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: November 2010

Christmas Tax Tips

Guidance on Christmas Parties and Gifts

Wit the year-end fast approaching this seems like a good time to remind everyone of the tax surrounding tax and VAT when it comes to Christmas parties and giving gifts to customers and staff.

Staff Christmas Parties

An employer can pay up to £150 per head per tax year for the provision of a Christmas party or similar annual function, with no liability to income tax arising on the employee. The cost per head must include the cost of the actual party or function (including room hire, food and drinks, entertainment and any other associated costs), any transport or accommodation provided for people and any value added tax charged whether or not it can be reclaimed.

The cost per head is calculated by dividing the total cost by the number of people actually attending. As long as the cost doesn’t exceed £150 per head there is no tax charge on the employee, but if the amount exceeds £150 the full cost is treated as a taxable benefit, not just the excess.

The employer can claim the full cost for employees and their partners as an allowable expense, but cannot reclaim VAT on expenses related to non-employees. Accordingly the VAT charge will need to be split.

All employees (or where applicable all those at a particular location) must be eligible to attend even though some may choose not to.

During the tax year the employer may hold a number of annual functions, e.g. a Summer Outing, a Christmas Party and a Barbecue. In such cases the cost per head of each function is added together and only those functions where the total cost per head is below £150 will be free of income tax. The functions that exceed the limit will be subject to a tax liability on the employee. For example, if the Summer Outing costs £90 per head, the Christmas Party costs £50 per head and the Barbecue £40 per head, although the total of all three functions exceeds £150 per head, two of the functions when aggregated are less than the limit and will not be subject to income tax. Only the Barbecue at £40 per head will be taxable. Where the employee takes a partner who is not an employee, the employee will suffer a benefit in kind charge of £80, i.e. £40 x 2.

The employer may enter into a settlement agreement with HM Revenue and Taxes through which the employer carries the cost of the income tax and national insurance charges payable.

Gifts to Employees

If an employer gives an employee a non-cash gift such as a bottle of wine or a Christmas hamper, then depending upon the value, a benefit in kind charge may arise on which the employee would be subject to tax. In practice the tax authorities accept that ‘trivial’ gifts may not be taxable. Although not formally defined, it is accepted that a gift such as a turkey given in the spirit of Christmas, or a bouquet of flowers to celebrate a marriage or birth is not part of any reward for services, and the benefit should be treated as trivial and not taxable.

As with the annual function, the employer can enter into a Pay As You Earn Settlement Agreement (PSA) with the Inland Revenue in order to pay the tax and national insurance liability on the employee’s behalf.

Gifts to Customers

Normally gifts for customers and clients are treated in the same manner as entertainment but gifts up to £50 carrying conspicuous advertisement can be treated as an allowable expense. However as with Christmas parties you need to be careful as if the gift costs more than £50 including gift wrap the whole amount will be disallowed, not just the excess.

Common examples of allowable gifts are diaries, flash-drives, pens and mouse mats. The advertisement should be on the actual gift itself, and not just on the wrapping.

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Bookkeeping Basics

It is a legal requirement for every business to keep accurate records of its financial transactions. The basic need it to keep track of what the business owes, what the business owns, what its income is and what its outgoings are.

 

There are lots of inexpensive bookkeeping programmes available designed for non-accounting types, and nowadays most people have some sort of spreadsheet programme which makes it quite straightforward to record money coming in and out of the business.

 

At its simplest, cash accounting is a system where transactions are only recorded when money is either paid out or received. Sales and purchases on credit are only recorded when money changes hands, and no notice is taken of things like stock purchased but not yet used. This is often referred to as ‘single entry bookkeeping’ and is only really appropriate for very simple businesses.

 

Accruals accounting goes one step further, and records income when a sale is made regardless of whether or not it has been paid for, purchases when they are received even if not paid, and keeps track of things like the value of stock on hand. This is generally known as ‘double entry bookkeeping’.

 

It is essential to keep records up to date. With the best will in the world if you only try to make sense of what each scrap of paper or receipt is for every six months, you WILL forget, and in practice will probably end up not claiming for costs that are quite legitimate simply because you forget.

 

Even for small businesses, try to sort out your record keeping at least monthly. Any longer than that and the backlog ends up just growing.

 

Keep and sort your receipts for all outgoings. Use some type of system to list them by date and type of expenditure, and use a numbering system so you can find individual receipts if needed. At its simplest a spreadsheet with columns for reference number, date, amount and description may suffice. Number the first receipt ‘1’, the next ‘2’ and so on, write the number on the receipt and file them all in number order. To make it easier to analyse where your money is going, use different columns for major expenses, e.g. stock, printing, advertising or whatever is important in your business.

 

Record all cash sales in some form of register, again it can be something as simple as a spreadsheet showing the date, amount and any required details. If you sell on credit make sure that invoices go out quickly, and keep a separate page for each customer recording the date and amount of each sale, and the date and amount of each receipt.

