Taxing Times 2
 

Thanks for this chance to meet so many MoneySavers and answer their tax questions. 

I hope my answers are informative and interesting.  I guess most of the questions are from people who do not use professional help.  It's very instructive to me to learn what issues concern you most.  It is a great shame that our tax system has become so complicated that so many people are unsure of their obligations and even of how to start their relationship with the tax authorities.

I strongly recommend the website at Hmrc.  It's excellent, particularly for Revenue taxes.  You will even find the Revenue's own internal manuals there.  The VAT sections are less easy find your way round, but it's getting better.

At ground level, I find that the real human beings that work in local offices and who answer the various Revenue and Customs telephone help lines are genuinely ready to lend a hand.  You should not be afraid to ask them to explain how to complete your self assessment forms.

If you need professional help, but genuinely cannot afford it, try TaxAid.  TaxAid is a UK charity providing free tax advice to people who cannot afford to pay a professional adviser. The service is independent and confidential.

The inevitable disclaimer (well he is an accountant – Martin)

The answers to these questions are based on tax law at January 2006.  They are general in nature and are no substitute for taking professional advice specific to your own circumstances.  While the answers are given in good faith, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the author or by MoneySavingExpert.com.

Q.  I had a terrible pc crash a while back and lost most of my self employed business records such as invoices and expense records.  Any advice?

Read the Revenue booklet SA/BK3 - Self Assessment - A guide to keeping records for the self-employed, linked from the Self Assessment tips page of their website.  You are responsible for keeping proper records, including all the supporting paperwork.  These days I think that includes proper PC back up procedures.

You should try to recreate the records.  Surely you've not lost everything?  If you have genuinely lost all your records, you have no choice but to do the best you can and estimate your income and expenditure.  Losing the records will not excuse you from doing a return.  You will have to explain that you have done this on the white space on your return.  And remember they've heard it all before.

There's a specific penalty of up to £3,000 for failure to keep records.  Provided the Revenue believes your story, you should get away with just a written warning, but they will go for penalties if they think records were destroyed deliberately or if it happens too often!  You are also lining yourself up for a bothersome investigation with unpredictable results.  If they revise your return following an investigation, you will pay a tax-geared penalty, which will be increased because you lost the records.

Best advice I can give you is be much, much more careful in future.

Oh, and make sure you pay your best estimate of the tax due on time.  The obligation to pay your tax is a separate one from the obligation to do a return.

Q. My turnover is likely to be under £15,000.  My accounting year ends on 9 October so should I be filing the year to-9 October 2004 for this year's return?

If your business has been running for more than a couple of years, the tax return will deal with the accounting year that ended in the tax year.  So yes, year ended 9 October 2004 falls in tax year 2004/05 and will be the basis period for the 2005 return.

There are special rules for the opening years of a business.  See the notes about basis periods in the Revenue help sheet IR222.

You can pick any convenient accounting period that you like.  It doesn't have to be to the anniversary of when you started.  There are special rules in IR222 if you change your accounting date from one year to the next.

Q. My husband received his self assessment with a huge amount owing (he owns a limited company and pays himself a salary under PAYE), however 1/3 of the amount they want paid is for 2005/6. Does this have to be paid before 31 January as well and how can we avoid it in the future?

Self assessment can land you with an unexpectedly large bill to pay on 31 January, particularly if your income rose last year or if last year was your first under self assessment.

On 31 January 2006, you must pay any balance for 2004/05 that was not already paid by PAYE or by the two payments on account.  And yes, you must pay the first payment on account of 2005/06 by the same day.   You can apply to reduce the payments on account by ticking box 18.6 on your return.  But you must have a genuine reason, for example if you expect next year's income to be lower.  Put the reason in the white space in box 23.7.  Interest will be payable if the reduced payments on account prove to be too low.

Please check that you are operating PAYE properly.  If that is your only or main income, there shouldn't be much to pay at the end of the year.

