Tax is, well, taxing! As it's a very specialised field, about two years 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.
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- Help for low-income taxpayers
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This has been hugely popular, so much so that this is now the sixth instalment of the Tax Tony saga. 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 http://www.tesciuba.com/.
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Hi again MoneySavers.
Arctic Systems: HMRC vows revenge Arctic Systems, the most important tax case in decades, was finally decided against HMRC in the House of Lords at the end of July.
HMRC wanted to tax Mr Jones on the dividends that their small IT company paid to Mrs Jones, saying in short that she did not deserve to be paid so much for the little work that she did and that in reality Mr Jones was just giving away income that he had earned.
Never mind that accountants have been advising clients to structure their affairs in similar ways for years and that everyone thought that this was merely sensible planning. HMRC came down like a ton of bricks on Mr & Mrs Jones and would have nearly bankrupted them and tens of thousands of other couples had they won.
Our professional body always considered that HMRC were wrong to use this obscure legislation against small businesses like the Jones’s, and the House of Lords has now agreed with us.
While Mr & Mrs Jones are no doubt celebrating their escape, the story is far from over.
The government has made plain that they think too many small companies are not paying the “right” amount of tax, whatever that means. They intend to legislate against what they call “income splitting”. Fair do’s: it’s the government’s business to decide what tax we should pay. We just hope that they do not rush into yet more complex legislation. Small businesses are the life blood of the economy and should be supported, not burdened with constantly shifting, unpredictable and Byzantine tax legislation. The taxation of small business generally is overdue for a comprehensive and sensitive review.
In the meantime, I am advising clients to put off forming husband and wife structures until we have a clearer picture. HMRC has published guidance on the taxation of Artic-type companies under the law as it stands now.
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There’s a summary of the budget changes on my website.
The Chancellor continued the whittling away of the advantages of incorporating a small business, but it can still save tax, as explained here. Many businesses will be able to take advantage of the tax-free withdrawal of the value of their goodwill and this is likely to remain a big factor in favour of incorporation.
The capital allowance regime is to change radically. Some details are missing, but from next year, every business will be able to write off 100% of the first £50,000 of capital expenditure.
The trend towards on-line filing and payment of all taxes is continuing. Within 3 years, almost all business will have to file VAT returns and pay on line. Anyone who chooses to file a paper self-assessment return will have only until 31 October to do so, from next year. Fortunately, the deadline for on-line filing is to remain at 31 January. Payment dates are not changing.
I know many MoneySavers work through Managed Service Companies. New legislation clamps down on these, to deal with the failure of the IR35 regime.
Tax relief for pension contributions used to buy life insurance has been abolished for new policies. Existing policies are not affected.
The civil penalty regime is to be rationalised and harmonised across all taxes. Penalties will continue to range from 0% to 100% of the tax and will depend on the behaviour and level of disclosure by the tax payer. The worst miscreants who deliberately conceal income and make no disclosure, even when prompted are in for 100% penalties. Innocent error will attract no penalty. Innocent error is an inaccuracy that is neither careless nor deliberate and which if discovered by the taxpayer is reported to HMRC. My advice in every case is to make prompt and full disclosure of any omission or mistake. That way, the taxman is more likely to greet you with tea and biscuits, or at worst, indifference.
The answers to these questions are based on tax law at 20 September 2007. 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.
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Finally, let me plug again two excellent organisations providing free tax advice to people who cannot afford to pay a professional adviser.
Tax Aid and The Low Income Tax Reform Group provide useful information on their websites and in free consultations to people with income below £15,000.
Both depend on volunteer help from the tax profession run by volunteers and no doubt would appreciate support with their running costs.
The chairman’s letter in the 2006 accounts of Tax Aid refers to complex legislation and the resulting HM Revenue & Customs (HMRC) procedures that hit the unrepresented taxpayer hardest – and are especially traumatic for those on low incomes. These anomalies and injustices particularly affect the elderly, those who struggle with English or numeracy, and those who have fallen victim to illness, depression or catastrophic life events that make them unable to meet their obligations.
Tax Aid is justifiably proud of some of the results it has achieved, close to saving lives in some cases. For example, Thomas Goode put his savings into opening a café but the enterprise failed within months. He had registered as self-employed, but because the business had never made a profit he believed that he had no obligation to file a tax return. Many years later a tax debt of under £1,500 based on a determination by HMRC had turned into an enforced bankruptcy at £42,000. He had been poorly advised by a debt agency that had not considered his Revenue debt alongside agreements with creditors. TaxAid’s advisers are able to assess the “true” debt and help people avoid unnecessary bankruptcy.
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The answers to these questions are based on tax law at 21 September 2007. 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.
MoneySaver's Question:
I run a sole trader business as a photographer at equine events. Can I claim the cost of my babysitter as an expense whilst I am at an event? I would not be able to do the job without someone to look after my baby.
Tax Tony's Answer:
Sorry, the babysitter is not a cost of doing the job of photography and so is not an allowable expense for tax. Make sure that you include any eligible childcare costs in your Tax Credits claim.
Should I declare retrospectively?
MoneySaver's Question:
I worked for a total of 4 months as an IT Contractor in Dublin during 2005. I paid tax on my earnings following a Tax Return calculation made by the Management Company looking after my affairs, in Oct 2006 for their Year 2005. I was sent my first self assessment Tax form in April 2006 following my return to work in the UK. I unintentionally failed to declare any details about this overseas working on my tax return, mainly due to my lack of understanding of the process and having paid the tax in Ireland already. Does this need to be declared retrospectively? Will it have a beneficial or detrimental effect if it is?
Tax Tony's Answer:
I am not sure which UK tax year this income falls into. Assuming it was all in the year to 5 April 2006, you have until 31 January 2008 to amend your 2006 self assessment return. A simple letter explaining which boxes you need to amend (or rather fill in!) will do.
You get credit for the Irish tax you have already paid, so you will only have any UK tax to pay if the UK tax is more than the Irish tax. You are going to them to correct an oversight, so I would expect your local tax office to be helpful if you need them to help you through the forms.
What can a tour manger claim?
MoneySaver's Question:
I have recently started working as a freelance Tour Manager and I invoice travel companies for my services for running day trips both within the UK and longer trips to continental Europe. I am registered as self employed.(sole trader). Can I claim any/all of the following as 'claimable expenses' without a significant risk of question?
1. Meals (and beverages? alcohol?) whilst away from home on UK trips (ie lunch in Bath on a day trip)
2. Meals/snacks/drinks whilst away over a weekend or longer as above (eg lunch/dinner over 3 days in Paris)
Breakfast is usually covered as part of the accommodation package supplied to me/passengers.
3. The cost of train/bus/taxi fares to meet the coach which takes me on these trips?
4. Entrance fees to museums/monuments etc. on the continent/UK? I need to research these before offering advice to passengers on what to see/do
5. Travel guidebooks, magazines, subscriptions and maps? I need these to research and design microphone 'spiels' whilst guiding passengers on the coach and on walking tours
6. A percentage of my electricity, council tax, rent, ISP, gas, landline, standard monthly mobile fee (calls are claimable via the company) and other household bills, as I do most of my research and gain bookings via my laptop at home.
