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.

Tag Archives: business

The rebranding blues

The rebranding blues

It seems I have started something big. At the end of April I wrote to my clients with exciting news about our practice.  I was giving up the old blue livery for the brand new claret and grey of TLA Business Services.

I wasn’t doing it to start a trend. I just wanted to expand the services we provide and make better use of our skills in business planning and metrics. And I wanted my new business to reflect that change.  I really didn’t have anything in particular against the colour blue.  And I certainly didn’t expect Tesco to follow suit last month, giving up its 20-year-old blue-striped Value brand for a softer, more upmarket look. Barely a glimpse of blue to be seen. And then, last week the Bluebirds of Cardiff FC abandoned 100 years of blue for a new scarlet home strip.

Now, I’m no trendsetter, but it does seem that the launch of TLA Business Services started something big.  Which brings me neatly to the point of this blog.  We like to work with small businesses with big ambitions. I want us to be at the heart of exciting change and growth in small and medium enterprises throughout Worcestershire, where our business development skills can really help to catalyze the dreams of our clients and turn them into reality.

TLA Business Services may be a new brand but our core principles remain the same; we don’t charge any more for the services we already provide but we are more efficient and our proactive approach helps us to make a bigger contribution to our clients’ bottom line.

Of course we are, at heart, accountants – fully qualified chartered management accountants – so we can take care of all that boring stuff which keeps you from growing your business. And we do it professionally and smartly. And we now work closely with AVN (the Added-Value Network), a broadly-based association of UK accountants, who have developed a range of powerful business improvement tools and we will be using these to support new services that will be rolled out in the next few months – watch this blog and your inbox for more details.

Whatever the colour of your brand, if you’re ambitious for your business but struggling to turn your dreams into reality, don’t get the blues, pick up the phone and talk to me on 01905 21411 or contact me through the website at www.tlaservices.co.uk.

Advertisements

VAT Flat Rate Scheme

When advising clients, one of the areas we examine in some detail is value added tax, not just whether or not they should register (if they have a choice!) but also which of the various schemes available is most suitable. The Flat Rate Scheme is intended to simplify VAT accounting, but in the right circumstances it can also result in improved profits. We have put together this guide to how the scheme operates; if you think it may be beneficial to your business please get in touch (email here or telephone 01905 21411) for a free, no-obligation discussion.

VAT Flat Rate Scheme

The flat rate scheme for small businesses was introduced to reduce the administrative burden imposed when operating VAT.

Under the scheme a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase you make.

Who can join?

The scheme is optional and open to businesses that do not breach the relevant limits which have recently changed due to the increase in the standard rate of VAT. From 4 January 2011, a business must leave the scheme when income in the last twelve months exceeds £230,000, unless this is due to a one off transaction and income will fall below £191,500 in the following year. A business must also leave the scheme if there are reasonable grounds to believe that total income is likely to exceed £230,000 in the next 30 days.

The turnover test applies to your anticipated turnover in the following 12 months. Your turnover may be calculated in any reasonable way but would usually be based on the previous 12 months if you have been registered for VAT for at least a year.

To join the scheme you can apply by post, email or phone and if you are not already registered for VAT you must submit a form VAT1 at the same time.

You may not operate the scheme until you have received notification that your application has been accepted and HMRC will inform you of the date of commencement.

When is the scheme not available?

The flat rate scheme cannot be used if you:

  • use the second hand margin scheme or auctioneers’ scheme
  • use the tour operators’ margin scheme
  • are required to operate the capital goods scheme for certain items.

In addition the scheme cannot be used if, within the previous 12 months, you have:

  • ceased to operate the flat rate scheme
  • been convicted of an offence connected with VAT
  • been assessed with a penalty for conduct involving dishonesty.

The scheme will clearly be inappropriate if you regularly receive VAT repayments.

How the scheme operates

VAT due is calculated by applying a predetermined flat rate percentage to the business turnover of the VAT period. This will include any exempt supplies and it will therefore not generally be beneficial to join the scheme where there are significant exempt supplies.

The percentage rates are determined according to the trade sector of your business and range from 4% to 14.5%. The table in the appendix to this factsheet summarises the percentages. In addition there is a further 1% reduction off the normal rates for businesses in their first year of VAT registration. The percentages used in the scheme changed from 4 January 2011 to reflect the increase to 20% in the standard rate of VAT.

If your business falls into more than one sector it is the main business activity as measured by turnover which counts. This can be advantageous if you have a large percentage rate secondary activity and a modest major percentage trade. You should review the position on each anniversary and if the main business activity changes or you expect it to change during the following year you should use the appropriate rate for that sector.

Although you pay VAT at the flat rate percentage under the scheme you will still be required to prepare invoices to VAT registered customers showing the normal rate of VAT. This is so that they can reclaim input VAT at the appropriate rate.

Example of the calculation

Cook & Co is a partnership operating a café and renting out a flat. If its results for 2011 are as follows:

VAT inclusive turnover:

£

Standard rated catering supplies

70,000

Zero rated takeaway foods

5,500

Exempt flat rentals

3,500

£79,000

Flat rate 12.5% x £79,000 = £9,875
Normally £70,000 x 20/120 = £11,667 less input tax

Treatment of capital assets

The purchase of capital assets costing more than £2,000 (including VAT) may be dealt with outside the scheme. You can claim input VAT on such items on your VAT return in the normal way. Where the input VAT is reclaimed you must account for VAT on a subsequent sale of the asset at the normal rate instead of the flat rate.

Items under the capital goods scheme are excluded from the flat rate scheme.

Transactions within the European Community

Income from sales of goods is included in your turnover figure.

Where there are acquisitions from EC member states you will still be required to record the VAT on your VAT return in the normal way even though you will not be able to reclaim the input VAT unless it is a capital item as outlined above.

The rules on services are complex. Please get in touch if this is an issue so that we can give you specific advice.

Records to keep

Under the scheme you must keep a record of your flat rate calculation showing:

  • your flat rate turnover
  • the flat rate percentage you have used
  • the tax calculated as due.

You must still keep a VAT account although if the only VAT to be accounted for is that calculated under the scheme there will only be one entry for each period.

Summary

The scheme is designed to reduce administration although it will only be attractive if it does not result in additional VAT liabilities. The only way to establish whether your business will benefit is to carry out a calculation and comparison of the normal rules and the flat rate rules.

How we can help

We can advise as to whether the flat rate scheme would be beneficial for your business and help you to operate the scheme. Please do not hesitate to contact us.

 

APPENDIX: Table of sectors and rates

 

Trade Sector

Appropriate % from 1 Jan 2010 to 3 January 2011

Appropriate % from 4 January 2011

Accountancy or book-keeping

13

14.5

Advertising

10

11

Agricultural services

10

11

Any other activity not listed elsewhere

10.5

12

Architect, civil and structural engineer or surveyor

13

14.5

Boarding or care of animals

10.5

12

Business services that are not listed elsewhere

10.5

12

Catering services including restaurants and takeaways

11

12.5

Computer and IT consultancy or data processing

13

14.5

Computer repair services

9.5

10.5

Dealing in waste or scrap

9.5

10.5

Entertainment or journalism

11

12.5

Estate agency or property management services

10.5

12

Farming or agriculture that is not listed elsewhere

6

6.5

Film, radio, television or video production

11.5

13

Financial services

12

13.5

Forestry or fishing

9.5

10.5

General building or construction services*

8.5

9.5

Hairdressing or other beauty treatment services

11.5

13

Hiring or renting goods

8.5

9.5

Hotel or accommodation

9.5

10.5

Investigation or security

10.5

12

Labour-only building or construction services*

13

14.5

Laundry or dry-cleaning services

10.5

12

Lawyer or legal services

13

14.5

Library, archive, museum or other cultural activity

8.5

9.5

Management consultancy

12.5

14

Manufacturing fabricated metal products

9.5

10.5

Manufacturing food

8

9

Manufacturing that is not listed elsewhere

8.5

9.5

Manufacturing yarn, textiles or clothing

8

9

Membership organisation

7

8

Mining or quarrying

9

10

Packaging

8

9

Photography

10

11

Post offices

4.5

5

Printing

7.5

8.5

Publishing

10

11

Pubs

6

6.5

Real estate activity not listed elsewhere

12.5

14

Repairing personal or household goods

9

10

Repairing vehicles

7.5

8.5

Retailing food, confectionary, tobacco, newspapers or children’s clothing

3.5

4

Retailing pharmaceuticals, medical goods, cosmetics or toiletries

7

8

Retailing that is not listed elsewhere

6.5

7.5

Retailing vehicles or fuel

6

6.5

Secretarial services

11.5

13

Social work

10

11

Sport or recreation

7.5

8.5

Transport or storage, including couriers, freight, removals and taxis

9

10

Travel agency

9.5

10.5

Veterinary medicine

10

11

Wholesaling agricultural products

7

8

Wholesaling food

6.5

7.5

Wholesaling that is not listed elsewhere

7.5

8.5

“Labour-only building or construction services” means building or construction services where the value of materials supplied is less than 10 per cent of relevant turnover from such services; any other building or construction services are “general building or construction services”.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

March 2011 Questions and Answers

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!!!

Bad debt adjustments

Q: I have recently found out that one of my customers has been declared bankrupt. Unfortunately, I invoiced them four months ago for £1,000 plus VAT of £175 and as this is still outstanding, there is a good chance I won’t receive this and will need to write it off.

How do I account for this in my December 2010 year-end accounts and what income tax relief can I get? And what do I do about the VAT?

A: As the debt is only possibly irrecoverable at this stage you may only ‘provide’ for the debt. You will therefore reduce the amounts owing to you at 31 December by £1175.

For income tax purposes, the doubtful debt expense of £1,000 is allowable because it is for a specific debt and therefore written off in the profit and loss account.

Provided that you have paid the VAT over to HMRC, you can reclaim VAT that you paid and which you have not received from the customer, provided that either the Official Receiver has notified you that no monies will be forthcoming or the debt becomes six months old or more.

You add the amount of VAT you are reclaiming to the amount of VAT you are reclaiming on your purchases (input tax) and put the total figure in Box 4 of your VAT Return.

If you cash account for VAT, you will never have paid the VAT over to HMRC and therefore, you are not due a refund from HMRC. You will merely need to do the accounting adjustment above.

If you would like more information of the treatment of bad debts, and a referral to help with collecting overdue amounts, get in touch.