 

Keep a summary comparing income and expenditure so you can see how healthy your finances are. It is particularly common for small businesses to try to manage the business only by looking at the bank balance, but all to often you can be caught out by irregular bills that only come into focus when it’s time to make payment.

 

Your bookkeeping system can be as simple or as complicated as you like, as long as you can establish easily where your money is coming from, where it is going to, what assets the business owns, what money it is owed and what money it owes. Although simple spreadsheets may work for very simple businesses most would benefit from at least a basic computerised record keeping system. Some of the best available are also some of the least expensive.

 

As an accountant I often help clients choose suitable packages and of course we do perform bookkeeping services for clients. As an absolute minimum though if you do outsource your bookkeeping, make a point at least once a month of going through the reports in detail. Nobody understands your business as well as you and you owe it to yourself to keep on top of the numbers as well as everything else. By all means get help, but never leave it completely to someone else.

Questions and Answers Bumper Edition

Each month we prepare a ‘Q&A’ covering questions raised by clients. Although I will normally post them here monthly, this is a catch-up of the past few months, so happy reading!

As always if you want to discuss any of the items as they apply to your particular circumstances please get in touch and we can arrange a suitable time to meet.

June 2010 Questions and Answers

Cycle To Work and Tax Free Bicycles

Q: Due to the increase in fuel prices over recent months, I’ve now started cycling to work. My employer has suggested that they could offer me a new bicycle under the “cycle to work” scheme. If I accept this offer, will I get taxed on this?

A: The UK government is keen to encourage use of more sustainable “greener” modes of transport, so introduced substantial tax breaks in the Finance Act 2003 for employees who cycle to work.

No tax or National Insurance is payable if your employer provides you with a bicycle and/or related safety equipment and they ensure the provision of the bicycle and equipment is available to all staff, and they are used for journeys to and from the workplace.

Some firms have implemented a salary sacrifice scheme to encourage the use of this scheme, as it reduces the amount of employers National Insurance Contributions payable.

However, in December 2009 HM Revenue & Customs clarified where employees are aged under 18, they are prevented from entering into a legal agreement under which the employer would loan them the bike. Therefore they cannot participate in the scheme which means that the ‘All Employee’ condition of the cycle to work scheme is not met. You should ensure you check the validity of the scheme before agreeing to a salary sacrifice.

Medical Insurance for Employees

Q: I’d like to arrange medical insurance for my employees but I don’t want them to be liable for the National Insurance Contributions. Is this possible?

A: Employers who would like to provide medical insurance or other benefits to employees without the employee incurring a National Insurance liability can make a voluntary agreement with HM Revenue & Customs to meet the tax payable on the benefits in kind. This is known as a PAYE Settlement Agreement (PSA).

If HMRC agree to your request for a PSA for any given tax year, you do not have to enter the items covered on the employer year end forms P9D or P11D.  During the year you will not be required to operate PAYE on them, or assess the items for National insurance Contribution purposes if they would otherwise be liable for Class I or Class IA NIC.

You will actually pay Class 1B NIC on the items included in any PSAs and will be required to meet the tax liability on the total amount of the gifts to your employees. This will result in your employees paying no tax on the gifts they have received.

Donating Prizes for A Raffle

Q: I run a pub and restaurant in a small village and our local football club are holding a fundraising raffle. We have agreed to donate a voucher for a meal for two together with a bottle of house wine as a raffle prize. We have also agreed to donate part of the night’s bar takings to the club. How would we treat this for VAT purposes?

A: The voucher would represent the provision of free hospitality to someone other than an employee and it would therefore be treated as ‘business entertainment’ by HM Revenue & Customs. Unfortunately, this means that any input tax you incur on providing the “supply” will be disallowed.

In the case of a supply of catering it is likely that the majority of the components used to make up the meal will be zero-rated foodstuffs, but you should disallow the recovery of input VAT incurred on any standard-rated items given away, such as the alcohol or ice-cream for the dessert.

The fact you have chosen to donate a proportion of the bar takings does not reduce your VAT liability and output tax should still be accounted for on the full amount of the bar takings. VAT exemption does exist for certain charitable fund-raising events by charities and other eligible bodies where they are advertised as such.

Renting a room out during Wimbledon Fortnight

Q: I live near Wimbledon Tennis Club and I have been approached to see if I would rent some of my rooms to spectators for the fortnight. The amount offered is quite tempting. Would I have to declare this for tax purposes?

A: The short answer is yes. However, providing that the amount involved is less than £4,250 and you continue to live in the property whilst renting the room(s) out, you could claim ‘Rent a Room relief’.

This relief was introduced to encourage home owners to use surplus rooms and benefit by not paying tax. It is restricted to the letting of fully furnished rooms for residential purposes only and the property must be your main home.

