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.
Withdrawals from a company
Q: My daughter has just found a house she’d like to buy and I would like to lend her £25k for her deposit. I am the sole director and shareholder of a company, and I am a higher rate tax payer. Can you give me a summary of the options I have for withdrawing the £25k from the company?
A: You have three main options:
Assuming the company has sufficient reserves, you could declare a dividend. Don’t forget, as you are a higher rate tax payer, the net dividend should be big enough to cover your eventual, additional tax bill.
Director’s loan account
Assuming you do not have a director’s loan account in credit that you can draw on, any withdrawals you make from the company is a loan and will therefore trigger a tax charge. This is calculated as 25% of the balance of the loan at the end of the accounting period- however, HMRC will repay it as you pay the loan back. As the loan is in excess of £5,000, a benefit in kind will also be triggered. Using the current average rate of interest, the benefit would be 4% of the loan balance. Upon this, the company will pay employer’s national insurance (NI) at 13.8% and you will pay income tax at 40%. Again, ensure your withdrawal is large enough to cover the NI and income tax.
If you take it as a bonus, you will pay income tax on it at 40%, the company will pay employer’s NI at 13.8% and you will pay NI at 2%. Again, ensure your withdrawal is large enough to cover the NI and tax. However, the company will receive tax relief on the gross bonus and the employer’s NI.
Cashflow must also be considered. Whilst drawing on the director’s loan account is likely to cost the least initially, unless you repay the loan it will continue to have the tax charge, income tax and NI implications year-on-year. Therefore, in the long run, it could be the most expensive option if the overdrawn loan account is not cleared.
Some of the calculations can be quite complicated and it’s worth seeking specific advice about which of the various options is best for you.
Tax relief on new cars
Q: I am self-employed and want to purchase a new motor vehicle for my business this month. A friend told me that if I buy a certain type of car I can receive tax relief on the full cost of the vehicle. Is this correct?
A: Cars are treated as capital assets for tax purposes and tax relief is given in the form of capital allowances; rather than a deduction for the cost of the vehicle. This means that the cost of buying the vehicle is not deducted when calculating your profit or loss for the year. Instead a proportion of the cost – a writing down allowance (WDA) – is given as a deduction each year until the full original cost has been relieved.
Cars with emissions below 160g/km attract a WDA of 20% a year and cars with emissions over 160g/km only 10%.
Your friend may be referring to the special allowance available for low-emission vehicles. Low-emission cars first registered on or after 16 April 2002 attract an allowance for tax purposes of 100% of the cost of the vehicle. In order to qualify, the emission level must not exceed 110 g/km for acquisitions made on or after 6 April 2009 (1 April 2009 for limited companies). For purchases made from April 2002 to April 2008, the maximum emission level for a qualifying vehicle was 120 g/km.
To find out if a vehicle will qualify for this enhanced capital allowance, contact the car manufacturer or dealership to check the CO2 emissions.
There are lots of things to consider when buying a new vehicle such as the benefit in kind implications, available capital allowances, income tax upshots and the finance of the purchase, but we can certainly assist you with your decision.
Letting a furnished property
Q: Earlier this year I started to let out the flat that I previously lived in and have bought new furniture for most of the rooms. I have registered for self assessment with HM Revenue & Customs, so when will I receive a tax return and can I get some tax back if I have made a loss?
A: If your letting income commenced before 6th April, the first tax return you will need to prepare will be the 2011 return, which covers the tax year from 6 April 2010 to 5 April 2011. You will need to report all income received during that period, not just the income from the flat rental.
The cost of purchasing new furniture for the rental property cannot be deducted against the rental income in the year. When you first start to let out a furnished property, you need to choose between two options for relief with regard to the cost of furnishings.
You cannot claim the cost of the initial furnishings purchased, but one option is to use the ‘replacement’ basis, which means that you can deduct the cost of replacement furniture in the future. If you have just purchased new furniture, this may not be the best option as presumably it should not need replacing for some time.
The alternative is that you can claim an annual ‘wear and tear’ allowance as a deduction from the rental income. The allowance is 10% of the gross rents, after deducting certain costs you have paid on the property such as council tax or water rates. If this annual allowance is adopted, the cost of replacing any items of furniture cannot be claimed in the future.
Losses arising from rental income cannot be offset against other sources of income, so if you have made a loss, it will not generate a tax refund in the year. The loss will be carried forward and offset against future rental income profits.
Transferring property on divorce
Q: I am currently in the process of divorcing my wife and as part of the settlement agreement I am passing one of my rental properties to her. My solicitor has told me I may need to pay tax, but is this true if this is part of my divorce?
A: Under current legislation when chargeable assets are passed between spouses, they are treated as passing at ‘no loss/no gain’ which means there is no tax to pay. In the year of separation (i.e. the year in which a couple cease living together as husband and wife) the same rule is applied, so no capital gains tax is payable.
From 6th April following separation however the inter-spouse rules cease and any assets being gifted between the couple are treated as passing at open market value. This can lead to a capital gains tax liability for the donor. Therefore if you separated from your wife in the current tax year and if the property is transferred into her name before 5th April, no liability will arise. On the other hand, if you separated before 6th April 2011, or if the property is not transferred before 5th April this year, you may have a capital gains tax liability to settle.