If so how much would be appropriate? (I use approx 10% of my studio apartment for storing documents/office supplies/research library etc. and my laptop is on my 'kitchen table')
7. One company is introducing a meal allowance soon-do I need to record this meal allowance as income for tax purposes?
All accommodations are paid for by the companies I work for.
Tax Tony's Answer:
Wow, quite a list! The general rule is that you can deduct expenses incurred “wholly and exclusively” for the purpose of the trade.
Your work obviously takes you away from home, so your travel and subsistence costs in 1, 2 and 3 should be OK. Just don’t overdo the alcohol. That’s health advice as well!
The entrance fees and guides in 4 and 5 sound fine. Just make sure that you can justify that these are for the business and not for your personal entertainment. If they are destinations that you work and are reasonable, I do not foresee a problem.
The Revenue used to have a real downer on home running costs. However, they have softened considerably recently. Have a look at their detailed guidance. The short version is that a modest claim of £2 a week for a home based business will always get through. Beyond that, you have to be reasonable and realistic about what it costs to work from home. Council tax, rent and line rentals are a no-no, because you have to pay them anyway, business or no business. Whatever you do, do not say that any part of your home is used exclusively for business (it isn’t), or you will walk into business rates and capital gains tax.
The ISP costs are a separate matter and a reasonable apportionment, although not technically correct, should be OK.
The meal allowance is income, just like the fees you charge. You will be claiming the actual costs you pay against this though.
Can I claim flight costs?
MoneySaver's Question:
I am a UK citizen with Spanish Residency. I have never worked or paid tax in Spain since moving there 4 years ago. I am now working 2 weeks out of every 4 in the UK on a self employed basis, since 1 April 2007. Can I claim my flights to and from Spain as travel expenses, or include any of my Spanish expenses such as telephone costs?
Tax Tony's Answer:
No, I do not think you can claim the cost of flights. You are merely commuting to work and the cost fails the “wholly and exclusively” test. Other costs also have to pass the “wholly and exclusively” test. If they do pass, they it makes no difference that they were incurred in Spain, rather than the UK.
Underpaid pension tax
MoneySaver's Question:
I am a bank pensioner and all my income including my pension is taxed at source. The Revenue have just advised me that I have underpaid tax (PAYE) on my pension over the last five years of almost £1,000 and they have changed my tax code to recover this over 12 months reducing my income by £80 each month. As they knew the amount of my pension and they set the allowances by tax code surely this is their error. I have put this to them but they do not answer my correspondence. What can I do?
Tax Tony's Answer:
I have heard of this happening quite often recently. I think it is a symptom of overload and delay in the system. That is no comfort to you having to face a serious reduction in income. The difficulty is that you do owe the tax and they are within their rights to ask for it. However, there is a concession under which they will write off tax in certain circumstances. Quote Extra Statutory Concession A19 at them.
Translation tax
MoneySaver's Question:
I hope you can help me. I have a full-time, normal office job where I pay PAYE tax and NI contributions on a salary of £26,500. But in order to earn extra income to pay off my debts (it's the only way it's going to happen) I have recently started freelance translation. So far I have had 3 jobs, totalling £480. I'm hoping to get other similarly valued jobs as the client who I have done this job for is impressed but I don't know where I stand re tax.
Can you tell me what I should/need to do as regards the IR and how much tax or NI contributions I may be asked to pay?
Tax Tony's Answer:
Call the Newly Self-Employed helpline on 0845 915 4515. Please do this now as there is a £100 penalty for doing this out of time: you have to the end of the third month after you started.
They will issue a tax return to you next April and the tax and class 4 National Insurance will be payable under self-assessment. Get your return in by 31 October 2008 and they will collect tax of up to £2,500 through PAYE. At the level of income you are talking about, you should not have to pay class 2 National Insurance. The helpline will explain what you need to do about this.
Preparing to go down under
MoneySaver's Question:
We are emigrating to Australia in 6 weeks, and as far as I can see, there is nothing as great as the MSE website over there. As such, can you simplify what we should be doing about our UK shares, bank accounts, (I won't mention pensions as that is a book's worth I gather) UK tax etc. I realise that this is a bit of cuff but if you could offer any advice then that would be great.
Tax Tony's Answer:
Yep, we could write a book about this one!
It sounds to me that you will become non-resident, not ordinarily resident and possibly non-domiciled as well. If you are kissing goodbye to the UK, then your UK tax liability will probably be limited to any deducted at source. Your Aussie tax liability is another matter.
The Revenue has a very helpful department for non-residents. Give them a ring on 0845 070 0040 and they will tell you what forms you need to fill in. All of this is tax-type stuff. There is no reason to sell your UK investments, just because you are emigrating.
Cabin business
MoneySaver's Question:
I am self employed working with computers and have been happily filling in my returns for the last few years and now I actually have something a little more complex to fill in than previously and would appreciate some pointers.
I have had a home office (nice log cabin actually) built at the bottom of my garden. I have had an electricity meter put onto the supply meaning I should be able to claim the full and true cost of the power I use for the business. I am not worried (much) about capital gains. As a wood structure it will actually deteriorate as time passes thus having a negative effect on value and I should be able to claim for future upkeep. Besides if I ever move I should be able to take it with me (at least in theory). It has been suggested that I make sure I make use of the cabin whenever I have a BBQ to negate exclusive use triggering CGT as well.
1. Can I claim the full cost of it, the materials for the cabin and the fitting out?
2. I believe I could claim 50% in the first year and the more in subsequent years, is this until the whole amount has been claimed or until a certain number of years has passed?
Tax Tony's Answer:
You are both imaginative and well informed! Unfortunately it is not possible to claim capital allowances on the cost of the setting in which you conduct the business (as opposed to assets you use to conduct your business) so the cost of the actual cabin is not going to get relief at all. There is case law regarding terrapins which supports this. Er, that’s the school temporary classroom type terrapin, not the wonderful red-eared reptile native to North and Central America. I had one for many years as a pet and miss it dearly. We got children instead.
The fitting out would be eligible for capital allowances – 50% first year allowance and then 25% writing down allowance (soon to be 20%) on the remaining balance each year, for ever in theory.
I have never had to address the disposal of a log cabin for CGT. If it is truly portable, it would probably be a chattel or a wasting asset. Anyway, as you say, it is unlikely to be a problem.
US Consultancy
MoneySaver's Question:
I'm a UK citizen and UK-based (Northern Ireland). I'm an IT consultant and just about to start up independently. I'm in discussions with a US company to provide them consultancy on an hourly basis (possibly fixed price basis in the future), which can all be provided remotely. I won't need to have personal access to the funds in the short-term (if there was a benefit in leaving it off-shore).
Do you have any initial guidance about how best to organise my affairs for this scenario? Do you know any companies who specialise in this area?