Even though you will not pay tax if the rental income is less than the relief available, you should report the income on your tax return, and any excess above the £4,250 is taxable at your marginal rate.

Gift of Money To Purchase a Home

Q: A friend of mine will be receiving £50,000 from a family member to buy a flat. Can you explain the tax implications for my friend, and the person making the gift?

A: The gift of cash in this way does not have any income tax implication for the recipient. However you should make the family member aware of the Inheritance Tax (IHT) implications which apply. You can give £3,000 per annum without any IHT implications. In addition, the £3,000 allowance can be carried forward from the previous year if unused, making up to £6,000 IHT free.

The balance of the gift is called a potentially exempt transfer (PET). This means that if the donor dies within 7 years there may be tax payable by the donor’s estate. Tapering provisions apply so the longer the donor lives the less the potential tax.

The two extremes are that gifts made “on the death bed” are fully taxable, but gifts where the donor survives 7 years are not taxable. In addition, to the £3,000 per annum exemptions there are specific exemptions for normal expenditure out of income, gifts on occasion of marriage, small gifts, gifts to spouses and other specific gifts.

The rules are very complex and if you are the donor, you should seek specialist advice from your us. The answer also assumes that the donee is not an executor or trustee of the donor’s estate. If he is, specific advice will be required, as the answer will change.

Selling Through Classified Adverts & Internet Auctions Sites

Q: For many years I have sold a number of old second hand items I own through classified adverts in my local newspaper, and I have recently started selling on internet auction sites. I saw an article in a magazine which suggested I may have to pay tax on the money I receive in this way. Is this correct?

A: If you are just selling some unwanted items that have been lying around in the attic and your home, the answer is probably no, as in order to pay tax on the goods you sell, you either have to be trading or make a capital gain.

You are likely to be treated as trading where the HMRC consider you to be purchasing or making goods for resale with the intention of making a profit, or sell goods for others and receive a commission.

If you only sell occasional, unwanted personal items through internet auctions, car boot sales and classified advertisements then it is unlikely they will view you as self-employed. This is due to the fact that in most cases the second hand value and amount you receive rarely exceeds the original price you paid for the items, and as tax is only chargeable on the profits you make, no tax will be chargeable.

Capital Gains Tax is only charged on gains you make and if you sell an item for less than you purchased it for you will not make a gain. It is the gain that is taxed, not the amount you receive. Therefore, you will only have to pay tax if the items you sell have increased in value during the time you have owned them, and as they are likely to be personal effects or goods (known as ‘chattels’) you are selling, which are individually worth less than £6,000 when you dispose of them, it is very unlikely you will have made a gain.

If you are concerned that your situation may be considered to be trading you should discuss this with us, as there is a late registration penalty if you do not register within 3 months of starting to trade.

July 2010 Questions and Answers

Statutory Maternity Pay & Two Employments

Q: I have recently become pregnant and currently employed in two part time jobs. Am I entitled to maternity pay and leave from both employers? How much will I receive?

A: To qualify for Statutory Maternity Pay (SMP) and maternity leave then you must have been employed by the same employer continuously for at least 26 weeks into the 15th week before the week your baby is due (the qualifying week).

You also must have earned at least £97 per week on average for the eight weeks prior to the fifteenth week before the baby is due.

Therefore, provided that you have worked concurrently for each employer for at least twenty six weeks prior to the qualifying date of the 15th week before the baby is due then you will be able to claim from each employer.

The amount you receive depends on the amount you earn from each job. The first six weeks will be paid at 90% of your average earnings for the eight weeks prior to confinement. The remaining 33 weeks will be paid at 90% of your average earnings as above or at the rate of £124.88 per week, whichever is the lower.

Goods Taken for Own Use

Q: We run a lighting shop and have taken delivery of some lamps that my spouse really likes. A friend of mine in the trade said it would be alright to just pay into the business the cost price of the lamps. Is it alright to do this?

A: Regrettably your friend is wrong.

On any goods or items from stock that you remove for your own use you will have to account to the business for the full selling price and assuming that you are VAT registered, the VAT applicable to the sale.

Gift Of Goods To Charity Shops

Q: I have recently cleared out lots of old summer clothes which I have stored over the years. If I give these items to my local charity shop can I include a deduction in my tax return for Gift Aid? As I am a higher rate taxpayer will I receive 40% tax relief on this gift?

A: Unfortunately donations of goods and other items to a chosen charity cannot receive tax relief under Gift Aid as the scheme only applies to gifts of money. However, your charity can act as an agent for you by selling goods on your behalf in the hope that you then donate the proceeds from the sales to the Charity.

If the donation of the eventual sale proceeds is made in this way then you will be able to include a deduction for gift aid in your tax return, and higher rate taxpayers will receive a further 20% tax relief either in the tax year you make the donation, or the year before if you choose to carry it back.

