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: December 2014

Simplified accounting for small businesses

From 6 April 2013 you can use two “simplifications” to make accounting easier for your unincorporated businesses: the cash basis and fixed rate deductions. If your business falls within the size criteria you can use one or both of these simplifications, or neither, the choice is yours.

To start to use the cash basis your business must have annual turnover of less than the VAT registration threshold (currently £81,000). There are slightly different rules if you also claim the Universal Credit benefit (successor to tax credits). You must stop using the cash basis if your turnover reaches double the VAT registration threshold.

You can opt to use the cash basis on a year by year basis and make that decision after the end of the year when you complete your tax return. For example you can opt into the cash basis for 2013/14 then and opt out for 2014/15. There are no specific rules to prevent you from doing this, but adjustments may need to be made to your taxable income when moving out of the cash basis to the accruals basis (normal accounting).

You can’t claim capital allowances (CAs) for most assets you buy while using the cash basis, as a full deduction is given for the cost of the asset when it is paid for. But the cost of a car can’t be deducted under the cash basis, so CAs for cars used for the business should be claimed, subject to a reduction for any private use of the vehicle.

However, claiming CAs for the car means that fixed rate deductions (45p or 25p per business mile) can’t be claimed for that vehicle. It is possible to have some cars subject to fixed rate deductions (for which CAs haven’t been claimed) and others that don’t qualify for fixed rate deductions (where CAs are claimed) within the same business.

There are a number of confusing rules about capital allowances which have been claimed for assets that you hold when you start to use the cash basis. Our tax experts can talk you through those rules if they apply to your business.

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Research and Development: Enhanced Deductions

Companies (not unincorporated businesses), can claim enhanced deductions for qualifying costs they incur on research and development (R&D) projects. For small companies the deduction can be 225% of the qualifying costs, and since April 2012 there is no minimum spend required in an accounting period.

The major barrier to claiming this tax relief is working out whether your project qualifies as R&D. To qualify it must push the boundaries of scientific or technical knowledge. Ask yourself:
a) Has anyone else done what we are trying to achieve with this project?
b) If another business has achieved that goal, have they kept their discovery secret?

If the answers to those questions are a) no and b) yes, then you probably have an R and D project, but you need to monitor the point where R and D turns into regular production of the new product or process.

Some R and D projects can attract grant funding. If this applies to your company you need to be careful as a Government funded grant can disqualify the project from R and D tax relief for small companies. Your company may still qualify under the large company scheme for R and D tax relief but the maximum deduction under the large company scheme is 130% of the qualifying costs rather than 225%.

If your accounts show a loss after the enhanced deduction for R and D costs, you can claim a payable tax credit by surrendering that loss to HMRC. This will only apply if you have claimed the R and D deduction under the small company scheme, not the large company scheme.

We can help you jump through the hoops necessary to claim R and D enhanced relief, but we will need to talk about your R and D projects in detail.

Let Property

Repairs or improvements?

If you let out residential property you need to know whether you can receive a tax deduction for the cost of replacing or repairing furniture and fittings provided inside that property. The cost of equipment used to maintain the outside of a property, or used in the communal areas of a building containing multiple dwellings, is always deductible.

When you fit something for the first time to a property, such as a fitted kitchen, that cost will form part of the capital cost of the building and will only be deductible when you sell the property. If you repair a fitting or replace the fitting with something of the same quality, the cost counts as a repair which can be deducted from the rental income.

If the fitting is replaced with items of a higher quality, the whole cost must be treated as a capital improvement, which is only deductible from the proceeds of selling the property. This does not apply if the replacement is superior just because the modern equivalent of an outdated material or design is used. For example when you replace an old central heating boiler with a new condensing boiler, which does the same job but with greater energy efficiency, that will be a tax deductible repair not an improvement.

Furniture and Fittings

When your property is fully furnished you can claim a wear and tear allowance (10% of the net rents), each year to cover the cost of replacing furniture and furnishings such as carpets and curtains. You can only claim capital allowances for furniture used inside a property which is let out commercially as furnished holiday accommodation for at least 140 days a year (other conditions also apply).

