April Tax Tips & News

Welcome to the Benedicts Tax Tips & News monthly newsletter, bringing you the latest news to keep you one step ahead of the taxman.

If you need further assistance just let us know or send us a question for our Question and Answer Section.

We’re committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.

Please contact us for advice on your own specific circumstances. We’re here to help!

Newsletter issue - April 07.

The increase in corporation tax for small companies from 19% to 22% over three years is intended to discourage businesses from incorporating just to save tax. As from 2009 the corporation tax rate will be higher than the basic rate of income tax, which will apply on profits of up to about £43,000.

For 2006/07 the basic personal tax rate was 22% and the corporation tax rate 19% but by 2009/10 it looks like being the other way around with a basic personal tax rate of 20% and a corporation tax rate of 22%, an overall swing of 5% more tax for small companies!

However, an individual also has to pay Class 4 NICs at a further 8% on his self-employed profits, on top of the income tax due.

To assess the overall effect of these different tax charges, consider a business making profits of £50,000 in 2009. As a company it will pay corporation tax of £11,000. Trading as an individual the total income tax and NI payable will amount to £12,614, (assuming allowances increase in line with inflation). The tax saving for the company is thus expected to be about £1,600 per year. However the funds are held within the company, so transferring the money to the shareholder may create a further tax charge if that shareholder is already paying higher rate tax. Whether or not you plan to retain profits in the company for reinvestment will be a major factor to consider.

If you are considering forming a company, or want to stop using one, please come and talk to us first so we can work through the numbers. There will be a different answer for each business and at present in the 2007/08 tax year it is likely the company is still the best option.

Newsletter issue - April 07.

Gordon Brown wanted his last Budget to be remembered for the dramatic cut in the basic rate of income tax from 22% to 20%, but most taxpayers will see little benefit from this tax reduction, due to the tax increases which will come in at the same time. Some points to note...

• Wait a Year - we have to wait for over a year for the new 20% tax rate as it does not take effect until 6 April 2008. On the same day the 10% tax band will disappear for earned income, and the upper income limit for the main rate of national insurance (11% for employees) will increase to approximately £40,000. As a result of all these changes a single person on a salary of £15,000 will pay about £72 more in tax per year, but someone currently in the upper tax bracket on a salary of £45,000 will reap a net saving of £390 per year. These figures do not take account of any working or child tax credits the individual may be able to claim.
• Rental Income - if you receive most of your income in the form of rents, you could be one of the winners from the cut in the basic rate of income tax from 2008. As rents do not attract national insurance, the reduction in the tax rate is not cancelled out by the increase in national insurance as it is for earned income.
• Pension Contributions - the new 20% band will have a knock-on effect on personal pension contributions. Currently if you want your pension fund to receive £4,000 you make a contribution of £3,120 net of 22% tax, and the pension scheme reclaims £880. From 6 April 2008 to achieve the same payment into your pension fund, you will have to pay £3,200 net of 20% tax, and the pension scheme will reclaim £800. So you end up paying £80 more into your pension scheme for the same result.
• Charities - will also be hit hard by the reduction in the basic rate. At present when you make a charitable gift of £100 and certify it under the gift aid scheme, the charity can claim back a further £28.20 from the Government. From 6 April 2008 the same gift of £100 will only be worth £125 to the charity, so they will lose £3.20 of income for every £100 of gift-aided donations.

Newsletter issue - April 07.

The Taxman has now given some guidance on how to apportion the costs associated with your home when you use that property partially for your business. You need to consider these questions:

1. What area is used for business compare to the total area of the property?
2. How long is it used for and is the area used for anything else?
3. What costs and services are consumed and are they metered?

For the first question an approximation of the number of rooms is acceptable. So if you use one room out of eight, use the fraction 1/8.

Next work out the number of hours out of 24 the room is actually used for business purposes.

Finally add up all the fixed costs associated with the property including mortgage interest, rent, insurance, council tax, cleaning, repairs and maintenance. Apportioned these costs according to the answers from questions 1 and 2. It is good to know that HMRC now fully acknowledge that mortgage interest can be claimed.