Initially, we recommend you speak to your local Charity shop to see if they will actually sell the goods on your behalf, as they must remain your property until they are sold. Also you reserve the right to keep all or part of the proceeds of the sale, so the charity must keep a record of the items they sell on your behalf and if they ask you to complete a Gift Aid declaration before the sale (in anticipation of the proceeds being gifted to them) the wording of that declaration must not force you to make a donation as you must retain a choice of whether or not to gift the proceeds.

Capital Allowances on a new Van

Q: I’m coming to the end of my third year of business as a soletrader, and understand I can reduce my tax liability by investing in a new van and some equipment before my accounting year ends. Can you explain further?

A: By purchasing equipment for your business before the end of your accounting period, you can receive tax relief in the form of capital allowances. The amount of tax relief you receive depends on whether you are a higher rate tax payer (currently 40%), or a basic rate taxpayer (20%). You will also receive National Insurance Class 4 relief of either 1% or 8% depending on the level of profits for the year.

Under current rules, the majority of small businesses are able to claim a 100% Annual Investment Allowance (AIA) on the first £100,000 of expenditure on most types of plant and machinery (except cars) in the 2010/11 tax year. Any expenditure exceeding this level will receive a 20% writing down allowance (WDA).

Vans qualify for the AIA allowance, and therefore assuming you do not have any private use of these items, the full cost of the new van and other items will be offset against your self-employed profits in the year.

You should also be aware the new government recently proposed a reduction in capital allowances rates. From April 2012, the maximum amount of AIA will reduce to £25,000, and the standard writing down allowance will also be reduced to 18%.

Recovering VAT on Purchases before Registration

Q: I recently registered my small retail outlet for VAT and read that I am able to reclaim all of the input VAT on goods I purchased, (and subsequently sold) since I first started trading two years ago? Is this possible?

A: Unfortunately not – you can only claim back the VAT on goods that you have acquired in the 3 years prior to registration which are still held in stock (or used to make other goods which are still held in stock) and originally acquired for the business purposes. This also includes VAT incurred on fixed assets you still use in your business.

You can also recover the vat incurred on services which have been supplied within 6 months prior to becoming registered, assuming they were also supplied for the purpose of the business. Therefore, any VAT suffered on goods which have been sold on to customers cannot be re-claimed.

To reclaim VAT on the allowable items you need to include the claim on your first VAT return. You should also carry out a careful stock check and record the quantities of goods and the dates when you obtained them. This will form the basis of the records you need to keep to validate your claim.

Community Interest Companies

Q: I want to start a new business which benefits the schools in my local community, and recently read an article regarding Community Interest Companies. Can you provide further information?

A: Community Interest Companies (CIC’s) are a new type of company set up for the benefit of the community, not to make profit and therefore recognised as Social Enterprises. They’re regulated by the Community Interest Company Regulations 2005 and are different to most limited companies which are set up to make a profit for the shareholders.

Despite being particularly attractive to those who wish to establish their business as a benefit to the community there may be a significant tax disadvantage in operating a CIC. CIC’s cannot pay dividends in the same way as a normal limited company because the director’s salary and shareholder dividends are restricted by legislation thus ensuring the assets and profits are retained for community purposes.

Also, CICs do not have any special tax status, and are generally in the same position as any other organisation in obtaining any tax concessions and are required to submit tax returns and make accounts available for public record.

In summary Community Interest Companies are a good concept but those setting them up should be aware of the tax consequences and ensure they seek appropriate advice before proceeding.

Reducing Payments on Account

Q: I have now received my tax bill for payment on account due at the end of July. Last year my business made substantial profits, but this year I have incurred lots of expenditure and as a result my business profits have fallen. Is there any scope to reduce these payments and what are the ramifications if I do not pay on time?

A: Payments on account are generally calculated as 50% of the individual’s net tax liability for the previous year, and are used to “prepay” the tax liability due in the following January. They are made up of two payments which are due in January and July. All individuals are liable to make these payments unless their net tax liability is less than £1,000 or more than 80% of the tax due was deducted at source.

Given that your net profit and subsequent tax liability for the 2009/10 tax year is likely to be significantly less than the previous tax year (2008/09) on which the payments on account are based, you can make a claim to reduce them. The amount that you reduce these to should reflect your estimation of the tax liability for the 2009/10 tax year, which is due for payment on the 31st January 2011. Either you or your accountant can make this claim using a form SA303.

However, if it is later found that you have overestimated the fall in your income, and consequently paid too little, you will be liable to pay interest on the difference between the amounts paid as payments on account and the amount actually due. Equally, if you have overestimated, you will be due a tax refund for the year and receive an interest supplement.

Transferring a company bicycle to an employee

Q: We currently supply some of our employees with bicycles to get to our premises. Can you advise on the tax implications for us and the employees concerned. Also, some employees use the bicycles to deliver packages for business purposes, so does this affect the position?

