Mike Tombs's Blog

This blog provides information about tax, accounting and other issues affecting small owner-managed businesses in the UK. It is intended as a general source of information but you should not assume that everything applies to your specific circumstances. We are always happy to discuss providing tailor-made solutions to suit your individul needs. Visit www.tlaservices.co.uk to sign up for our free monthly Tax Tips and News newsletter.

Monthly Archives: April 2010

April 2010 – Q & A’s

Becoming Self Employed

Q: I have always worked as an employee, but now want to take steps to set up my own business and work for myself. Can you explain how this differs from being employed?

A: When you are employed, your employer deducts tax and National Insurance (NI) from your gross pay and the balance is paid to you. The amounts deducted are paid to HM Revenue and Customs (HMRC) through your employer’s Pay As You Earn Scheme. Assuming you have no other sources of income and are not a higher rate taxpayer, you are unlikely to have any further tax liabilities and will not be asked to complete a self assessment tax return (SATR).

Self-employed taxpayers are required to register with HMRC within 3 months of starting a business and failure to do so results in a £100 fine. Self-employed individuals must disclose their profits on self assessment tax returns and they are responsible for ensuring that any tax and National Insurance liabilities are paid by the due dates. This means that you will be required to maintain appropriate records of all business transactions.

We can provide you with guidance and support to help you comply with these regulations, together with identifying any tax savings available to you. We can also help you develop sound ways of improving business profitability from the outset, ensuring you can measure the progress of your business against your desired targets.

Do I still need a tax return?

Q: Last year I completed my tax return but received a letter from my tax office stating that I do not need to complete a tax return in the future. However, I purchased a rental property during the 2009/10 tax year and have been renting this out for a small profit. Should I continue to file a tax return even though they have not issued me with one?

A: There is a requirement to notify the tax office by 5th October following any tax year where you owe further tax in addition to any tax that has already been deducted at source. As you have made a small profit from your rental income activities then you need to notify the HMRC. This gives them enough time establish if a tax return is required and to issue you with one to complete.

However, HM Revenue & Customs are trying to reduce the burden of Self Assessment on taxpayers who have straightforward affairs and have identified some areas where a tax return will still not be required.

If your income from rents is less than £2,500 for the year and your other income is from employment where tax is deducted at source, you can just contact the tax office and they should be able to settle your additional tax liability through an adjustment in your PAYE code, and collect the underpaid tax through deductions in your wages each month. This will avoid the onerous task of completing a tax return to show this small amount of income.

Employees on Jury Service

Q: One of my employees has been called for jury service. Do I have to pay them for the days they are away?

A: There is no statutory obligation to pay unless their contract of employment says otherwise, although the individual may recover certain costs from the court.

Whilst on jury service, an employed individual can claim for travelling and subsistence costs incurred.  The amount that they receive for this is not deemed to be taxable income. The individual is also entitled to submit a claim to the court for loss of net earnings, based on a maximum claim of £31.56 for a half day (up to four hours of service) and £63.12 for a full day.

The above claims cover the first ten days of service, after which the amounts in respect of loss of earnings are doubled. If you do not intend to pay the employee for their days on jury service, you will need to complete and send a Certificate of Loss of Earnings to the court. The form will be provided by HM Courts Service and must be completed for the employee to provide direct to the court on their first day of service.

Signing Company Accounts & Tax Returns

Q: My company accounts and corporation tax return need to be filed soon, but I am actually going to be away on business for both deadlines. Is there anyone else who can sign the documents on my behalf as I am the only director?

A: There are two sections in a set of accounts that need to be signed, firstly the directors’ report and secondly the balance sheet.  Although a company secretary is able to sign the directors’ report, only a director can sign the declaration on the balance sheet.  Without the correct signatures, the accounts will be rejected.  You will therefore need to make provision for your accounts to be signed before you go away, in order to avoid a late filing penalty being issued.