Tax Tony's Answer:
I guess you are UK born, bred and resident. If so, you are subject to UK tax on your interest and other income wherever in the world it arises. So there is nothing to be gain (from a UK tax point of view) by leaving your income off shore.
What's the HMRC's view?
MoneySaver's Question:
Last year I started my own limited company. The paperwork is atrocious but I have managed. However, during the 2006/07 year I also worked overseas. I would like to declare non domiciled so I don't have to declare the monies and avoid double taxation. Is it better to not submit my self-assesment by Sept 30th 2007 and do so closer to Jan 2008? What is the HMRC approach to these kind of issues should I expect any difficulties or hard questions from them? Second related question is that I am again doing work abroad this year and the company agency I use made me fill out a leaving UK form which I feel conflicts with my current ltd company operations since I can very well work (although currently there has been no activity since I started working with the agency) under my ltd company at any time. What are the implications?
Tax Tony's Answer:
You’ve got me all confused with this, but I think you are going to be disappointed. A UK limited company is UK resident and subject to UK corporation tax, wherever its income arises. Your residence or domicile has no bearing on this.
So far as you are concerned, domicile is a matter of fact and not something you can change by filling in a form. The leaving the country form that I think you are referring to is for individuals becoming non-resident. You are in a very complicated area. Start by having a look at HMRC brochure IR20 and speak to the Residency helpline on 0845 070 0040 if you need more help.
4 days self employment
MoneySaver's Question:
I seem to have done something very foolish. In my anxiety to do the right thing I told the tax man that I was starting self employment from 1st April, as I was being made redundant from 31 March and didn't want a gap between the two. I then went on holiday and didn't actually start trading till late April. Now they sent me a tax return for last year as I was technically self employed for 4 days. I didn't earn anything last year apart from my job, so do I only need to fill in the details from my P60? Or do I have to do the whole form?
Tax Tony's Answer:
Don’t worry. You are not the first person I have heard who has done this! You started trading in late April, so that’s what matters.
Just fill in the employment pages of the return with the P60 details and put a note in the white space at the end of the return saying that you had no self-employment income until the next tax year. Leave the self-employment page blank. On next year’s return you will enter the correct commencement date on the self-employment page. I hope it goes very well for you.
Dealing with vehicles
MoneySaver's Question:
I am a sole trader and wonder what the best way to deal with vehicles is? Can I keep my vehicle as private and pay myself and any staff mileage allowance? If so, do I need any petrol receipts for me and any staff? As I understand it I don't as I can only claim a fixed amount back in VAT (if I become VAT registered) - is this still the case and what is the fixed amount?
Tax Tony's Answer:
If you are under the VAT threshold, you can claim mileage on the basis of the allowances of 40p per mile up to 10,000 miles a year and 25p thereafter. You can pay up to this amount to your staff too – and can continue to do so even once the VAT threshold is exceeded. You and your staff must keep a mileage log to justify the amount claimed. You do not need to keep any receipts, which makes this method so much simpler.
Once you are VAT registered you will lose this concession for your own mileage and so will have to keep receipts and claim a business proportion of the actual expenses.
Can I claim training fees?
MoneySaver's Question:
I have retrained as an acupuncturist over the last 3 years. Can I claim my training fees and/or travel costs as part of my new business set up? I have received conflicting advice on this. By the way, I continued to work full time PAYE during this time.
Tax Tony's Answer:
Sorry, they have thought of this one. Training to gain a new skill is not a cost of doing the work and so is not a deductible expense. Keeping yourself up to date, once you are working is fine.
Claiming home running costs
MoneySaver's Question:
I rent a therapy room weekly and plan to have a "home base" from January 2008 - a therapy room in my house. Can I claim for the room /electricity/heating as it would be the business address - how do I work out what I should be claiming for this?
Would it be simpler to have a mobile phone just for the business use and claim that rather than a % of telephone on landline and personal mobile?
I understood that home to rental room is like normal commuting so I cannot claim travel expenses for going to my rented room? But now I will have a permanent room for the business at home will that change anything for next year?
Finally can I claim dry cleaning of my white coats as a business expense?
Tax Tony's Answer:
You should benefit from HMRC’s more relaxed stance on self-employed people claiming a proportion of home running costs. Have a look at their detailed guidance and particularly the example of George the architect on the last page. You should be able to work out a reasonable proportion of the house’s fixed and variable costs. Keep a written note of your calculations.
Make sure that you do not reserve the therapy room solely for business use. If you do, that part of your house will lose the private residence exemption for CGT. Any genuine domestic use such as storage or a second TV room will solve this.
There can be non-tax issues working from home, such as planning regulations and business rates. Make sure that your home insurance allows business use.
If you want an easy life, yes it would be simpler to have a separate line (land or mobile) reserved for business use.
Claiming travelling to your rental room is always going to be difficult. The rental room is your usual place of business and so getting there is mere commuting. The judge’s comments in the case of Horton v Young help jobbing builders who travel from site to site, but by implication knock your claim on the head. Have a look at HMRC’s summary.
Dry cleaning your coats sounds fine to me.
NI limits?
MoneySaver's Question:
Is there a limit on how much NI you have to pay? I work for the NHS as a therapist (so pay standard employee's NI there), but have also started doing some private work, where I am paying class 2 NI plus at some point class 4. So I am paying 3 separate lots of NI. Is there any limit on this?!
Tax Tony's Answer:
Because you are both employed and self-employed, you are in for the whole deal: classes 1, 2 and 4. Anyone with more than one employment has to pay class 1 in each of them.
There is a limit above which contributions will be refunded. However, this takes us into the Neverland of impossible complexity that years of tinkering with the tax system has left us with. (Yes, I feel strongly about this!)
Until 2003 there was a simple, overall maximum that applied to all taxpayers. Since then, NI is payable at 1% on both employed and self-employed income above what used to be the upper limits, ad infinitum. Now the upper limit (before the 1% kicks in) depends on the mix of employed and self-employed income and takes nine steps to work out.
Unless your combined income is likely to exceed £34,840, you need not be concerned with this anyway. If it will be much more than this, use form CA72B to apply for deferment of Class 2 and Class 4. Form CA72A is for people with more than one employment who might otherwise pay too much class 1. These forms are here with some detailed notes. The helpline (if they can understand it any better than you) is 0845 915 3296.
There is a form there for claiming refunds retrospectively as well.
If your self-employed income is expected to be below £4,635 a year, you can claim exemption from class2.
There’s a helpsheet about National Insurance on my website.
Claiming back mileage
MoneySaver's Question:
Please could you give me some guidance on claiming back mileage on my personal car for business use in my private practice? I am guessing I can claim something but not sure how much?
Tax Tony's Answer:
This depends on whether you are, excuse the term, an itinerant worker. If your travelling is merely to places where you work permanently, the travelling will not be allowable. At the other extreme, irregular visits to private homes would be allowable in full. You would have to tell me more. If the travelling is deductible, the easiest solution is to claim 40p a mile for the first 10,000 miles a year and 25p a mile after that. This helpful concession is available only to small businesses, which HMRC defines as those with turnover up to the VAT threshold of £64,000 currently (whether VAT registered or not). You must keep a mileage log. Parking, tolls and congestion charges for business journeys can be claimed on top.