Qualifying years for National Insurance

Q: Last year I incorporated my business and I now draw a small monthly salary and quarterly dividends, which means I do not have to pay any tax or National Insurance. Should I be paying National Insurance to protect my rights to state pension and benefits?

A: National Insurance is charged on income from employment when the earnings exceed £110 per week. However, if your earnings are above the Lower Earnings Limit (currently £97 per week) you are still credited with a qualifying earnings period for state pension and benefits.

If your earnings fall under the Lower Earnings Limit, you can consider making voluntary National Insurance Contributions.

Certain individuals may also be entitled to National Insurance credits where they have not been earning due to caring for a younger child or disabled person, or where they are an approved foster carer. There are also credits available for people in receipt of certain state benefits.

You have not stated your age, but if you are concerned about your state pension, you should apply online for a forecast at www.direct.gov.uk.

High earners tax tips

Q: I am the Director of Marketing for a London-based company and have a salary of £120,000 per annum, plus benefits. What changes are going to affect me during 2011/12, and how can I mitigate these changes?

A: From April 2011, the Government is lowering the 40% higher rate band from £37,401 of taxable income to £35,001, to ensure high earners do not benefit from the £1,000 increase in the personal allowance. National Insurance will also rise by 1%.

Furthermore, those earning over £100,000 like you will lose their personal allowance at a rate of £1 for every £2 of income in excess of this band. And worst of all, income in excess of £150,000 will be taxed at the Additional Rate of 50%. You’ve mentioned that your employer gives you benefits in kind, so this may well apply to you.

High earners have been one of the hardest hit by the Budget, so you need to be more aware of the allowances available to you and smarter with your tax planning. Here are some really simple ideas for you to consider:

  • Investing up to £10,680 in an ISA
  • Top up your pension. Whilst relief has reduced to contributions below £50,000, contributing to your pension remains one of the best ways to reduce your tax liability
  • Transferring assets to someone you trust such as your spouse if they are a lower tax rate payer, to cut your overall tax bill as a couple. There are pitfalls here for the unwary!
  • Childcare vouchers. Their benefits have been reduced for higher rate tax payers, but there are still some tax savings
  • Putting your money in investments with capital growth; rather than income such as dividends, to make use of your Annual Exemption of £10,100
  • Consider investments in Venture Capital Trusts or through the Enterprise Investment Scheme
  • Donating under the Gift Aid scheme

Staff suggestion box

Q: We have a staff suggestion scheme in place and one of the staff has come up with a great idea that we think will create less waste during our manufacturing processes. Consequently, we think it will save us about £14,000 over the next twelve months and about £10,000 annually.

What is the maximum that I can pay him without having to deduct tax and NI?

A: As a result of you adopting the suggestion and it being expected to lead to efficiencies that you estimate will save you money, you meet the exemptions under the ‘financial benefit award’ rules for staff suggestion schemes.

There are two ways of calculating the award. The first is to pay 50% of the expected first year savings.  The second method is to apply 10% to the expected savings over the first five years. 

With both of these methods, there is an overriding amount of £5,000 that can be paid without the employee being subject to PAYE and NI.  Any payment above this will be subject to PAYE and NI and should be added to your employee’s wages in your normal payroll calculations.

The first method results in an award of £7,000 and the second £5,400. However, if you wish to avoid tax, then the maximum you can pay him is £5,000. You would then not need to make any deductions and have no additional reporting requirements.

Use of 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, electric, 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.

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. If the room has a dual purpose, you must be aware that the room should not be used for any other purpose whilst it is being used for business purposes. 

Each case will be different, so if you would like advice in this area, please feel free to contact us.

VAT errors

Q: I finished drawing up my books for the year ended 31 December 2010, and realised I’d made an error with my VAT. I think when I totalled up the input VAT for the June quarter, I missed out a whole page of my cashbook expenses.

Am I able to reclaim this now somehow?

A: You may correct errors that arose in VAT accounting periods that ended up to four years ago.

At the end of your VAT accounting period, if the net value of previous return errors is less than £10,000 and 1% of the Box 6 figure on your VAT return for the period when you discover the error (subject to an upper limit of £50,000), then you can make the adjustments to correct the error on the next return.

As your mistake was not deliberate or careless, no penalties or interest should arise.

However, if you had made a deliberate or careless error, you could have been required to separately notify HMRC and in this instance, HMRC would probably have levied penalties which can be up to 100% of the error.

In conclusion, you will be able to reclaim the input VAT on your next return provided it meets the criteria above.

VAT and cashflow

Q: The settlement of my VAT liability each quarter is beginning to become a burden in these difficult times. Is there anything I can do to reduce my liability or ease my cashflow?

A: Firstly, you may be able to reduce your liability by registering for the Flat Rate Scheme (FRS). Basically, you would pay an industry specific percentage (set by HMRC) of your turnover inclusive of VAT at the standard rate. You would not be able to recover your input VAT, unless it was on capital items costing in excess of £2,000 (including VAT). You would need to assess whether the scheme would be advantageous for you. However, you should bear in mind that once you join the scheme, you must remain in it for 12 months and your VAT exclusive turnover must be below £150,000 p.a.

If your annual turnover is above £150,000 but below £1.35m, then you could apply to use the Annual Accounting Scheme. You make 9 monthly payments based on the previous 12 months with a final balancing payment and only submit one return per year.

If your customers are slow to pay and your VAT taxable turnover for the next 12 months is expected to be under £1.35m, you could apply the Cash Accounting Scheme. This will mean that all VAT is accounted for on sales invoices only once customers have settled them, and on your suppliers’ invoices when you pay them; not when they are raised.

The above schemes may be used in conjunction with one another.

As you can see, there are a number of things to consider and therefore we suggest you contact us for specific guidance and advice, before making a decision.  

Amending a tax return

Q: I rushed the preparation of my 2009/10 tax return in order to file it on time, but I have just realised that I missed off my rental accounts!

Can I revise my tax return and will I incur any fines for doing this?

A: If you make a mistake on your tax return, you’ve normally got 12 months from 31 January after the end of the tax year to correct it.

You may notify HMRC in the form of a letter to your Tax Office, detailing the omissions and which page numbers and boxes are affected. Or you may find it easier to write to them and enclose an amended return or just the particular pages that have changed. Alternatively, if you filed your return online with HMRC, you may make any alterations online.

No penalties for late filing will be applicable, but please be aware that if the amendment results in additional tax to pay, you will be charged interest from the due date of payment. As 28 February has also now passed, you will be liable to a 5% surcharge on any unpaid tax. And a second 5% surcharge will apply from 31 July 2011 if it continues to remain outstanding at that point.

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.

February 2011 Questions and Answers

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!!!

Tax Point of a Transaction for VAT

Q: I have recently registered for VAT and I am getting slightly confused regarding when my supplies and purchases take place in regards to VAT quarters. Could you please explain to me when a transaction takes place for VAT purposes?

A: The date when a transaction takes place for VAT is called its tax point. It is not always the date the supply is actually made. It is vital that you apply the correct tax point to a transaction to ensure that the VAT is declared on the right VAT return and at the correct rate.

The basic tax point is the date at which the goods are made available to the customer (or for services the date they are performed). If a VAT invoice is issued before this date, the date of the invoice becomes the tax point. Similarly, if payment is received before the goods are supplied/ work is done, then the date of payment becomes the tax point.

The date a VAT invoice is issued will also become the tax point if it is issued between 1 to 14 days after the supply takes place. If an invoice is issued 15 days or more after, then the date of supply remains the tax point.

It is possible to raise a pro-forma invoice for goods which you have not yet supplied or received payment for. A pro-forma invoice is not a VAT invoice, but it does enable the business to raise a sales document.  No VAT is due on this document and it must be clearly display a message such as ‘This is not a VAT invoice’.

Share Transfer Procedure

Q: I am a shareholder and director of a close limited company. There are four shareholders, each owning a 25% share in the company. One of the shareholders wishes to pursue other ventures and wishes to transfer his share holding equally among the remaining 3 shareholders. Could you please explain the process and any tax implications?

A: The first thing you must do is check the company’s articles of association to ensure that a share transfer of this type is allowed. When Table A model articles have been adopted, share transfers are permitted.

An ordinary resolution must be passed by the board of directors either at a general meeting or by written resolution.

The stock transfer form J10 should be filled in and sent to HM Revenue & Customs for ‘stamping’ if the consideration (payment) for the transferred shares is over £1,000. If the consideration is over £1,000 stamp duty will be payable to HM Revenue & Customs at a rate of 0.5%.

A share certificate should be issued to the new shareholder(s) stating the company name, location of registered office, company registration number, shareholders name, share holding details and signatures.

The company’s internal books and registers should be updated and Companies House must be informed of the transfer on the next annual return.

This is one of the many services included within our Company Secretarial Support Services.

Lease Premium

Q: My business has just taken out a 10 year lease on a new factory. We have been charged a lease premium of £12,500. Could you please advise me what a lease premium is and how it will be treated for my accounts and tax?

A: A lease premium is a non-refundable lump sum paid by the tenant (lessee) to the owner (grantor) upon signing a tenancy agreement.

As the lease is under 50 years, it will be classed as a short lease.

In the accounts, the premium will be capitalised as a leasehold asset and amortised (written off) over the term of the lease. The amortisation is then added back for tax purposes.

To calculate the actual relief available for tax purposes, first find the amount of the premium assessable on the grantor to capital gains tax using a simple formula:

Premium x 2% x (duration (in years) – 1) = Amount assessable on grantor

This figure is taken away from the premium leaving the amount assessable to income tax on the grantor as property income. This is also the amount allowable for tax for the lessee, using the straight line basis over the number of years of the lease.

Hire Purchase

Q: I am about to buy a new van through my limited company. It will be used 100% for business purposes. I have been looking into various ways of financing the purchase and I am a little bit unsure of what is meant by the term hire purchase. Could you please explain to me how hire purchase works and also how to account for it in my company bookkeeping? We are a VAT registered company so what happens with VAT?

A: A hire purchase agreement is a method of spreading the cost of capital items over a number of years. The purchaser enters into a contract with a finance company who initially funds the purchase.

The buyer usually pays a deposit and spreads the remainder of the cost into monthly repayments over the course of the agreement. The monthly repayments will include interest at a pre-agreed rate. Legally, the asset remains the property of the finance company until the final payment is made. The final payment is normally higher than the monthly repayments. This is often referred to as a ‘balloon payment’.