See the section on payments in my help sheet An Introduction to Self Assessment.

Q.  I was a director of a failing limited company, until I resigned in September 2003.  I had purchased shares of £18,000 and remained as a shareholder after I left.  In early 2005, the company was dissolved by the remaining directors.  The company was basically insolvent and my shares were worth nothing.   The directors have not published any accounts, but have written to me to say that my shares were worth nothing.  I understand that I can claim my £18,000 shares as a capital loss, and although I have no capital gains to offset this against this year, will I be able to offset it against any capital gains that I may make in future years?

When I left, I was owed over £3,000 in expenses that the company couldn't afford to reimburse to me. Can I add this £3,000 to the £18,000 capital loss, since it was effectively capital that I introduced to the company?

Things just might be better than you think.  If you subscribed for the shares (and I mean subscribed for new shares from the company, rather than buying them from someone else) your capital loss can be used for income tax purposes against your total income for the year of loss or the one before.

Otherwise, you are right, you have a capital loss which you will have to carry forward until you have a gain to use it against.

Yes, provided the company was a trading company and used your unclaimed expenses as a loan to finance its trade, I think you claim a loss.  But it will only be a capital loss, certainly not offsetable for income tax purposes. 

Q.  I've been self employed for the past eighteen years.  During that time I've amassed a considerable amount of paperwork - mountains of it.  If turned into fuel pellets it could probably heat a small planet for the remainder of eternity.  Needless to say, I'd like to ditch as much of it as possible.

For how many years is a sole trader obliged to keep old invoices, receipts, books, etc., for income tax, NI and VAT purposes? Secondly - is it wise to keep these records for longer than you have to?

The longest time limit for keeping business records is for self assessment: five years from the deadline for filing your return.  So on 1 February 2006, you can happily destroy (in an environmental friendly and secure manner of course) the records used to prepare your 1999/2000 return.  You only have to keep them longer if there is an open enquiry into your affairs, or if your 2000 return went in late.

Oh, you will want to keep permanently and very carefully the records of what you paid for any assets subject to CGT, such as properties.  The rest can go.  Make a ceremony of it – have your friends round and drink a toast to departed friends!

Q.  We've just completed my husband's first full year accounts, and we know how much tax he has to pay for 2004-05.

We realised that the HMRC would like it paid in full by 31 January 2006, but we weren't expecting to pay half as much again in advance for 2005-06.  Is it worth getting in touch with HMRC to ask if they would allow us some extra time to find the advance payment as it is a real stretch for us?

They don't really have discretion to allow time to pay and are taking a much firmer line on late payments these days.  They certainly won't waive the interest and surcharges that apply to late payments.  You really need to put aside your tax as you go along, as if you were on PAYE.  It's a burden we all have to bear, I'm afraid.

Q.  I run a small limited company business (a children's theatre company).  I pretty much run it myself and it doesn't make a lot of money having been only set up in 2003.  Is there any way I can get a cheap accountant or do the accounts myself?  For 2003/04 my accountant charged me over £500 however my business only made £71 in profit.

If cost is the only issue, you could dump the limited company and run the theatre as your self-employed business.  The accounting is simpler, but you'd have to say if you are up to it.  If you do go sole trader, be clearly aware that you are personally responsible for all the business debts.  See my help sheet What Business Structure Should I Use?

At 500 quid, you are pretty close to the irreducible minimum fee for a limited company's accounts and corporation tax work.  You can't expect the accountant to fund his clients. 

Q.  I have a small limited company which has about £35,000 left in its bank accounts.  I was the sole employee and shareholder.  It has no creditors.  The company has stopped trading and deregistered for VAT.  I am now starting the process of liquidating the company as I have had a new job for a few months.

Can you advise of the most tax efficient method to remove the cash form the company as I am now a higher rate taxpayer and would hate to pay 40% tax on this money when I have not taken money from the company in previous years! I have heard something about ESC16 but am not sure how this works.

