Welcome to another tax update August 2025.  We hope you'll find this update useful, it includes the latest update and status of the Make Tax Digital initiative that HMRC is rolling out. If you have any queries or concerns at all about your situation and how you will be affected by new information or changes, just give us a call. We'll be delighted to help.

Make Tax Digital LEGISLATION DAY 2025 - WHAT WAS PUBLISHED?

On ‘Legislation Day’ (21 July 2025), HM Treasury released a range of draft legislation and tax documents. The key measures to be implemented by the new legislation can be categorised into the following areas:

CLOSING THE TAX GAP

Several measures are proposed that will target tax avoidance. In addition, tax agents will be required to register with HMRC in order to deal with HMRC on their customers’ behalf. One of HMRC’s main reasons for introducing Making Tax Digital (MTD) for Income Tax is that it will supposedly reduce errors. MTD is covered in more detail in the article below.

PUTTING THE TAX SYSTEM ON A FAIRER, MORE SUSTAINABLE FOOTING

Key measures in this category include:

• The controversial restrictions on the amounts of inheritance tax relief available for agricultural and business property from April 2026 (see below);
• Proposals to include inherited pension pots in a deceased person’s estate for inheritance tax purposes from April 2027; and
• Proposals to bring Employee Car Ownership Schemes into scope of the benefit in kind rules as company cars.

MAINTAINING THE TAX SYSTEM

Key measures in this category include:

• A proposal to introduce an easement that will help to mitigate the significant increase in benefit in kind (BiK) for plug-in hybrid electric vehicles (PHEVs) following a potential introduction of the new Euro 6e standard. If the standard is introduced in Great Britain, it would significantly increase the BiK tax due on PHEV company cars, which is linked to CO2 emissions.
• Technical guidance that aims to provide clarity on the tax implications of PISCES. PISCES stands for “Private Intermittent Securities and Capital Exchange System”, which is a new type of stock market that will allow private companies to have their shares traded intermittently.

HMRC’S TRANSFORMATION ROADMAP

On 21 July 2025, HMRC launched their Transformation Roadmap, which sets out ambitious plans for HMRC to become a digital-first organisation by 2030, with 90% of customer interactions taking place digitally. This compares to 76% as at today. HMRC will automate tax wherever possible and offer new digital self-serve options across a number of tax regimes.

It is estimated that the plans will save HMRC £50 million a year, including by moving customer letters and reminders to a digital-first approach and reducing the reliance on paper correspondence by 2028/29. Paper post provision will remain for critical correspondence and for the digitally excluded.

The Transformation Roadmap sets out timescales for delivery and HMRC is committed to reporting on progress. Work is underway to deliver some of the measures set out in the roadmap this tax year, including:

• improving Self Assessment registration service and streamlining the exit process for those customers who no longer need to file a Self Assessment tax return.
• A new service to give employed parents, who are newly liable for the High Income Child Benefit Charge, the choice to pay it directly through their tax code without needing to register for Self Assessment.
• Launching an enhanced reward scheme for informants, targeting information on serious non-compliance in large corporates, wealthy individuals, offshore and avoidance schemes.

Longer-term improvements include:

• From April 2026, the pre-population of Self Assessment tax returns with Child Benefit data.
• From 2027-28, digitising the inheritance tax service.
• Simplifying payments and refunds, including direct bank repayments and easier National Insurance contribution refunds.
• Single Customer Account Programme to provide a unified view of the taxpayer's overall income and tax position in their digital account.

Lastly, in what will come as good news to many, HMRC announced that MTD for Corporation Tax will not be implemented.

MAKING TAX DIGITAL - WHAT’S NEW?

HMRC are pushing ahead with the implementation of Making Tax Digital (MTD) for Income Tax, set to commence from 6 April 2026. Legislation Day saw the publication of draft MTD legislation, which makes the following recently announced changes to the planned regime:

• More individuals will be exempt from MTD – Ministers of religion, Lloyds underwriters, recipients of Blind Persons’ Allowance and donors of Power of Attorney.
• Certain kinds of income will be outside the scope of the MTD rules, namely Qualifying Care Income (e.g. foster care income) and the UK earnings of non-resident entertainers and sportspeople who have no other sources of income caught by the MTD rules.
• The requirement to use MTD-compatible software to file the individual’s year end tax return.
• A new concept introduced in the draft MTD Regulations is ‘latency’, which is the term being used for the concept of a newly-commenced trade or property business not being subject to the MTD rules until 6 April following the tax year in which a filing obligation arose for the tax year of commencement. As an example, if a trader is mandated into MTD in 2026/27 because of her property income, then starts a new trade in December 2026, 2027/28 is the year in which the filing obligation (31 January 2028) arises for the year of commencement and she will need to start complying with MTD rules for the new trade from 6 April 2028.

If you are an individual who receives income from a trade or property business, you are likely to be mandated at some point over the next few years if your combined sales from property businesses and self employment (‘qualifying income’) exceeds £20,000. The first group of individuals to be mandated, from 6 April 2026, will be those who had qualifying income in excess of £50,000 in the 2024/25 tax year.