To account for the hire purchase you will need to make the following entries in your company’s books:

  1. When the asset is initially purchased:

Debit the assets code with the net amount of the purchase

Debit the full amount of VAT to input VAT (assuming you are not partially exempt)

Credit a hire purchase creditor on the balance sheet with the full amount

The VAT is reclaimable in the relevant VAT period in which you acquired the van..

  1. Monthly payments will decrease the liability but will also contain an element of interest which must be added to the liability. The entries are as follows:

Debit the hire purchase interest code on the profit and loss account

Debit the liability with the amount of the repayment less the aforementioned interest

Credit the bank with the gross repayment.

Over the course of the agreement, the balance sheet creditor will therefore diminish.

  1. The asset will need to be depreciated as a normal asset each year

For tax purposes, the interest in the profit and loss is allowable, the depreciation will be added back, but the van will qualify for capital allowances- potentially 100% relief in the year of purchase if you have not used all of your Annual Investment Allowance.

Where we carry out bookkeeping for our clients we take of the entries ourselves. Where our clients carry out their own bookkeeping we will, if requested, provide a schedule showing how all payments throughout the term of the hire purchase agreement should be treated.

Payments on Account

Q: I am in full time employment, but last year I also started doing some self-employed work. I am taxed at basic rate in my employment, but think I may be subject to some higher rate income tax on my self-employment. I know I will have to do a tax return after April this year, but when will I have to pay the tax on my profits?

A: The tax due on your first trading profits for 2010/11 must be paid on or before 31 January 2012.  In addition, if the tax to be paid for 2010/11 exceeds £1,000 you may also need to make payments on account for 2011/12.

Payments on account are due where the underpayment at 5 April exceeds £1,000 and less than 80% of the total tax due for the year was deducted at source, eg through the PAYE system.  If you do need to make payments on account for 2011/12, each one will be 50% of the previous year’s liability, becoming due on 31 January and 31 July 2012.

If the tax due for 2010/11 is less than £2,000 and you submit your 2011 tax return to HM Revenue & Customs before 31 December this year, you could opt to have the underpayment collected through your PAYE code from 6 April 2012.  This method of payment is beneficial from a cashflow point of view, but also means that you do not need to make payments on account for the 2011/12 year either.

There is one more consideration that you need to make and that is regarding National Insurance.  As a self-employed individual you need to be registered for Class II National Insurance, but in addition your profits may be subject to Class IV National Insurance.  Where an individual has both employment and self-employment income, consideration needs to be given to claiming deferment for Class IV National Insurance, in order to avoid a potential overpayment.  The rules governing the interaction of Classes I, II and IV National Insurance and complex and you should therefore consider seeking professional guidance.

Loans from directors

Q: I am a director and owner of a limited company that I have loaned money to.  Can I charge the company interest on this loan?

A: The short answer is yes you can.  The interest charge in the company accounts will be an allowable expense for Corporation Tax purposes.  However this does mean that the interest received by you will be subject to income tax.

When companies pay interest to an individual they must deduct basic rate tax at 20% in the same way that a bank deducts tax on the interest it pays to savers.  The company must also complete form CT61 every quarter to record the interest paid and tax deducted.  This form must be submitted to HM Revenue & Customs along with payment of the tax deducted.  For example, if a company makes an interest payment of £100 then the director will physically receive £80 and the company will pay the remaining £20 to HM Revenue & Customs.  If you are a lower rate tax payer then there will be no further tax on this interest, however there will be additional tax to pay when you complete your tax return if your income is in the higher brackets.

If  you would like to find out more about paying interest to directors then please contact us for specific advice.

Reclaiming VAT on mileage claims

Q: A number of my employees use their own vehicles for business purposes.  They submit a monthly expenses sheet to me and I then reimburse them using the HMRC approved mileage rates. Can I claim back any VAT on these amounts?

A: Yes, but unfortunately you will not be entitled to claim back VAT on the full amount. Instead you can reclaim the VAT applicable to the deemed fuel element of the mileage rate and you need to ensure the employee submits a valid VAT receipt for fuel purchased in support of the claim.

The fuel element of the mileage rate currently varies between 9p and 21p, and depends on the size of the engine and the type of fuel being used.  The rates are available from HM Revenue and Customs at http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm

The requirement to submit a valid VAT receipt was introduced as a result of a ruling made against the UK in March 2005.  In that case, the European Court ruled that the UK legislation which allowed employers to reclaim the VAT element on mileage claims submitted by employees was in breach of EU legislation for two reasons:

  • the purchases are actually supplied to the employees as private individuals and therefore the employers have no right to deduct because the goods are not supplied to them as taxable persons.
  • even if there were a right to deduct, employers as taxable persons cannot exercise that right because they do not hold a VAT invoice.

The UK government has therefore introduced secondary legislation which allows employers to recover the VAT on fuel purchased by their employees for business purposes, as long as they hold a valid VAT invoice in support of the claims that are submitted.

Tax credits

Q: Lots of our friends are claiming tax credits and as our business profits have fallen in the recession, they are telling us to apply because we’ll probably be eligible. But how do we go about applying and are we likely to qualify?

A: If you don’t have children, you need to at least meet the following conditions:

  • Aged 25 or over and do paid work for at least 30 hours a week
  • If you are disabled, you must be at least 16 and do paid work for at least 16 hours a week
  • If your partner or you are aged over 50 or over and are going back to work after being on ‘out of work’ benefits such as Jobseekers Allowance or Income Support, you must do paid work for at least 16 hours a week

If you have children, you need to be 16 or over and doing paid work for at least 16 hours a week.

If your household’s income is less than £18,000 for the year ended 5 April 2010, you are likely to qualify for tax credits.

As covered heavily by the Press, the tax credits system will be changing from April 2011 and thereafter, households with income above £40,000 will be less eligible to receive tax credits.

To make an application to claim tax credits, you must complete a claim form which can only be ordered from the Tax Credit Helpline on 0845 300 3900. You must have your National Insurance number to hand when you call.

The above list is not conclusive and there are other circumstances to take into account. But if all of the above applies, it would certainly be worth obtaining and completing a claim form.

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.

January 2011 Questions and Answers

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!!!

Margin Scheme

Q: I am a second-hand car dealer who is now approaching the threshold for VAT registration. A friend of mine who also deals in second-hand goods, albeit art and antiques, has informed me that there may be a VAT scheme which I can use to minimise my liability and administration costs. Could you please advise me if such a scheme exists and explain the mechanics behind it?

A: The VAT margin scheme works by enabling traders who deal in second-hand goods to account for VAT only on the difference between the price paid for an item and the price at which you sell it – the margin. You will not be able to reclaim any input VAT when the goods are purchased and will only pay over to HMRC VAT on the difference between the purchase and selling price. You won’t pay any VAT if you don’t make a profit on a deal and if you use the margin scheme, you can still use normal VAT accounting for other items that you sell. You can also reclaim VAT on business expenses such as overheads.

You can only use the margin scheme for a vehicle that has at some point actually been driven on the road for business or pleasure – HM Revenue & Customs (HMRC) doesn’t consider a vehicle to be second-hand just because it’s been registered, has delivery mileage and has been bought and re-sold.

You can only use the margin scheme for a vehicle that has at some point actually been driven on the road for business or pleasure – HM Revenue & Customs (HMRC) doesn’t consider a vehicle to be second-hand just because it’s been registered, has delivery mileage and has been bought and re-sold.
 
    Your purchase price is everything which you had to pay for the vehicle. You must not reduce the margin by deducting any cost to you of bringing the vehicle to sale such as repairs, refurbishment, accessories or your business overheads.  Your selling price is everything which you are to receive for the vehicle, whether from the buyer or a third party. It includes incidental charges such as for an MOT and accessories fitted prior to the sale.

You can only use the margin scheme for a vehicle that has at some point actually been driven on the road for business or pleasure – HM Revenue & Customs (HMRC) doesn’t consider a vehicle to be second-hand just because it’s been registered, has delivery mileage and has been bought and re-sold.
 
 You should be aware that it is still your gross sales, rather than just the total of the ‘margins’ which makes up your VAT turnover for registration purposes.

 Capital Allowances – Integral Features

Q: My company is currently in the process of constructing a new business premises. I am aware that the old industrial building allowances have gradually been phased out. Is there any immediate tax relief we can get on the construction of the building?

A: It is correct to say that industrial building allowances are being phased out and will be completely withdrawn from April 2011. However expenditure on the provision or replacement of integral features can qualify for capital allowances. Assets which are classed as integral features are an electrical system, a cold water system, a space or water heating system, a powered system of ventilation, air cooling or air purification including floors or ceilings in such a system, a lift, an escalator or moving walkway and external solar shading.

Integral features qualify for an annual writing down allowance of 10%. This rate is thought more appropriate as the integral features usually have a longer useful economic life than other plant and machinery. Despite the lower writing down allowance the expenditure can be claimed under the annual investment allowance so the expenditure could be claimed in full up to the annual investment threshold of £100,000. This may be more advantageous when other assets purchased qualify for the main writing down allowance of 20%.

Overseas property

Q: I own a property in Spain and I have been told that I have to declare the income from this property on my UK tax return, is this correct?

A: If you live and pay tax in the UK then you must declare rental income from overseas rental properties on the foreign pages of your tax return.  The profit from the overseas lettings can be worked out in exactly the same way as for a UK property; however if you make a loss from the rental then this cannot be offset against profits from UK rental properties. Another thing to consider is that if you live and pay tax in the UK then if you sell the property and make a gain this will be subject to UK Capital Gains Tax.

If you do make profits or a capital gain then you may find that there is a foreign tax charge.  If this is the case then you will usually get some relief on your UK tax return for this, so that you do not end up paying tax twice.

The above assumes that the taxpayer lives and pays tax in the UK. However if you are not originally from the UK, or spend less than half of the year here then the tax situation can change.  The residency status of an individual is a complex area of legislation and if you have any queries concerning your liability to tax on overseas rental properties please take personal advice.

Distance selling

Q: My VAT registered business is selling goods by mail order and I have just dispatched some goods to an individual in France who is not VAT registered. Should I be charging VAT on these goods?

A: When you sell to non VAT registered individuals in EU countries this is known as distance selling and the sale is treated as if it has taken place in the UK.  Therefore you must charge VAT at the applicable UK VAT rate and enter the details in Box 1 and Box 6 of your return as normal. 

If however the level of your sales to any one EU country exceeds a certain limit then you must register for VAT in that country.  This limit is known as the distance selling threshold.  Each EU country sets its own threshold which can be between €35,000andr €100,000 per year (or the country’s currency equivalent if not using Euro’s).  Once a UK business registers for VAT in an EU country then all the sales made to individuals there will be subject to the VAT rate applicable in that country instead of the UK.  