When a company is wound up under a formal insolvency procedure, such as liquidation, any payments to the shareholders are subject to Capital Gains Tax, as if the shares had been sold. 

More likely, you are just dissolving the company and intend to have it struck off when you have finished.  This is easier and much cheaper.  Strictly speaking, any payment to the shareholders would be a dividend subject to income tax.  But by Extra Statutory Concession ESC C16, you get the more favourable capital treatment, as if there was a formal liquidation.

The conditions for ESC C16 should not cause you any difficulty, but you must get the written approval of your tax inspector first. 

You need to get a move on now.  The shares would have qualified for full business asset taper relief on the day it ceased trading.  Since then, they have been non-business assets.  The taper relief you will get is a time-apportioned average of the very generous business rate and the measly non-business rate.  So, every day that passes the taper relief wastes away.

Q.  If a company earns interest on a savings account that credits the interest once a year is this taxable on an accruals basis or when it is received?

You have to use the method that should be adopted in the company's accounts.  So if anything but a trivial amount of money is involved, this will be the accruals basis.

Q.  My total income (PAYE salary and dividends received from own limited company) is below the higher tax bracket.  Do I have to submit a personal self assessment form?

The Revenue's guidance on who will be asked to complete a tax return is here.

You will have to do a return if they have asked you for one.  Company directors will always get a return to complete.

Remember that when deciding if you are a higher rate tax payer, a £90 cash dividend is £100 of taxable income with a £10 tax credit.  So you might be closer to the higher rate threshold than you thought.

 

Q.  I build websites and I am VAT registered.  I make payments to an Eire company for a service, and they charge me 21% VAT.  My accountant and several colleagues have said that, as the VAT has already been paid, they would put it through as a normal VAT invoice with a 21% VAT rate, not-intra EC, not zero rated.

However, the VAT helpline told me that I couldn't reclaim the Irish VAT on a UK VAT return.  Instead I would need to get in touch with the Irish tax authorities and get forms from them.

Which method is correct?

I can tell you with certainty which method is wrong!  You most definitely cannot recover non-UK VAT on a UK VAT return.  You could look at Notice 723 “Refunds of VAT in the European Community for EC and non-EC traders”.  However, it's more important that you get it right in future.

You need to go back to the VAT helpline (0845 010 9000) and tell them exactly what the service you have received is.  This is crucial, because the correct VAT treatment varies enormously between different types of services.  Don't confuse them by asking how you get the Irish VAT back.

I rather suspect that the “reverse charge” rules apply here.  Check with the helpline first, but I expect that you should tell your Eire supplier your VAT number, proving that you are in business.  Then they will invoice you without any VAT at all.

You have to apply the reverse charge rules to your VAT return, treating the service as both an input and output, with standard rated VAT.  The net effect is then the same as if you had purchased the service from a UK supplier and recovered the VAT.

It's not as bad as it sounds.  You can read about it in section 15 of VAT notice 741, but it might be easier to get the VAT helpline to talk you through it.

Q.  I urgently need to submit my 2004/5 tax return and don't know where to start.

I have always had to complete the large booklet form, but in recent years have been asked to complete the 4 page quick return.

During 2004/05, I had a company car for a couple of months and then switched to using my own car and claiming for the business mileage.  I have a P11D for the company car.  I understand that I can claim some of the money spent on mileage back in the form of a tax rebate.  Is this true?

More importantly I don't know which form or return I need to complete, and will it allow for P11D entries as well as mileage when using my own car?  I know my return needs to be submitted by 31 January 2006 and need to do something quickly.

You can use the short return.  The total taxable benefits from your P11D go in box 2.4.

You are allowed 40p a mile (for the first 10,000 miles in a year then 25p after that) for using your own car on your employer's business.  If the employer pays you exactly that amount, that's the end of the matter and nothing goes on your return.  If the employer pays you more, the difference will be taxed in the P11D figure.