Before 6 April 2013, the taxman allowed landlords of unfurnished and partly furnished properties to claim for the cost of items provided in those properties under the “renewals basis”. Now the taxman has changed his guidance, saying that claims for “renewals” can only apply to small items such as toasters, lamps, or rugs.

This denies a tax deduction for the cost of larger loose items such as fridges, cookers, carpets and curtains. The cost of replacing items which are fixed to the building, such as a fitted oven or hob in a fitted kitchen, are counted as “repairs”, and are deductible as described above.

However, law still allows deductions for “any implement, utensil or tool” used for the rental business. The taxman is interpreting this to mean only small value items, but the law makes no reference to the value of things that qualify as an “implement, utensil or tool”.

If you want a tax deduction for say the cost of the washing machine you have replaced in your let property, you can choose whether to follow the taxman’s opinion or the law. If you chose to go against the taxman’s opinion and deduct the cost in your accounts, we recommend you explain what you have done in the white space on your tax return.

Talk to us about the risks and benefits of claiming for items against the taxman’s guidance.

December 2014 Q&A

Q. HMRC has reminded me to claim the employment allowance for 2014/15 worth £2000. My company doesn’t pay any employers’ NI on my very low salary, so I thought I couldn’t claim the employment allowance. But the Government website referred to in the HMRC letter says I can get a refund of my VAT, PAYE or corporation tax as I haven’t used the full employment allowance for the year. How do I get my hands on this money?

A. Unfortunately the GOV.UK website is wrong. The employment allowance can only be set against employer’s class 1 national insurance contributions due in respect of wages or salary paid. It cannot be set against any other tax such as VAT, corporation tax or PAYE. The unused portion of any allowance cannot be carried forward to the next tax year.

As your company has not paid any employer’s NI for this tax year, due to your low salary, it has nothing to set against the employment allowance. You can claim the employment allowance by submitting an Employer Payment summary (EPS) to HMRC under RTI and ticking the employer allowance box on that EPS, but it will have no effect until the company is due to pay employer’s class 1 NI.

Q. I started my new business this summer and raised my first invoice on 1 August, with no VAT added. I realised I would need to register for VAT very soon, so I applied online. The VAT registration confirmation said my business is VAT registered from 4 August 2014. Do I need to do anything about invoice number 1?

A. As your VAT registration date fell after the date of your first invoice you don’t have to do anything about that invoice. It has been issued correctly without VAT added. When you do your first VAT return be careful not to include that invoice. However, you can claim for VAT you incurred on services used by the business in the six months before VAT registration date.

Q. My company is closing down. All the bills are paid and I want to close the PAYE scheme. How do I do that under the RTI system?

A. You can simply close the PAYE scheme by submitting an Employer Payment Summary (EPS) or full payment submission (FPS) indicating that it is the ‘final’ for the year and tick the box to say the PAYE scheme has ceased. You complete the end of year questions on the EPS as if you were at the end of the tax year, and that’s it – job done!

Autumn Statement Roundup

Summary

The Chancellor of the Exchequer pulled out a few surprises in his Autumn Statement. The most eye-catching is the reform of stamp duty land tax (SDLT), which is payable by purchasers of land and property. The changes should reduce the SDLT payable on 98% of transactions which complete from 4 December 2014 onwards.

Small businesses should be pleased with the £1,500 business rate discount for small high street shops, cafes, pubs and restaurants. All employers will benefit from the zero rate of employers’ national insurance for workers aged under 21, which is to be extended to apprentices aged under 25 from April 2016.

People employing carers in their own homes will qualify for the employment allowance of up to £2,000 per year. Where an ISA is passed on to the surviving spouse or civil partner on death, the tax shelter for the savings will be preserved.

Further detail on all these points is given below. This newsletter is based on the documents released on 3 December 2014. It is possible that a different position will be shown by the draft legislation which will be published on 10 December 2014. We will keep you informed of any significant developments.

Property Taxes

Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) is paid by purchasers of land and buildings. The tax is regarded as unfair, as it is imposed in a slab system on the whole value of the property according to the highest rate applicable for the property value.

From 4 December 2014 the new rates and bands of SDLT apply (see below) and the tax is imposed in a progressive fashion such that each slice of the property value bears tax at the rate according to that band, like income tax. These changes only apply for residential properties, not for commercial properties.