VAT – online registration

Q: I have been registered for VAT for a number of years and still do my VAT returns manually and send them in. Can I continue to do this or do I have to do it online.

A: If your annual turnover is over £100,000 you should have been filing your returns online from 1 April 2010 and paying any VAT electronically. If your annual turnover is below £100,000 the deadline to go online is 1 April 2012. If you should have been filing online from 1 April 2010, HMRC will start issuing penalties to businesses who fail to submit their return online after 31 March 2011. If a return for a period ending after that date is not filed electronically, an automatic penalty will be charged. This will be between £100 and £400 depending on your annual turnover.

The VAT online service system is fairly straight forward and has additional advantages which include setting up an email reminder service to advise when your next online VAT Return is due. Another benefit as you are required to make payments electronically either through Direct Debit, internet banking, telephone banking, is that you receive a further seven extra calendar (in addition to the usual one month deadline) to file your return and for the payment to reach the HMRC bank account.

What is a Dormant Company?

Q: I am intending to temporarily stop trading through my limited company and return to employment for personal reasons. I have been told that I can leave my company dormant for this period and return to it at a later date. Could you please explain to me what a dormant company is?

A: Companies House and    HMRC  both have differing definitions of what they class as a dormant company.

Companies House define a dormant company as a company which has no significant accounting transactions during it accounting period. A significant accounting transaction is one which it should enter in its accounting records. If a company has been dormant since the end of its last accounting period there is no need to submit full accounts. A dormant set of accounts can be submitted which do not have to contain a profit and loss account or a directors report. An annual return does still have to be filed yearly while the company is dormant.

HMRC consider a company to be dormant when it is not active, i.e. they are not trading. If no sales are made by a company HMRC will consider them dormant for tax purposes. A dormant company is not required to make a tax return. This exemption is gained by writing to HMRC informing them of the date on which the company stopped trading. In return HMRC will issue a final notice to file (if appropriate) and will not issue another notice until they are informed in writing that the company is once again trading.

How to Register a Partnership?

Q: My business partner and I have decided to carry on trade as a partnership. What are the formalities in registering ourselves and the partnership with the tax authorities?

A: When you become self employed you should register with HMRC. You can register either online, by telephone or by post. Details on how to register online or by telephone are on the HMRC website, http://www.hmrc.gov.uk.

If registering by post, HMRC have issued new forms from 25 October 2010 to use for partners and partnerships.

Form SA400 should be completed on behalf of the partnership by the nominated partner and will enable HMRC to issue the partnership with a unique taxpayer reference (UTR) number. This number should be quoted on the partnership self assessment tax return. Form SA401 should be completed by each partner and will enable HMRC to issue them with a UTR, if they do not already have one. This form will also register the partners for class 2 national insurance contributions.

If you need assistance on registering with HMRC or starting a business please contact us.

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.

 

 

December 2010 Questions and Answers

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!!!

Meals provided for employees

Q: I own a gift shop and we are now opening longer hours in the run up to Christmas.  On certain days this means opening late at night and we are now opening on Sundays too.  I need my staff to do additional hours during this busy period and want to pay for their meals when they are working longer hours than usual.  If I do this, will they have to pay tax on the cost of me providing the meals?

A: If you offer free or subsidised meals at your business premises for your staff, this can be done free of tax and National Insurance, but only if the offer is made to all employees, including directors and part-time workers.  If the offer is only made to certain employees, the exemption does not apply and then the cost of every meal represents a chargeable benefit in kind.  This must then be reported on the employer year end P11D forms, and tax and National Insurance would be due on the cost of providing the food and drink.

It is important to note that the offer has to be available for all employees, but if any staff decline the offer, it does not mean that the exemption is lost.  The meals do not have to be given to all employees at the same time, they just all need to have the opportunity to take them.  You should therefore consider the different working patterns of your staff and perhaps offer the meals at various times on different days of the week to ensure that all staff are included.

If the meals do not qualify for the exemption, you could, as the employer, offer to settle the tax and national insurance liabilities on behalf of the staff, however this would increase the cost to you considerably.

Increase in VAT standard rate

Q: I know that the standard rate of VAT is due to increase in January 2011, but can you tell me how this will affect my business?

A: The standard rate of VAT will increase from 17.5% to 20% with effect from 4 January 2011.  The way in which this will affect your business will depend on whether you are a cash or invoice business.

If you have a cash business, the new rate of 20% will apply to the takings you receive on or after 4 January 2011 and you should ensure that your pricing and any electronic till systems are updated to cope with this.  For any sales made prior to that date, the current rate of 17.5% will continue to apply.

If you are raising invoices, the new rate should be shown on all invoices raised on or after 4 January 2011 providing that they are being raised within 14 days of the goods or services being provided.  On the other hand, if you raise an invoice after the new rate has been introduced which relates to goods or services that were provided before 4 January 2011, you can apply the current rate of 17.5%.  This would probably only be necessary where you are supplying a non-VAT registered customer though, as a VAT registered business could just reclaim the higher amount on their next VAT return.

It is important to remember that if you raise a credit note on or after 4 January next year, you must apply the VAT rate that was in force at the time when the original invoice was issued.

Dormant Company

Q: I have been self-employed for a few years and due to the success of my business, I am now considering incorporating so I can trade through a limited company.  I have used my current trading name since I first started and want to use the same name for my limited company.  Will I be able to do this and can I protect the business name?

A: One way of partly protecting the name is to set up a dormant limited company, which you can trade through at a later date when you decide to incorporate your business.  Although you would not be using the company to run your business at first, it would still be subject to the same filing requirements with regard to an annual return and accounts, but would be classed as dormant if no trading transactions have taken place.

Simplified dormant company accounts must be submitted to Companies House each year, and HM Revenue and Customs should also be informed of the company’s dormant status.

Once you decide to bring your business into the dormant company, all the assets and trade should be transferred in and Companies House and HMRC must be notified of the change in status for the company. Form CT41G (new company details) should be completed and filed with HMRC in order that notices to file corporation tax returns can be issued.

If at some point during the company’s life trade ceases for any reason, the company may be put back into a dormant state to avoid the need for full accounts and tax returns to be submitted to HMRC; however abbreviated accounts would still be required by Companies House.

It is important to remember that the timing of an incorporation, or indeed cessation of a business can be crucial from a tax point of view and therefore it is a good idea to seek professional advice before you stop or start trading, in order that it can be managed in the most tax efficient way.  If you would like to discuss this, please contact us and we will be happy to speak about the circumstances that may apply to your business.

Gift aid relief on one off donations

Q: I will be attending a number of fund raising functions over the festive season. I know that I get tax relief on the regular charitable donations I make under the gift aid scheme, but what about one off donations I make and items purchased in auctions at such events?

A: One off donations do qualify for tax relief, providing that the guidelines set out for gift aid relief are followed.  For the charity to claim tax relief under gift aid, you must provide personal details including your name and address and confirm that you are a taxpayer.  This entitles the charity to treat your donation as being made net of basic rate tax and the charity then reclaims the calculated amount of basic rate tax. In addition, if the donor is a higher rate taxpayer, they can claim higher rate tax relief on the amount donated.

The payment for an item at a charity auction is not officially a gift to charity, but HM Revenue & Customs do recognise that people may intentionally pay more than an item is worth, in order to support the charity.  The Revenue will therefore treat such payments as donations qualifying for tax relief under the gift aid scheme, providing that the other rules of the scheme are met and the benefits don’t exceed certain limits.

To calculate how much can be considered as a qualifying donation for gift aid relief, you need to consider if the item is commercially available. Where you can buy the item, the amount over and above the retail price is considered to qualify for gift aid.  When it is not available, for example an item that is signed by a particular celebrity, the value of the item auctioned is the price paid by the successful bidder. A bidder is likely to be prepared to pay more for such an item because it is unique.

Where an individual purchases a number of different items at charitable auctions, each item must be considered separately as the treatment could differ for each item purchased.  It is therefore advisable to seek professional advice in order that the correct relief is claimed.
 

Corporate gym membership

Q: I would like to treat my staff with a bonus this Christmas and was considering a corporate gym membership at a local health club.  Will my staff have to pay any tax or National Insurance on the amount I pay for their membership?

A: If you provide your staff with access to sporting or recreational facilities, this can be a tax free benefit in kind for the employees providing that certain conditions are met, although gym membership is unlikely to qualify.

The facilities must be available for use by all of your firm’s employees and must not be available to the general public.  The facilities do not have to be used exclusively by your firm’s employees though, so if you jointly offer the facility with another firm and their employees use the facilities too, the membership is still tax free.

The cost of the membership is not tax free where the facilities are open to the public, or based at a private residence or holiday accommodation, or where the membership provides you with use of a vehicle (which includes boats and aircraft).

You may wish to consider securing preferential rates at your local health club or gym rather than offering to meet the full cost of the membership, as the provision of the membership will be a taxable benefit in kind and your staff will be taxed on the amount you pay on their behalf. 
 

Category: PAYE, NIC & Benefits In Kind

 
 

Going to work on a ship

Q: Unfortunately I had to close my restaurant earlier this year due to the recession.  After several months of looking for work, I have just got a new job working on a ship. A friend told me that if I work overseas, I will not have to pay tax on my earnings, is that correct please?

A: There are special rules for employees who are classified as seafarers and providing that certain conditions are met, it may be possible to claim the seafarers’ earnings deduction.

In order to qualify, you must be working under a contract of employment as the rules do not apply to self-employed individuals.  You must be working on a ship – oil rigs and offshore installations do not qualify, but cruise liners, tankers and passenger vessels do qualify as ships for this relief.  The other main condition is that you must be working wholly or partly abroad – this means outside UK territorial waters.

You must have a qualifying period of at least 365 days in order to be eligible to claim the relief and you must spend more than fifty percent of that time outside the UK for that period.  Days of departure from and return to the UK must be recorded and any documentation to support those dates should be retained.  You must record all ports of call for each voyage, as well as details of each ship you work on.

Claims must be made on a self assessment tax return each year and there are special sections that must be completed in order to claim the relief.  Providing that a qualifying claim is made, the earnings during that qualifying period are not subject to tax in the UK.

This is a complex area of legislation and you should seek advice about your own personal circumstances to ascertain whether or not you will be eligible for the relief.