If the employer has paid you less than 40p a mile, you can claim the difference in box 2.5 of the short return.  There's a clear example of how to do this in the notes that you have with the short return.

There's a calculator for checking your company car P11D benefit on my website.

Q.  My wife and I set up a small business earlier this year as a partnership.  We both had full time jobs as well.  It went so well that my wife has quit her job and is now doing it full time.  Should we carry on as a partnership or should I drop out and leave it to her.  I still have my full time job paying £25,000 gross.  If I were to drop out, do I have to notify the Revenue and how will sorting the tax out work?

Sounds great.  Well done.  You still have a few grand of basic rate band available to be soaked up by your partnership income.  But please don't let the tax tail wag the commercial dog.  Do weigh up all the issues before deciding what to do about your partnership.  Having both of you fully liable for the partnership debts might be one issue!

You would give the date of your retirement on both the partnership return and your individual return in the year you go.  In future years, the Revenue will automatically send your wife the self-employed pages, instead of the partnership return and pages.  Don't forget to cancel your Class 2 NI and to change the VAT registration.

Q.  I am self employed.  On a number of occasions I have also undertaken some ad hoc deliveries for a customer and charged them less than the permitted 40p per mile allowance - i.e. I charged say £35 for 100 mile journey.  Can I claim £40 in tax relief to offset against other tax due?

Yes you can.  The 40p a mile allowance is regardless of what you charged your customer for the journey.

As a practical matter, the Revenue will allow small businesses (defined as having turnover below the VAT threshold, although it's nothing to do with VAT) to claim mileage rates, instead of the running costs of a vehicle and capital allowances.  In addition to the mileage rate, you can still claim costs that are specific to a particular business journey such as tolls, congestion charges and parking fees, and the business proportion of the interest on a loan used to purchase the vehicle.

There are full details here.

Back to the top

Q.  I am a PAYE employee.  Is it worth doing a self assessment? Can the costs of items like a broadband connection used to dial into work be claimed as an expense? Are there any expenses a PAYE employee can claim? How do I know the tax I have paid is correct?

It is notoriously difficult for an employee to claim expenses against income.   Have a look at the notes for the employment pages of the self assessment return.  The main problem is that expenses have to be wholly, necessarily and exclusively incurred in the course of the employment duties.  A better bet would be to get your employer to reimburse these costs.  If your employer won't, chances are they are not tax-deductible.

The broadband contract would have to be in the employer's name.  See the Revenue's manual on home telephones and broadband connections in employees' homes.

Ask your employer's payroll department to help you check your PAYE calculation on your P60 and in particular that you have the right tax code.

Q.  I have a full time PAYE job but have also started to do self-employed work part-time.  Do I already pay enough NI contributions through my PAYE, or should I pay contributions on self-employed earnings as well?  Currently my self-employed earnings are at the sub £1,000 level - but this could (hopefully) increase in time.

You have to register as self employed (call the help line on 0845 915 4515) and would normally have to pay the class 2 stamp.  However, you should apply for exemption from class 2, as you are well below the exemption threshold.  You'll have no class 4 NI to pay at this level.  If things take off and you approach the overall NI maximum, talk to the self-employed help line about deferment of class 4 and class 2.  I can't say more without knowing your PAYE income.

Q.  I'm in full time employment and assumed that my employers knew how much tax and NI I should be paying.  But last year I was particularly bored and filled out the online self-assessment and got a fair bit of money paid back as I'd over-paid.  When I got my cheque I also got a letter saying that I needn't fill out any further assessments.  So, if my employer over-paid last year, they could also over-pay this year.   Should I complete the assessment anyway, just in case?

Your employers are only responsible for operating PAYE properly, which might or might not result in the right amount of tax being paid.  Sounds like you had the wrong tax code.