Being mandated into MTD for Income Tax will mean that you need to keep your trade and property business records in MTD-compatible software and use the software to send quarterly summaries to HMRC. The changes mentioned above are relatively minor - the key requirements of MTD for Income Tax have not changed.

MTD FOR INCOME TAX: INCOME FROM JOINTLY HELD PROPERTY

If you are a sole trader or landlord with combined turnover from trade and property exceeding £50,000 in 2024/25, you’re likely to be mandated into Making Tax Digital (MTD) from 6 April 2026. Individuals with lower income will be mandated at later dates. We have covered the general MTD requirements in previous newsletters, but it’s time to focus on how MTD will apply to those with income from property that is jointly owned by more than one person.

The MTD legislation prescribes the various categories that should be used to record each individual item of income and expenditure. Any MTD-compatible software package or spreadsheet should enable you to categorise income and expenditure according to the prescribed categories for jointly held property income. Each quarter, year-to-date totals for each category will be totalled and submitted to HMRC in a Quarterly Update.

There are two easements that individuals with jointly held property income can take advantage of:

• Easement for individuals with turnover below £90,000 per annum - instead of using the various categories, it will be sufficient to categorise each item as either ‘income’ or ‘expense’.
• Easement for jointly held property income - this involves recording just one quarterly figure for each of the prescribed income categories and one annual figure for each of the prescribed expense categories.

If an individual qualifies, it is possible to combine the two easements, which would mean that reporting income from jointly held property would entail entering one total income figure each quarter and one annual total expense figure in quarter 4.

PROPOSED CHANGES TO INHERITANCE TAX

As announced at Autumn Budget 2024, the government has published draft legislation to reform Agricultural Property Relief (APR) and Business Property Relief (BPR) from 6 April 2026 to make them “fairer and more sustainable”

In addition to existing nil-rate bands and exemptions, APR and BPR will continue, but a cap will be introduced that will restrict the 100% relief to the first £1 million of combined agricultural and business property. The rate of relief will be 50% thereafter.

Relief will also be reduced to 50% (with no £1m allowance) for quoted shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM. The changes will take effect from April 2026.

In inevitable disappointment to business owners and farming communities, no significant changes have been made to these plans since the Autumn Budget 2024 announcement.

The government has, however, announced that it will not proceed with the proposed extension of the related property rules for qualifying property settled into multiple trusts.

It has also been announced that:

• The option to pay IHT by equal annual instalments over 10 years interest-free will be extended to all property which is eligible for agricultural property relief or business property relief.
• The £1 million allowance for agricultural property relief and business property relief will be indexed in line with CPI, but will remain fixed up to and including tax year 2029/30 in line with maintaining the IHT nil rate bands at current thresholds.

CLASS 2 NICs - 2024/25 ERRORS

HMRC have identified an issue affecting some Self Assessment taxpayers in relation to Class 2 National Insurance contributions (NICs) for 2024/25. Some self-employed taxpayers with profits above £12,570 have seen a Class 2 NICs charge of £358.80 added to their accounts when they shouldn’t have been. In some circumstances it will be less.

HMRC say that they have taken action to correct the Class 2 NICs figure where the information they hold has allowed. If this applies to you, you will have received a message to let you know.

HMRC will correct the records of other taxpayers after the issue has been resolved and will notify them once this has been done. Taxpayers will be issued with a new SA302 tax calculation after their record has been corrected.

The issue seems to have been caused by reforms to NICs that took effect from 2024/25. Self employed taxpayers and partnership members no longer have to pay Class 2 NICs - if their profits are over the small profits threshold (£6,725 for 2024/25), Class 2 NIC is treated as having being paid.

DOUBLE-CAB PICKUPS – RULE CHANGES FOR BENEFIT IN KIND PURPOSES

Following a recent Court of Appeal ruling, from 6 April 2025, the classification of double-cab pickups (DCPUs) will need to be determined by assessing the vehicle as a whole at the point that it is made available to determine whether the vehicle construction has a primary suitability. If the vehicle is primarily suited to carrying goods or burden, for direct tax purposes it can be treated as a van. Most DCPUs are suited to both passenger transport and carrying goods, so they do not have a primary suitability. It therefore follows that most DCPUs are expected to be classified as cars when calculating the benefit in kind charge.

Transitional arrangements apply for employers that have purchased, leased, or ordered a double cab pickup before 6 April 2025, whereby they will be able to rely upon the previous treatment until the earlier of:

• Disposal
• Lease expiry, or 5 April 2029

VAT GROUPS AND ANTI-AVOIDANCE

HMRC have published Tax Avoidance Spotlight 70 ‘VAT grouping structure arrangements used by care providers’, highlighting tax avoidance arrangements used by state-regulated care providers to reclaim VAT.

The VAT legislation exempts supplies of welfare services where they are made by either a charity or a state-regulated care provider. The impact for the charity or state-regulated care provider is that they are unable to recover any VAT which relates to these supplies.