 
 

National Insurance Contributions for the self-employed

Q: I recently applied for a state pension forecast and have had a response showing that I have already contributed enough to get my state pension.  Does this mean that I can stop paying National Insurance on my self-employed earnings?

A: Unfortunately, just because you have contributed enough National Insurance to qualify for your state pension, this does not mean that you can stop paying National insurance if you have not yet reached pensionable age.

There are two classes of National Insurance that are applicable to self-employed individuals, Class II which is sometimes called the ‘weekly stamp’ and Class IV which is levied on profits if they exceed a certain amount.

Class II National Insurance Contributions must be paid until the earlier of the date on which you cease to trade, or the day on which you reach the qualifying age for state pension. For those individuals who have a low income, it is possible to apply for a small earnings exemption from Class II.

Class IV National Insurance Contributions are computed according to the net profit each year on your self assessment tax return. The final liability for Class IV Contributions falls in the tax year you cease to trade, or the year you reach the qualifying age for state pension.

National Insurance is a complex area of legislation, particularly for individuals who are required to pay more than one class.  If you have any queries concerning your liability to pay National Insurance, please consult us.

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.

 

Christmas Tax Tips

Guidance on Christmas Parties and Gifts

Wit the year-end fast approaching this seems like a good time to remind everyone of the tax surrounding tax and VAT when it comes to Christmas parties and giving gifts to customers and staff.

Staff Christmas Parties

An employer can pay up to £150 per head per tax year for the provision of a Christmas party or similar annual function, with no liability to income tax arising on the employee. The cost per head must include the cost of the actual party or function (including room hire, food and drinks, entertainment and any other associated costs), any transport or accommodation provided for people and any value added tax charged whether or not it can be reclaimed.

The cost per head is calculated by dividing the total cost by the number of people actually attending. As long as the cost doesn’t exceed £150 per head there is no tax charge on the employee, but if the amount exceeds £150 the full cost is treated as a taxable benefit, not just the excess.

The employer can claim the full cost for employees and their partners as an allowable expense, but cannot reclaim VAT on expenses related to non-employees. Accordingly the VAT charge will need to be split.

All employees (or where applicable all those at a particular location) must be eligible to attend even though some may choose not to.

During the tax year the employer may hold a number of annual functions, e.g. a Summer Outing, a Christmas Party and a Barbecue. In such cases the cost per head of each function is added together and only those functions where the total cost per head is below £150 will be free of income tax. The functions that exceed the limit will be subject to a tax liability on the employee. For example, if the Summer Outing costs £90 per head, the Christmas Party costs £50 per head and the Barbecue £40 per head, although the total of all three functions exceeds £150 per head, two of the functions when aggregated are less than the limit and will not be subject to income tax. Only the Barbecue at £40 per head will be taxable. Where the employee takes a partner who is not an employee, the employee will suffer a benefit in kind charge of £80, i.e. £40 x 2.

The employer may enter into a settlement agreement with HM Revenue and Taxes through which the employer carries the cost of the income tax and national insurance charges payable.

Gifts to Employees

If an employer gives an employee a non-cash gift such as a bottle of wine or a Christmas hamper, then depending upon the value, a benefit in kind charge may arise on which the employee would be subject to tax. In practice the tax authorities accept that ‘trivial’ gifts may not be taxable. Although not formally defined, it is accepted that a gift such as a turkey given in the spirit of Christmas, or a bouquet of flowers to celebrate a marriage or birth is not part of any reward for services, and the benefit should be treated as trivial and not taxable.

As with the annual function, the employer can enter into a Pay As You Earn Settlement Agreement (PSA) with the Inland Revenue in order to pay the tax and national insurance liability on the employee’s behalf.

Gifts to Customers

Normally gifts for customers and clients are treated in the same manner as entertainment but gifts up to £50 carrying conspicuous advertisement can be treated as an allowable expense. However as with Christmas parties you need to be careful as if the gift costs more than £50 including gift wrap the whole amount will be disallowed, not just the excess.

Common examples of allowable gifts are diaries, flash-drives, pens and mouse mats. The advertisement should be on the actual gift itself, and not just on the wrapping.

Bookkeeping Basics

It is a legal requirement for every business to keep accurate records of its financial transactions. The basic need it to keep track of what the business owes, what the business owns, what its income is and what its outgoings are.

 

There are lots of inexpensive bookkeeping programmes available designed for non-accounting types, and nowadays most people have some sort of spreadsheet programme which makes it quite straightforward to record money coming in and out of the business.

 

At its simplest, cash accounting is a system where transactions are only recorded when money is either paid out or received. Sales and purchases on credit are only recorded when money changes hands, and no notice is taken of things like stock purchased but not yet used. This is often referred to as ‘single entry bookkeeping’ and is only really appropriate for very simple businesses.

 

Accruals accounting goes one step further, and records income when a sale is made regardless of whether or not it has been paid for, purchases when they are received even if not paid, and keeps track of things like the value of stock on hand. This is generally known as ‘double entry bookkeeping’.

 

It is essential to keep records up to date. With the best will in the world if you only try to make sense of what each scrap of paper or receipt is for every six months, you WILL forget, and in practice will probably end up not claiming for costs that are quite legitimate simply because you forget.

 

Even for small businesses, try to sort out your record keeping at least monthly. Any longer than that and the backlog ends up just growing.

 

Keep and sort your receipts for all outgoings. Use some type of system to list them by date and type of expenditure, and use a numbering system so you can find individual receipts if needed. At its simplest a spreadsheet with columns for reference number, date, amount and description may suffice. Number the first receipt ‘1’, the next ‘2’ and so on, write the number on the receipt and file them all in number order. To make it easier to analyse where your money is going, use different columns for major expenses, e.g. stock, printing, advertising or whatever is important in your business.

 

Record all cash sales in some form of register, again it can be something as simple as a spreadsheet showing the date, amount and any required details. If you sell on credit make sure that invoices go out quickly, and keep a separate page for each customer recording the date and amount of each sale, and the date and amount of each receipt.

 

Keep a summary comparing income and expenditure so you can see how healthy your finances are. It is particularly common for small businesses to try to manage the business only by looking at the bank balance, but all to often you can be caught out by irregular bills that only come into focus when it’s time to make payment.

 

Your bookkeeping system can be as simple or as complicated as you like, as long as you can establish easily where your money is coming from, where it is going to, what assets the business owns, what money it is owed and what money it owes. Although simple spreadsheets may work for very simple businesses most would benefit from at least a basic computerised record keeping system. Some of the best available are also some of the least expensive.

 

As an accountant I often help clients choose suitable packages and of course we do perform bookkeeping services for clients. As an absolute minimum though if you do outsource your bookkeeping, make a point at least once a month of going through the reports in detail. Nobody understands your business as well as you and you owe it to yourself to keep on top of the numbers as well as everything else. By all means get help, but never leave it completely to someone else.

Questions and Answers Bumper Edition

Each month we prepare a ‘Q&A’ covering questions raised by clients. Although I will normally post them here monthly, this is a catch-up of the past few months, so happy reading!

As always if you want to discuss any of the items as they apply to your particular circumstances please get in touch and we can arrange a suitable time to meet.

June 2010 Questions and Answers

Cycle To Work and Tax Free Bicycles

Q: Due to the increase in fuel prices over recent months, I’ve now started cycling to work. My employer has suggested that they could offer me a new bicycle under the “cycle to work” scheme. If I accept this offer, will I get taxed on this?

A: The UK government is keen to encourage use of more sustainable “greener” modes of transport, so introduced substantial tax breaks in the Finance Act 2003 for employees who cycle to work.

No tax or National Insurance is payable if your employer provides you with a bicycle and/or related safety equipment and they ensure the provision of the bicycle and equipment is available to all staff, and they are used for journeys to and from the workplace.

Some firms have implemented a salary sacrifice scheme to encourage the use of this scheme, as it reduces the amount of employers National Insurance Contributions payable.

However, in December 2009 HM Revenue & Customs clarified where employees are aged under 18, they are prevented from entering into a legal agreement under which the employer would loan them the bike. Therefore they cannot participate in the scheme which means that the ‘All Employee’ condition of the cycle to work scheme is not met. You should ensure you check the validity of the scheme before agreeing to a salary sacrifice.

Medical Insurance for Employees

Q: I’d like to arrange medical insurance for my employees but I don’t want them to be liable for the National Insurance Contributions. Is this possible?

A: Employers who would like to provide medical insurance or other benefits to employees without the employee incurring a National Insurance liability can make a voluntary agreement with HM Revenue & Customs to meet the tax payable on the benefits in kind. This is known as a PAYE Settlement Agreement (PSA).

If HMRC agree to your request for a PSA for any given tax year, you do not have to enter the items covered on the employer year end forms P9D or P11D.  During the year you will not be required to operate PAYE on them, or assess the items for National insurance Contribution purposes if they would otherwise be liable for Class I or Class IA NIC.

You will actually pay Class 1B NIC on the items included in any PSAs and will be required to meet the tax liability on the total amount of the gifts to your employees. This will result in your employees paying no tax on the gifts they have received.

Donating Prizes for A Raffle

Q: I run a pub and restaurant in a small village and our local football club are holding a fundraising raffle. We have agreed to donate a voucher for a meal for two together with a bottle of house wine as a raffle prize. We have also agreed to donate part of the night’s bar takings to the club. How would we treat this for VAT purposes?

A: The voucher would represent the provision of free hospitality to someone other than an employee and it would therefore be treated as ‘business entertainment’ by HM Revenue & Customs. Unfortunately, this means that any input tax you incur on providing the “supply” will be disallowed.

In the case of a supply of catering it is likely that the majority of the components used to make up the meal will be zero-rated foodstuffs, but you should disallow the recovery of input VAT incurred on any standard-rated items given away, such as the alcohol or ice-cream for the dessert.

The fact you have chosen to donate a proportion of the bar takings does not reduce your VAT liability and output tax should still be accounted for on the full amount of the bar takings. VAT exemption does exist for certain charitable fund-raising events by charities and other eligible bodies where they are advertised as such.

Renting a room out during Wimbledon Fortnight

Q: I live near Wimbledon Tennis Club and I have been approached to see if I would rent some of my rooms to spectators for the fortnight. The amount offered is quite tempting. Would I have to declare this for tax purposes?

A: The short answer is yes. However, providing that the amount involved is less than £4,250 and you continue to live in the property whilst renting the room(s) out, you could claim ‘Rent a Room relief’.

This relief was introduced to encourage home owners to use surplus rooms and benefit by not paying tax. It is restricted to the letting of fully furnished rooms for residential purposes only and the property must be your main home.