Check the calculation at the end of the year and certainly you should make a repayment claim if you've paid too much. Ask your tax office for a new tax code if this keeps happening.

Q.  I am paid mileage allowance at I think 32p a mile, and also get a lump sum payment every month of approx £65.  Some of my colleagues have successfully claimed tax back, based on the suggestion that we are taxed assuming we get 40p a mile.  Our employer however has indicated that we will have to repay the money, as receipt of the lump sum would invalidate the legitimacy of the claim.  My dad used to work for the Inland Revenue, and even he is unsure.  What do you think?

Hummm.  I assume you are talking about using your own car on company business.

The £65 lump sum has to go through PAYE, even if it is nominally for mileage.  But, I can't see that it invalidates your claim for relief on the difference between 32p and 40p.

Ignoring the lump sum, the employer has paid you less than 40p a mile (first 10,000 miles, 25p a mile after that), so you can claim the difference as a deduction from your employment income. 

There's a Revenue fact sheet about this here.

Q.  I am employed full time, earning £23,000, with tax and NI dealt with by the firm, but since August 2005 I've been doing a little freelance work too - I expect to have earned less than £3,000 from this by April.  I have been keeping detailed records, but the problem is that I have no idea what or when to send to the tax people.

You must register a new self employment within 3 months of the end of the month in which you start up in business.  So you are in for an automatic £100 fine.  Even so, it will only get much, much worse if you don't deal with this now.  So ring the newly self employed helpline on 0845 915 4515.  They won't shout at you and will set you up for the appropriate tax return from April 2006.

Q.  I am on a 1 year freelance, self-employed, 5 day/week contract for a charitable organisation, for which I am paid a monthly fee.  The contract is likely to be renewed again in April.  I have no other work at present.  I work regularly in their offices and also at home which are in different cities and so therefore incur a large amount of travel (train and/or bus or taxi) expenses between the two.  To try and lessen the amount of time I travel I now also rent a flat for a part of the week there too whilst still paying my mortgage.  As I incur these extra work related expenses (and my life is so complicated) am I able to claim a proportion for any of the above? I.e. train, bus or taxi fares, proportion of the mortgage as I have a workroom there, rent or utility bills.

Your life really is complicated!  You don't sound like you're self-employed to me, but that's the charity's problem, not yours.

It seems to me that most of these expenses are to provide you with a convenient home and are not wholly and exclusively business expenses.  Sorry.

Q.  I am working from home as a sole trader and claiming 15% of heat and light bills.  What else can I claim and what percentage?

The Revenue is getting really sticky about this.  They've said that they won't quibble if employees claim no more than £2 a week (wow!) and I suppose that sets the expectation for the self-employed as well.

Q.  I work as a self employed window cleaner and live in a one bedroom flat.  Last year I had a problem with the tax man because I tried to claim a percentage of my rent and council tax as expenses due to the fact that I use my bedroom to do my accounts, prepare advertising cards and book appointments for work.

I tried to claim back tax because I was told that I could do this.  But my local inspector told me that I couldn't claim anything because my bedroom is not used exclusively for the use of my business.   He said that if I had a two bedroom flat and one room was set aside for my work then I could count that but I couldn't claim a percentage.  I tried to argue and he threatened to open an investigation into my accounts and that I would be charged for the time spent by the Inland Revenue to investigate me.  He also told me they can freeze my bank accounts.

I felt very intimidated and backed off.  But was it correct what they said to me? Can they really charge for the costs of an investigation even if they find nothing wrong?

The Revenue cannot charge you for the costs of an investigation and only freeze bank accounts of major fraudsters.  The suggestion that they would do such things to you is so totally outrageous that I can't believe that any responsible Revenue official would have said such a thing.

You do have a valid claim because you are running your business from home and are incurring costs doing so.  £2 a week should be safe enough and what you heard about one and two rooms is bunkum.  He was trying to trick you (rather pathetically I must say) into a CGT trap.

