Published 28 March 2006
Tax is, well, taxing! As it's a very specialised field, about a year ago I brought in some help. Tax Accountant Tony Tesciuba (who also happens to be my Uncle) offered to answer personal and small business tax queries.
This has been hugely popular, so much so, that this is now the third instalment of the Tax Tony saga, just in time for the end of this tax-year. The process itself is simple, MoneySavers are invited to ask their question in the Chat Forum (see original link) and then they're collated and answered here in one big article.
Oh and I nearly forgot, it's important to remember the answers below are Tony's not mine, and in return for his hard work I agreed to tell people about his website www.tesciuba.com.
Last week's budget continued HMRC's stated campaign to make tax avoidance not worthwhile by 2008. Caught up in the cross fire this time are families that innocently want to set up trusts to pass wealth to their children only when they are old enough to manage it themselves. Accumulation and maintenance trusts will now carry an IHT charge unless the beneficiaries can get their hands on the dosh no later than age 18.
The favorable tax climate for small companies that we enjoy now may not last for ever. Hidden away in paragraphs 5.85 and 5.86 of the Red Book is a policy statement to target employment income disguised as dividends. I believe the Chancellor when he says he is aiming at mass-marketed managed service company schemes. But if one day he puts National Insurance on dividends, this will hurt small companies across the board. Anyway, for now he has left things as they are.
Those of you struggling to get your tax return filed by 31 January will not welcome the news that from 2008 the filing deadline is to move to 30 November if you file on line and 30 September if you use snail mail.
Otherwise, this was a fairly quiet budget, with lots of detail, but no major headlines. It does nothing to end the scandal that sees people on low wages paying a whopping 70% marginal tax rate when you take into account income tax, National Insurance and the withdrawal of tax credits.
HMRC's official budget site is here. My fan site is here.
Thanks again 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.
If you need professional help, but genuinely cannot afford it, try TaxAid. TaxAid is a
The inevitable disclaimer (well he is an accountant – Martin)
The answers to these questions are based on tax law at 
Should I tell the tax man? Companies & corporation tax Employed or self-employed How much tax will I pay? Dealing with the taxman What can I claim for? How can I pay less tax?
See Taxing Times 1 See Taxing Times 2
The law requires any person who is chargeable to income tax or capital gains tax for any year of assessment to tell HMRC within six months of the end of the year, even if they do not receive a tax return. Newly unincorporated businesses must register with HMRC within three months of starting to trade. Questions can arise when what started as a hobby drifts into being a trade or if a business is not making any money.
Generally speaking, if you are wondering if you are required to notify HMRC, almost certainly you should. Telling them cannot generate a liability that does not otherwise exist and can save a great deal of trouble later. You may also want to claim exemptions and reliefs that might be lost if you miss deadlines.
The situation is slightly different for companies, because HMRC automatically get to know about all new registrations at Companies House. The company still has to let HMRC know when it has “come into the charge for corporation tax”, normally when it starts trading.
There are some useful booklets for new businesses on the HMRC site.
I have some fact sheets about setting up in business on my website.
When hobbies turn into jobs
MoneySaver's Question:
I've been DJ-ing for a couple of years now. It started as a hobby in my spare time, but in the last few months its really taken off and I pretty much live on the earnings from it now, relying less and less on my occasional employed shift work which used to be my main income source.
I always get paid for my DJ work in cash or cheque. Hence I don't pay income tax on this portion of my income and I'm obviously concerned about the Inland Revenue catching up with me one day.
I want to register to pay tax but I am unsure if I should just ask to fill in a tax return each year or register as a sole trader to take advantage of offsetting tax against all my expenses as a DJ. I'm also worried that the Revenue might want to go back through previous income and I don't have the records I need or the money to pay them. In the last few months I have started saving all my invoices and receipts.
Oh dear. If being paid in cash exempted you from paying tax, Tesco would be a lot better off.