Even though you will not pay tax if the rental income is less than the relief available, you should report the income on your tax return, and any excess above the £4,250 is taxable at your marginal rate.

Gift of Money To Purchase a Home

Q: A friend of mine will be receiving £50,000 from a family member to buy a flat. Can you explain the tax implications for my friend, and the person making the gift?

A: The gift of cash in this way does not have any income tax implication for the recipient. However you should make the family member aware of the Inheritance Tax (IHT) implications which apply. You can give £3,000 per annum without any IHT implications. In addition, the £3,000 allowance can be carried forward from the previous year if unused, making up to £6,000 IHT free.

The balance of the gift is called a potentially exempt transfer (PET). This means that if the donor dies within 7 years there may be tax payable by the donor’s estate. Tapering provisions apply so the longer the donor lives the less the potential tax.

The two extremes are that gifts made “on the death bed” are fully taxable, but gifts where the donor survives 7 years are not taxable. In addition, to the £3,000 per annum exemptions there are specific exemptions for normal expenditure out of income, gifts on occasion of marriage, small gifts, gifts to spouses and other specific gifts.

The rules are very complex and if you are the donor, you should seek specialist advice from your us. The answer also assumes that the donee is not an executor or trustee of the donor’s estate. If he is, specific advice will be required, as the answer will change.

Selling Through Classified Adverts & Internet Auctions Sites

Q: For many years I have sold a number of old second hand items I own through classified adverts in my local newspaper, and I have recently started selling on internet auction sites. I saw an article in a magazine which suggested I may have to pay tax on the money I receive in this way. Is this correct?

A: If you are just selling some unwanted items that have been lying around in the attic and your home, the answer is probably no, as in order to pay tax on the goods you sell, you either have to be trading or make a capital gain.

You are likely to be treated as trading where the HMRC consider you to be purchasing or making goods for resale with the intention of making a profit, or sell goods for others and receive a commission.

If you only sell occasional, unwanted personal items through internet auctions, car boot sales and classified advertisements then it is unlikely they will view you as self-employed. This is due to the fact that in most cases the second hand value and amount you receive rarely exceeds the original price you paid for the items, and as tax is only chargeable on the profits you make, no tax will be chargeable.

Capital Gains Tax is only charged on gains you make and if you sell an item for less than you purchased it for you will not make a gain. It is the gain that is taxed, not the amount you receive. Therefore, you will only have to pay tax if the items you sell have increased in value during the time you have owned them, and as they are likely to be personal effects or goods (known as ‘chattels’) you are selling, which are individually worth less than £6,000 when you dispose of them, it is very unlikely you will have made a gain.

If you are concerned that your situation may be considered to be trading you should discuss this with us, as there is a late registration penalty if you do not register within 3 months of starting to trade.

July 2010 Questions and Answers

Statutory Maternity Pay & Two Employments

Q: I have recently become pregnant and currently employed in two part time jobs. Am I entitled to maternity pay and leave from both employers? How much will I receive?

A: To qualify for Statutory Maternity Pay (SMP) and maternity leave then you must have been employed by the same employer continuously for at least 26 weeks into the 15th week before the week your baby is due (the qualifying week).

You also must have earned at least £97 per week on average for the eight weeks prior to the fifteenth week before the baby is due.

Therefore, provided that you have worked concurrently for each employer for at least twenty six weeks prior to the qualifying date of the 15th week before the baby is due then you will be able to claim from each employer.

The amount you receive depends on the amount you earn from each job. The first six weeks will be paid at 90% of your average earnings for the eight weeks prior to confinement. The remaining 33 weeks will be paid at 90% of your average earnings as above or at the rate of £124.88 per week, whichever is the lower.

Goods Taken for Own Use

Q: We run a lighting shop and have taken delivery of some lamps that my spouse really likes. A friend of mine in the trade said it would be alright to just pay into the business the cost price of the lamps. Is it alright to do this?

A: Regrettably your friend is wrong.

On any goods or items from stock that you remove for your own use you will have to account to the business for the full selling price and assuming that you are VAT registered, the VAT applicable to the sale.

Gift Of Goods To Charity Shops

Q: I have recently cleared out lots of old summer clothes which I have stored over the years. If I give these items to my local charity shop can I include a deduction in my tax return for Gift Aid? As I am a higher rate taxpayer will I receive 40% tax relief on this gift?

A: Unfortunately donations of goods and other items to a chosen charity cannot receive tax relief under Gift Aid as the scheme only applies to gifts of money. However, your charity can act as an agent for you by selling goods on your behalf in the hope that you then donate the proceeds from the sales to the Charity.

If the donation of the eventual sale proceeds is made in this way then you will be able to include a deduction for gift aid in your tax return, and higher rate taxpayers will receive a further 20% tax relief either in the tax year you make the donation, or the year before if you choose to carry it back.

Initially, we recommend you speak to your local Charity shop to see if they will actually sell the goods on your behalf, as they must remain your property until they are sold. Also you reserve the right to keep all or part of the proceeds of the sale, so the charity must keep a record of the items they sell on your behalf and if they ask you to complete a Gift Aid declaration before the sale (in anticipation of the proceeds being gifted to them) the wording of that declaration must not force you to make a donation as you must retain a choice of whether or not to gift the proceeds.

Capital Allowances on a new Van

Q: I’m coming to the end of my third year of business as a soletrader, and understand I can reduce my tax liability by investing in a new van and some equipment before my accounting year ends. Can you explain further?

A: By purchasing equipment for your business before the end of your accounting period, you can receive tax relief in the form of capital allowances. The amount of tax relief you receive depends on whether you are a higher rate tax payer (currently 40%), or a basic rate taxpayer (20%). You will also receive National Insurance Class 4 relief of either 1% or 8% depending on the level of profits for the year.

Under current rules, the majority of small businesses are able to claim a 100% Annual Investment Allowance (AIA) on the first £100,000 of expenditure on most types of plant and machinery (except cars) in the 2010/11 tax year. Any expenditure exceeding this level will receive a 20% writing down allowance (WDA).

Vans qualify for the AIA allowance, and therefore assuming you do not have any private use of these items, the full cost of the new van and other items will be offset against your self-employed profits in the year.

You should also be aware the new government recently proposed a reduction in capital allowances rates. From April 2012, the maximum amount of AIA will reduce to £25,000, and the standard writing down allowance will also be reduced to 18%.

Recovering VAT on Purchases before Registration

Q: I recently registered my small retail outlet for VAT and read that I am able to reclaim all of the input VAT on goods I purchased, (and subsequently sold) since I first started trading two years ago? Is this possible?

A: Unfortunately not – you can only claim back the VAT on goods that you have acquired in the 3 years prior to registration which are still held in stock (or used to make other goods which are still held in stock) and originally acquired for the business purposes. This also includes VAT incurred on fixed assets you still use in your business.

You can also recover the vat incurred on services which have been supplied within 6 months prior to becoming registered, assuming they were also supplied for the purpose of the business. Therefore, any VAT suffered on goods which have been sold on to customers cannot be re-claimed.

To reclaim VAT on the allowable items you need to include the claim on your first VAT return. You should also carry out a careful stock check and record the quantities of goods and the dates when you obtained them. This will form the basis of the records you need to keep to validate your claim.

Community Interest Companies

Q: I want to start a new business which benefits the schools in my local community, and recently read an article regarding Community Interest Companies. Can you provide further information?

A: Community Interest Companies (CIC’s) are a new type of company set up for the benefit of the community, not to make profit and therefore recognised as Social Enterprises. They’re regulated by the Community Interest Company Regulations 2005 and are different to most limited companies which are set up to make a profit for the shareholders.

Despite being particularly attractive to those who wish to establish their business as a benefit to the community there may be a significant tax disadvantage in operating a CIC. CIC’s cannot pay dividends in the same way as a normal limited company because the director’s salary and shareholder dividends are restricted by legislation thus ensuring the assets and profits are retained for community purposes.

Also, CICs do not have any special tax status, and are generally in the same position as any other organisation in obtaining any tax concessions and are required to submit tax returns and make accounts available for public record.

In summary Community Interest Companies are a good concept but those setting them up should be aware of the tax consequences and ensure they seek appropriate advice before proceeding.

Reducing Payments on Account

Q: I have now received my tax bill for payment on account due at the end of July. Last year my business made substantial profits, but this year I have incurred lots of expenditure and as a result my business profits have fallen. Is there any scope to reduce these payments and what are the ramifications if I do not pay on time?

A: Payments on account are generally calculated as 50% of the individual’s net tax liability for the previous year, and are used to “prepay” the tax liability due in the following January. They are made up of two payments which are due in January and July. All individuals are liable to make these payments unless their net tax liability is less than £1,000 or more than 80% of the tax due was deducted at source.

Given that your net profit and subsequent tax liability for the 2009/10 tax year is likely to be significantly less than the previous tax year (2008/09) on which the payments on account are based, you can make a claim to reduce them. The amount that you reduce these to should reflect your estimation of the tax liability for the 2009/10 tax year, which is due for payment on the 31st January 2011. Either you or your accountant can make this claim using a form SA303.

However, if it is later found that you have overestimated the fall in your income, and consequently paid too little, you will be liable to pay interest on the difference between the amounts paid as payments on account and the amount actually due. Equally, if you have overestimated, you will be due a tax refund for the year and receive an interest supplement.

Transferring a company bicycle to an employee

Q: We currently supply some of our employees with bicycles to get to our premises. Can you advise on the tax implications for us and the employees concerned. Also, some employees use the bicycles to deliver packages for business purposes, so does this affect the position?

A: Generally, company owned assets which are provided for the use of employees attract a benefit in kind based on 20% of the market value. However, bicycles which are supplied to employees for home to work travel do not attract a benefit in kind. One condition for this is that the bicycles or equipment are made available generally to all employees of the employer. This does not mean that every employee has to be provided with a bicycle or equipment, just that the offer of bicycles or equipment is open to all employees if they wish to take it up.

If your employees are using bicycles for business deliveries, it may be more tax efficient for them to own these personally. Employees who use their own pedal cycle for business mileage can claim a tax free expense of 20p per mile from the employer.

Please be aware that if you transfer the bicycle to the employee for this purpose, the employee will be assessed on the higher of the market value at the time it was first made available to employee for private use, or the market value at the time of the transfer. So if you give an employee who pays tax at basic rate, a bicycle worth £500, then he will incur a tax charge of £100.

