This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!! if you want to discuss how any of these issues – or other tax and related business matters – may affect your business please get in touch (email here or telephone 01905 21411) for a free, no-obligation discussion.
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Too big to cash account
Q: I am about to complete my VAT return for the quarter ended 31 March, and I fear that my turnover has crept to over £1.35m- which is the threshold for cash accounting for VAT. Despite best efforts, my customers are taking longer and longer to pay, so the VAT on my debtors is about £40k on average. If I have to pay the VAT liability on the normal ‘accruals’ basis, the bank account will exceed its overdraft limit and as I’ve only just had a review I don’t think we’d get an extension. Is there anything we can do?
A: When you leave the cash accounting scheme, you may choose either to:
- account for all your outstanding VAT due in the period in which you stop using the scheme. This may be simpler but could have a serious effect on your cash flow if the amount of the VAT on your debtors is high, or
- opt for a further six months in which to account for the outstanding VAT.
Please note that you cannot opt for the six months extension in which to account for the outstanding VAT if:
- HMRC has withdrawn use of the scheme from you, or
- the value of your taxable supplies has exceeded £1,600,000 and the value of your supplies made in the previous three months totalled more than £1,350,000
If you want to make sure your business is running as tax-efficiently as possible and making use of all the reliefs and allowances available to it, please feel free to contact us for advice.
Employer Supported Childcare Scheme
Q: I’ve just started a new job and my salary is about £60,000 per annum depending on bonuses. My employer offered me childcare vouchers in exchange for some of my salary. Should I take this offer up, or continue to pay for childcare out of my net pay?
A: If your employer’s scheme meets the criteria of a ‘qualifying’ scheme, these vouchers carry tax relief. Although you sacrifice some of your gross pay, the vouchers do not have tax or national insurance deducted from them. Under the existing rules, the tax and NI relief available is a maximum of £920 per parent per annum, irrespective of the level of your income.
From 6 April 2011, new joiners may receive only the following tax relief:
- Basic (20%) Taxpayer – Allowed £55/week vouchers, maximum annual gain £920
- Higher (40%) Taxpayer – Allowed £28/week voucher, maximum annual gain £610
- Top (50%) Taxpayer – Allowed £22/week voucher, maximum annual gain £590
Based on the information you have supplied, it sounds like you would benefit from joining the scheme and it would be advisable to join the scheme prior to 6 April 2011, when the rules change for higher rate tax payers like yourself.
A final word of warning though- if, in the interests of simplicity, the employer decides to close the scheme to new entrants from 6 April 2011 to avoid the extra administrative burden, the scheme is then no longer ‘open to all employees’ and all current members of the scheme will be taxable and NICable in full!
Divorce and personal company
Q: A couple of years ago, I formed a company with my wife. We were both directors and held 50% of the shares each. Last year we split up; her shares were transferred to me and she also resigned as a director.
The company ceased trading recently, and it will be wound up informally. Can I claim entrepreneurs’ relief on the whole of the capital distribution paid to me on the winding up, or will just part of the distribution qualify because I only held 100% of the shares for a few months of trading?
A: You qualify for entrepreneurs’ relief on gains arising from all your shares, as you held at least 5% of the ordinary shares for 1 year up to the date the company ceased trading, and you were also a director throughout the last year of trading.
Therefore any shares you held in the company qualify for entrepreneurs’ relief, and you will pay capital gains tax at an effective rate of 10% on the capital distribution (after deduction of your annual exemption of £10,100); rather than tax at 28% or 18%.
Preparing your tax return when capital gains are being included can be tricky, so if you would like any assistance please feel free to contact us for help.
VAT on electric and gas
Q: I run a small shop. I have recently being reviewing my bills; looking for any possible savings. I noticed that sometimes my gas bills have VAT charged on them at 5% and other times the standard rate. Why does it fluctuate?
A: VAT on domestic use is normally charged at the reduced rate of 5% and for business use at the standard rate of 20%.
However, some businesses meet HMRC’s ‘de minimis’ rules and therefore, can have the reduce rate charged on their electric and gas supplies.
The low usage thresholds for common supplies are as follows:
- Electric – an average of 33 kWh per day during the bill period
- Gas – an average of 145 kWh per day during the bill period
- Deliveries of no more than 2,300 litres of fuel oil, gas oil or kerosene
If your business meets the above requirements, it will also qualify for exemption from being charged the Climate Change Levy (CCL).
