due.

If the cancellation fee is in the form of a retained deposit, then you can reclaim any VAT already collected on your next return.

The Government Gateway is a system in which you can access the majority of government online services, including your tax account.

Let’s explore how to set up your account, add your taxes and invite your accountant.

Register for a Gateway

A Gateway account is created the first time you enrol for a government online service. If you previously accessed online government services, you may already have an account. If this is the case, you will be prompted to log in instead of register.

To register for an account, go to the HMRC services website and follow these steps:

1. Enter your email address. You will then receive a verification code that you will need to enter.
2. Enter your full name.
3. Create a unique password.
4. Set up a recovery word in case you lose your password.
5. Choose the type of account you wish to set up. Select “Organisation” if you’re registering as a business.
6. Set up 2-Step Verification for security protection. You can either enter a phone number or use an authentication application.
7. Answer the additional security questions when prompted.

Once registered, you will receive your Government Gateway User ID via email. Make sure to save this for your records.

Add your taxes

You will be able to add any relevant business taxes to your account from the Business Tax Account Home Page. The most common tax services are VAT, Self Assessment, Corporation Tax, PAYE and CIS (which is included in the PAYE option).

Each time you add a service, you will receive an activation PIN within 10 days. Once you have entered the pin, you can start using the service.

To add a service, follow these steps:

• On the Home Page, click “add a tax, duty or scheme”.
• Select which tax or service you wish to add.
• Follow the steps when prompted.

For Corporation Tax, you will need your Unique Taxpayer Reference (UTR) and your Company Registration Number.

For Self Assessment, you will need your UTR and National Insurance Number (NIN). If you do not have this, you will be prompted to register for Self Assessment and will receive your UTR within 10 days.

For PAYE or the Construction Industry Scheme, you will need your Employer PAYE Reference and the HMRC office number found on the letter HMRC sent you when you registered as an employer.

For VAT, you will need your VAT number, date of registration, the month your last VAT Return ended and the amount in box 5 of your last VAT Return.

Add your accountant

You can authorise an agent to have access to your Business Tax Account and handle your tax affairs.

To invite your accountant, follow these steps:

• Click “Manage Account” in the navigation bar at the top.
• Choose “Accountants” from the list in the middle of the screen.
• Select the service(s) you would like to add them to.
• Click “Authorise an Agent”.

It can often be difficult to distinguish between repairs and improvements, however, it’s extremely important to report them correctly for tax purposes.

Property investors generally want to report costs as repairs because it would result in an immediate tax break. HMRC, on the other hand, generally prefer investors to report costs as improvements because the tax relief would only apply once the asset is sold.

Repairs are often referred to as revenue expenditure and improvements are referred to as capital expenditure. Let’s take a look at the differences between these cost types with specific examples for property investors.

Repairs

A repair or revenue expenditure refers to the money spent on maintaining and keeping an asset in a good working condition.

This includes repairs to a newly acquired property that requires work to be done, as long as the property was lettable at the time of purchase.

This also includes replacing outdated items with the nearest modern equivalent. For instance, replacing single glazed windows with double glazed windows or replacing lead pipes with copper or plastic pipes.

In regards to kitchen repairs, the costs involved in the refurbishment would also be considered revenue expenditure. This may include stripping out the old items, replacing worktops and wall units, retiling, plastering and wiring. Only similar replacements to the original kitchen can be claimed as repairs. Any new additions (e.g. storage or additional appliances) would be considered an improvement.

Improvements

An improvement or capital expenditure refers to money spent on an alteration that increases the value of the property, changes its main function or extends the life of the building.

This includes newly purchased properties that were not in a lettable state at the time of purchase and require renovations to be in a condition to let. If significant work is required, you should speak with an accountant to determine the status.

Upgrading any materials or appliances to a superior quality item would also be considered an improvement.

Integral features

There are special rules surrounding ‘integral features’ such as electrical, cold water, water heating and air cooling or purification systems.

If you replace more than 50% of an integral feature within 12 months, this is considered an improvement (capital expenditure) for capital allowances purposes. If you replace less than 50% within the year, this will be treated as a repair (revenue expenditure).

For example, let’s say you have a 6 room property and will be replacing the electrical system in 2 rooms within 12 months. Because you are replacing less than 50% of the property’s electrical system, this will be treated as revenue expenditure.

Summary

When considering the cost type of an expense, it’s best to consider whether the work done will significantly increase the market value of the property.

For instance, replacing the roof would be a repair, however, upgrading the kitchen with superior materials and appliances would be an improvement. If in doubt, feel free to contact us for advice.

Replacement of domestic items (RDI) relief, previously known as The Wear and Tear Allowance, allows residential landlords to claim tax relief for replacements of certain items in the property, known as domestic items.

What are domestic items?

Domestic items include:

• Moveable furniture, such as beds and wardrobes
• Furnishings, such as curtains, carpets and linen
• Appliances, such as fridges, freezers and TVs
• Kitchenware, such as cutlery and crockery

Domestic items do not include any items that become part of the house, for instance, fitted appliances and bathroom fixtures.

