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New Queries: 10 March 2022

08 March 2022
Issue: 4831 / Categories: Forum & Feedback

Pension problem

How to make up lost years for state pension entitlement.

A friend has asked me about the rules on ‘buying extra years’ for the state pension. She feels that she was badly advised by her accountant in the past, who did not tell her that it was worth paying Class 2 NIC even though her sole trade made profits below the small earnings exception.

As a result, she only has five qualifying years of contributions. She has bought the maximum of six extra years to make eleven, but at the age of 47 she does not have enough working years left to bring her up to 35 and a full entitlement. She has no children, and therefore does not qualify for the extra years by that route.

Is there anything that she can do? I am aware of a number of cases that have considered this kind of problem, but because it is not something I deal with I am not sure whether any of the claimants were successful.

I look forward to hearing from readers.

Query 19,911 – Gappy.

Mortgage penalties

Early redemption penalties on buy to let mortgages.

I understand that an early redemption penalty (ERP) is tax deductible in the same way as interest, albeit now on a reduced basis since 2017-18, but I am unsure whether these can be offset against rental profits if they are rolled up and passed on to a new mortgage.

My assumption is that this would be the case as the debt is still owing and the ERP would be added to the new loan. My client would then be paying a small proportion of the interest monthly on the ERP amount in the new mortgage.

My question to readers is therefore whether an ERP is tax deductible when it has been incurred, ie added to the new mortgage, or whether it has to be paid upfront in cash to claim tax relief on it?

I look forward to receiving replies from anyone who has dealt with this situation.

Query 19,912 – Uncertain.

Payment in lieu of notice

When is the date of a PILON payment for tax purposes?

My client received a payment in lieu of notice (PILON) payment from her employer in March 2020. According to her settlement agreement, this payment should have been made by her employer 21 days after her employment settlement agreement termination date of 31 March 2020.

We requested that this be paid to her early to enable her to pay some bills. For her 2019/2020 return we deducted this PILON payment from the 2019/2020 employment income amount and declared it instead on her 2020/2021 return because this additional income would have otherwise taken her into a higher rate tax bracket resulting in increased tax of £3,500 and her having to pay extra tax for a PPI claim instead of getting tax back.

HMRC disputed the tax return and said it must be declared in 2019/2020 and added this income back to the 2019/2020 return that resulted in a £3,500 increase in tax to pay.

We were unaware that the early payment would change the contract effective payment date for tax treatment as this income would ordinarily have been earned and paid over the three months of the new tax year and ‘… in lieu of the employee’s notice period…’.

Can readers provide any assistance on the interpretation of the new PILON tax law?

Query 19,913 – Mr K.

Transfer of a going concern

VAT on buying a business as a TOGC.

I recently dealt with two unusual VAT situations with clients who bought businesses. I would like to confirm with readers that I advised them correctly.

My first client is a florist who has never registered for VAT because his annual sales are only £70,000. But on 1 December 2021, he purchased another small florist business as a transfer of a going concern (TOGC) from someone who was not registered for VAT either. Her annual sales were £30,000.

I told my client that he did not need to register for VAT on 1 December 2021 because he could ignore the seller’s sales because she was not registered for VAT or liable to be registered. It is only when his own sales exceed the registration threshold of £85,000 that he must register. But a colleague said that the sale of flowers is a taxable activity and he should have registered for VAT on 1 December 2021 because £100,000 of combined sales for the previous year exceeds £85,000.

In the second case, my client is VAT registered and bought a business that sells stationery and greeting cards. The shop had been closed for six months before the sale because of Covid restrictions and the seller decided that it was not a TOGC for VAT purposes because of this break in trading. The seller charged VAT to my client on stock, fixtures and fittings and a small goodwill fee. I told my client that she could claim input tax on her next return. This seems reasonable but is it correct?

Could readers provide assistance?

Query 19,914 – Lily.

Issue: 4831 / Categories: Forum & Feedback
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