But a word to the wise: you really don't want trouble with the Revenue, so don't start any crusades.  They are much bigger than you.

Q.  I am an actress and paid no tax on any jobs last year but NI on some of them.  On my bill this year I have been charged the 8% class 4 NI even though I already paid class 1 NI on some jobs.  I do not pay the class 2 stamps but maybe I should? I don't understand!

I know this is not a simple issue and quite specific to entertainers but if you have any light to shed it would be appreciated!

The normal rule for mere mortals is that employees pay class 1 NI and the self employed pay class 2 and class 4.  Class 1 works out more expensive in most cases, but builds up entitlement to contribution based job seekers' allowance. 

Regulations deem entertainers in certain circumstances to be employed for NI purposes, when they would not be so, based on the usual income tax rules.  The idea is that young talent will not be put off an acting career, because they can draw the dole while resting.

Under these regulations:

• If there is any element of salary (defined as hours worked and paid on more than one occasion) then all earnings from the engagement will be subject to class 1 NI.
• Where the payment is a fee for the production, not a salary, the entertainer will be self-employed and subject to class 2 and class 4 NI.

So yes, you can end up paying class 4 and class 1.  You should also have been paying the class 2 stamp, unless your self employed earnings were below the exemption limit (£4,345 last year).

I suggest that you speak to the Revenue's self employed contact centre help line (0845 915 4655).  Check your entitlement to class 2 exemption.  You might also be entitled to a refund if you have paid too much NI, as there are overall limits when you pay more than one class.

Q.  My partner works for a sole trader (building trade) for an hourly rate but is responsible for paying his own tax and NI.   I complete his tax return every year before September so all tax/NI due is calculated by IR.  His income has been quite low with only ever a few pounds due to be paid as he only works part-time.  This year though, as well as working for an hourly rate as stated above, he has done some jobs for another builder but on a price per job basis, earning a fair bit more than in previous years.  I understand he will have more tax to pay for this tax year but am wondering if we can offset some of the income against expenses for tools, petrol, etc.  It is our family car he used to get to and from the houses he was working at.  I'm guessing he will earn approximately £12,000 to £15,000 this year, as opposed to the usual £4,000 to £5,000 - is it worth us contacting a professional accountant to complete the tax return (guessing it will cost us a few hundred pounds)? He also started using a CIS card a couple of months ago so some tax and NI has already been paid via this method.

My partner is also considering stopping working for the sole trader on an hourly rate, and starting up as properly self employed doing price jobs for a few different people - who should we speak to regarding tax, accounts and other such requirements/information for becoming a sole trader?

I think you should take professional advice from an accountant experienced in dealing with the Construction Industry Scheme.  The Revenue takes a very close interest in this sector and it is important to get things right.  Major changes to the scheme are due to come in next year.

Q.  I am a self employed doctor registered with a limited company and getting paid through Freelance Professionals.   I filed tax returns in last April, should I file again before 31 January?  Freelance Professionals charge me a heavy fee for invoicing and they also do the business expenses return service but the fee is again high.   Are there any corporations that offer invoicing, accounting and tax service at a cheaper rate for people like me who want to work with a limited company?

The tax reporting procedures and deadlines and for your limited company are completely separate from your own self-assessment on your salary and dividends from the company.  Only your personal income has to be reported by 31 January.

Your existing accountants should be telling you well in advance what information you need to give them for your personal tax return.  If not, you should be asking them why not.  I am also not happy that you understand the structure that they have set up for you as you seem to be confusing employment through your own company and true self-employment.

Many accountants offer umbrella accounting services for small businesses.  If you are not happy with the service you are getting or the price, you should ask around your colleagues for a recommendation.  Please make sure that you go to a properly qualified accountant.

Q.  My daughter works in a small hairdressing salon.  The owner pays her approximately £150 cash weekly but does not pay her tax and insurance.  How does my daughter sort this out?  The salon owner has told her she is not self employed but that it is her responsibility to sort out tax.