The corporation tax return must be signed by an ‘authorised person’ and this includes the company secretary. If there is not an appointed company secretary, the form must be signed by a director so again, you would need to ensure that this was dealt with before going away.

You must ensure that an original signature is used for all of the above documents, as a photocopy of a signature is not acceptable for Companies House or HM Revenue & Customs.

Tax Relief on New Cars

Q: I am self-employed and want to purchase a new motor vehicle for my business this month. A friend told me that if I buy a certain type of car I can receive tax relief on the full cost of the vehicle. Is this correct?

A: Cars are treated as capital assets for tax purposes and tax relief is given in the form of annual capital allowances, rather than a deduction for the cost of the vehicle.   This means that the cost of buying the vehicle is not deducted when calculating your profit or loss for the year, but instead a proportion of the cost is given as a deduction each year until the vehicle is sold or the full original cost has been deducted.

Cars with emissions below 160g/km attract a deduction of 20 percent of the cost on a reducing scale each year. Cars with emissions over 160g/km are restricted to an annual writing down allowance of only 10%.

Your friend may be referring to the special allowance available for low-emission vehicles. Low-emission cars first registered on or after 16 April 2002 attract an allowance for tax purposes of 100% of the cost of the vehicle.  In order to qualify, the emission level must not exceed 110 g/km for acquisitions made on or after 6 April 2009 (1 April 2009 for limited companies). For purchases made from April 2002 to April 2008, the maximum emission level for a qualifying vehicle was 120 g/km.

To find out if a vehicle will qualify for this enhanced capital allowance, contact the car manufacturer or dealership to check the CO2 emissions.  

Jury Service for the Self-employed

Q: I am a sole trader and have been called for jury service.  This will last for approximately 2 weeks and therefore I have had to cancel all of my appointments for this period. Do I have any entitlement to claim for the loss of my earnings during my 2 week period of jury service?

A: As a self-employed individual, if you are called up for jury service you are entitled to claim a daily allowance for loss of earnings over the period of service.  The rate at which you can claim is dependant on the number of hours and period you act as a juror. In addition, you can also claim a daily allowance for subsistence and travel costs incurred.

When making a claim for loss of earnings you will need to provide the court with some supportive evidence and you may need consult your accountant on this. Details of the rates payable can be obtained from the Crown Court where you have been asked to attend, or on the website at www.hmcourts-service.gov.uk.

Any payments you receive from the court to compensate you for financial loss will be treated as taxable receipts of the business. Any payments made to you in respect of personal expenditure you incur, such as a daily subsistence allowance and travel costs, will not be taxable.  

The Rent-A-Room Scheme and Extensions

Q: I am extending my home to build a self-contained flat at the rear of my property. I will be looking to rent this out after April for £450 per month. Can I apply the rent-a-room scheme on the income I receive from this extension?

A: The rent-a-room scheme only applies to the letting of furnished rooms for residential purposes in the taxpayer’s home. If rooms are let as an office or for any other business purpose a claim cannot be made for rent-a-room relief. 

It is highly unlikely that you would be able to claim this relief if the extension is a self-contained unit.  HM Revenue & Customs would need to be satisfied that the extension formed part of your main residence and was not a separate residence.  They would generally only allow a claim where a property has been divided if the division was only a temporary one.  This would be determined by reviewing whether structural alterations would be necessary to reverse the division and how long the residence has been divided into separate accommodation. Other factors that will be considered are whether or not the apartment has a separate postal address and door entry and whether it is metered separately for mains services.

If you are uncertain as to whether rent-a-room relief will be available on your property, you should seek advice from us.

Rental Property and Houses In Multiple Occupation (HMO)

Q: I own a large three storey property near a university and have considered renting the five rooms separately to students in the next academic year, to increase my return on the investment. I understand that I may need to apply for a licence from the local council to rent my property in this way. Is this true?