A: Generally, company owned assets which are provided for the use of employees attract a benefit in kind based on 20% of the market value. However, bicycles which are supplied to employees for home to work travel do not attract a benefit in kind. One condition for this is that the bicycles or equipment are made available generally to all employees of the employer. This does not mean that every employee has to be provided with a bicycle or equipment, just that the offer of bicycles or equipment is open to all employees if they wish to take it up.

If your employees are using bicycles for business deliveries, it may be more tax efficient for them to own these personally. Employees who use their own pedal cycle for business mileage can claim a tax free expense of 20p per mile from the employer.

Please be aware that if you transfer the bicycle to the employee for this purpose, the employee will be assessed on the higher of the market value at the time it was first made available to employee for private use, or the market value at the time of the transfer. So if you give an employee who pays tax at basic rate, a bicycle worth £500, then he will incur a tax charge of £100.

August 2010 Questions and Answers

Sole Trader Maternity Allowance

Q: I am expecting a baby in October and will be temporarily ceasing my sole trader business.  I have been paying regular National Insurance Contributions in respect of my business, so will this entitle me to any benefits such as statutory maternity pay?

A: In order to qualify for maternity leave and statutory maternity pay, a woman must be an employee, that is to say, she must work under a contract of employment.

Employees are, of course, entitled to sick leave, paid holiday leave and maternity leave as the employer is bound by legislation.  This does not apply to self-employed individuals and so any period of leave to cover the birth of your baby will be a matter entirely up to you.

Although you will not be entitled to statutory maternity pay, you may be able to claim maternity allowance to fund the period that you will not be working, assuming you satisfy the criteria outlined in the claim form. The current rate is £124.88 or 90 per cent of your gross average weekly earnings (before tax), whichever is the smaller.  

Car Scrappage Scheme

Q: During the year I traded in my old car and purchased a new car for my business under the scrappage scheme. How do I deal with this in my accounts and tax return?

A: When a vehicle is purchased for business use, the cost of the vehicle is treated as capital expenditure and although the cost is not deducted from your trade income, capital allowances can be claimed which reduce the amount of profits charged to tax. 

When a business has taken advantage of the scrappage scheme, when purchasing a new vehicle, capital allowances are available on the amount actually paid for the car, i.e. the net amount paid after the £2,000 deduction.

The car that has been traded in under the scheme is treated as having been scrapped, so the £2,000 discount is not treated as consideration for the old vehicle.  The £2,000 does not need to be declared as taxable disposal proceeds for capital allowances purposes.

Where a sole trader or partnership business has taken advantage of the scrappage scheme, adjustments must be made to the capital allowances claims for private use of the vehicle.

For assistance with any of the above, please contact us.

Training Courses & Qualifications

Q: I have recently started to trade as a self-employed music tutor and in order to do this I had to gain a teaching qualification.  Can I deduct the cost of the training course and exams  in my first set of accounts even though the expense was incurred before I started trading?

A: When considering the cost of professional qualifications and courses, the Revenue will consider whether or not the claimant was learning new skills. 

Where the training is undertaken merely to update the current expertise and skills of the individual, this will usually be regarded as revenue expenditure and as such deductible from the business income, provided it is incurred wholly and exclusively for the purpose of the trade.

Where the cost relates to new expertise or knowledge it is classed as capital expenditure and cannot be deducted from business income.  It would appear from the query above that the teaching qualification would be classed as a new skill and therefore the expense will not be allowable.

There are instances where the distinction is not clear and there have been recent court cases concerning this area.  If you are uncertain whether or not you should be claiming the cost of training courses or qualifications, contact us for further advice.

 

Redundancy Payments

Q: I have just been made redundant and my employer has offered me a redundancy package of almost £80,000.  The managing director has told me that I will get £30,000 of this tax free – is that true?  He has also asked if I would like the settlement amount to be paid after my official leaving date.  He has told me I will pay less tax if he delays my payment – is this true, or is he just trying to improve his cashflow situation?

A: Where an individual is made redundant a tax-free amount of up to £30,000 can be paid, but care must be taken as not all termination payments qualify.  In order to qualify as a tax-free payment, the sum must relate specifically to the cessation of the employment, rather than to duties already performed or to be performed in the future.

There are special rules for payments which are made to an employee after the cessation date of their contract.  The leaver’s form P45 will show the gross pay and tax deducted up to the date of leaving and the final PAYE code that was operated.  Any payments made after the P45 has been prepared must be subjected to a BR PAYE code, which means basic rate tax is deducted from the gross amount.  

The above treatment of payments issued after the P45 means that higher rate tax payers receive an initial cashflow advantage. It is important to note, however, that this is simply deferring the higher rate tax due.  The income will need to be declared on a self assessment return and the tax will need to be paid by 31 January following the tax year in which the sum is received.  If you receive a lump sum payment this summer that will be assessable on the tax return for the year ending 5 April 2011 and therefore any additional tax due must be paid to reach the Collector by 31 January 2012.