August 2010 Questions and Answers

Sole Trader Maternity Allowance

Q: I am expecting a baby in October and will be temporarily ceasing my sole trader business.  I have been paying regular National Insurance Contributions in respect of my business, so will this entitle me to any benefits such as statutory maternity pay?

A: In order to qualify for maternity leave and statutory maternity pay, a woman must be an employee, that is to say, she must work under a contract of employment.

Employees are, of course, entitled to sick leave, paid holiday leave and maternity leave as the employer is bound by legislation.  This does not apply to self-employed individuals and so any period of leave to cover the birth of your baby will be a matter entirely up to you.

Although you will not be entitled to statutory maternity pay, you may be able to claim maternity allowance to fund the period that you will not be working, assuming you satisfy the criteria outlined in the claim form. The current rate is £124.88 or 90 per cent of your gross average weekly earnings (before tax), whichever is the smaller.  

Car Scrappage Scheme

Q: During the year I traded in my old car and purchased a new car for my business under the scrappage scheme. How do I deal with this in my accounts and tax return?

A: When a vehicle is purchased for business use, the cost of the vehicle is treated as capital expenditure and although the cost is not deducted from your trade income, capital allowances can be claimed which reduce the amount of profits charged to tax. 

When a business has taken advantage of the scrappage scheme, when purchasing a new vehicle, capital allowances are available on the amount actually paid for the car, i.e. the net amount paid after the £2,000 deduction.

The car that has been traded in under the scheme is treated as having been scrapped, so the £2,000 discount is not treated as consideration for the old vehicle.  The £2,000 does not need to be declared as taxable disposal proceeds for capital allowances purposes.

Where a sole trader or partnership business has taken advantage of the scrappage scheme, adjustments must be made to the capital allowances claims for private use of the vehicle.

For assistance with any of the above, please contact us.

Training Courses & Qualifications

Q: I have recently started to trade as a self-employed music tutor and in order to do this I had to gain a teaching qualification.  Can I deduct the cost of the training course and exams  in my first set of accounts even though the expense was incurred before I started trading?

A: When considering the cost of professional qualifications and courses, the Revenue will consider whether or not the claimant was learning new skills. 

Where the training is undertaken merely to update the current expertise and skills of the individual, this will usually be regarded as revenue expenditure and as such deductible from the business income, provided it is incurred wholly and exclusively for the purpose of the trade.

Where the cost relates to new expertise or knowledge it is classed as capital expenditure and cannot be deducted from business income.  It would appear from the query above that the teaching qualification would be classed as a new skill and therefore the expense will not be allowable.

There are instances where the distinction is not clear and there have been recent court cases concerning this area.  If you are uncertain whether or not you should be claiming the cost of training courses or qualifications, contact us for further advice.

 

Redundancy Payments

Q: I have just been made redundant and my employer has offered me a redundancy package of almost £80,000.  The managing director has told me that I will get £30,000 of this tax free – is that true?  He has also asked if I would like the settlement amount to be paid after my official leaving date.  He has told me I will pay less tax if he delays my payment – is this true, or is he just trying to improve his cashflow situation?

A: Where an individual is made redundant a tax-free amount of up to £30,000 can be paid, but care must be taken as not all termination payments qualify.  In order to qualify as a tax-free payment, the sum must relate specifically to the cessation of the employment, rather than to duties already performed or to be performed in the future.

There are special rules for payments which are made to an employee after the cessation date of their contract.  The leaver’s form P45 will show the gross pay and tax deducted up to the date of leaving and the final PAYE code that was operated.  Any payments made after the P45 has been prepared must be subjected to a BR PAYE code, which means basic rate tax is deducted from the gross amount.  

The above treatment of payments issued after the P45 means that higher rate tax payers receive an initial cashflow advantage. It is important to note, however, that this is simply deferring the higher rate tax due.  The income will need to be declared on a self assessment return and the tax will need to be paid by 31 January following the tax year in which the sum is received.  If you receive a lump sum payment this summer that will be assessable on the tax return for the year ending 5 April 2011 and therefore any additional tax due must be paid to reach the Collector by 31 January 2012.

Where termination payments consist of a number of different sums relating to loss of office, payment in lieu of notice, holiday pay and possibly disability elements and free shares, the tax situation can be very complex.  For guidance and advice, please contact us.

Is Rental Income a Trade?

Q: My husband and I invested in two residential properties earlier this year which are now both being let out.  I need to register this as a new partnership with the Revenue, but as my husband is already in full time employment, can I have all of the profits, as I have been told that this will reduce the tax and National Insurance Contribution liabilities?

A: The income from residential letting properties is not treated as trade income, as there is insufficient activity to constitute trade income.  The ownership of residential letting properties is deemed to be a form of investment and therefore you do not need to register a partnership business with HM Revenue & Customs.  Likewise, because it is a form of investment, National Insurance Contributions are not due on this source of income.

Where a husband and wife have joint investments, the income arising is assessed equally on a 50:50 basis, unless the property is actually owned in different proportions AND a joint declaration is made to that effect.  Assuming that you hold the property equally, you would each need to declare 50% of the income received and expenses incurred to the Revenue.

If you do not currently have income that fully utilises your personal allowance, you could consider having the properties held in your sole name so that all rental profits are assessed as your income.  Under the current capital gains tax legislation, there are no implications for transfers between a husband and wife, but there would be some legal fees incurred.

The long term capital gains tax and inheritance tax position should also be considered, especially if the properties are owned outright.  You should seek professional guidance before making any decisions that may have a bearing on any of these taxes.

Home Telephone & Broadband 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 at section K.

If the landline is registered in your personal name, then it is regarded as a payment made on behalf of the employee. You must report on form P11d at section B the total of all line rentals and call charges, including all calls for business use.

It may be possible, depending on your circumstances to claim an expense deduction for any business calls you make, but unfortunately no deduction is allowed for a proportion of broadband costs.

If you are making numerous calls for business purposes, it is more tax efficient for you to receive the use of a company mobile, registered in the company name. No tax or NIC liability arises on the use of a company mobile, even where the mobile is used for private calls.

PAYE Late Payment Penalties

Q: I run a small business, employing 10 employees who are all paid monthly. I recently read an article suggesting that if I fail to pay the PAYE and NIC liabilities on time I could face a penalty. Is this correct?

A: A new penalty regime was introduced with effect from 6 April 2010 and late payment penalties will now apply to monthly, quarterly or annual PAYE payments. It will include all income tax and national insurance contributions due under PAYE, the Construction Industry Scheme and student loan deductions.

There will also be late payment penalties for not paying amounts due annually on time and in full, including Class 1A National Insurance Contributions due on forms P11d and Class 1B National Insurance Contributions due on PAYE settlement agreements.

The amount of the penalty will be calculated on a sliding scale of percentages ranging from 1% to 4% and be dependent on the number of times the employer has been late making payments during the past tax year. The new penalties apply to all employers and CIS contractors, regardless of the size of the business or normal frequency of payment.

Apprentices & The National Minimum Wage

Q: I am currently looking to take on a new member of staff as an apprentice. I understand the national minimum wage rules may mean I have to pay him a certain hourly rate, is this true?

A: The new government announced that there would be changes to the National Minimum Wage that will take effect from 1 October this year.

At the moment, the National Minimum Wage for adults aged 22 years and over is £5.80 per hour. There are development rates for 18 to 21 year olds of £4.83 per hour and for 16-17 year olds of £3.57 per hour. These amounts will increase from 1st October 2010 and in addition, the National Minimum Wage will apply to workers from the age of 21, so the new weekly rates will be £5.93 for workers aged 21 and over, £4.92 for those aged between 18 and 20 and £3.64 for 16 to 17 year olds.  However there are a few workers for whom these rates do not apply.

Under current legislation, apprentices under the age of 19 are not entitled to the development rate under the National Minimum Wage scheme and apprentices aged between 19 and 25 are not entitled to the minimum wage in the first year of their contract.  From 1 October this legislation will change.  Those apprentices aged under 19 will be entitled to a minimum hourly rate of £2.50 and apprentices aged 19 or over will be entitled to £2.50 per hour in their first 12 months of the apprenticeship.

Apprentices as far as the minimum wage is concerned are either workers who have contracts of apprenticeship or workers who are taking part in the specific training programmes which are funded by a local development agency. You must ensure you have a written agreement between you and your new worker which confirms they are employed an apprentice contract.

For further information about the National Minimum Wage, you can contact the national helpline on 0800 917 2368.

September 2010 Questions and Answers

Income from car boot sales

Q: I had pitches at a couple of car boot sales earlier this year to get rid of unwanted children’s clothes, toys and various other items.  I am a self-employed hairdresser and have to complete a tax return – will I also be taxed on the £225 I took at the car boot sales?

A: The income you receive from hairdressing is taxed because you are running a trading business with a view to making a profit.  Selling goods at car boot sales is potentially also trading income; however each case must be considered on its own merits.

For somebody like yourself who has only sold their own unwanted second hand goods on a couple of occasions, HM Revenue & Customs would not deem there to be a trading activity and therefore the income received would not need to be declared on a self assessment tax return.  Likewise, because the income is not declared, relief for any associated expenses incurred (such as pitch fees and petrol/motor costs) cannot be claimed.

On the other hand if somebody regularly attends car boot sales (for instance every fortnight) with a view to making profits, HM Revenue & Customs will deem them to be trading and they would need to be registered as self-employed for tax and National Insurance purposes.

Paying tax after retirement

Q: I recently retired as a school teacher, but as I still enjoy working as a self-employed music tutor, I have opted not to receive my state pension for now.  My first Teachers’ Pension payment was paid last month, but they deducted tax from it – is this right?  I didn’t think I would need to pay tax once I was 65 years old.

A: Your Teachers Pension will be taxed in the same way that your salary used to be taxed – a PAYE coding notice will be issued annually showing you how much personal allowance is being allocated against your pension income.  The main difference when you reach retirement age is that you are no longer required to pay National Insurance Contributions.

Now that you have reached your 65th birthday, your annual personal allowance may increase.  The maximum personal allowance available for somebody aged between 65 and 74 is currently £9,490 – this allowance is pro-rated where income exceeds £22,900, down to a minimum of £6,475.  There is also a higher allowance available for individuals aged 75 and over, currently at a maximum amount of £9,640.

With regard to your self-employment, your Class II National Insurance Contributions should have ceased on the week of your 65th birthday.  Class IV Contributions, which are based on assessable profits for the year are still charged in full for the tax year of your 65th birthday, but not charged for subsequent years.