CIS confusion
MoneySaver's Question:
This is probably really simple but the explanation given by the Revenue in the help box is confusing.
My darling husband is self employed and sometimes works under the CIS scheme, should the total amount in box 3.29 be the amount he received/invoiced (ie a certain amount of it is after tax because of CIS, most of it is not) or the full amount he would have received/invoiced if not for CIS?
Tax Tony's Answer:
The explanation from the Revenue is "Enter in box 3.29 the amount of your turnover, if it includes income from which tax has been taken off (excluding deductions made be contractors on account of tax)"
I can interpret that that either way!
In box 3.29 you need to put the total amount he has invoiced including the tax deducted under the CIS scheme ie the gross income. The CIS tax taken off is then put in box 3.97
The new CIS is described on my website here.
Claiming for retraining
MoneySaver's Question:
I am a sole trader, working part time on PAYE and freelance training consultant. I am about to retrain to become a driving instructor, can I claim against tax for the cost of this retraining?
Tax Tony's Answer:
No, you cannot claim for costs of training to be something new.
When do I do my first tax return?
MoneySaver's Question:
I registered as Self Employed on 16 April 2007 as I work for another company that requires me to be self employed (they don’t tax the money I earn from working for them). When do I do my first Tax Return?
Tax Tony's Answer:
I assume that you have registered as self employed by the time limit of the end of July 2007. Your first tax return will be for the year to 5 April 2008 and will be sent to you automatically then.
Do I need to do a return this year?
MoneySaver's Question:
I am confused! Do I need to do a tax return for the year ending 5 April 2007 or not? I was made redundant at the end of February and received a lump sum. I registered as self-employed on 1 March 2007. I made a loss in the first month. I have not been asked to do a tax return for the year ending 5 April 2007. HMRC said that as I had only been trading for a month then I might not be asked to do a return and that it would be included in next years'. Is this correct? Would it be better for me to do a return anyway particularly as I made a loss?
Tax Tony's Answer:
This sounds very strange to me. If you have notified HMRC that you were self employed in 2006/07, you should be filling in a return for that year even if you made a loss.
P60 Problems
MoneySaver's Question:
I want to file my son's return online but he is living overseas at present and has lost his P60. His last employer promised to send a Statement of Earnings but hasn't. Is there any way we can ask the Revenue to confirm his P60 earnings or can we complete the return without his P60 earnings. The return has to be done because of unearned income levels.
Tax Tony's Answer:
Your son could write to his employer’s tax office and ask for the P60 details. They might give this to him over the phone if he calls them personally. Can’t he just ask his former employers to cooperate?
Leaving the P60 details off the return is not an option.
When should his end of year be?
MoneySaver's Question:
My son is about to become self-employed. His start date will be around the beginning of October. When should his end of year be? Should it be 12 months from his start date or is it better to be 5 April 2008?
If it’s the 5 April, will he have to fill in a self-assessment form as part employed and part self-employed? What's his best option?
Tax Tony's Answer:
There are two completely separate issues here. First of all, your son has to choose an accounting date. This is the date each year when he draws up his balance sheet and completes his accounts. That’s entirely up to him and he can have any date he likes. Many businesses chose a date when things are seasonally quiet. The end of the month, 12 months after he started is an option if that suits. There used to be a tax advantage by using 30 April, but it hardly makes any difference these days in most cases.
Once the business has been running for 3 years, your son’s tax return will be based on his accounts for the accounting year that ends in the tax year. So if he chooses 31 October, his 2010/11 return for example will be based on the profits in his accounts for the year ended 31 October 2010.
The second issue is that whatever accounting date he chooses, there are specific rules in the opening and closing years. These are spelled out in the notes to the self-employment pages of the tax return and are complicated. In year one, for example, the taxable profits are those for the period from the start to 5 April. He does not need to prepare accounts to 5 April. He will use his normal accounts and pro rata the results to 5 April.
Have you followed all that? Your son can simplify things by making up his accounts to 5 April each year to avoid these complexities. HMRC recognises that 31 March is more convenient than 5 April and will treat the 31 March accounts as being made up to the end of the tax year.
For 2007/08, you son will have to complete the employment and self-employment pages.
My website has several help sheets for people setting up a new business here.
LLP benefits?
MoneySaver's Question:
I am a self employed IT Consultant and have a limited company (just me) are the any tax benefits to me using a LLP instead, with my wife (house wife) as my partner?
Tax Tony's Answer:
Limited liability partnerships are described in this helpsheet. The issues involved in choosing a structure for your business are discussed here.
An LLP is treated for tax purposes as a partnership, so your question is the age old one of company v self-employed.
I have written before about HMRC’s declaration of war against small companies which they see as set up merely to save tax. But incredibly after all the sabre rattling and the changes in the 2007 budget, it is still more tax-effective to run a small business as a company rather than a self-employment. That is, if you structure things correctly.
What has changed recently is HMRC being defeated in the Lords in the Artic Systems case. They have made it plain that they are not going to take this lying down and they will be legislating to defeat the tax advantages of income splitting with a spouse that does not work in the business.
You could gift shares to your wife and pay her tax-free dividends under the law as it stands. But before making any radical changes, such as setting up an LLP, you might prefer to wait and see what legislation is introduced.
There should be no objection to employing your wife and paying her a wage to use up some of her allowances. Her employment must be genuine (or it’s fraud) and the wage should be realistic for the work she does. Make her company secretary and you can pay her merely for holding that office. HMRC gives an example of a non-working spouse being paid £5,000 for being company secretary of a company with only £100,000 turnover. That sounds a bit rich to me, but there you are.
Voluntary VAT registration
MoneySaver's Question:
I am considering going VAT registered voluntarily. Most of my work involves fitting relatively expensive equipment so the VAT I pay for the equipment is generally much more than the VAT I would charge for my labour. Can I claim back all the VAT I pay for the equipment I supply? If so is it then possible to get a rebate from IR if I pay more VAT than I charge? Also I am fitting renewable energy systems so do I charge 5% VAT for my labour?
Tax Tony's Answer:
If you register for VAT, you will have to charge VAT on the total amount of your sale, not just the labour element. So as a general rule, you would only register voluntarily for VAT if your customers were VAT registered themselves and so could recover the VAT that you charge them. The installation of energy saving materials is currently subject to the reduced rate of 5%. You would have to be sure that your work fitted the definition in VAT notice 708/6 energy-saving materials. You will have to do some arithmetic to work out if voluntary registration works for you.
I have a series of help sheets about VAT here.
Do I have to fill in a self assessment form?
MoneySaver's Question:
Do I need to fill in a self assessment form if I am a higher rate tax payer? I don't have much savings but presumably if I don't fill in a self assessment form I'm not paying enough tax on any savings I do have. Is there a savings threshold above which you need to do this? If not, does that mean that essentially all higher rate tax payers need to fill in a self assessment form?
