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: August 2011

Capital Gains Tax and the Family Home

This is the third and final post (at least for now) relating to tax on properties. It covers capital gains tax on your main residence. As always, 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.

To sign up for our monthly Newsletter for Small Business visit our webpage here.

Capital Gains Tax and the Family Home

The capital gains tax (CGT) exemption for gains made on the sale of your home is one of the most valuable reliefs from which many people benefit during their lifetime. The relief is well known: CGT exemption whatever the level of the capital gain on the sale of any property that has been your main residence. In this post we look at the operation of the relief and consider factors that may cause it to be restricted.

Several important basic points

Only a property occupied as a residence can qualify for the exemption. An investment property in which you have never lived would not qualify.

The term ‘residence’ can include outbuildings separate from the main property but this is a difficult area. Please talk to us if this is likely to be relevant to you.

‘Occupying’ as a residence requires a degree of permanence so that living in a property for say, just two weeks with a view to benefiting from the exemption is unlikely to work.

The exemption includes land that is for ‘occupation and enjoyment with the residence as its garden or grounds up to the permitted area’. The permitted area is half a hectare including the site of the property, which equates to about 1.25 acres. Larger gardens and grounds may qualify but only if they are appropriate to the size and character of the property and are required for the reasonable enjoyment of it. This can be a difficult test. In a court case the exemption was not given on land of 7.5 hectares attaching to a property. The owner said he needed that land to enjoy the property because he was keen on horses and riding. The courts decided that the owner’s subjective liking for horses was irrelevant and, applying an objective test, the land was not needed for the reasonable enjoyment of the property.

Selling land separately

What if you want to sell off some of your garden for someone else to build on? Will the exemption apply? In simple terms it will if you continue to own the property with the rest of the garden and the total original area was within the half a hectare limit.

Where the total area exceeds half a hectare and some is sold then you would have to show that the part sold was needed for the reasonable enjoyment of the property and this can clearly be difficult if you were prepared to sell it off.

What if on the other hand you sell your house and part of the garden and then at a later date sell the rest of the garden off separately, say for development? Then you will not get the benefit of the exemption on the second sale because the land is no longer part of your main residence at the point of sale.

More than one residence

It is increasingly common for people to own more than one residence. However an individual can only benefit from the CGT exemption on one property at a time. In the case of a married couple (or civil partnership), there can only be one main residence for both. Where an individual has two (or more) residences then an election can be made to choose which should be the one to benefit from the CGT exemption on sale. Note that the property need not be in the UK to benefit although foreign tax implications may then need to be brought into the equation.

The election must normally be made within two years of the change in the number of residences and the potential consequences of failure to elect are shown in the case study that follows. Furthermore the case study demonstrates the beneficial rule that allows CGT exemption for the last three years of ownership of a property that has at some time been the main residence.

Case study

Wayne, a 50% taxpayer, acquired a home in 2001 in which he lived full-time. In 2005 he bought a second home and divided his time between the two properties.

  • Either property may qualify for the exemption as Wayne spends time at each – ie they both count as ‘residences’.
  • Choosing which property should benefit is not always easy since it depends on which is the more likely to be sold and which is the more likely to show a significant gain. Some crystal ball gazing may be needed!
  • The choice of property needs to be made by election to HMRC within two years of acquiring the second home. Missing this time limit means that HMRC will decide on any future sale which property was, as a question of fact, the main residence.

Wayne elects for the second home to be treated as his main residence for CGT purposes. In 2011 he sells both properties realising a gain of £100,000 on the first property and £150,000 on the second property.

The gain on the second property is CGT-free because of the election.

Part of the gain on the first property is exempt. Namely that relating to:

  • the four years before the second property was acquired (when the first property was the only residence) and
  • the last three years of ownership which will always qualify providing the property has been the main residence at some time.

In other words out of the ten years of ownership, a total of seven qualify for the exemption. Therefore 3/10ths of the gain – i.e. £30,000 will be taxable. Not bad on total gains of £250,000.