I'm afraid I can only advise you to make a clean breast of it right now and get registered as self employed immediately. Putting it off will only make things worse. They generally do not shout at people who come to them voluntarily and will agree estimated profits for earlier years (what else can they do?). You can't just start filling in tax returns in future, as you do have to state specifically when you started trading and lying about that is a very bad idea.
Depending on when you started trading, it might be that only one tax year's income is missing and perhaps the tax is not yet much overdue.
Get professional help if anything more than pin money is involved.
Property abroad
MoneySaver's Question:
Last year my wife and I bought a small property in
The flat is about to be rented out and will generate an income of about £300pcm. We have set ourselves up as tax payers in
Yes you do, because as
A simple phone call to your tax office will suffice to inform them. They will then issue the appropriate pages with your tax return.
Declaring overseas income
MoneySaver's Question:
I'm wondering if I or my wife needs to declare any overseas income in our tax returns. I am British, my wife is Greek. We live and work in the
The foreign properties are in my wife's name in
What is our tax position?
I am befuddled by your Greek property being in your wife's name, but the income being taxed as joint. What are you paying tax on income that is not yours for?
So far as your wife is concerned, her
Non-domicile is claimed on form DOM1 and on the non-residence pages of her tax return. Taxable income from abroad is reported on the foreign pages.
Domicile has important implications for various
Working full time and being self employed
MoneySaver's Question:
A friend has started working for himself. He has only done a few jobs worth around £300. He has had to buy in services such as web hosting. He has also bought and sold around 60 items with a small profit, (50p here, £2 there) to enable the labour side of the work to take place. He hasn't declared himself self employed and is aware that he will have a £100 fine. Can the £100 be a business expense next year?
As he works full time too what requirements are there: taxes, NI etc, are there any others? I have given him the CWF1, is it just a case of sending this off?
Get the CWF1 in as soon as possible. You can do it over the phone if that's easier. They just might overlook the £100 fine, but otherwise, it is not a deductible expense.
Ask them at the same time about the Small Earnings Exemption from Class 2 NI and about deferring Class 4 NI.
The only other things you need to think about immediately are whether IR35 might apply and about registering for VAT either voluntarily or when you have to at £61,000 turnover.
Moving to self-assessment
MoneySaver's Question:
I recently started freelancing on top of my normal job. As I began this in February, after the deadline for self assessment, will I have any tax liabilities in this financial year? I have been told I will not be liable for any tax until April 2007. Is this correct? How do I go about moving to self assessment? Sorry this all seems a bit simple but I've always been on PAYE before.
The increasing complexity of the
Share dealing
MoneySaver's Question:
I do quite a lot of share dealing. I know I have not exceeded my capital gains allowance but my level of dealing is such that I am supposed to report it all. This is a pointless chore. If I don't report it and HMRC find out, is there any penalty, given that no tax was payable anyway?
You have to complete the capital gains pages if you disposed of chargeable assets, such as shares, worth more than £32,800. There is no exemption merely because no tax is payable. Although in theory there would be no penalty if no tax was lost, omitting information from your return on the grounds that it was “a pointless chore” is an extremely bad idea. You are encouraging them to wonder what else you might have omitted.
They will know about your share dealing either from your broker or from the dividend income on your return.
You could avoid the tax consequences by spread betting or by dealing within an ISA wrapper.
A property business?
MoneySaver's Question:
I live with my partner and we own our own home. Recently my parents retired and moved into rented property after selling their home in order to release the equity. They were paying rather a lot of rent so I bought another house, which I pay the mortgage on, as a long term investment as pensions are performing relatively poorly. My parents have moved into this other property now and pay their own bills, council tax etc. and give me a token amount (I suppose which could be construed as rent). This amount does not cover anywhere near the money I pay out each month on the mortgage, term assurance and buildings insurance. However, I am not concerned at that because the second home was bought for investment and hopefully will provide my partner and me a reasonable pension (and give our impending new arrival some inheritance).
Where do I stand regarding tax being as I am paying out more than I am getting from my parents?