Where termination payments consist of a number of different sums relating to loss of office, payment in lieu of notice, holiday pay and possibly disability elements and free shares, the tax situation can be very complex.  For guidance and advice, please contact us.

Is Rental Income a Trade?

Q: My husband and I invested in two residential properties earlier this year which are now both being let out.  I need to register this as a new partnership with the Revenue, but as my husband is already in full time employment, can I have all of the profits, as I have been told that this will reduce the tax and National Insurance Contribution liabilities?

A: The income from residential letting properties is not treated as trade income, as there is insufficient activity to constitute trade income.  The ownership of residential letting properties is deemed to be a form of investment and therefore you do not need to register a partnership business with HM Revenue & Customs.  Likewise, because it is a form of investment, National Insurance Contributions are not due on this source of income.

Where a husband and wife have joint investments, the income arising is assessed equally on a 50:50 basis, unless the property is actually owned in different proportions AND a joint declaration is made to that effect.  Assuming that you hold the property equally, you would each need to declare 50% of the income received and expenses incurred to the Revenue.

If you do not currently have income that fully utilises your personal allowance, you could consider having the properties held in your sole name so that all rental profits are assessed as your income.  Under the current capital gains tax legislation, there are no implications for transfers between a husband and wife, but there would be some legal fees incurred.

The long term capital gains tax and inheritance tax position should also be considered, especially if the properties are owned outright.  You should seek professional guidance before making any decisions that may have a bearing on any of these taxes.

Home Telephone & Broadband Bills

Q: I run a small limited company working from my home address and arrange for the company to pay my home telephone and broadband costs. Are there any tax issues that should concern me?

A: The costs will be deductible against the company profits, but the personal tax position for both items will depend on whether the bill is issued in the name of the company or in your own name and will lead to an Income Tax and National Insurance (NIC) liability for you, based on the full costs incurred.

If the bill is in the company name, and the contract is between the company and the provider, then put the full amount of the rental and call charges on form P11d at section K.

If the landline is registered in your personal name, then it is regarded as a payment made on behalf of the employee. You must report on form P11d at section B the total of all line rentals and call charges, including all calls for business use.

It may be possible, depending on your circumstances to claim an expense deduction for any business calls you make, but unfortunately no deduction is allowed for a proportion of broadband costs.

If you are making numerous calls for business purposes, it is more tax efficient for you to receive the use of a company mobile, registered in the company name. No tax or NIC liability arises on the use of a company mobile, even where the mobile is used for private calls.

PAYE Late Payment Penalties

Q: I run a small business, employing 10 employees who are all paid monthly. I recently read an article suggesting that if I fail to pay the PAYE and NIC liabilities on time I could face a penalty. Is this correct?

A: A new penalty regime was introduced with effect from 6 April 2010 and late payment penalties will now apply to monthly, quarterly or annual PAYE payments. It will include all income tax and national insurance contributions due under PAYE, the Construction Industry Scheme and student loan deductions.

There will also be late payment penalties for not paying amounts due annually on time and in full, including Class 1A National Insurance Contributions due on forms P11d and Class 1B National Insurance Contributions due on PAYE settlement agreements.

The amount of the penalty will be calculated on a sliding scale of percentages ranging from 1% to 4% and be dependent on the number of times the employer has been late making payments during the past tax year. The new penalties apply to all employers and CIS contractors, regardless of the size of the business or normal frequency of payment.

Apprentices & The National Minimum Wage

Q: I am currently looking to take on a new member of staff as an apprentice. I understand the national minimum wage rules may mean I have to pay him a certain hourly rate, is this true?

A: The new government announced that there would be changes to the National Minimum Wage that will take effect from 1 October this year.

At the moment, the National Minimum Wage for adults aged 22 years and over is £5.80 per hour. There are development rates for 18 to 21 year olds of £4.83 per hour and for 16-17 year olds of £3.57 per hour. These amounts will increase from 1st October 2010 and in addition, the National Minimum Wage will apply to workers from the age of 21, so the new weekly rates will be £5.93 for workers aged 21 and over, £4.92 for those aged between 18 and 20 and £3.64 for 16 to 17 year olds.  However there are a few workers for whom these rates do not apply.

Under current legislation, apprentices under the age of 19 are not entitled to the development rate under the National Minimum Wage scheme and apprentices aged between 19 and 25 are not entitled to the minimum wage in the first year of their contract.  From 1 October this legislation will change.  Those apprentices aged under 19 will be entitled to a minimum hourly rate of £2.50 and apprentices aged 19 or over will be entitled to £2.50 per hour in their first 12 months of the apprenticeship.

Apprentices as far as the minimum wage is concerned are either workers who have contracts of apprenticeship or workers who are taking part in the specific training programmes which are funded by a local development agency. You must ensure you have a written agreement between you and your new worker which confirms they are employed an apprentice contract.