Without the election, and the first property being treated as the main residence throughout, Wayne would have found the gain on the first property wholly exempt and the gain on the second property wholly chargeable. Failure to make an election can be an expensive mistake.

Business use

More and more people work from home these days. Does working from home affect the CGT exemption on sale? The answer is simple – it may do!

Rather more helpfully the basic rule is that the exemption will be denied to the extent that part of your home is used exclusively for business purposes. In many cases of course the business use is not exclusive, your office doubling as a spare bedroom for guests for example, in which case there is not a problem.

Where there is exclusive business use then part of the gain on sale will be chargeable rather than exempt. However, it may well be that you plan to acquire a further property, also with part for business use, in which case the business use element of the gain can be deferred by ‘rolling over’ the gain against the cost of the new property.

Residential letting

A further relief is given if your main residence has been let as residential accommodation during the period of ownership. The case study below best demonstrates the operation of this.

The letting exemption can be very valuable but is only available on a property that has been your main residence. It is not available on a ‘buy to let’ property in which you never live.

Case study

Frank bought a property in 1996 and lived in it as his main residence for eight years until 2004. Then he bought a second property which immediately became his main residence and the first property was let from then until its sale in 2011.

The gain on sale of the first property amounted to £210,000.

Exempt as main residence

1996-2004

8 years (actual occupation)

2008-2011

3 years (last 3 years of ownership)

Total

11 years

Gain exempt – 11/15 x £210,000 = £154,000

The balance of the gain (£56,000) relates to the period from 2004 to 2008. The property was let during this period and had previously been Frank’s main residence so that the letting exemption is available. Although the gain relating to this period amounts to £56,000 the exemption for letting is limited to a maximum of £40,000.

Overall £194,000 of Frank’s gain is exempt leaving £16,000 chargeable to tax and this is subject to the annual exemption so that any CGT bill will be minimal.

Periods of absence

Certain other periods of absence from your main residence may also qualify for CGT relief, for example if you have to leave your property to go and work elsewhere in the UK or abroad. The availability of the exemption depends on your circumstances and length of period of absence. Please talk to us if this is relevant for you. We would be delighted to set out the rules as they apply to your particular situation.

Trusts

The exemption is also available where a property is owned by trustees and occupied by one of the beneficiaries as their main residence.

Until December 2003 it was possible to transfer a property you owned but which was not eligible for CGT main residence relief into a trust for say the benefit of your adult children. Any gain could be deferred using the gift relief provisions. One of your children could then live in the property as their main residence and on sale the exemption would have covered the entire gain.

HMRC decided that this technique was being used as a mechanism to avoid CGT and so blocked the possibility of combining gift relief with the main residence exemption in these circumstances.

How we can help

The main residence exemption continues to be one of the most valuable CGT reliefs. However the operation of the relief is not always straightforward nor its availability a foregone conclusion. Advance planning can help enormously in identifying potential issues and maximising the available relief.

We can help with this. Please contact us if you have any questions arising from this post or would like specific advice relevant to your personal circumstances.

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 colum, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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Top Tips – August 2011

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.

To sign up for our monthly Newsletter for Small Business visit our webpage here.

Reducing the reporting of expenses and benefits

Q: I’ve recently submitted forms P11D and P11D(b) for benefits in kind and business expenses. They’re so fiddly and time-consuming- is there any way I can reduce the paperwork and preparation time?

A: You could apply for a dispensation (on form P11DX) from HMRC. This can be done online here. If you are successful, this form completely removes the requirement to report anything covered by the dispensation on form P9D or P11D. Note that there is no need to report mileage claims paid at the normal rates (£0.45 for cars for the first 10,000 miles, and other rates as applicable.) and if that is all you pay out, then no need to apply for a dispensation either.

There is a list of expenses that can be covered by dispensations, but examples of expenses typically covered are:

  • Travel, including subsistence costs associated with business travel
  • Fuel for company cars
  • Hire car costs
  • Telephones
  • Business entertainment expenses
  • Credit cards used for business
  • Fees and subscription

Put simply, to stand a chance at obtaining a dispensation, you must have an independent system in place for checking and authorising expense claims so as a minimum, someone other than the employee must check their claim. If you are a sole director, you may still be successful, provided that you obtain receipts for all expenditure and the expenses are within the list referred to above.