It is a debatable point whether or not you are carrying on a property business that needs to be reported to HMRC at all. You have no tax to pay and (having their cake and eating it) HMRC might well deny you the use of the losses you are running against future profits, on the grounds that you are not carrying on the business commercially.
It certainly costs you nothing other than time and effort to report the rent and expenses on the land and property pages of your return. I suggest that you do, as it would make you bomb proof if HMRC ever enquired into your return and otherwise you will never be able to use the losses for certain.
Of course, if the token amount ever exceeds the properly deductible expenses, you certainly have to report the income.
Renting properties for no profit
MoneySaver's Question:
I have been renting a residential property out for over two years. Do I need to declare this for tax purposes? I am not making any profit on the income. If so, is there a problem that I haven't declared it for two years?
You will want to claim the loss as a deduction against future profits, so it is in your interests to report these to the HMRC. If you are too late for a return, a letter giving the same information will do. HMRC is unlikely to make a fuss, as no tax has been lost.
Closing companies
MoneySaver's Question:
I started a limited company over 2 years ago but only traded for the first six months. However I haven't told the Inland Revenue about the couple of hundred we made. How should we go about trying to make it legal or is the easiest going to be closing it down?
HM Revenue & Customs will object if you just try to strike off the company without having ever done a corporation tax return. Sounds like your profits were made at the time the rate of corporation tax on profits below £10,000 was 0%. So I don't expect any problems. Just write a letter to the company's tax inspector explaining what has happened and providing simple accounts. If she's happy, you can then ask Companies House to strike the company off the register.
Rental income
MoneySaver's Question:
I recently moved in to my partner's house. I own another flat which I am now renting out. My rental income is about £80 less than my mortgage payment. Am I liable to tax as I'm not even covering my mortgage? I have a young baby now so strictly speaking I guess my principal place of residence is at my partner's house.
It is the interest on the mortgage that you deduct, not the repayments. If you are still making a loss, there will be no tax to pay. However, you still have the obligation to do a tax return.
Your remark about principal place of residence hints at the CGT exemption for your home when you sell it. It is not an income tax exemption. If you sold your flat within the next 3 years, there would still be no CGT to pay on any profit you made. There are further generous exemptions that would reduce and possibly cancel any gain you made after that. I have a fact sheet here.
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Small businesses rushed to incorporate when the rate of corporation tax on the first £10,000 of profit was cut to 10% in 2000 and then to nil in 2002. Although successive budgets have chipped away at the advantages of incorporation, it remains the most tax efficient vehicle for the majority of small businesses.
Unfortunately, as several questions to me demonstrate, many people incorporated without fully appreciating the much greater regulatory burden and cost that they were letting themselves in for.
I have some fact sheets about corporate and business tax on my website.
Reducing the tax bill
MoneySaver's Question:
As a director of a small limited company (incorporated March 2001) I'd like some advice on reducing our corporation tax bill. Last financial year we paid £27,000; with only a couple of weeks left on this financial year our estimated bill is £60,000.
We have always purchased as much new machinery as we can afford. What other ways do we have to reduce our corporation tax liability?
Your accountant should have done a year end tax plan with you by now. He knows your company better than I do.
The easy things that spring immediately to mind include: (1) pushing off sales into next year or accelerating expenditure into this year, (2) pension contributions, (3) gift aid contributions to charity, (4) making specific provisions against bad stock or for any other specific reason, (5) making use of the generous allowances for qualifying R&D expenditure or for remediating contaminated land and (6) capital allowances, especially the 100% allowances for energy-saving equipment and electric or low carbon emission cars. You'd have to tell me if any of these made any sense for your business.
You might want to put off capital expenditure, because the rate of first year allowance goes back up to 50% from
I have a more detailed article about tax saving opportunities for companies on my website.
Ltd companies with no turnover
MoneySaver's Question:
My wife has a limited company incorporated last March which has earned about £150 since then. She has just received a payment slip from the tax authorities for tax year to April 2006. I don't think that she has filed a tax return for the business as it essentially earned nothing, and she understood the tax year relevant to business ended in December.
