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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Can I use my loss?
Q: I paint in my spare time and sometimes, my friends and family buy my paintings from me. Because artists’ materials can be expensive and some pieces don’t work out and I throw them in the bin, I run at a loss. Luckily, I have a full-time job to keep the money coming in but is there any way I can use my painting loss to reduce my tax bill?
A: HM Revenue & Customs stipulate that losses may only be offset if the trade is commercial and it aims to generate a profit. Your outline of your circumstances suggests you are not optimistic of ever turning a profit, and therefore, you are unlikely to be able to offset your losses against your employment income. Instead, the losses will be carried forward and can only be offset against any profits your business makes.
It also sounds as if you need to review what constitutes a trade, before you register as self-employed. You need to consider for example, if you have ulterior motives (i.e. it’s a hobby), the frequency of the paintings, the turnaround times of the paintings, and (as mentioned above) if you really hope and intend to make a profit.
There is no conclusive definition of what constitutes a ‘commercial’ basis or a ‘trade’. And whilst HM Revenue & Customs provides guidance on these areas, it is in part, a judgment call.
Selling on Ebay
Q: I own a shoe shop but due to cash-flow problems, I have been selling some of my personal belongings and old stock on Ebay recently. Should I include my income from Ebay on my tax return?
A: All your trading sales (whether you sold through the internet, at car boot sales, through small ads or any other means) should be included in your total sales figure. If you are VAT registered, you should also charge VAT on sales to your customers where applicable. Remember to include any sales to friends and family and don’t forget to include cash sales too.
As for the sales of your personal belongings, it is unlikely you will need to declare the proceeds on your tax return, unless you can answer yes to at least one of these points:
- buy goods to then sell online
- sells items that you have made, and you made them with a view to profit
- sell goods for others, on commission
- sell a service and get paid for it
And a word of warning- HMRC has a tax evasion hot line for people to ‘tip-off’ plus it uses computer programmes to scan internet sites like Ebay and look for people making multiple transactions.
If you are unsure or would like to discuss this further, please feel free to contact us..
HMRC are knocking at the door!
Q: HMRC have sent me a letter asking to visit my premises. I work from home and have young children, so I am not keen on them visiting my house. Is there any way I can refuse to let them visit? If not, can I hold the meeting somewhere else?
A: If you do not co-operate in trying to arrange a visit, HMRC have the power to arrange an unannounced visit, so this may only defer the problem; not eliminate it.
Whether you accept their proposed arrangement for their visit or they turn up unannounced, they cannot force entry on to your premises. So you are entitled to refuse entry, although the inspector will try to establish why and they will try to re-arrange another appointment with you.
In either case, you are entitled to suggest an alternative venue, such as your accountant’s or a HMRC office.
During the course of an inspection, you are also entitled to ask them to leave, but again, they will note down the circumstances and ask you for a reason, and will want to arrange another time for them to complete their inspection.
Note that if you never used your home for business purposes, they would have had no right of entry whatsoever to your home unless you offered that venue to them.
We can help you to prepare for the visit and attend, so please feel free to contact us if this would interest you.
Q: Last year, I purchased a flat which my letting agent lets for £500 per month. After the agent has taken their 10% commission, I receive about £5,400 per annum. I’ve got an interest-only mortgage on the property, which annually costs me about £3,000. I am employed and pay tax via PAYE, and have never completed a tax return before. But one of my friends said that I need to complete a tax return now, because I need to declare this rental income and I should be paying tax on the profits too. Are they right?
A: If you don’t already complete a tax return (and assuming you don’t meet other criteria), you will need to do so if you your income from property is higher than:
- £10,000 before deducting allowable expenses; or
- £2,500 after deducting allowable expenses
You don’t meet either of the above rules; however, you must still inform HM Revenue & Customs about any new sources of income or changes to your income if:
- You pay tax through PAYE on employment/ pension income and your other taxable income changes or becomes liable to higher rate tax; or
- You don’t pay tax through PAYE and your total taxable income is more than the personal allowance you’re entitled to
Clearly, you meet the first rule and therefore you must inform HMRC of the rental income. They will then decide if you need a tax return. As you pay your tax via PAYE, they may be able to collect any additional tax due through your tax code though, which will cut down on the administrative burden.