Oh dear.  The responsibility to operate PAYE falls squarely on the employer, not the employee.  Your daughter cannot “sort it out”.  Only in the extreme case of the employer doing a runner, leaving the PAYE unpaid, will the Revenue go after employees, and then only if they were themselves directors or colluded with the employer (and there is a niggling worry that has happened here).

But your daughter is working for an irresponsible employer and will find that she is missing out on benefits, because of her lack of an NI payment history.  You might also wonder about the employer's attitude to health and safety and other issues.

Perhaps your daughter should be telling the salon owner to operate PAYE properly, or else find another job.

Q.  I started working from home as a self employed audio transcriber in September 2005, just to supplement my full time (PAYE) income.  From September to December 2005, I've earned less than £2,000.  Will I be liable to pay any tax on that when I complete my 2005 return this month?  I should have been putting money by but haven't actually done so.  I've been paying the additional NI contributions.

This income started after April 2005, so will go on your 2006 return, not the one you are doing now.  You will have tax to pay, because this income is on top of your PAYE salary.  Get your 2006 return in before 30 September 2006 and they will be able to get the tax you owe through your PAYE code.

Q.  I am self employed as a proof reader.  It is my only income.  In my first year of self employment (April 2003 to April 2004) I earned £8,000 after expenses.  I am just about to fill in my tax return for 2004-05 and I have earned £2,000, well below the personal allowance.  Next year (2005/06) I expect to earn £12,000.  Can I "lump together" 2004-05 and 2005-06 to pay less tax in 2006?

You need to read very carefully the section on basis periods in the notes to the self-employment pages.  The period on which you are taxed in the second year depends on when you started trading and on your accounting year end.  Anyway, I'm afraid that any unused personal allowances are lost for ever.  You cannot average your profits in the way you suggest, unless you are a farmer or author.  Nice try though!

Q.  If you are employed and also self employed do you have to pay the £2 per week National Insurance or do you just pay class 4 of 8% on profits.  And if you do have to pay class 2 is it better to pay it as you go along or apply for a deferment and pay at the end of the year.  I know the Revenue will tell you to pay but they just want your money!

Also, just to check, normally you pay 8% on profit less tax free pay but being as you have a job do you just have to pay 8% on all your profit?

Class 2 NI (it's currently £2.10 a week) raises questions out of proportion to its diminutive size.  I don't think the Government can see it as a major revenue earner.  Really, it's just the membership fee to join the self-employed club.

Class 4 is at 8% of self-employed profits between £4,895 and £33,540 and then 1% on all profits after that (2004/05 rates).  Class 4 NI is based only on your self-employed profit and the calculation is not affected by your employment income.  Yes, you do have to pay class 2 as well as class 4.

(Pause to draw breath!)  If you are both employed and self employed, there is a limit on the amount of NI you can pay in grand total (except the class 4 bonus 1% is not capped).  You need to check for yourself that you do not pay too much.  You can leave it until you do your self-assessment.  But if you have good reason to believe that you will go over the limit, you should apply for deferment of either class 1 or class 4 and class 2 on the forms in booklet CA72.  You have to do this every year, I'm afraid.

Q.  I am self-employed earning up to about £4,000 pa so I don't want to pay an accountant for what is just a few transactions.  When I complete my tax return should include any tax paid as an allowable expense (3.25A)?

I was going to give this question a very quick answer: no.

But then it got me thinking about the Byzantine complexity and inconsistency of our tax system.  Of course, your regular taxes on self employment income: income tax and class 4 NI are not deductible expenses.  Pretty blindingly obvious, I would have thought.

But you could be forgiven for asking if the flat rate class 2 NI was deductible.  It isn't. 