For further information about the National Minimum Wage, you can contact the national helpline on 0800 917 2368.

September 2010 Questions and Answers

Income from car boot sales

Q: I had pitches at a couple of car boot sales earlier this year to get rid of unwanted children’s clothes, toys and various other items.  I am a self-employed hairdresser and have to complete a tax return – will I also be taxed on the £225 I took at the car boot sales?

A: The income you receive from hairdressing is taxed because you are running a trading business with a view to making a profit.  Selling goods at car boot sales is potentially also trading income; however each case must be considered on its own merits.

For somebody like yourself who has only sold their own unwanted second hand goods on a couple of occasions, HM Revenue & Customs would not deem there to be a trading activity and therefore the income received would not need to be declared on a self assessment tax return.  Likewise, because the income is not declared, relief for any associated expenses incurred (such as pitch fees and petrol/motor costs) cannot be claimed.

On the other hand if somebody regularly attends car boot sales (for instance every fortnight) with a view to making profits, HM Revenue & Customs will deem them to be trading and they would need to be registered as self-employed for tax and National Insurance purposes.

Paying tax after retirement

Q: I recently retired as a school teacher, but as I still enjoy working as a self-employed music tutor, I have opted not to receive my state pension for now.  My first Teachers’ Pension payment was paid last month, but they deducted tax from it – is this right?  I didn’t think I would need to pay tax once I was 65 years old.

A: Your Teachers Pension will be taxed in the same way that your salary used to be taxed – a PAYE coding notice will be issued annually showing you how much personal allowance is being allocated against your pension income.  The main difference when you reach retirement age is that you are no longer required to pay National Insurance Contributions.

Now that you have reached your 65th birthday, your annual personal allowance may increase.  The maximum personal allowance available for somebody aged between 65 and 74 is currently £9,490 – this allowance is pro-rated where income exceeds £22,900, down to a minimum of £6,475.  There is also a higher allowance available for individuals aged 75 and over, currently at a maximum amount of £9,640.

With regard to your self-employment, your Class II National Insurance Contributions should have ceased on the week of your 65th birthday.  Class IV Contributions, which are based on assessable profits for the year are still charged in full for the tax year of your 65th birthday, but not charged for subsequent years.

Staff Christmas Party

Q: I would like to book tickets for a staff Christmas party at a local wine bar, to reward my employees for their hard work over the last year.  It would be nice if we could invite partners to make it a special evening, but will this then be a taxable benefit in kind?

A: The cost incurred on holding staff parties/social events can be provided as a tax-free benefit, providing certain requirements are met.

The events must be open to all staff to attend and there is an annual limit of £150 per head (including VAT) per attendee that can be treated as a tax-free amount.  If the total cost per person for all functions during any tax year exceeds £150, the exemption can be claimed against one or more functions for which the total cost does not exceed £150.  The exemption cannot be deducted against the cost of any event where the amount per head has exceeded that annual limit.  Expenditure for any event not covered by the exemption would be a benefit in kind and need to be reported on the end of year form P11D accordingly.

Expenditure for staff entertaining is allowable as a deduction in your accounts on the basis that it is incurred for the benefit of your employees.  For VAT, input tax can be recovered on the proportion of entertaining expenses relating to employees only and not on any such expenditure relating to other guests.

Small Business Rate Relief

Q: A friend told me that there was an announcement in the last Budget that small business rate relief was going to be extended and this may affect my hairdressing salon.  How do I apply for the new rates?

A: That is correct; it was announced earlier this year that Small Business Rate Relief (SBRR) would be temporarily extended to help small businesses. The relief available will depend on whether the premises are in England, Northern Ireland, Scotland or Wales. 

The qualifying requirements have remained unchanged and most businesses in England will qualify if they occupy only one property and the rateable value is less than £18,000 (£25,500 for London).  Rates are charged at a reduced amount depending on the value of the property (there are three different reduced rate bands) and then further relief is given at 50% for properties with a value of less than £6,000 and at 25% with a value of less than £12,000.

The new increased rates come into effect on 1 October this year and will apply until 30 September 2011.  For premises in England the enhanced relief will mean that businesses operating from qualifying premises with a rateable value of up to £6,000 will get 100% relief.  Where the rateable value is between £6,001 and £12,000 the rate of the enhanced relief is tapered from 100% to zero.  Your local authority should issue a revised bill to you showing the increased relief now due.

In previous years, SBRR had to be applied for at the start of each valuation period, but that process has now ceased and if SBRR has been claimed in the previous year, it will automatically be applied for future years.

There are other reliefs available for community amateur sports clubs of up to 80% and various non-profit making organisations could qualify for up to 100% relief.  It is also worth noting that there are special reliefs available for certain rural businesses and hardship relief may be available for certain businesses that have difficulty in paying.