Your supplier should charge you the correct rate of VAT and CCL. Don’t forget, if your business is not VAT registered, the VAT element is a cost to your business and therefore affects your profits and cashflow. Therefore, it is important that you ensure these are correctly calculated.
Low paid staff – filing requirements
Q: I want to take on my first member of staff for 16 hours a week and I’ll pay her the minimum wage for now. What requirements do I have for the collection of tax and national insurance etc, and what do I need to file with HMRC?
A: Unless employees provide you with a P45 from a previous employment, you should always get them to complete HMRC form P46. However, assuming she indicates this is her only job since 6 April on the P46 (box A), you needn’t submit this to HMRC because she will be earning below the Lower Earnings Level (LEL), which for 2011/12 is £102 per week. You can simply file it away until her earnings exceed this level.
Again on the assumption that she ticked box A, you will not need to calculate any tax or national insurance because her earnings do not exceed either of the thresholds. So unless her earnings exceed the LEL, you can simply pay her gross pay.
You will not need to complete the annual forms P14, P60 or P35 either because her earnings were below the LEL. So you have no requirements to file anything with HMRC or provide anything to your employee.
On a practical note though, it sounds like your employee may be claiming tax credits and therefore, she may want you to fill out a P60 for her so that she has evidence of her earnings.
Although your situation is quite straightforward, payroll can be a minefield and penalties for late submission of returns are quite harsh. If you need help in this area please get in touch.
Can I offset interest from my re-mortgage?
Q: I have a buy-to-let property which I bought about 5 years ago for £130,000 cash. My wife and I have just had twins so we are looking to extend our house to accommodate our growing family. If I mortgage the buy-to-let property, am I able to offset the interest charge against the rental income? I’d be looking to raise about £40,000.
A: Generally speaking, it is not possible to offset the interest on a loan if the loan monies were not used for the purpose of the letting business.
However, there is a concession in HMRC’s Business Income Manual which gives landlords the opportunity to release equity from their portfolio and offset the interest regardless of what the money was used for.
The only restriction is that the amount of the equity release cannot exceed the original market value of the property when it was introduced to the lettings business.
Property can be a complicated area of tax, so feel free to talk to us about the issues involved.
Letting your house and CGT
Q: I bought my house about seven years ago and used to live in it. But I moved in with my girlfriend about five years ago, and since then, I have let my house out. I am now considering selling it so that we can buy a bigger house together. I know normally you don’t pay any tax when you sell your house, but have I lost this exemption because I let it out?
A: As you suggested, you are entitled to Only or Main Residence relief (OMR) on the sale of your house. In your case, the OMR will be restricted because you did not occupy it for the entire time of ownership. The last three years are counted as occupation, plus you lived in it for two years. This means your OMR will be restricted to 5/7ths of the gain.
However, you are in addition able to claim letting relief (assuming it was residential letting) and the amount you can claim is the lower of :
- The OMR relief due
- The amount of the chargeable gain that is attributable to the period of letting, i.e. in your case, your gain after the OMR
Depending on the values involved, this may well wipe your gain out entirely.
As mentioned above, Capital Gains Tax is a particularly complex area and you should seek professional advice.
Q: My husband and I run a small cafe as a partnership and have one member of staff. Their hours vary depending on how busy we are. How much paid holiday are they entitled to?
A: You must pay holiday for all employees- irrespective of the size of your business or the number of hours they do.
Employees are entitled to 5.6 weeks paid holiday per annum – 28 days for a ‘five day week’ worker. As your employee’s hours vary, you will need to pro rata this for the typical number of days a week they work and the number of hours. You may therefore find it easier to apply the percentage of 12.07% to the number of hours they work in a year instead.
They must give you notice of holiday to be taken, amounting to twice as long as the leave requested. But you have the right to refuse permission, provided you give as much notice as the leave requested.
Don’t forget that the leave entitlement runs with the holiday year in their contract. If they don’t have one, the year should start on the day the employee joined or the 1 October. Being seasonal, you may also want to specify when you want your employee to take their holiday; and when you don’t, in their contract.
For future reference, holiday entitlement is not restricted to just employees. It also applies to the broader definition of workers, so will also apply to anyone you may have working for you on a temporary, seasonal or casual basis.
Employment issues can be tricky, so please feel free to contact us. If we don’t know the answers then we can certainly put you in touch with an appropriate professional.
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.