Staff Christmas Party

Q: I would like to book tickets for a staff Christmas party at a local wine bar, to reward my employees for their hard work over the last year.  It would be nice if we could invite partners to make it a special evening, but will this then be a taxable benefit in kind?

A: The cost incurred on holding staff parties/social events can be provided as a tax-free benefit, providing certain requirements are met.

The events must be open to all staff to attend and there is an annual limit of £150 per head (including VAT) per attendee that can be treated as a tax-free amount.  If the total cost per person for all functions during any tax year exceeds £150, the exemption can be claimed against one or more functions for which the total cost does not exceed £150.  The exemption cannot be deducted against the cost of any event where the amount per head has exceeded that annual limit.  Expenditure for any event not covered by the exemption would be a benefit in kind and need to be reported on the end of year form P11D accordingly.

Expenditure for staff entertaining is allowable as a deduction in your accounts on the basis that it is incurred for the benefit of your employees.  For VAT, input tax can be recovered on the proportion of entertaining expenses relating to employees only and not on any such expenditure relating to other guests.

Small Business Rate Relief

Q: A friend told me that there was an announcement in the last Budget that small business rate relief was going to be extended and this may affect my hairdressing salon.  How do I apply for the new rates?

A: That is correct; it was announced earlier this year that Small Business Rate Relief (SBRR) would be temporarily extended to help small businesses. The relief available will depend on whether the premises are in England, Northern Ireland, Scotland or Wales. 

The qualifying requirements have remained unchanged and most businesses in England will qualify if they occupy only one property and the rateable value is less than £18,000 (£25,500 for London).  Rates are charged at a reduced amount depending on the value of the property (there are three different reduced rate bands) and then further relief is given at 50% for properties with a value of less than £6,000 and at 25% with a value of less than £12,000.

The new increased rates come into effect on 1 October this year and will apply until 30 September 2011.  For premises in England the enhanced relief will mean that businesses operating from qualifying premises with a rateable value of up to £6,000 will get 100% relief.  Where the rateable value is between £6,001 and £12,000 the rate of the enhanced relief is tapered from 100% to zero.  Your local authority should issue a revised bill to you showing the increased relief now due.

In previous years, SBRR had to be applied for at the start of each valuation period, but that process has now ceased and if SBRR has been claimed in the previous year, it will automatically be applied for future years.

There are other reliefs available for community amateur sports clubs of up to 80% and various non-profit making organisations could qualify for up to 100% relief.  It is also worth noting that there are special reliefs available for certain rural businesses and hardship relief may be available for certain businesses that have difficulty in paying.

October 2010 Questions and Answers

Fuel Scale Charge

Q: How do I account for the recovery of input VAT I have paid when I purchase fuel for my business vehicles which are often also driven by employees for their private use?

A: You can recover all of the input VAT on the purchase but you must also apply a fuel scale charge which is a method used to account for the private usage. The charge is included in the output VAT box on your VAT return. The charge does not have to be calculated, but is taken from tables published by HM Revenue & Customs and is determined by the vehicle’s CO2 Emissions. The charges in the tables are amended annually (usually May 1st) to reflect the changes in fuel prices.

For example, if your vehicle has an emission rating of 160g/km CO2 the fuel scale charge would be £297. This figure is then multiplied by the VAT fraction (7/47) to find 17.5% i.e. £43.23 which must be included in box 1 for the VAT quarter. The tables increase CO2 emissions in multiples of 5. If your vehicle’s emissions are not an exact multiple of 5 then you can round down to the nearest multiple. So if your vehicle’s emission rating is 164g/km CO2, the fuel scale charge will still be £297 per quarter.

In some cases the charge may be higher than the total input VAT reclaimed for the vehicle. The only way to avoid the charge is to reclaim none of the input tax paid. This must apply to all vehicles right across your business. If this is always going to be the case you may, however, reclaim input VAT on business mileage only, but this will involve keeping a detailed business mileage log.

VAT visit from HM Revenue & Customs

Q: I have received a letter telling me that somebody from the VAT office is going to visit my business to inspect my records.  I do not believe I have done anything wrong, so why are they visiting me and what should I expect?

A: Just because you have been told you are going to have a visit from somebody at the VAT office, this does not necessarily mean that they think you are doing something wrong.  Lots of random visits are arranged and the VAT office use these random checks to ensure that you are paying or reclaiming the correct amount of VAT on your returns and that you are keeping your records in a suitable manner.  The visiting officer may offer advice and recommendations for improvements to assist you in future periods.

Before the visit takes place HM Revenue & Customs will write to you to arrange a mutually convenient date and time for the visit.  They will also confirm the person at your business they wish to speak with, which accounting records they want to inspect and how long they expect the visit to last.

During the visit the officer may inspect your business premises, examine your business records and check details of supplies made by you and to you.  At the end of the visit the officer will discuss his review with you, including any problems he has identified.  The officer will explain any adjustments that need to be made if mistakes have led to an underpayment or overpayment of VAT.  They will also explain how you should keep your records and deal with certain situations to help to avoid future errors.

Occasionally the visiting officer may have a number of queries that cannot be answered in full on the day, in which case they may need to ask you to provide further information in order that they can conclude their inspection.

Restoring a Company

Q: I have recently received a letter from Companies House stating that my Limited Company has been struck off the register. There is still money in the company bank account but the bank account has been frozen. Is there any way I can get the company reinstated to the register? Can you please explain the process to me?

A: If a company is struck off, a former director or share holder of that company can apply to have it reinstated back onto the register using a procedure called an administrative restoration. The procedure does not require a court hearing, but there is a £100 administration fee that is payable to Companies House.

The company can be re-instated within 6 years of the date that the company was struck off. This will, however, involve re-opening all of the liabilities of the company. The company will be required to file all accounts and annual returns which would have been due in the time the company was not on the register.

Administrative restoration only applies to companies that have been struck off the register for the following reasons:


* Under section 1000 of the Companies Act 2006 – The registrar has reasonable cause to believe that the company is not carrying on business or in operation.

* Under section 1001 Companies Act 2006 – The registrar has reasonable cause to believe that no liquidator is acting, or that the affairs of the company are fully wound up.

October Self Assessment Filing Deadline

Q: I have received a letter from HM Revenue & Customs reminding me that I need to file my self assessment tax return by 31 October.  I did not have all of the information together, so was not able to complete it – is there a way I can avoid a late filing penalty?

A: The filing deadline of 31 October 2010 only applies to those taxpayers wishing to complete and submit a paper copy 2010 tax return.  The online filing procedure allows taxpayers to submit 2010 returns until 31 January 2011. 

There are other important deadlines that need you should also be aware of for self assessment.  Where a taxpayer receives a new source of income which is not fully taxed at source, or where capital gains have arisen during a particular tax year, HM Revenue & Customs must be notified by 5 October after the end of the tax year.

Where a taxpayer has an underpayment of tax of less than £2,000 for 2009/10 and they have employment or taxed pension income, they can ask for that underpayment to be collected through the PAYE code for the tax year 2011/12.  This means that the taxpayer settles the liability each month through the PAYE system operated on their employment/pension income from 6 April 2011 to 5 April 2012, instead of having to pay the full liability by 31 January 2011.  If you wish to settle a liability through your PAYE code, your self assessment return must be filed by 31 December.

If you would like to discuss any aspects of your self assessment return, please ask us.

Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayers’ 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.

Emergency Budget Round-up

Chancellor George Osborne revealed a mixed bag of measures that will affect small businesses around the UK in the new coalition government’s first Budget.

 

He announced that the Lib-Con coalition will not be making any cuts to capital expenditure during this parliament. This could come as good news to a number of businesses in the construction sector and should serve to protect a number of jobs.

 

One of the highlights of the speech with regard to small business organisations was the introduction of a new national insurance scheme. Under the initiative, certain businesses will be exempt from up to £5,000 of employer National Insurance payments for the first ten employees that are hired. This means new companies can save up to £50,000.

 

The scheme will not be offered to companies starting up in London or the south-east. The areas which will benefit will be Scotland, Wales, Northern Ireland, the north-east, Yorkshire and the Humber, the north-west, the East Midlands, the West Midlands and the south-west

 

Mr Osborne explained, “The government will shortly announce details of a scheme to help new businesses in targeted areas of the UK that need it most. During a three-year qualifying period, new businesses which start up in these areas will get a substantial reduction in their employer National Insurance contributions”

 

Businesses could also be encouraged by the chancellor’s announcement that corporation tax will be reduced by one per cent next year. The main rate of corporation tax will then continue to be reduced in instalments of one per cent for a total of four years. By the end of the reductions period, corporation tax is expected to stand at 24 per cent.

 

Mr Osborne commented: “The government understands the importance of the whole corporate tax system to business and will set out a more detailed programme for reform in the autumn. This will allow it to take a considered approach to implementing tax reforms and to listen to the needs of business through greater consultation. The government will provide greater certainty for business by committing to principles for corporate tax reforms. In particular, it intends to develop its view that in general a broad tax base, a low rate and a more territorial approach will improve competitiveness.”

 

Small businesses stand to see a more immediate reduction in the tax after the government announced that small companies corporation tax will be cut to 20 per cent in 2011.

 

The chancellor also announced that the enterprise finance guarantee scheme will be extended, with the intention of ensuring that finance for businesses remains accessible.

 

One of the announcements made that will affect individual taxpayers was the confirmation of an increase in the personal tax allowance. As was widely expected by industry experts, the chancellor announced a £1,000 increase, meaning income tax will now only be paid on earnings above £7,475 from April next year.

 

Value Added Tax (VAT) will, as expected, rise to 20 per cent from January 4th next year. This will be seen as a blow for many of the country’s smaller firms, who earlier this week said such a move would be damaging.

 

A recent survey published by the uSwitch price comparison website revealed that 87 per cent of business owners said the rise will hamper their business, with one-third saying it will have a negative effect on consumer spending.

 

Jake Ridge, the firm’s small business energy expert, said: “Small firms seem to be very clear about one thing – a VAT rise will be bad for business. “They need support from the government to help safeguard their future – a VAT hike could be one blow too many for businesses who have faced the brunt of the recession and are now battling their way to recovery.”

 

Residential landlords operating in the buy-to-let sector could also be forced to hang on to their investments after the chancellor announced that capital gains tax will be set at 28 per cent for taxpayers on higher rates. While the rate is lower than many experts had predicted, the timing of the change, which came into effect as of midnight on 22nd June 2010, means those planning on selling investments before the change will no longer be able to avoid the rise.