Tax Tony's Answer:
In the first instance, you need to tell them if you have savings income that should be subject to higher rate tax. A call or letter to your local tax office will do.
Once you have done that, you only have to fill in a self-assessment return if you are sent one. HMRC is trying to cut down on the number of returns it issues and they might decide to leave you alone, once they know how much your income is.
Buy-to-let income
MoneySaver's Question:
My wife kept on her flat when we got married in 2004 and has let it out for the last 3 years but has only just realised via advice on Radio 2 that she should have been paying tax on this income! What sort of fines/interest penalties will she face and how should she approach HMRC?
We are also looking to take out some of the equity which we require by increasing the mortgage which would mean that after expenses there would be little profit - would increasing the mortgage be allowed by the revenue and would there be any issues/penalties with doing this?
Any advice would be appreciated as we are both very unsure about how tax works and do not know any accountants who could help.
Tax Tony's Answer:
Don’t panic. Your wife is still well within time to report her income for tax year 2006/07, so we only have to worry about one or two years’ income and I guess we are not talking about a vast fortune. You do not say what other income your wife has and so it is possible that this rental income is partly or wholly covered by her personal allowance.
You need to work this out properly, but let’s suppose that your wife has maybe £2,000 of tax to pay. As you would expect, your wife will have to pay the tax in full plus interest at 6.5% to 7.5% from the original due dates. Tax for 2004/05 would not have been payable until 31 January 2006, so that might not be too bad. There will also be 10% late payment surcharges. HMRC will stand no negotiation on interest and surcharges, which it sees as merely commercial restitution.
Provided you go to them in a suitably apologetic tone, rather than them catching you out, there is a very good chance that they simply will not bother with a penalty. If they go to the trouble of raising a penalty assessment, it should be of the order of 10% to 20%.
They will be less happy if your wife has been making a self assessment return and omitting this income from it and they will be positively cross if they have to come to your wife. So make a written voluntary declaration as soon as possible, with the numbers to follow, if necessary. The maximum penalty is 100% of the tax not paid, but that is not going to happen here.
The maximum mortgage interest you can offset is that on a loan up to the value of the property when you first let it out. HMRC will have no objection to this and actually give it as an example in their manuals.
There is some general advice about buy-to-let in this helpsheet on my website.
Class 2 contributions
MoneySaver's Question:
I have run a small business/hobby for 29 years and during this time have always filed my tax returns but have only passed the tax threshold during the last few years. Class 4 contributions have always been taken care of by the tax office but I have never paid Class 2. How can I rectify this? It worries me that I will either end up with a huge outstanding bill or no state pension.
Tax Tony's Answer:
If you have only just passed the tax threshold you have probably also been below the level for paying class 2 contributions. I guess that you applied for exemption some time ago and it’s just been rolled forward each year.
You need to check your entitlement to the State Pension. There is far too little information here for me to guess at your position. Start by calling the Pension Service on 0845 300 0168. You can make voluntary contributions to plug gaps in your contribution record.
Employed or self employed?
MoneySaver's Question:
I'm employed full-time by the company I work for, but also do some work for other parts of it on a freelance basis. I make between £500 and £1,000 a year on top of my regular salary this way.
Due to the vagaries of the finance department, it's possible but difficult for them to pay me internally (so it goes into my regular pay packet and the tax is calculated as PAYE) and in the past I've always stood firm and asked for this to happen to avoid having to spend ages calculating my own tax.
However, I've always been kind of aware that you can write off certain expenses against tax for equipment you use while working and wondered whether it might be worth going the self assessed route.
I've just received a cheque for £400 paying me as an external contributor - and am debating whether to go back and ask to be paid internally, or to go self-assessed.
What would you advise?
Tax Tony's Answer:
Hmm. You do not have a choice about whether you are employed or self-employed – it’s a matter of fact. You don’t tell me what you do, but it seems hard to imagine a situation where you could be both employed by a company and a self-employed contractor to it. Tell me if I’m wrong, but shouldn’t all your income go through the payroll?
In the circumstances, are your expenses a real issue? Can they not be paid for you by the company?
CGT allowances
MoneySaver's Question:
My wife kept on her flat to rent out when we got married in 2004 and we are likely to sell it next year so I was wondering if the title needs to be in both our names for us to both use our CGT allowances to offset the CGT liability. If so, would it be better to transfer ownership now and what effect would this have on the tax due on rental income as I could become a 40% tax payer and my wife is only 22% and claims the rental income in her name only at present.
Tax Tony's Answer:
Hang on. If this was your wife’s former home, it will be completely exempt from CGT if she sells it within three years of her moving out. After that, the maths gets complicated, but if she had lived in it for several years before you got married, CGT will not be an issue for quite a few years yet because of the generous reliefs for former homes that have been let out. The reliefs are described on my website here.
You are right that if the property is jointly held, there would be two CGT annual exemptions to set against any gain, plus the balance of your wife’s basic rate band. The transfer to joint names has to be genuine and so best well before a sale is decided on.
There’s quite a complicated calculation to weigh any CGT savings against the additional income tax and possibly Stamp Duty involved. My instinct would be to leave things as they are for now and bank the income tax savings.
When to take voluntary redundancy?
MoneySaver's Question:
I have the opportunity of taking voluntary redundancy (effectively early retirement as I am over 50) from 31 March 2008 and will receive redundancy pay, lump sum and a pension from that date. Is the end or start of a financial year the most tax efficient time to cease employment or doesn't it matter? I am also intending on taking some employment after that date so are there any other issues I should be considering?
Tax Tony's Answer:
You need to think about what your tax rates will be in 2007/08 and 2008/09. If any of your lump-sum retirement package will be taxable, it would be better to receive it in the year with the lower marginal tax rate: 2008/09 presumably.
The rules on tax-free lump sum payments are tight and strictly applied. Make sure your employer is taking proper advice.
Is leasing better than buying a new vehicle?
MoneySaver's Question:
I am a self-employed Business Analyst and I am about to replace my car. Currently I get 40p per mile from the tax man for travelling expenses when using my car and was wondering what the tax benefits would be for leasing a vehicle rather than an outright purchase? I would go for the total package including maintenance and repair for the leasing option if I decide to go down this route. I would appreciate your advice.
Tax Tony's Answer:
The 40p mileage rate scheme applies equally to leased vehicles. You might well choose to stick with this rather than the formal method of apportioning actual expenditure, just for the simplicity of it.
If you want to do the tax sums, be aware that leasing charges are currently restricted in a way similar to the capital allowances on expensive cars.
CIS issues
MoneySaver's Question:
I'm self employed and have been doing work for the same company last and this tax year and under the CIS scheme. Prior to 5 April 2007 I understand I was to be taxed 18% at source and given tax vouchers, whereas this year I am to be taxed at 20% and not given any vouchers. My query is; if I carried out work in last tax year, but only invoiced for it in this tax year:
1. Should they have taxed me at the 18% (taxable amount at the time the work was carried out) and given me tax vouchers, or at 20% (taxable about at time I invoiced them) and no vouchers?