For example, say one room out of eight is used for 8 hours each day and the total fixed costs are £4,000. The business proportion of the fixed costs would be: 1/8 x 8/24 x £4,000  = £166.66.

If the room is only ever used for business purposes, then this would be 1/8 x £4,000 = £500 but there is then likely to be a reduction in the capital gains tax main residence relief on the sale of the property, which may give rise to a capital gains tax complication depending on the circumstances.

The cost of metered services can be apportioned according to area and usage, remembering that little light and heat is used while you are asleep. Telephone bills, including the line rental, can be apportioned according to the cost of business calls made, and a similar reasonable apportionment can be made for broadband connections.

When done, the total business cost must be reasonable for the use made of the property, so stand back and consider the result. If the costs are very small you can use the flat rate instead of £2 per week.

Newsletter issue - April 07.

The rates of Stamp Duty Land Tax (SDLT) were not changed in the Budget. The duty is payable on all homes valued at over £125,000, (or £150,000 in a disadvantaged area), and on all commercial properties valued at over £150,000.

However there was one welcome change for family members who want to exchange properties. Currently when a widowed grandparent living alone in the former family home wants to exchange that large house for a small property currently occupied by her daughter, the total value of both properties is added to together to work out the SDLT rate that will apply.

So where a property worth £300,000 is exchanged for a property worth £220,000, the total value of the properties is £520,000 and the rate of SDLT on both transactions is 4%, giving a SDLT charge of £20,800. After the law is changed in July 2007 there will be a charge at 1% on the acquisition of the property worth £220,000, and a charge at 3% on the acquisition of the property worth £300,000, giving a total SDLT charge for the family of £11,200.

Newsletter issue - April 07.

Q. I deal in small electronic goods such as Sat Navs, CD-players and DVD players. I heard there was something in the Budget that could affect my business. Can you explain please?

A. This is to do with special powers the VATman has to demand from you any unpaid VAT arising in your supply chain. From 1 May 2007 the type of goods that can trigger the use of this power is expanded to include electronic items that may be owned by individuals and used by them personally for leisure, amusement or entertainment, and this would include Sat Navs and DVD equipment.  To avoid the VATman asking you for extra VAT be sure to carry out reasonable checks to establish the integrity of all your supplies, supplier and customers. If you are concerned that you could be caught up in deals that deliberately under price the goods on offer, please talk to us without delay.

Q. I am a contractor and I work through a managed service company. The organisation that runs this company wants to transfer me into a new personal service company to avoid the Budget tax changes. Will this work?

A. Probably not if there are no other major changes in how everything is organised and run. Your new personal service company will be treated like a managed service company where the provider controls aspects of the personal service company such as the finances, the payments made to you out of that company, or how you find your next contract. The payments to you from the personal service company will have to have PAYE deducted from them after 5 April 2007, even if they are called "dividends". You will also no longer get a deduction for your travelling expenses. For more advice on how you could structure your own personal service company with a view to avoiding both the new MSC legislation and IR35 please talk to us.

Q. One of my employees has just told me she is pregnant and says I have to give her a full year off work. Is this true, and do I have to pay her for all that time as well?

A. Your employee is correct, she is entitled to up to 52 weeks of statutory maternity leave, but this leave is not necessarily paid leave. You only have to pay her Statutory Maternity Pay (SMP) while she is on maternity leave, if she has been on your payroll for at least 26 weeks, including the 15th week before the baby is due. The SMP also doesn't last for the full 52 weeks, it currently can only be paid for up to 39 weeks. This has increased from 26 weeks for babies due after 31 March 2007. The SMP is also not paid at the employee's full wage rate. The first six weeks are paid at 90% of her average weekly wage and the rest of the period is paid at a flat rate of £112.75 (from 6 April 2007). As a small employer you can claim back from the Taxman all the SMP you pay out, plus an extra 4.5% as compensation for the employer's class 1 NIC you have to pay on the SMP.

Benedicts Accountants are based in London, offering local business owners and individuals a wide range of services.

All clients are entitled to fixed fees, work delivered on time and unlimited phone support. Visit our website jbenedict.co.uk for more information.