Although dispensations can remain in force indefinitely, HMRC reviews them regularly (usually at intervals of five years or less) to make sure the conditions under which they were granted still apply. They cannot be backdated to previous years, but in normal practice they are effective from the start of the tax year in which they are granted.

Company filing requirements

Q: I have just set up a company. Could you walk me through the filing requirements I’ll have for the company please?

A: Firstly, there is the Annual Return.This is a snapshot of general information about a company’s directors, secretary (where one has been appointed), registered office address, shareholders and share capital. The return covers the first twelve months from incorporation and is submitted annually thereafter. On each anniversary, you have 28 days to submit the return to Companies House. It is a criminal offence not to do so and officers and the company may be prosecuted for late delivery. There is a filing fee of £14 for electronic filing and £40 if filing on paper.

Then there are the company accounts. Your first set will need to be filed with Companies House within 21 months of the date of incorporation. Thereafter, they will need to be filed within 9 months of the ‘accounting reference date’ (effectively the company’s year end), unless you subsequently change the accounting reference date. There is no fee for filing the accounts.

The company will also need to pay any corporation tax it owes. This will need to be paid to HM Revenue & Customs nine months and one day from the accounting reference date.

The company will also need to submit its corporation tax return to HM Revenue & Customs. This is due twelve months after the accounting reference date. There is no filing fee for this either.

Please note that any change in the company’s accounting reference date can affect some of these deadlines, and they may vary from the rules given above.

As you’re just starting out in business, you may find it useful to talk to us about some of the other requirements such as record-keeping and dividend paperwork

VAT registration avoidance

Q: I’ve been running a bed and breakfast for a few years now, and my turnover to March was just over £60k. I therefore fear I may breach the VAT registration threshold soon, so could I split the business up and deem a portion of it to be my husband’s? My husband has a full-time job and does very little to help with the business.

A: Firstly, let me start by making you aware that the turnover limit for VAT registration is for any consecutive twelve months; not the turnover during your accounting period nor the turnover in the tax year. Therefore, as you are getting close to the threshold, you must ensure you review this at least every month. Late registration can lead to penalties and interest.

In answer to your specific question, business activities cannot be ‘artificially separated’ in order to avoid VAT registration. HM Revenue & Customs even go as far as to specifically list the bed and breakfast trade as a sector where artificial separation is a common tactic, often between the accommodation and the catering sides.

If you deliberately avoid registering for VAT, you may be liable to a penalty. For serious offences, you could even face prosecution. HM Revenue & Customs have also recently launched their VAT Initiative Campaign, which is essentially an amnesty for traders to come forward and admit they should have been VAT registered, so VAT is a hot topic at the moment.

If you are concerned about breaching the VAT registration threshold and the impact it would have on your business, talk to us. We can help you with setting up record keeping systems to make the administration of VAT reasonably straightforward.

Retention of records

Q: I prepare a tax return and have done for years. I’ve never thrown any of my records away, but I’m starting to run out of space! What are HM Revenue & Customs’ requirements?

A: Everyone must keep their records for at least twelve months from the due date of the return. So, for the 2010/11 year, returns must be filed by 31 January 2012. Therefore, the relevant records must be retained until at least 31 January 2013.

However, if you have any self employment or rental activities, the related records must be kept for five years from the due date of the return. So following on from the example above, the records would need to be kept until 31 January 2017.

Should your return be submitted late one year, you will need to keep the records for the year until the later of:

  • five years after the normal filing deadline
  • fifteen months after the date you sent your tax return

Gross CIS receipts

Q: I am a registered subcontractor, and I currently receive payments from my customers after the deduction of tax. I got talking to my mate down the pub, and he reckons he gets his money gross. Am I able to receive my invoices gross too?