Until 3 December 2014 a house which sold for £260,000 would attract SDLT at 3% on the entire value, so the purchaser would pay £7,800 (£260,000 x 3%), although SDLT for properties costing up to £250,000 was just 1%.

Where the contract for the same house at the same price completes on or after 4 December 2014 the SDLT will be calculated as:

£250,000 – £125,000 x 2% £2,500
£260,000 – £250,000 x 5% £500
Total = £3,000

This saves the purchaser £4,800.

Buyers who have already exchanged contracts to purchase, but have not completed the transaction before 4 December 2014 will pay SDLT at the new rates and bands which are:

Purchase price Rate of SDLT on each band
£0 – £125,000 0%
£125,001 to £250,000 2%
£250,001 to £925,000 5%
£925,001 to £1,500,000 10%
Over £1,500,001 12%

The changes for SDLT will mean that purchasers of residential properties costing less than £937,500 will pay less tax, but purchasers of properties over that threshold will pay more tax, and for purchasers of properties costing over £2.1 million will pay considerably more.

Land and Building Transaction Tax

From 1 April 2015 purchasers of land or buildings in Scotland will pay Land and Building Transaction Tax (LBTT) in place of SDLT. This new Scottish tax will be imposed in a progressive fashion, like the new SDLT. However, the new progressive LBTT will apply to both residential and commercial properties at the following rates and bands:

Residential Properties

Purchase price LBTT rate
Up to £135,000 0%
£135,001 to £250,000 2%
£250,001 to £1m 10%
Above £1m 12%

Non-residential Properties

Purchase price LBTT rate
Up to £150,000 0%
£150,001 to £350,000 3%
Above £350,000 12%

Annual Tax on Enveloped Dwellings

The annual tax on enveloped dwellings (ATED) is paid by the owners of residential properties (dwellings), where the property is held by a non-natural person such as a company, partnership with one or more corporate members, unit trust or similar structure. A number of reliefs and exemptions are available which must be claimed on a property by property basis for dwellings that are commercially let, held as stock for development companies, used as employee accommodation or as farmhouses, or are open to the public.

This tax was introduced in April 2013 and has raised five times more than expected, so the Chancellor is putting up the annual charges to apply in 2015/16 as follows:

Property value 2014/15 2015/16
Up to £1,000,000 £Nil £Nil
£1,000,001 to £2,000,000 £Nil £7,000
£2,000,001 to £5,000,000 £15,400 £23,350
£5,000,001 to £10,000,00 £35,900 £54,450
£10,000,001 to £20,000,000 £71,850 £109,050
Over £20,000,000 £143,750 £218,200

Business Rates

The Chancellor has ordered a full review of the future structure of business rates to report by Budget 2016. In the meantime the high level of small business rates relief (SBRR) will be extended to 31 March 2016, and the increase in business rates for that year will be capped at 2%.

High street shops, pubs, restaurants and cafes with a rateable value of less than £50,000 currently qualify for a discount on business rates of £1,000 per year. This discount will be increased to £1,500 per year for 2015/16.

Employers

Employment Allowance

The employment allowance was introduced from 6 April 2014. It is worth £2,000 per year per employer to set against the employer’s national insurance liability. For 2014/15 individuals who employed people in their own home, such as nannies, housekeepers or gardeners could not claim the employment allowance. This blanket ban for domestic workers also applied to carers, but from April 2015 the employment allowance will be available to households who employ care and support workers.

National Insurance

From 6 April 2015 employers will not have to pay employers’ NI on the wages of workers aged under 21, for wages up to £815 per week. From 6 April 2016 that exemption from employers NI will be extended to wages paid to apprentices aged under 25, with the same weekly cap on the amount paid.

Employee Benefits

Company Cars

Drivers of very low-emission cars may be in for a shock from 6 April 2015. Those vehicles with CO2 emissions from zero (i.e. electric) to 50g/km will be subject to tax as a benefit in kind for the first time. Tax will be payable on 5% of the vehicle’s list price, or 8% for diesel cars. The benefit in kind chargeable amount for all other cars will increase by 2% of the list price, including those cars which are currently taxed on 35% of the list price, as the maximum benefit rises to 37% of the list price.