2. Should this income be included in last years (2006/2007) self assessment or this years (2007/2008)?
It's a significant amount (to me, anyway!) of around 8k.
Tax Tony's Answer:
Any payments made from 6 April 2007 must be taxed at 20% even if the work was done prior to that date. The income, however, will need to be included in your profits for last year (assuming you make your accounts on a tax year basis) as accounts are prepared on the basis of the income earned in a period, not when it is invoiced.
40p per mile confusion
MoneySaver's Question:
I do not understand the 40p per mile from the tax man.
Currently we have two vehicles, one is a van, used 100% for the business (joinery and building business) - I put all receipts through the books, including vehicle tax, diesel, repairs, MOT etc.
The second vehicle I use to deliver/collect materials, and for quoting. It is also used if van is being repaired etc. I put through receipts for petrol, working out a percentage on an average use for the business. Should I just be working it out on 40p per mile? If that is the case I would probably end up with more than I currently claim for.
Tax Tony's Answer:
The 40p mileage rate scheme is optional and only available if your turnover is below the VAT threshold. You cannot chop and change between the two schemes: whichever way you go applies until you change the vehicle concerned.
Can I claim back for sat nav?
MoneySaver's Question:
I started trading as a driving instructor in December 2006 and am filing a short tax return in next month. I had a car before I started trading but can I include it in the form and where do I put it on the forms? I had bought a sat nav a few months earlier than trading to use for when I start working, can I submit the receipt in?
Tax Tony's Answer:
You can claim capital allowances for the car based on its market value when you put it in the business. The claim goes in box 3.9 of the short return. The rules for capital allowances are explained briefly in the notes to the short return and in more detail in HMRC leaflet IR222.
If the sat nav has an intended working life of less than two years, just treat its cost as an expense included, 3.8. If you feel it will be used for longer, you should include it in your capital allowances claim. It does not matter that you bought this before you started trading.
Claiming electricity costs
MoneySaver's Question:
I am a school photographer and have not been claiming home office costs as I use an open plan living/dining/patio area as my office. Digital photography has increased the computer use to many hours a day, in busy periods this can be 8-10 hours per day. How can I claim the electric costs against tax and how far back can I go?
Tax Tony's Answer:
I suppose you could go back 6 years if you can claim you made an error by not claiming these costs originally on your return. Other wise only the 2005/06 return remains open for amendment. You need to make a reasonable estimate of the actual costs and claim those. See the guidance here. You might weigh the value of the relief that you intend to claim against the hassle and correspondence that this might well cause.
Laptop Leasing
MoneySaver's Question:
I lease a laptop for my self-employed work. I bought it from PC world and they told me that as it is leased I can claim tax relief on the full lease cost. Is this correct? This is my first year of trading. Are there any other costs I can claim for?
Tax Tony's Answer:
You can treat the lease payments as an expense. In theory, the lease terms might make the laptop subject to capital allowances, but this is not a point that HMRC is likely to take with a small business laptop.
Broadly speaking, you can deduct from your turnover all the costs you incur for the sole purpose of earning business profits. The notes to the self-employed pages of the tax return give a general guide. You might like in particular the table on page SEN8.
Where to declare?
MoneySaver's Question:
This is more of a question for my future (I hope!). If you receive work via the internet from businesses based in England but you move to Spain and pick the work up there on the web and actually do it in Spain with payments probably being made to a UK bank account, in which country do you declare your earnings for tax purposes - still in the UK or in Spain?
Tax Tony's Answer:
International tax law is struggling to keep up with the internet. The current state of play seems to be that if there is an operator actually doing something (as I guess you will be) then the business is based where she is.
Remember though that your tax liability will be determined by your residence. If you are UK resident, you are taxed on your world-wide income anyway. You would need advice from a Spanish accountant if you are living there.
eBay business
MoneySaver's Question:
I work part time as a nurse and pay my national insurance and tax as normal at that job. I have also started a small online business on eBay and wanted to know where I stand regarding paying tax and national insurance. I heard a rumour that as long as I don’t earn any more than £7,000 from my business that I am not liable for tax but I find that hard to believe and cannot find any information on such a scheme if there is on. Can you advise?
Tax Tony's Answer:
Total tosh, I’m afraid. eBay is cooperating with HMRC to identify traders who are not paying their taxes. Perhaps you have heard something about the level at which they don’t bother to investigate, but I doubt they would publicise such a thing.
HMRC has published a guide to selling on line, through classified ads and at car boot sales.
You’ve called it a business and so I expect you are trading. Register as self employed now on 0845 915 4515.
I hope you make a fortune!
Is our community work taxable?
MoneySaver's Question:
Along with a few other neighbours I recently formed a Residents Association to help with the upkeep/improvement of the village green (or at least provide a united front when we need the council to do something!). I agreed to be Treasurer so I just want to make sure I do it all right. Do I need to register the Association for Corporation Tax?
We're all volunteers and our income, if any, is likely to be in the low £hundreds - mainly raffle money from the general meetings, funds raised on bric-a-brac stalls (all stock donated by residents) at the occasional fete and possibly around £300 of Local Government community fund money if we're lucky! Obviously as we're a community group we plan to spend it all anyway on things like hanging baskets, extra litter bins and benches etc.
The HMRC website suggests contacting the local tax office. I've tried that but always seem to end up on hold...much as I like listening to Mozart I suspect he's not the leading authority on UK tax law!
Tax Tony's Answer:
Community groups are normally mutual associations – everyone is a member and fund raising is within the community – so no taxable profit arises.
It would be cautious to register with HMRC but on the basis that you are going to have no taxable income and ask that you be treated as dormant.
Holiday apartment tax
MoneySaver's Question:
We bought an apartment in Portugal 3 years ago, and have been approached by a rental company who are keen to rent it out on our behalf. Say they earned us 3000 euros during a year...
1) Would I have to declare the 'profit' as taxable income to HMRC
2) Would we be able to deduct 100% of costs directly resulting from the rental - eg repairs
3) Main issue is how much of our normal fixed costs could we offset - eg Council tax, Utility costs, Monthly condo fees, annual legal charge.
If we could offset enough of these, then the property could show zero profit and presumably be liable for zero tax.
Only want to go ahead with such occasional rentals if we aren't going to pay a bomb in tax.
Tax Tony's Answer:
Assuming you are UK resident, the net rental income would be UK taxable after deducting expenses. Direct expenses, such as letting agent’s fees and advertising, would be fully deductible. If you are only renting for part of the year, you will have to make a sensible apportionment of the standing costs. You will have to do the sums to decide if the offset of those costs justifies letting strangers into your lovely home.
The income will also be subject to Portuguese tax. You must take local advice about that. You will deduct the amount of the Portuguese tax from your UK liability and only pay any surplus to HMRC. You cannot claim a refund if it’s the other way round.
Holiday apartment expenses
MoneySaver's Question:
We own a Spanish apartment we are considering renting out - can we claim against any taxes due on rental income in respect of our expenses such as our 150,000 Euro interest only mortgage, management fees, cleaning and laundry and management and maintenance fees?