Conditions for relief

A deduction cannot be claimed if the property is considered a Furnished Holiday Let (FHL) or if Rent a Room relief has been claimed.

In order for a cost to be considered a replacement, the following 4 conditions must be met:

1. The individual or company must run a property-letting business.
2. An old domestic item in the house-let is removed and replaced with a new domestic item, for sole use by the tenant.
3. The domestic item being replaced must be required for the property business to function. If it is not a necessity, the relief cannot be claimed.
4. You have not claimed capital allowances on the cost of the new item.

If all 4 conditions have been met, then you can claim a deduction for the cost of the new domestic item.

New domestic items

The cost of replacing an item is only deductible when it’s replaced with one that is of similar quality.

If the replacement was bought new, this doesn’t automatically make it a higher quality or standard.

For instance, a brand new fridge that cost £400 is not an improvement over a 10-year-old fridge that cost £400 at the time of purchase. In this case, the cost of the new fridge can be deducted.

If the new fridge is of far superior quality and is much more expensive than the original item, RDI relief cannot be claimed as the cost is considered an improvement (capital expenditure) rather than a replacement.

The Construction Industry Scheme (CIS) is an HMRC scheme for workers in the construction sector. Contractors and businesses that employ subcontractors are required to register for the CIS, deduct money from each subcontractor’s pay, and complete monthly CIS returns.

The monthly returns inform HMRC about the payments and deductions made throughout the period.

Monthly CIS returns must be submitted by the 19th of the following tax month. Tax months run from the 6th to the 5th. For example, if you are submitting a return for the period ending on March 5th, this covers all subcontractor payments made between February 6th and March 5th. The CIS return would be due on March 19th.

You can file your monthly return from the HMRC CIS online service or through compliant commercial CIS software.

Required information

The return must include all payments to all subcontractors in that month, regardless of the subcontractors CIS status or deduction rate. You must also declare that the subcontractors listed are not considered employees of the business. If you incorrectly declare the employment status of a subcontractor, you could receive a fine of up to £3,000.

You will need to submit the following information for each subcontractor paid in the period:

• The subcontractor’s name or business name
• The subcontractor’s unique tax reference (UTR)
• The subcontractor’s verification number – this is provided when you verify the worker on your CIS account
• The gross amount of payments made to the subcontractor that month
• The total cost of any materials paid for by the subcontractor that month
• The total amount of tax deducted from the subcontractors pay that month

Nil Returns

If you have tax months in which no payments were made to subcontractors, you must file a nil return. If you do not file a monthly return, HMRC will assume that the return is late and you may incur a penalty.

To file a nil return, simply tick box 5 next to “Nil return” and submit it as normal.

Correcting submitted returns

If you realise that you have made a mistake or forgotten an entry, you should amend the return or contact HMRC as soon as possible to avoid fines.

You can file an amended CIS return through your online CIS account or contact the CIS Helpline on 0845 366 7899.

Example deduction

Let’s say you paid a standard-rated (20%) subcontractor £500 this month and they did not purchase any materials. On the return, you would enter the total payment as £500, the cost of materials as £0 and the amount deducted as £100.

Most property businesses will require investment from their directors or from individual lenders, whether for startup costs, renovations or expansion.

In this case, the lender can charge interest on any money that the company has borrowed but not yet repaid. For the business, the interest can be deducted as a business expense for Corporation Tax. For the lender, any interest earned will be subject to income tax.

What is a CT61 form?

If a business pays interest on a loan from a director or individual lender, it must submit quarterly CT61 returns. The CT61 should not be used for business-to-business interest payments.

The CT61 form is used to report interest, royalties, alternative finance payments and other similar recurring payments to HMRC.

How to request form CT61

It’s not possible to simply download the CT61 form. Rather, it needs to be requested via an online form on the HMRC website.

Please note that if you’re an LLP, you must send a letter to HMRC with your unique taxpayer reference (UTR) and details of the payment(s) made.

Nil returns

Unlike most taxes, it is not required to submit a nil return if no payments were made. You only need to submit a CT61 if you made interest payments within the calendar quarter.

Deadlines and penalties

If interest payments are made, the CT61 must be submitted on a quarterly basis. Normally, this aligns with the calendar year and the periods ending on the last day of March, June, September and December.

The form and any related payments must be submitted within 14 days from the end of the reporting period. If it is submitted 1 day – 3 months late, HMRC may charge you £100. If it is 3 – 6 months late, they may charge an extra £100. From 6 – 12 months, HMRC will charge an additional 10% of any unpaid tax.

Example

If a director lends their company £25,000, they can charge the standard commercial interest rate based on the size of the loan. In this scenario, the standard interest rate is 2%.

The business would record £500 of interest in the annual accounts (25,000 x 0.02) and the director would record £500 of interest on their Self Assessment return.

The director would not pay interest on this amount if they are a basic rate taxpayer and did not receive any other interest payments in the tax year.

This example is a tax-efficient way of extracting the interest amount from the business. However, each situation will differ. Don’t hesitate to contact us if you would like some advice.