Where a company car driver receives free fuel (petrol, diesel or LPG) for private journeys, the taxable benefit is calculated as the percentage of the list price for the car applied to the fuel charge multiplier set at £22,100 for 2015/16 (£21,700 for 2014/15) . The maximum taxable benefit of receiving free road fuel for private use will increase to £8,177 for 2015/16 from £7,595 for 2014/15.

Where the employer pays for the electricity to charge an electric company car there is no tax on the benefit of using that electricity on private journeys. Equally there is no standard rate to reimburse employees when they use their own domestic electricity supply to charge an electric company car.

Company Vans

Driving from home to work in a company van is not considered to be a private journey, but it is when the vehicle is a company car.

When a company van is used for private journeys the driver is taxed on £3,090 for 2014/15. This increases to £3,150 for 2015/16. When road fuel is provided for private journeys in a company van the taxable benefit is £581 for 2014/15, rising to £594 for 2015/16.

An electric van is currently tax-free for the driver, even when it is used for private journeys. However, from 6 April 2015 the private use of an electric commercial vehicle will be a taxable benefit, calculated as £630 for 2015/16. The taxable benefit for electric vans will increase each year until it is equal to other vans from April 2020.

Business Taxes

Corporation Tax

Corporation tax rates for all sizes of company in the UK (excluding the oil and gas sectors which pay at special rates) are aligned at 20% from 1 April 2015. This removes the need for the associated companies rule that restricts the use of the small profits rate of corporation tax, so those rules are abolished from April 2015.

However, large companies must pay their corporation tax by quarterly instalments once their taxable profits exceed £10 million, and the tax due is at least £10,000. From 1 April 2015 those thresholds are divided by the number of companies in the corporate group which are related by a 51% holding.

The Chancellor has proposed the Northern Ireland Executive could take control of corporation tax rates, and directly collect corporation tax from companies based in that region. There is no indication of when this change may occur.

Creative Sector

In 2013 and 2014 the Government introduced various new tax reliefs for companies that produce high-end TV programmes, video games or theatre productions. These reliefs are all similar but not exactly the same.

A new tax relief along the same lines for companies that produce children’s TV programmes will be introduced from April 2015. It will also consult on introducing a new tax relief for orchestras from April 2016.

Research and Development

Small Companies

Companies have been able to claim enhanced tax relief for expenditure on research and development (R&D) for many years. The amount spent on specific classes of costs relating to qualifying R&D projects is multiplied by a percentage, before the total is deducted from the company’s taxable income for the year. Since 1 April 2012 that percentage has been 225%.

For R&D expenditure incurred from 1 April 2015 that percentage is increased to 230%. However, the costs that qualify for this deduction will be further defined to remove materials which are used in products that are sold.

Large Companies

Large companies claim R&D tax relief as an expenditure credit equal to a percentage of the R&D spend for the accounting period. That credit (known as “above the line” credit) is generally set against the company’s corporation tax liability for the year. The percentage of R&D costs translated into the “above the line” credit was 10% for periods since 1 April 2012, and will be increased to 11% from 1 April 2015.

Individuals

Income Tax Allowances

The standard personal allowance will increase from £10,000 to £10,600 on 6 April 2015, but the personal allowances for those born before 6 April 1938 are frozen. From 6 April 2015 married couples and civil partners will be able to transfer £1,060 of their unused personal allowance to their spouse/ partner, if the recipient is taxed at no more than the basic rate for the year (20%).

Tax Rates

The income tax rates for 2015/16 on earnings and dividends are the same as apply in 2014/15. However, the savings rate is reduced from 10% to zero and the savings rate band is increased to £5,000. The savings rates only apply if the individual’s net non-savings income does not exceed the savings rate limit.

Pensions

The Chancellor announced in September 2014 that the “death tax” on undrawn pensions, set at 55% of the value of the pension fund, would be removed from 6 April 2015 where the deceased was aged under 75. Where the deceased was aged 75 or more the undrawn pension fund is taxed in the hands of the beneficiary (usually the surviving spouse) at their marginal rate of tax, or at 45% where the fund is taken as a lump sum.

