January 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 - January 07.

We're into a new year and already the taxman is after us, reminding us the deadline for filing of 2006 tax returns is fast approaching on 31st January. So if you haven't already supplied the information for completion of your return, please contact us urgently. The initial penalty for being late is £100. Whilst that may be affordable for some, not only does it rise if you continue to delay it is a factor that may put you at increased risk of a tax enquiry.

For anyone who may potentially be affected by the Arctic Systems husband and wife case you have to decide what to put on your return as the case does not get its final hearing until 5th June. Our advice is that where your situation is similar to that of Mr & Mrs Jones, as the taxpayer won the last case, that is the prevailing law at this time and your return should be prepared on that basis. In addition no note is required in the white space of the return that you are relying on this. If HMRC should win the appeal there will be time to amend your return if this is really necessary.

Newsletter issue - January 07.

HMRC have launched a calculator on their website to help you decide whether you would be better off receiving tax credits or, instead, taking childcare vouchers from your employer to help you with your childcare costs.

This is because the taking of childcare vouchers can affect your entitlement to tax credits. The calculator is presently only a pilot version running until the end of February 2007.

Click here to try the Childcare Indicator

Newsletter issue - January 07.

Many small businesses find themselves trading through a limited company, often resulting from the tax advantages of doing so. Many first incorporated when the first £10,000 of company profits was tax free, although this is no longer the case. Incorporating is easy with many reliefs available to ensure there are no adverse tax consequences of doing so. However, going the other way is not quite as simple.

There are still many tax advantages of using a limited company including lower tax rates and avoidance of national insurance by using dividends as well as the benefit of limited liability. However for the very smallest of companies that would prefer the simplicity of a sole trader or partnership set up, the following are just some of the main points needing careful consideration...

• As this is a transaction between connected parties (the company and the individual) any capital assets are transferred at market value for tax purposes and Capital Gains Tax will be applicable to any capital assets including goodwill that have grown in value since incorporation or even prior to that if any gains were deferred when the company was first incorporated. You also need to consider how the assets are transferred. For example, they could be transferred as a dividend which in turn can create another tax charge on any individuals liable to higher rate tax.
• Any losses that are in the company cannot be carried forward to set off against future profits, only set-off against profits of the same previous 3 years.
• Any accumulated profits remaining in the company have to be passed to the individual. This could be by dividend or by capital distribution and the most tax efficient method will vary dependent on your circumstances.
• A formal liquidation process can be used to wind up the company but it can be expensive and a far simpler method is to get the Registrar to use S652 of the Companies Act 1985 to strike off the company. This just involves a £10 application fee although there are various requirements to be met.
• Payment of tax will be brought forward as on the transfer of trade the year end of the company is brought forward to that date.
• Values for transfer of stock and fixed assets will need consideration and there may be a balancing adjustment for capital allowances purposes.
• Now that the shares in the company are worthless, the shareholders may be able to make a claim for a capital loss on the shares using a negligible value claim or for any loans the directors/shareholders have made to the company that are being written off. Additionally, if the shares were subscribed for in the first place a claim for an income tax loss is possible.

In some cases these complications may be minimal and the business owner can literally cease trading as limited company one day and recommence the next day as a sole trader. For further advice in your own situation please contact us.

Newsletter issue - January 07.

EFRBS stands for "Employer Financed Retirement Benefit Schemes" and from "A Day" replaced the funded unapproved employer pensions.

These are employer pension schemes and under the "A Day" rules when the company makes a contribution to one, it does not count as a tax deductible expense. However, on the other hand, there is no tax charge on the individual the pension fund relates to. As unregistered schemes, EFRBS are not subject to the new A Day tax rules and so are not subject to the Annual Allowance Charge or the Lifetime Allowance.

Another benefit of using an EFRBS can come when you want to move surplus cash out of your company without incurring a tax cost in taking it out. For example, to ensure when a company is sold with business asset taper relief available and so tax paid at only 10% rather than 40% on any gains, it can be important to ensure the company does not build up assets of an investment nature. So by moving the surplus cash or other investments into the pension fund, you can avoid taking the cash out personally and paying higher rate tax in doing so.