Tax Tony's Answer:
The rules for deductible expenses against property income apply wherever the property is. Have a look at the notes to the land and property pages of the self assessment return. Everything in your list looks OK. You will also be able to offset the Spanish tax on the rental income against your UK tax liability. Please take local advice on this.
My website has a helpsheet about buying property in France or Spain.
Renting out current property
MoneySaver's Question:
My wife and I are in the process of buying a larger house and want to rent out our current property. I understand we have to declare the rental income, but won't pay tax on that income if it just covers the interest payment of the mortgage. But, if we secure both properties on a single mortgage can we still claim the tax relief on the portion of the interest of the mortgage? For example if the value of our rental property accounts for 1/3 of the total property value, can we claim for 1/3 of the interest, or do we need a completely separate mortgage to benefit?
Tax Tony's Answer:
Good luck with the rental first of all.
Interest incurred for the purpose of your rental business is deductible no matter what property the loan is secured against and you can apportion a loan, as you say. The deductible interest would be limited to that on a loan up to the market value of the property when you first put it up for rent.
Shall I include my wife for tax reasons?
MoneySaver's Question:
I am in the process of starting a small business via a limited company and wanted to know if it's worth including my wife as a director so she can legitimately share the income/dividends to cut down on tax. She will be doing admin for me in between looking after the kids so it's a genuine partnership.
Let’s see what legislative changes are made in the light of HMRC’s defeat in Arctic Systems. I very much hope that whatever changes are made will not catch sensible wages or dividends that reflect the true value of a spouse’s work.
Secondly we are emigrating to New Zealand later next year and hoping to transfer the company activities out there but continue to earn £ sterling. NZ will allow me to take any non-NZ income free for the first 4 years we live there. Do I have to still pay tax in the UK though if we leave the UK permanently, especially if we have the limited company structure?
Sorry it's a complex one and I appreciate any advice or a suggestion on where to go.
Tax Tony's Answer:
A UK limited company would remain subject to UK corporation tax, wherever you live. So the UK company does not sound a good idea. You need personal advice from a New Zealand based accountant with experience of ex pat issues. I expect there is no shortage of these.
Who should declare?
MoneySaver's Question:
My wife and I are both in full time employment. I am a basic rate tax payer, and my wife is higher rate. We have also earned a small extra income from sales on eBay and Amazon this year. Is it more effective for me to declare it as income, or for both of us to do so? Also does one or both of us have to start paying self employed National Insurance contributions?
Tax Tony's Answer:
The income belongs to and must be reported by the person making the sales. Make sure the account is in your name if you have spare basic rate capacity. There is no point your wife having any of the income.
You should register as self-employed now, if you are trading. See HMRC’s guidance. You will only have to pay class 2 National Insurance if you expect your self-employed income to be above £4,635. Would you believe class 4 kicks in at a higher figure: £5,225 this year.
Child tax credit
MoneySaver's Question:
My husband has just started his own limited company in August 2007 and has given himself a basic wage of £5,000 a year.
We were actually claiming Child Tax Credit for our 2 year old being at nursery as I also freelance but I can only work during term time only until my 2 year old starts full time school in 2009. I have estimated my wage therefore being roughly £5,000 a year. We have one child at school and other at private nursery our combined wages last year was £30,000 and we therefore qualified for full amount of CTC. Can we still claim CTC even though we now have a limited company and do my husband qualify for any other credits towards childcare being a sole employee of his own company?
Tax Tony's Answer:
Your husband’s income from the company is reportable in his tax credits renewal, like any other income. It will include the dividends he expects to draw in the “other income” section. See my helpsheet on Tax Credits.
Employees can save National Insurance by using child care vouchers, but this is not relevant to your example and they can muck up your tax credits claim.
Volunteer car expenses
MoneySaver's Question:
I am retired but work voluntarily for the local WRVS running people to the local hospital and doctors’ surgery. On average I do about 3,000 miles per year and over the last four years received between 34 and 37p per mile. This has now been increased to 40p per mile. I provide the car, petrol and my time. Can I claim a mileage allowance from the tax man?
Tax Tony's Answer:
Car running expenses could only be claimed as an expense against taxable income. If you have been working as a volunteer, there is no income to offset. I guess the WRVS has picked 40p to avoid any suggestion that this payment is salary by another name, as that is the maximum that HMRC will allow as a deduction.
Shares & overseas question
MoneySaver's Question:
I'm doing my husband's return (he is employed) and just wondered about the following:
1. He was given preference shares (i.e. didn't pay anything for them) - he has a share certificate and can work out the cost - there is no scheme in place for any tax benefits - should he just pay tax on the value of the shares at the date he got them as if he was given cash instead? Is this a BIK or what? (Dividends not payable until next year)
2. He worked on some overseas projects for a couple of weeks at a time. His company don't pay any subsistence (ie £10 a night) - can he still claim for that or can you only claim if you actually receive it?
Tax Tony's Answer:
This is a complex technical area and your husband needs advice. The accountant who set the scheme up should tell your husband what the tax consequences are.
I expect he is chargeable on the difference between the market value and the price paid. There is a special page with the self assessment return for share scheme.
He can claim his actual overseas subsistence costs in the normal way. Watch for any element of holiday which would poison the claim.
Life assurance
MoneySaver's Question:
My father's life assurance policy recently matured and the company paid him a lump sum. Is that lump sum taxable and if so is liable for income tax or capital gains tax?
The proceeds of most life policies on normal maturity are tax free. There are various circumstances in which the proceeds are taxable and if so the insurance company would have provided a chargeable event certificate stating the taxable amount.
I have rented out a house that although it is not furnished it has carpets curtains and light fittings. Can I claim wear and tear allowance?
Also due to the mortgage interest and costs I don’t earn anything. Can I expect to get maintenance costs back in the form of a rebate from the income tax I pay on my fulltime job?
Tax Tony's Answer:
As a simplification, a flat deduction of 10% of rent is allowable as an expense of property letting instead of the replacement cost of furniture. This only applies to furnished letting, which yours ain’t. The original cost of furniture is never allowable.
No, sorry. Property losses can only be carried forward to be set off against future property profits. They cannot be set against other income. (OK, certain capital allowances can be offset, but this does not apply to you.)
When to declare retirement to the tax man?
MoneySaver's Question:
My wife has been self employed for 5 years and has now decided to retire. Does she need to tell the tax office now or when she sends in her tax return for 2006/07 or when she completes her 2007/08 tax return next year? Also can she now stop paying her NI Class 2 contributions?
Tax Tony's Answer:
As soon as your wife has ceased trading, she should call the self-employed helpline on 0845 915 4655 and arrange to cancel her class 2 payments.
In the tax return for the year in which she ceases trading, all she needs to do to inform HMRC of her cessation is to enter the cessation date in box 3.8 of the self-employment pages. She must include all her profits up to the date of cessation in her final return, whatever her normal accounting date and can deduct any overlap profit brought forward. See the notes to the self-employed pages about accounting periods.