Those tax changes would not apply where the pensioner had already bought an annuity with his pension fund, leaving the surviving spouse worse off. From 6 April 2015 where the pensioner dies before age 75 and had purchased a joint life annuity or guaranteed term annuity to provide for the spouse, further payments from the annuity made after the death of the pensioner will be tax free.

Non-domiciled

The Government likes to welcome foreign-born individuals to the UK, especially if they are very wealthy. Such individuals have a special tax status, which is almost unique to the UK, called “non-domiciled”. Even though the individual is resident for tax purposes in the UK their non-domiciled status allows them to keep their overseas income and gains outside of the UK tax net, such that it is only taxed when it is brought into the UK. This tax arrangement is called the remittance basis.

To take advantage of the remittance basis the non-domiciled person must elect to do so, and pay an annual charge which varies according to how long they have been living in the UK:

  • 7 out of last 9 tax years: £30,000
  • 12 out of last 14 tax years: £50,000 to be increased to £60,000
  • 17 out of last 20 tax years: £90,000 (new charge)

Tax Favoured Investments

ISAs

For deaths on and after 3 December 2014 the surviving spouse or civil partner will inherit the deceased person’s ISA including all its tax benefits. This means the survivor will be able to contribute into the ISA account that belonged to their partner, as well as into their own ISA. The income from the deceased person’s ISA will continue to be tax free in the hands of the survivor.

The tax free ISA investment limits will increase as follows:

2014/15
(limits from 1 July 2014)
2015/16
Shares and cash ISA £15,000 £15,240
Junior ISA and Child Trust Fund £4,000 £4,080

Social Investment Tax Relief

Social investment tax relief (SITR) was introduced from 6 April 2014 and provides income tax and capital gains tax reliefs for individuals who invest in social enterprises. The activities the social enterprise can undertake will be expanded to include community farms and horticultural businesses, with effect from 6 April 2015.

The maximum investment each social enterprise organisation can receive is limited to about £283,000 for each three year investment period. The Government is to seek EU approval to increase this limit to £5 million per year, up to £15 million for each investment period.

Capital taxes

Gains on UK Dwellings

Non-residents

People who are not tax-resident in the UK do not pay UK capital gains tax when they sell a property in the UK, although the gain may well be taxed in the country where the individual is tax-resident.

From 2015/16 non-resident owners of UK homes (dwellings) will have to pay UK capital gains tax on the gain that arises on the sale of their home for periods from 6 April 2015 onwards. However, the non-resident individual can elect for their UK home to be treated as free from capital gains tax, if they spend at least 90 midnights in that home in the UK during the tax year. Those 90 days may be spread over several properties if they own several homes in the UK. Spending 90 days in the UK could make the individual tax-resident in the UK for the tax year in question.

UK Residents

This 90 day rule will also apply to UK residents who own a second home outside of the UK. Currently the owner can elect for an overseas home to be treated as free of capital gains tax. From 6 April 2015, an overseas property will only be eligible to be free of UK capital gains tax if the owner spends at least 90 midnights there during the tax year, or is treated as being tax resident in the country where the property is situated. It is possible to be tax resident in more than one country concurrently.

Entrepreneurs’ Relief

Entrepreneurs’ relief was introduced from 6 April 2008 to apply a 10% tax rate on gains made on disposing of a business, part of a business, or shares held in a personal company.

Incorporation

Entrepreneurs’ relief has always been available to apply to gains that arise on the incorporation of a business, which often involves the transfer of goodwill created by the unincorporated business into the company that takes over the trade. The Government has decided that this use of entrepreneurs’ relief is unfair. From 3 December 2014 entrepreneurs’ relief will not be available for gains arising on the transfer of goodwill on the incorporation of a business.

EIS or SITR Shares

Where an individual makes a gain that taxpayer can defer tax on the gain by investing in Enterprise Investment scheme (EIS) shares, or shares or loan notes issued under the social investment tax relief (SITR) scheme. Where such an investment is made any entrepreneurs’ relief due on the original gain is normally lost. For investments under EIS or SITR from 3 December 2014, the entrepreneurs’ relief can be retained, and may be claimed when the EIS or SITR investments are subsequently disposed of.