If there is a gain chargeable to tax and it occurred before 6th April 2011, any tax due will become payable on or before 31st January 2012. On the other hand, if the transfer takes place on or after 6th April this year, any tax due will not become payable until 31st January 2013.
When selling or transferring property, there are many things to take into consideration with regard to the capital gain computation, especially with regard to allowable costs and various reliefs that may be available. You should therefore seek professional advice in connection with this and any other assets being transferred as part of your divorce.
Company cars and benefit in kind
Q: My company car is due to be replaced early this year and I am keen to keep my taxable benefit as low as possible (as well, of course, as doing my bit for the environment). What are the current Benefit in Kind rates applicable?
A: The taxable benefit in kind you are deemed to receive from the private use of a company vehicle is still based on the CO2 emissions and the list price. The benefit is calculated by reference to a table of percentages which are dependent on the vehicle’s CO2 emission and range from 15% to 35%. Petrol cars produce less toxic emissions than diesel and therefore, diesel cars have a 3% supplement (up to the maximum of 35%).
Vehicles with emissions under 115 g/km are known as Qualifying Low Emissions Cars (QUALECs), and a special rate applies to these of only 10%. Note however, the 3% supplement for diesel cars is still relevant and the normal rounding down rules do not apply (i.e. a vehicle with emissions of 116 g/km would not be a QUALEC). Please note, (under current plans), in order for your vehicle to qualify as a QUALEC in 2012/13, the emissions will need to be under 99 g/km and for 2013/14 under 94 g/km.
If you are really serious about getting a low emission vehicle, those with emissions under 75 g/km attract only a 5% benefit in kind. And if electric cars appeal to you, vehicles with zero emissions trigger no benefit in kind.
Please note, the reductions for vehicles powered by bi-fuels, road fuel gas and bioethanol were abolished from April 2011. The discount given for Euro IV standard diesel cars registered before 1 January 2006 was also abolished then.
Claiming expenses for working at home
Q: I’ve been talking to my mates down the pub and I’ve found out that some of them claim lots more Use of Home in their accounts than I do, yet we do similar things. Why is that?
A: There are two main ways of calculating use of home. If there is only minor use, for example writing up the business records at home, you may put through a reasonable estimate with little risk of dispute by HMRC. Needless to say, it should be consistent with your household utility bills though.
If you were based from home, then you could apportion the household bills such as gas, electricity, water etc by dividing the total costs over the number of rooms, and multiplying that figure by the number of rooms used for business purposes.
In order to satisfy tax law, when part of the house is being used for the business then that must be the sole use for that part at that time. Thus if the part of the home used for business purposes is simultaneously used for some other non-business purposes, then no deduction is available. You should also avoid making one of your rooms solely for business purposes and out-of-bounds to the rest of your family though. Doing this could jeopardise an element of your Only or Main Residence Relief for Capital Gains Purposes, which normally sees any gain on your home reduced to nil.
As you can see from the above, if you don’t work from home regularly, you may be using the first method. If you are working regularly from home, then it would be advantageous to use the second, i.e. apportionment method.
In practical terms, you will need to be seen to be applying common sense to your claim, for example, if you only write up your books at home, there would be a far smaller charge than if you were working each day from home and treating it like an office.
Although there is no fixed proportion of costs for particular trades, there is an expectation of what use of home will amount to. Any enquiries from HMRC will be more likely when the amount of use of home claimed is significant and inconsistent with the nature of the trade.
Just to add to the confusion, the rules are different for sole traders and limited companies, so the legal structure of your business also needs to be taken into account. Each case will be different, so if you would like advice in this area, please feel free to contact us.
Can I claim the cost of work clothing?
Q: I am self employed and while I do most of my work at my office, there are frequent occasions when it is necessary for me to visit clients in their workplaces in appropriate business dress. I need to buy a couple of new suits for such meetings – is this considered an allowable expense for tax purposes?
A: This is one of a variety of expenses which the Courts have held to have an “intrinsic duality of purpose” – which means they are not deductible for tax purposes.
The suits are actually classed as “ordinary clothing worn by a trader during the course of their trade” and are not deductible expenditure for tax purposes. This is the case regardless of whether particular standards of dress are required, for example, to comply with the rules of a professional organisation, or simply for the trader to keep up appearances on meeting clients.. Conversely, the cost of clothing that is not part of an ‘everyday’ wardrobe, such as protective clothing and uniforms (especially where they bear your business logo) is deductible against your business income for tax purposes.
Home broadband and telephone 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 and they will be subject to Class 1A NIC- but the company pays this. You will then pay income tax on the benefit- although eventually, HMRC are likely to collect this tax via your tax code and the PAYE system. Alternatively, if you reimburse the company the cost of the private calls, no Class 1A NIC will fall due and you will eliminate the benefit.
If the landline is registered in your personal name, then it is regarded as a payment made on behalf of the employee. You should include the line rental and call charges with the employee’s gross pay. Therefore, Class 1 NIC and income tax will arise. Unless the use is exclusively business, the only way you can reduce the benefit is to identify any business calls, and no claim can be made against the line rental.
If you are making numerous calls for business purposes, it is probably more tax efficient for you to receive the use of a company mobile, registered in the company name. Generally, no tax or NIC liability arises on the use of a company mobile, even where the mobile is used for private calls.
If you think you are not claiming enough business expenses such as telephone bills or you would like to review the structuring of your expenditure, please feel free to contact us for some advice.