If you would like to discuss this further or would like someone to handle this for you, please feel free to contact us.
Interest on start-up capital
Q: I am setting up my own business soon and I plan to re-mortgage my current home to raise the start up capital. Will the interest payable on my mortgage be considered a tax deductible expense against my business profits?
A: Whether or not the interest is deductible depends on the purpose of mortgage. Although the mortgage will be secured on your personal asset, in the circumstances outlined the interest is an allowable deduction when establishing the net profit of the business.
However, you will need to ignore the interest on the original mortgage element, as this is entirely personal. Also, if any of the re-mortgage funds are to be used for personal reasons, then the interest must be restricted further.
If you would like reassurance that you are claiming all the expenses available to you or you would like to discuss this further, please get in touch.
Bookkeeping – what do I do?
Q: I’ve just started my own business having been made redundant from my last job. I’ve registered with HMRC as self-employed, but could you tell me what my obligations are with regards to record-keeping for HMRC?
A: Under current legislation, business owners must retain their records for 6 years. Payroll records, CIS records and personal tax return information may be retained for less.
HMRC provide no rules regarding the format of the records, but as a minimum they should include all sales and purchase invoices.
Ultimately, the most important factor is that you keep accurate, timely records. So these could be anything from manual cashbooks, to computerised spreadsheets, to a sophisticated computerised bookkeeping package.
Penalties will apply if HMRC ever enquired into your affairs and found no evidence to back up the figures in your income tax or VAT returns. HMRC are also clamping down on poor records, and can impose fines in severe cases where the records are felt to be inadequate and inaccurate.
We can give you advice on finding the right bookkeeping solution for you and more detail on your obligations..
Giving personal assets to my business
Q: I’ve just started my own business and wondered if it was possible to ‘give’ the business one of my personal computers and get tax relief on it?
A: You may bring an asset into your accounts regardless of the original reason for it being purchased (i.e. personal), provided it will be used for the trade.
There are a few unusual circumstances, but normally the asset should be valued in your accounts at market value; rather than cost.
You may continue to use it occasionally for personal purposes, but the tax relief on the computer will be restricted accordingly between business and private use.
Starting a business can be a stressful time, but we can help put your mind at ease and assist with your administrative obligations.
Working for their pocket money
Q: I run a cafe and would like my kids to work there during the summer holidays when they’re off school. I would really like to pay them for the hours they work- to make them appreciate money! But I don’t want too much paperwork to deal with- is there any way I can get round it?
A: In order to avoid paperwork and calculations, firstly make sure that they only work during holidays; and not term-time.
Each of them must also complete and sign form P38(S) which you can download from HM Revenue & Customs’ website.
If they receive over £102 per week, you will need to ‘add’ them to your payroll records, as their details and pay will need to go on the year end forms submitted to HM Revenue & Customs.
But, provided they do not earn any more than £136 per week, you won’t need to calculate or deduct any PAYE or National Insurance; and nor will you have to pay Employer’s National Insurance.
Also make sure their hourly rates are in-line with the National Minimum Wage for their age group:
- £5.93 – aged 21 and over
- £4.92 – aged 18-20
- £3.64 – aged 16-17 (for workers above school leaving age but under 18)
There are also lots of restrictions on when and how long children can work and their breaks, so please make sure you are aware of these requirements. You may also need to contact the Council depending on their age. Note, children under the age of 13 generally cannot be legally employed.
If you would like to discuss this further, please feel free to contact us.
Disclaimer – advice shared in this column is intended to inform rather than advise and is based on legislation and practice at the time. 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.