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 08.

From 6 April 2008 it will be far more difficult to reduce your tax bill by paying dividends or profit shares to less active shareholders in your company or members of your partnership. This is because of a new law on income shifting that will affect nearly every partnership and jointly owned company in the UK. It doesn't matter whether those co-owners (partners or shareholders) are married, other relatives or simply friends.

If you make a bigger contribution to the business than your co-owners, but receive a similar share of the profits, the Taxman could argue that you have shifted income away from yourself, so it falls into the hands of those co-owners who play a less active role in the business. You will have to pay tax on the amount of shifted income, and the less active co-owner(s) will be treated as having never received that shifted income.

Although the new income shifting law will only affect dividends or profits shares paid out from 6 April 2008, those profits may have been earned by the business many years earlier. If you are planning to pay a dividend on 6 April 2008, to place that income in the 2008/09 tax year, you may want to bring the payment forward to avoid the new income shifting rules. However, you should be careful of pushing your total income for 2007/08 into the higher tax bracket.

If you want to continue to pay profit shares or dividends to less active co-owners of your business from 6 April 2008, you will need to justify the amount paid according to the recipient's contribution to the business. This contribution could be measured by:

• the amount and type of work done
• the individual's responsibility for making key decisions for the business
• the capital contributed to the business
• the business risk taken on, such as a personal guarantee of a business loan

You may need to adjust the agreed profit sharing ratio of your partnership, or the number of shares each individual holds in your company, to reflect the actual input of each individual. We can help advise you on the best action to take and what to do in order to reduce the risk of being attacked for income shifting.

Newsletter issue - January 08.

When you transfer your business into a company you should get a valuation for the goodwill connected with that business. If that goodwill can be separated from you as a person, i.e. it is not attached to your personal skills, but relates to either the location of the business or the value of its customer base, the company can purchase that goodwill along with the other assets of the business.

This is very useful because the transferable goodwill is treated as a business asset in your hands. If the sale to the company is agreed before 6 April 2008 the gain arising on the transfer of the goodwill, which is likely to be the full sale price, will be reduced by up to 75% by taper relief. This can leave a very small gain in your hands, which may well be covered by your annual exemption for capital gains of £9,200.

The company can also benefit by purchasing the goodwill. Where your business was originally started after 31 March 2002 the cost of the goodwill can be written off against the taxable profits in the accounts of the company. It is important to establish exactly when your business commenced, as this will make a difference to the treatment of the goodwill by the company.

Newsletter issue - January 08.

Cars that cost over £12,000 get special treatment for capital allowances. The capital allowance for each car must be worked out individually as there is a cap of £3,000 per car that can be claimed per year. This is different to other assets such as machines, where the costs are added together in a pool, the capital allowance is then calculated on the total value of the assets in the pool.

The individual capital allowance calculation per car is fiddly but it does have advantages, as when you sell or scrap the car you get immediate tax relief for the remaining cost of the vehicle. Assets sold out of the pool do not get full tax relief on sale as only the sales proceeds are taken out of the pool which may be less than the cost of the asset which has yet to be given tax relief through capital allowances.

From April 2008 the distinction for cars costing over £12,000 is likely to be swept away. The Government has proposed that cars will be categorised on the basis of their CO2 emissions. Three or more pools may be established for cars that have low, medium or high CO2 emissions. Low emissions cars (up to 120g/ km) will qualify for a 100% first year allowance, as now. Those in the middle band are likely to qualify for a 20% capital allowance per year, and the most polluting cars will only qualify for a 10% annual allowance. This will lengthen the time over which tax relief for the full cost of the cars will be given. Also the ability to get immediate tax relief for the balance of the cost on the sale of a car will also be lost.

The new rules for capital allowances on cars have not been confirmed yet. They may only apply to cars purchased on or after 1 or 6 April 2008, as reorganising the existing cars into the new pools would be very difficult, although if that was the case it may be beneficial to sell the car prior to April 2008 to ensure any balancing allowances are obtained. Alternatively, if you are planning to buy a new car in 2008, you should think about the timing, as a purchase from April onwards could mean a long wait to get full tax relief for the cost. In summary, if you are thinking of buying or selling cars there may well be an advantage in doing so before April 2008 but keep in touch with us for up to date information if you are considering this.

Newsletter issue - January 08.

Where you pay a mileage allowance to your company car drivers to compensate for the cost of fuel used on business journeys, those payments can be paid tax free if they fall within certain limits. These limits are called advisory fuel rates and are set by the Taxman every few months. The new mileage rates that apply from 1 January 2008 are:

These mileage rates are advisory and are not set down in law. If your vehicle fleet has special features which means it is less fuel efficient that the average car, you can agree different advisory rates with your local tax office.

Newsletter issue - January 08.

Q. How do I know the VAT number on my suppliers invoice is genuine?

A. It's a good idea to check any VAT number you have doubts about, as you can't reclaim the VAT charged if the VAT registration is invalid. The quickest way to do this is to ring the VAT helpline on 0845 010 9000. The VAT officer will tell you if the VAT number and address details you read out match theirs. If they don't match, they won't tell you the details they have on file, but then you know you have a problem, so go back to your supplier.

Q. What will I gain by sending in my monthly CIS return online?

A. Your CIS return needs to be with the Taxman by 19th of every month, even if you have no payments to report. If you submit the return online you don't have to allow for the time a letter takes in the post. The online service is available 24 hours a day, so you can do your return at any time it suits you. You gain peace of mind knowing your return has arrived safely as you get an instant acknowledgement with an online return. As long as you receive this acknowledgement by midnight on 19th of the month you can also be sure you won't get fined for submitting a late return.

Q. I'm going to be a bit short of money for the self-assessment payment due on 31st January and was wondering what the Taxman would do if I paid another creditor I have instead of the Taxman?

A. If you don't pay your income tax bill by 31 January 2008 you will have to pay interest at 8.5% on the unpaid balance. Also if you delay paying beyond 28 February 2008 you will have to pay a surcharge of 5% on the outstanding tax due for 2006/07, which will also carry interest at 8.5%. What's more the Taxman marks late payers as high risk cases. A high risk marker means you are more likely to get investigated and end up paying penalties for any tax errors you have made in the last six years. If you are really going to struggle to pay it is sensible to talk to them to arrange a payment plan.

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.