A: There are three tests that your business must satisfy in order to apply to HM Revenue & Customs (HMRC) to receive your payments gross. In order to qualify, the business must:

1. Business Test

  • Do construction work in the UK
  • Be largely run through a bank account

2. Turnover Test

  • Have a turnover excluding VAT and the cost of materials of at least £30,000 per annum (please note there are different limits for companies and partnerships)

3. Compliance Test

  • Have complied with all its tax obligations in the 12 months before applying
  • Have submitted all tax returns on time in the 12 months before applying
  • Have paid all tax due on time in the 12 months before applying

There is some leeway to the Compliance Test and HMRC will allow you some slip-ups.

To apply, use HMRC form CIS302 (please note, there are other forms for partners and companies). If you would like any assistance with or advice about the application process or any other matter, please contact us.

Charging late-paying customers interest

Q: Although my business has not suffered too badly through the recession, I have noticed that many of my customers are paying me much later than I would expect and this is giving me some cashflow problems.  Have you any advice about strengthening my settlement terms?

A: Unless you state otherwise, an invoice is due within thirty days of the invoice date. You should state the terms on your invoices and to make it even more obvious, the due date itself.

If an invoice is not paid within this time, you are entitled to charge interest. This is not compulsory, but if you do, you should charge it at the Bank of England base rate plus eight percent and apply this to the gross (no VAT is chargeable on the interest itself). Your invoice must state that you reserve the right to charge interest.

You could also set out your terms of trade in a terms and conditions document which should be issued to your customer. This document could then go into more detail, such as setting out any credit limit applicable and the criteria to qualify for any discounts you permit, as well as reiterating the items above.

If you do decide to incorporate any of the above into your terms and conditions and invoices, you need to notify your customers about this change and this should be done in writing. And if you later do intend to exercise your right to charge interest, you should issue a letter to your customer that the payment is late and if the invoice is not paid within, say, seven days, interest will be charged.

If all else fails, there is also the last resort of court action.

What is the ‘NIC holiday’?

Q: I’ve heard about a NIC holiday, but I’m not sure what it means or if I’m eligible. Can you tell me more about it please?

A: Its full title is the Regional Employer National Insurance Contributions (NICs) Holiday for New Businesses. As the name suggests, it is focused at new business, set up between 22 June 2010 and 5 September 2013.

Under the scheme, new businesses may qualify for a reduction of up to £5,000 from their employer’s NICs that would normally be due, for each of the first ten employees they take on for up to 12 months.

You can only apply for the NICs holiday if your principal place of business is located within specific areas of the UK when your business started up, which can be found here.

Most trading entities can apply, i.e. sole trade, trading charity, company, investment business etc. Please note, there can be complications if the business is in receipt of other state aid, unclear in what region it is, when it started or whether it is truly new.

You can apply for the scheme online on HMRC’s website by following from the link above. If your situation is a bit more complex as above, HMRC prefer you to submit a paper form which you can obtain from the Employers Helpline on 0845 60 70 143.

If you think you may have been eligible, but didn’t apply for the scheme, you may also be able to backdate a claim.

Company stationery

Q: I’ve just set up a company and I am about to get the stationery/ business cards printed and website set up etc. What details do I have to show on them?

A: Please note, every trading company must display a sign with its registered name at its registered office and any other place it trades from, unless it is mainly a residential property.

You must include your company’s registered name in all business correspondence and documentation; whether in hard copy or electronic, including letters, emails, order forms, invoices etc.

As well as the company’s registered name, the company must also display the following on all its business letters, order forms and websites:

  • the part of the United Kingdom in which the company is registered (England and Wales/ Wales/ Scotland/ Northern Ireland);
  • the company’s registered number; and
  • the address of the company’s registered office;

There are more rules regarding more unusual companies, such as PLCs and investment companies but I assume these do not apply.

You do not have to state the directors’ names on business letters but if you do choose to include their names, then all directors must be listed.

As for business cards, the law is not prescriptive about what you show, so you can basically put whatever you like!

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.