A: Recent changes to the Housing Act mean that a rented property containing 3 or more unrelated individuals is now legally classified as a House in Multiple Occupation (HMO).  

A landlord of an HMO may be required to pay a licence fee to the local council; however licensing is at the discretion of local authorities and, in most cases, only properties with three or more floors and five or more tenants are termed an HMO for licensing purposes. Part-time landlords like yourself, who hold properties more as an investment rather than as a business, are likely to be most affected.  The fee can vary from £400 to £1,000 depending on location and you may also be obliged to carry out additional work on the property.

The main objective of the licence is to ensure that sub-standard properties are no longer being let. If you choose to do nothing, then you may be served with an enforcement notice which requires you to apply for a licence within 28 days – or cease renting rooms in the relevant property.

The government and local councils raised awareness regarding the new Act with a nationwide press campaign, advertisements on the television, radio and more information is available on www.propertylicence.gov.uk.

Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation.  If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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Business Structures – which to use?

Having made the decision to be your own boss, it is important to decide the best legal and taxation structure for your enterprise. The most suitable structure for you will depend on your personal situation and your future plans. The decision you make will have repercussions on the way you are taxed, your exposure to creditors and other matters.

The possible options you have are as follows.

Sole trader

This is the simplest way of trading. There are only a few formalities to trading this way, the most important of which is informing HMRC. You are required to keep business records in order to calculate profits each year and they will form the basis of how you pay your tax and national insurance. Any profits generated in this way are automatically yours. The business of a sole trader is not distinguished from the owner’s personal affairs so that if there are any debts, you are legally liable to pay those debts even if it means selling your home and other possessions.

Partnership

A partnership is an extension of being a sole trader. Here, a group of two or more people will come together, pool their talents, clients and business contacts so that, collectively, they can build a more successful business than they would individually. The partners will agree to share the joint profits in pre-determined percentages. It is advisable to draw up a Partnership Agreement which sets the rules of how the partners will work together. Partners are taxed in the same way as sole traders, but only on their own share of the partnership profits. As with sole traders, the partners are legally liable to pay the debts of the business. Each partner is ‘jointly and severally’ liable for the partnership debts, so that if certain partners are unable to pay their share of the partnership debts then those debts can fall on the other partners.

Limited company

A limited company is a separate legal entity from its owners. It can trade, own assets and incur liabilities in its own right. Your ownership of the company is recognised by owning shares in that company. If you also work for the company, you are both the owner (shareholder) and an employee of that company. When a company generates profits, they are the company’s property. Should you wish to extract money from the company, you must either pay a dividend to the shareholders, or a salary as an employee. The advantage to you is that you can have a balance of these two to minimise your overall tax and national insurance liability. Companies themselves pay corporation tax on their profits after paying your salary but before your dividend distribution. Effective tax planning requires profits, salary and dividends to be considered together.

There are additional administrative factors in running a company, such as statutory accounts preparation, company secretarial obligations and PAYE (Pay as You Earn) procedures. A big advantage of owning a limited company is that unless you give personal guarantees (e.g. to a bank) your personal liability is limited to the nominal share capital you have invested.

Limited liability partnership

A limited liability partnership is legally similar to a company. It is administered like a company in all aspects except its taxation. In this, it is treated like a partnership. Therefore you have the limited liability, administrative and statutory obligations of a company but not the taxation and national insurance flexibility. They are particularly suitable for medium and large-sized partnerships.

Co-operative

A co-operative is a mutual organisation owned by its employees. One example of such an organisation is the John Lewis Partnership. These structures need specialist advice.

The business structure you choose can have serious implications on both your business and personal financial situation. Before deciding which to choose, it is well worthwhile seeking professional advice. In some cases there are benefits in starting in one structure then changing later; in other cases the correct structure may be reasonably easy to determine. We will be happy to discuss your plans and the most appropriate business structure with you. The most appropriate structure will depend on a number of factors including consideration of taxation implications, the legal entity, ownership and liability.