October 2010 Questions and Answers

Fuel Scale Charge

Q: How do I account for the recovery of input VAT I have paid when I purchase fuel for my business vehicles which are often also driven by employees for their private use?

A: You can recover all of the input VAT on the purchase but you must also apply a fuel scale charge which is a method used to account for the private usage. The charge is included in the output VAT box on your VAT return. The charge does not have to be calculated, but is taken from tables published by HM Revenue & Customs and is determined by the vehicle’s CO2 Emissions. The charges in the tables are amended annually (usually May 1st) to reflect the changes in fuel prices.

For example, if your vehicle has an emission rating of 160g/km CO2 the fuel scale charge would be £297. This figure is then multiplied by the VAT fraction (7/47) to find 17.5% i.e. £43.23 which must be included in box 1 for the VAT quarter. The tables increase CO2 emissions in multiples of 5. If your vehicle’s emissions are not an exact multiple of 5 then you can round down to the nearest multiple. So if your vehicle’s emission rating is 164g/km CO2, the fuel scale charge will still be £297 per quarter.

In some cases the charge may be higher than the total input VAT reclaimed for the vehicle. The only way to avoid the charge is to reclaim none of the input tax paid. This must apply to all vehicles right across your business. If this is always going to be the case you may, however, reclaim input VAT on business mileage only, but this will involve keeping a detailed business mileage log.

VAT visit from HM Revenue & Customs

Q: I have received a letter telling me that somebody from the VAT office is going to visit my business to inspect my records.  I do not believe I have done anything wrong, so why are they visiting me and what should I expect?

A: Just because you have been told you are going to have a visit from somebody at the VAT office, this does not necessarily mean that they think you are doing something wrong.  Lots of random visits are arranged and the VAT office use these random checks to ensure that you are paying or reclaiming the correct amount of VAT on your returns and that you are keeping your records in a suitable manner.  The visiting officer may offer advice and recommendations for improvements to assist you in future periods.

Before the visit takes place HM Revenue & Customs will write to you to arrange a mutually convenient date and time for the visit.  They will also confirm the person at your business they wish to speak with, which accounting records they want to inspect and how long they expect the visit to last.

During the visit the officer may inspect your business premises, examine your business records and check details of supplies made by you and to you.  At the end of the visit the officer will discuss his review with you, including any problems he has identified.  The officer will explain any adjustments that need to be made if mistakes have led to an underpayment or overpayment of VAT.  They will also explain how you should keep your records and deal with certain situations to help to avoid future errors.

Occasionally the visiting officer may have a number of queries that cannot be answered in full on the day, in which case they may need to ask you to provide further information in order that they can conclude their inspection.

Restoring a Company

Q: I have recently received a letter from Companies House stating that my Limited Company has been struck off the register. There is still money in the company bank account but the bank account has been frozen. Is there any way I can get the company reinstated to the register? Can you please explain the process to me?

A: If a company is struck off, a former director or share holder of that company can apply to have it reinstated back onto the register using a procedure called an administrative restoration. The procedure does not require a court hearing, but there is a £100 administration fee that is payable to Companies House.

The company can be re-instated within 6 years of the date that the company was struck off. This will, however, involve re-opening all of the liabilities of the company. The company will be required to file all accounts and annual returns which would have been due in the time the company was not on the register.

Administrative restoration only applies to companies that have been struck off the register for the following reasons:


* Under section 1000 of the Companies Act 2006 – The registrar has reasonable cause to believe that the company is not carrying on business or in operation.

* Under section 1001 Companies Act 2006 – The registrar has reasonable cause to believe that no liquidator is acting, or that the affairs of the company are fully wound up.

October Self Assessment Filing Deadline

Q: I have received a letter from HM Revenue & Customs reminding me that I need to file my self assessment tax return by 31 October.  I did not have all of the information together, so was not able to complete it – is there a way I can avoid a late filing penalty?

A: The filing deadline of 31 October 2010 only applies to those taxpayers wishing to complete and submit a paper copy 2010 tax return.  The online filing procedure allows taxpayers to submit 2010 returns until 31 January 2011. 

There are other important deadlines that need you should also be aware of for self assessment.  Where a taxpayer receives a new source of income which is not fully taxed at source, or where capital gains have arisen during a particular tax year, HM Revenue & Customs must be notified by 5 October after the end of the tax year.

Where a taxpayer has an underpayment of tax of less than £2,000 for 2009/10 and they have employment or taxed pension income, they can ask for that underpayment to be collected through the PAYE code for the tax year 2011/12.  This means that the taxpayer settles the liability each month through the PAYE system operated on their employment/pension income from 6 April 2011 to 5 April 2012, instead of having to pay the full liability by 31 January 2011.  If you wish to settle a liability through your PAYE code, your self assessment return must be filed by 31 December.

If you would like to discuss any aspects of your self assessment return, please ask us.

Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayers’ 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.