Care home question
MoneySaver's Question:
My parents are both in their 80s. This last year their health has really gone downhill, and in a few weeks they will, very sadly, go into a care home.
They have around £70,000 in savings and a house worth around £150,000.
They, and their 3 children, are keen that the money that they have worked to save up all their lives doesn't end up in the pocket of the local authority/tax man.
Any tips on how we could avoid the money all being spent on their care so that there will be no financial legacy for their children or grandchildren?
Tax Tony's Answer:
Inheritance tax is not a problem here, so this is not really a tax question. I suggest you speak to Help the Aged about this important issue.
Double stamp duty?
MoneySaver's Question:
My wife and I have bought and moved into a larger house and want to rent out our previous property. It is currently exclusively in my name - would I have to pay stamp duty on its current value if I want to transfer it into my wife's name?
Tax Tony's Answer:
Only if there is a mortgage and you transfer part of the mortgage as well – Stamp Duty Land Tax (to give it its full name) would be payable on the amount of debt she assumed.
Will I be liable for Capital Gains Tax?
MoneySaver's Question:
I have been self employed working from home for about 15 years. I have been claiming a proportion, 14%, of the house running costs against the business.
Will I be liable for Capital Gains Tax on 14% of the gain during that period, and if so when will I be liable?
Increasing property values means I might be better not exposing myself to Capital Gain Tax liability. Can I stop claiming these expenses? Can I make an adjustment to this effect retrospectively?
Tax Tony's Answer:
Of course, CGT only could only apply on the eventual sale of the house, when you will have to self-assess any CGT liability that arises. If there has been exclusive use of any part of the property for business purposes, then that part will be subject to CGT. That’s the score whether you have been claiming expenses or not.
The business use has to be truly exclusive for CGT to kick in. So it’s really only an issue for premises such as doctors’ and dentists’ surgeries or workshops attached to a house. You do not say what trade you are in, but if you are merely using a bedroom as an office, CGT does not apply if the room is also used for some domestic purpose such as a guest room, storage or play area, at least some of the time.
Just be careful in any correspondence you might have with HMRC about the home expenses. In your eagerness to justify the expenses claimed, do not describe any usage as “exclusive” unless it is.
How will CGT be calculated?
MoneySaver's Question:
My husband is self employed working in property maintenance. He has been in business just over 12 months. I work a few hours a week cleaning and I have also just registered as self employed, although I only earn £200 or so a month. I do all my husband’s paperwork, accounts, banking, orders etc. If he pays me, what paperwork do we have to do and how do we show it on his tax return.
Also, we currently have one house (with mortgage), if we buy a second property to do up and sell, how is capital gains tax calculated? Can we deduct all expenses i.e. solicitors, estate agents and cost of work carried out from the amount we sell if for before calculating the profit. Would there be any problem if we paid my husband to carry out the work.
Tax Tony's Answer:
Well I think your husband should pay you for this work!
As you have no other employment (self-employment does not count), your husband can pay you up to £87 a week without having to operate PAYE. Assuming he has no other employees, he does not even have to register as an employer. The amounts he pays you should reasonably reflect the value of work you do. He should keep a record of the amounts that he pays you and a written statement from you that you have no other employment. He must actually pay you the money and it might be better if it went into a bank account in your sole name to prove this.
Your husband can deduct the amount he pays you as an expense in the self-employment pages of his return by including it in box 3.51 (or box 3.25 if appropriate).
You should include the income in your self-assessment return if you get one. I suggest you put it in the other income section (Q13) in the return because you will not have an employer’s reference that you would need for the employment pages. You will have no tax to pay if your total income remains below the personal allowance, currently £5,225 a year. At these levels you are not building any entitlement to the State Pension, unless you have Home Responsibility Protection by receiving Child Benefit.
If your husband pays you, you can deduct the amounts he pays from his turnover in computing his tax liability. HMRC might want to argue you are really an employee but on the amounts you earn this is not going to have any impact. You could do with keeping a record of the hours worked so that you can justify the amount paid per hour
If you buy anything (from sweets to houses) with an intention of selling it on at a profit, HMRC will say that you are trading and so subject to income tax, not capital gains tax. So I think the gain would be subject to income tax, not CGT.
The amount of the gain would be calculated as what you sold the property for, less what you paid for it, including all the costs you mention. Except, that is, for your husband’s own time which is not an expense.
Help with the form
MoneySaver's Question:
Can you help me fill in the amounts and the correct foreign pages on the tax return. I have asked HMRC helpline and the guy was useless. He had not heard of Santander!
I have just the usual 200 shares with Santander. My total 4 dividends for 2006/7 was £9.66 Spanish withholding tax and £51.87 net dividend payment. 18% (£2.52) withheld off gross of the last div of £11.44 net. Rest withheld at 15% gross.
Tax Tony's Answer:
You want the foreign supplementary page of the tax return; the one with the rather nasty green stripe at the top. Complete the boxes under the dividends heading on page 1. Tick the box at the end of the line to claim foreign tax credit relief.
The totals on the foreign pages do not have to be carried over and entered anywhere else.
Unused personal allowance
MoneySaver's Question:
I went self employed last year and didn't earn enough to use all my tax allowance. I have been told that I don't have to claim my capital assets in the first year if it means I lose my tax allowance. Is this correct? If so, does that mean that next year I can claim 50% as stated for the first year on my vehicle (van - sole business use) or is it just the 25% depreciation allowance. Also as I didn't use all my allowance is there any way I can get any of it in rebate on last years tax paid (not self employed) or on next year's profits?
Tax Tony's Answer:
Unused personal allowances are lost forever. You cannot carry them between years. So yes, it would be a good idea simply not to claim capital allowances last year. The cost of the van is carried forward and qualifies for writing down allowances in future years. The 50% first year allowance would only be available in the first year.
Decoration costs
MoneySaver's Question:
I have recently started my working on my own as a fitness instructor. I have been given the use of an old scout hall for a very good rent. However, it was in a bit of a state when I got it and I have spent quite a bit on painting and decorating and also some kitchen units for making refreshments for customers. Is the whole of the cost of the refurbishments allowable against tax ie is this revenue expenditure?
The decoration probably will last a couple of years and I will have to do it again, but there is no guarantee that I will be in for that length of time as I have not signed a lease.
Tax Tony's Answer:
Yes, I think the costs of decoration are allowable against profits even though you have not got a lease on the premises. The kitchen units are more difficult as they will presumably stay there once you have left.
Multiple employers
MoneySaver's Question:
This is the first time that I've had to fill in a form and I've got a little confused. I feel a bit stupid needing help, given that my taxable income is around the £350 - it all seems hardly worth the trouble but I still want to get it right.
I have been doing a small amount of mystery shopping for several different companies. Mostly, they employ me as self-employed, but 1 (or maybe 2) have treated me as a 'standard' employee and have sent me P60 (1 has taken tax) 1 sends me email payslips and 2 don't send anything.
I also very briefly worked one