I gather though from the existence of this forum and the (payment slip) that she should have filed a return stating her operating loss for the year ending April 2006 already.
What should she be doing at this point to ensure she gets her loss recognised and satisfies the taxation rules?
Humm, Is it worth the trouble and expense of a limited company for so little turnover?
The company has to prepare accounts to
The payment slip has, as usual, been issued early. Corporation tax is due for payment 9 months after the end of the accounting period and the return is only due for filing 3 months after that.
Filing accounts
MoneySaver's Question:
I incorporated a limited company in March last year and soon it will be time to fill out my accounts. I understand that I can receive a cash rebate for filing my accounts online. Do you know where I can find details of this? Also do you know how I can go about submitting my accounts online?
I was told by HMRC that I need to simply produce a balance sheet, profit and loss account and calculations showing how the tax that I have paid relates to the profit and loss account. Is this correct? Are there any examples of the format that these three items should take (again, Inland Revenue couldn't help here).
Finally, I don't have any specialist accounting software, but I do have Excel and software to make a PDF file from an Excel document. Is that sufficient?
Quite apart from the HMRC requirement to do a corporation tax return, the company must prepare accounts in accordance with the Companies Act and file them at Companies House. There are various exemptions for small companies, but it is still an onerous responsibility.
HMRC will insist on seeing full accounts and a corporation tax computation of the tax payable. Your question sounds as if you didn't make clear to them that you have a company, not a sole trader's business.
As things stand, you will file your accounts with Companies House in hard copy form. You can file them with the Revenue by pdf, but there is no cash incentive for doing so – that's just for PAYE annual returns at the moment.
‘Fraid to say that I think you will struggle to do all this without professional help.
There are completely different tax regimes for the employed and self employed. From the tax angle, it has long been the case that both the employer and the employee are better off if the worker was not on the payroll: National Insurance rates are much lower for the self-employed and the employer avoids having to operate PAYE. On the other hand, the self-employed have fewer rights and carry the business risk themselves.
It is very important to understand that you cannot choose whether to be treated as employed or self-employed. You are what you are and if you are truly an employee, the employer has to pay you through PAYE, whether he likes it or not. Sticking a limited company in the middle of an employment relationship helps the employer, because companies do not have to be paid under PAYE. It does not help the poor employee though, because he then has to apply the infamous IR35 regulations that leave him in much the same tax position as if he had been employed directly and with all the headache of running a limited company.
HMRC has been targeting status issues for several years and has dedicated teams working on this. It is very expensive for an employer to get this wrong. HMRC will say that the amounts actually paid were the net amounts under PAYE and that the employer owes the tax and NI that it should have deducted, up to the gross equivalent pay, possibly going back over several years.
“Employed or self-employed” is a crucial question. HMRC have published guidance on their website. You should take professional advice if you are not sure.
Foreign entertainers and sportsmen
MoneySaver's Question:
I am a member of a local cricket club who last year hired a professional cricketer from
If the contract amounts to employment, your cricketer should be paid through the payroll on PAYE, like any other employee.
Otherwise, payments to a foreign entertainer or sportsman fall under the Income Tax (Entertainers and Sportsmen) Regulations 1987. The payer, the cricket club in this case, must deduct tax at basic rate unless the payment is below £1,000 or the cricketer has persuaded HMRC to apply a lower or nil rate. There are detailed rules about administration etc.
HMRC will look to you for the tax and possibly NI. In law they do not have to give you any credit for the tax that the cricketer has paid (if he has), but in practice usually will. You really need to get this right now, because it can get expensive if HMRC takes the view that you have made a net payment and are holding a deemed deduction already.
MoneySaver's Question:
I have a limited company and also have a job under PAYE. I want to pay myself for work that I do through the company. Can I submit invoices from myself to the company to avoid PAYE and deal with the personal income gained for myself via my tax return?