And what about employers' NI contributions on the pay and benefits of the people you employ? That's a tax and yet it is deductible.  So is VAT on business purchases if you are not registered and VAT's a tax.  Business rates, insurance premium tax, landfill tax, aggregates levy, the tax easyJet adds to its fares, and all sorts of excise and import duties are taxes that are usually deductible.  And many years ago for some long forgotten reason you could deduct half your class 4 bill as an expense.

So it wasn't such a dumb question after all!

Q.  I rent out caravans and am also a childminder so I have two self employments.  The first year I had depreciation on the caravans and wondered if you were aware of the second or subsequent percentages.  I was going to employ an accountant but after reading Martin's tips I realised I could carry on doing my own but just did not know this info.

I hope you mean that you claimed plant and machinery capital allowances on the caravans last year.  Accounting depreciation is not a valid deduction for tax purposes.

Caravans fall into an interesting no-man's land between plant and machinery (which does qualify for capital allowances) and premises (which do not).  Chapter and verse is here in the Revenue's manuals.  Have a look, because it tells you when caravans do qualify and says what other expenditure can qualify for capital allowances.

A caravan is plant if it does not occupy a fixed site and is regularly moved as part of normal trade usage, even if it is only moved from its summer site to winter quarters.  The Revenue accepts that a caravan, which is provided mainly for holiday lettings on a holiday caravan site, is plant whether it is moved or not. Caravans occupying residential sites do not qualify for capital allowances.

The rate of First Year Allowances (FYA) has varied in recent years, but was probably 40% in your case.  The writing down allowances (WDA) in the second and subsequent years are at 25% of the remaining balance.  So if you paid £10,000 for the vans and claimed 40% FYA, the WDA in the second year is £1,500 (25% of £10,000 less 40%).  That leaves £4,500 of unrelieved cost and £1,125 WDA in the third year, and so on.  (You do not get FYA and WDA on the same asset in the same year.)

With some exceptions, you pool all your plant and machinery for capital allowances purposes, rather than doing it item by item.  See pages 5 to 8 of help sheet IR222 which explains how capital allowances work and what to do about further additions and disposals.

Note that you do not have to claim capital allowances in full or at all, if you don't want to.  You should restrict your claim, if otherwise your income would fall below the tax threshold.  The expenditure is then just carried forward and qualifies for WDA in subsequent years.

If the caravans are available for use only on one site, you should be putting this income on the land and property pages, not the self employment pages.

Q.  Hi, I am an employee of the NHS paying 40% tax and receive in the region of £1,500 in travel expenses per year before tax.  I do not currently complete a self-assessment tax return, is there any way that I can reclaim the tax that I pay (at 40%) on my travel expenses?  (Travel expenses I am paid for by my employer include rail fairs, parking charges and mileage and passenger allowances at a rate per mile).

Expenses paid to employees for travelling to work are taxable and NHS staff are treated exactly the same as anyone else.  The idea is that the travelling expense is getting you to your employment; it is not incurred “in the performance of the duties of the employment”.

There is a small get out for NHS staff.  If they can sign a special form agreed with the Revenue that they gave advice and took responsibility for the case while travelling to an emergency call-out, the expenses of that trip can be paid by the trust tax-free.  Otherwise, the payments have to be taxed through PAYE.

Q.  I am employed part-time (PAYE), but started selling cards/stationery for a company at end of October.  To date, I haven't made any profit due to starter pack/stock costs against sales.  I understand that I need to register for self-employment by the end of January, but do I need to fill in a self-assessment form by 31 January also?

You have to register as self employed within 3 months of the end of the month in which you started trading.  You are trading, even though you have not yet made a profit, so please do register now.  You will get a tax return in April 2006, on which you will report your income and expenditure in the period from starting to trade to 5 April 2006.

You do not have to do a tax return before 31 January this year, because your business started after 5 April 2005.

The cost of your stock is a deduction in arriving at your profit figure when you sell it, not before.  So I'm not sure you have correctly understood the accounting point in your question.

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