Newsletter issue - January 07.

HMRC has reported that calls to the Tax Evasion Hotline have rocketed to 75,000 over a three-month period. Apparently, as well as ex-spouses there are now many business rivals reporting others who are trying to gain an unfair advantage.

HMRC clearly believes the hotline is a success and is getting used more all the time as more people become aware of it. It believes that is is the right thing for businesses to be shopping competitors who are not playing by the rules. There is a danger of course that it will also be used by competitors to maliciously report others and give rise to unnecessary enquiries.

It is therefore becoming even more important to be properly represented should you fall under enquiry and to take all other precautions in the first place to minimise the risk of enquiry. If there are no other risk factors, it is likely that an anonymous phone call to the hotline may go no further but if you have other risk factors such as unusual variations on your tax return that have not been explained, the combination may result in an enquiry. Avoidance of tax enquiries is often about knowing what the risks are and properly managing those risks to ensure HMRC do not wrongly suspect you of something.

Newsletter issue - January 07.

Q. I'm starting a new business as a plumber and don't know if it would be a good idea to register for vat. Can you advise?

A. It is only compulsory to register for VAT if your annual cumulative turnover to the end of any month exceeds £61,000 or if you expect your turnover to exceed this in the next 30 days. So it is likely when starting you will not have to register but you should keep an eye on your turnover every month to monitor this. By registering, you have to add VAT onto your outputs (sales) which if supplying non vat registered businesses or people such as the general public will put you at a competitive disadvantage and is generally not advisable if this is your main customer base. However, the advantage of registering will come if you are supplying mainly vat registered businesses who can reclaim the vat and it largely doesn't matter to them whether you charge vat or not. By being registered you can then reclaim input vat on purchases and services including on any goods purchased within 3 years before registration, although this doesn't include any goods consumed before registration such as electricity but it does not apply to trading stock and capital assets such as equipment. For services, you can only go back 6 months. A vat registered business may also have more credibility with potential customers. To register voluntarily it will be necessary to satisfy HMRC that you are on intend to carry on a business making taxable supplies.

Q. The taxman has selected me for an enquiry, has had all my books and records and now wants me to have a meeting with him. Do I have to go?

A. Meeting the taxman can be a worrying process and if you are doing so it is vital that you are properly represented at the meeting. Under no circumstances should you attempt to go alone. However, there is no legal obligation for you to attend and you are within your rights to refuse to attend and deal with the enquiry through correspondence, saying you will be better able to consider the questions and give a fuller response that way. However, a meeting can often help to resolve matters more quickly and is a sign of co-operation that can help to reduce any eventual penalties should tax be found to be owing. You should ensure you are being advised by an accountant experienced in enquiry work as the right approach will vary depending on the client. Ensure an agenda is requested prior to any meeting and fully prepare beforehand. At the meeting you do not have to answer questions there and then. Do not be pressured into answering questions you are not certain of the answer to and ask them to be put in writing for you to consider.

It's also worth pointing out that there was also no legal obligation for you to send all your books and records to the taxman. For example it may be better to have him inspect the records at the office of your accountant.

Q. I've sold a lot of unwanted Christmas presents on Ebay and I remember reading something about paying tax on what you make on Ebay. That doesn't seem fair.

A. What HMRC say is that if you are trading online using Ebay, you will be liable to tax on your profits. Even if your profits are below the level of personal allowances you should still inform them that you are trading. However, the receipt of unwanted presents and then selling them would not be considered to be a trade and nor would the sale of any other unwanted personal goods if they were not bought with the intention of making a profit. A trade is where you buy the goods with the intention of selling them on at a profit and this occurs no matter the extent of it. So even if you did a bit with just a couple of items in the run up to Christmas to make some more money for Christmas, that is trading. In practice, it's likely HMRC are only going to go after the more substantial cases.

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.