The arrangement identified in Spotlight 70 is intended to work as follows:

• An unregulated entity forms a VAT group with the state-regulated care provider, or charity.
• Existing contracts for welfare services between the regulated body and the local authority or NHS are transferred to the unregulated provider. New contracts are drawn up with the unregulated care provider.
• The unregulated care provider then sub-contracts the physical provision of welfare services back to the regulated care provider. A facilitation measure in the VAT grouping legislation means that where services are supplied between members of the same VAT group, they are disregarded for VAT purposes.
• As the supplies of welfare services are being made by an unregulated care provider, they are taxable at the standard rate of VAT.
• The VAT group can reclaim input tax in respect of those taxable supplies. Were it not for this arrangement, the reclaim would be blocked.

HMRC consider these specific VAT grouping arrangements to be a form of tax avoidance. They say that, where necessary, they will refuse VAT group registration applications that are designed to implement, or facilitate, these avoidance structures. They are also reviewing existing group arrangements where it is known or suspected that this avoidance arrangement is in operation. During this review, HMRC may request additional information and will assess each case individually.

If Spotlight 70 affects you, please talk to us – we are here to help.

ADVISORY FUEL RATES

The table below sets out the HMRC advisory fuel rates from 1 June 2025. These are the suggested reimbursement rates for employees' private mileage using their company car.

Where the employer does not pay for any fuel for the company car these are the amounts that can be reimbursed in respect of business journeys without the amount being taxable on the employee.

Engine Size         Petrol     Diesel     LPG
1400cc or less   12p                          11p
                              (12p)                        (11p)

1600cc or less                    11p
                                               (12p)

1401cc to
2000cc               14p                          13p
                             (15p)                        (13p)

1601 to
2000cc                                13p
                                             (13p)

Over 2000cc      22p        17p        21p
                             (23p)      (17p)     (21p)

The previous rate is shown in brackets.

You can continue to use the previous rates for up to 1 month from the date the new rates apply.

Note that for hybrid cars you must use the petrol or diesel rate. For fully electric vehicles the rate is 7p (7p) per mile.

EXTRACTING FUNDS FROM AN OWNER-MANAGED COMPANY

“What’s the most tax-efficient way to take funds out of my company?” is perhaps the most common question put to accountants by their owner-managed company clients. The answer used to be simple: “Take a salary up to the level of the personal allowance and take the rest as a dividend”. Unfortunately, we are no longer able to give such a straightforward, one-size-fits-all answer. Put simply, the most honest answer we can give without performing individualised calculations is “It depends”!

If the director(s) need to take a market rate salary for commercial reasons (including obtaining finance in their own name or for making personal pension contributions), this should be a priority.

Individual calculations need to be carried out to arrive at the optimal profit extraction strategy for all but the most straightforward businesses. This is because the optimal extraction method will depend on a range of factors, including but not limited to:

• The company’s profit level, which determines its rate of corporation tax;
• The number of director/shareholders;
• The available distributable reserves in the company;
• The director/shareholder’s other income, which determines their marginal rate of income tax and the amount of Personal Allowance available to them.
• The director/shareholder’s age - those aged 66 or over do not pay employees National Insurance Contributions;
• The availability of the £10,500 Employment Allowance (EA) - the company might not qualify for EA or it might already be utilised by other employees’ salaries;
• Possible applicability of National Minimum/Living Wage legislation.

Consideration then needs to be given to the cash requirements of the director/shareholders. Extracting all available funds from the company is likely to incur a higher tax cost than extracting a set figure that is sufficient to cover living costs. Funds retained in the company will not be subject to income tax until they are taken out of the company by the director/shareholders. Alternatively, funds may be retained in the company with a view to realising a capital gain on the eventual sale or liquidation/striking off of the company. The capital gain will be subject to Capital Gains Tax and could be eligible for Business Asset Disposal Relief.

For many director/shareholders, the ‘classic’ extraction model of taking a salary equal to the £12,570 personal allowance, followed by dividends sufficient to cover their living requirements, is likely to be a tax efficient strategy, however, as can be seen above, there are many factors that may change the position. Individualised advice may be necessary - if you wish to discuss your profit extraction plan with us please get in touch – we’d be happy to help!

SALARY SACRIFICE FOR PENSION CONTRIBUTIONS

Employees who join their employer’s pensions salary sacrifice scheme stop paying pension contributions and instead sacrifice part of their gross salary in return for higher employer pension contributions. This means that both employers’ and employees’ National Insurance Contributions (NICs) are saved whilst maintaining the same amount of pensions savings. This is because employers’ pension contributions are exempt benefits and they are not caught by the salary sacrifice rules.

The employers’ NICs saving is the main benefit of such schemes. The employer can choose to use all or none of the saving to invest in the employees’ pensions.

Before implementing a pensions salary sacrifice scheme, employers should consider the drawbacks of operating one, such as the extra administration and the risks of failing to comply with National Minimum Wage legislation. Thought should also be given to the interaction with Auto Enrolment obligations.

Communication with employees is also essential because their reduced gross salary may affect their entitlement to earnings-based payments such as bonuses, as well as statutory payments such as sick pay.

For a salary sacrifice to be considered ‘successful’ by HMRC it must meet certain requirements, including amending the employees’ contracts. If you are interested in implementing such a scheme, please speak to us.

DIARY OF MAIN TAX EVENTS