Either you are doing the work, or the company is. If the company is entering into contracts and issuing invoices, the income belongs to the company, not you. If you are the only shareholder, you can take what you want out as a dividend. There are minimal formalities: the directors need to pass a simple resolution before paying each dividend and you must have sufficient after-tax profits to do it. Otherwise, what you take out is a salary, taxable under PAYE.
Freelancing and PAYE
MoneySaver's Question:
I freelance at various company premises through a composite company with limited status, receiving weekly final pay via a dividend payment structure. The company handles all my IR35 compliance and tax and NI payments and sends me a net pay weekly. I also do 'odd job' design work direct for other clients from home. I will be filling a tax return for all this.
Am I right in assuming that my composite company handled freelance work is categorised as employment earnings (they will supply me with the breakdown at the end of the financial year) and that I fill employment pages in for that and the extra work I fill in as standard self employment? Where do I stand in relation to National Insurance payments because I am classed as self employed? Although my 'freelance' contract work is self employed I am classed as employed by my composite company.
Your income from the composite company is probably a mixture of PAYE income and dividends. These will go on an employment page and in
If the freelance work amounts to a trade, you must register as self-employed with HMRC within 3 months of starting, or face a £100 fine. The profit is then reported using the self-employment pages. If it's merely one-off freelance income, put it in
Agency work, PAYE or self-employed?
MoneySaver's Question:
In addition to a full-time job, I have been partly self-employed for many years. However, at the end of April, I will be leaving my salaried job to go fully self-employed. My employer, however, wants me to help out after I've left, as a replacement might take some months to arrive. They will probably want me to be employed through an agency, who will take off tax and NI. Would it be better for me to offer my services on a freelance basis so that I can make a clean break to become fully self-employed or should I accept the agency work or perhaps decline to work for them once I've left?
Don't let paying tax get in the way of earning money!
It is not clear to me how your relationship with your employer is to change. If you are still an employee, you are still an employee and must go through PAYE. You only have the option of being a self-employed freelancer if the nature of your relationship with them changes completely. I imagine that they want you employed through an agency because you will in truth still be an employee and the agency will have the headache of running the PAYE payroll. I'm not clear why they would want to pay the agency a margin on your fee though.
Payroll agencies
MoneySaver's Question:
Having worked for the same plastering contractor for nearly 3 years continuously, the Inland Revenue is now saying that I should be employed by this contractor as opposed to being Self Employed (CIS) as I am now. My yearly gross wage is approximately £46,000.
The contractor doesn't want to do this as he says it will cost him money and has instead suggested that I get paid through a payroll agency (for this service I have to pay them £28.00 per week). They would set up Single Person Company for me, by where I get paid a minimum wage and dividends. I am totally confused and wondered if you could shed any light on what would be best for me to do, would I be better off, worse off, or could you suggest any alternatives to me.
The Construction Industry Scheme is about to change radically. The upshot is that HMRC is determined to get everyone that is a true employee onto someone's payroll. I'm sorry that your employer is unwilling to do what the law requires of him and put you on PAYE.
A single person company would shift the burden and cost of running the payroll to you. The minimum wage idea won't work, because it will be caught by IR35.
It sounds to me like you've just got a pay cut.
Saving tax through incorporation
MoneySaver's Question:
I have been contracting for about 6 months and many people have encouraged me to do so by opening a limited company where I would be the director, as they say it would be more tax effective seeing that I fall into a higher tax bracket. I have got a couple of properties rented out and I am a bit concerned that a limited company under my name would increase future CGT. What would be your opinion on this? I am very confused.
Provided you are not caught by IR35 and depending on how your income falls, the chances are that incorporation would be a big tax saving for you. How much is just a matter of arithmetic, but it could be several thousand pounds a year.
You've no obligation to put the properties into the limited company, so forget about the double CGT charge.
Please take professional advice first. It's obvious that other questioners have jumped into incorporation with both eyes closed and are not prepared for the much greater formality involved.
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