July 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 - July 07.

There have been some alarmist newspaper articles recently claiming the Taxman is about to crack-down on thousands of buy-to-let landlords. This is not the case, at present he has bigger fish to fry chasing those with undeclared off-shore bank accounts, but that doesn't mean that landlords are off the hook.

The problem with buy-to-let landlords is that many don't complete their tax returns correctly, or at all. There are possibly 500,000 landlords letting residential property in the UK, but the Taxman knows only about 300,000 people who complete the land and property pages of their personal tax return to report income from a let property. Some individuals may hold their let property through a company, in which case the rental income should be reported on the company's tax return not on the individual's, but others just forget to tell the Taxman about their lettings.

If you let a property, even one that used to be your own home, you must report the rental income on your tax return. This applies whether or not you actually make a profit from the letting. The income and all tax deductible expenses have to be shown to tell the Taxman you have made a loss for the year. You can't set that loss against your other income, unless the property is regularly let as furnished holiday accommodation, but you can carry the loss forward to off-set against future profits from a lettings business. If you don't claim the loss you won't be able to use it in the future.

The other problem is that landlords make mistakes about what to deduct as expenses from the rents received. Valid expenses include the costs of running the property from day to day, such as a management agent's fees, repairs, advertising for tenants and insurance. Tax deductible expenses do not include the costs of acquiring the property, such as stamp duty, estate-agent's, or solicitor's fees.

The interest you pay on any loans or mortgages connected with your lettings business is deductible, but not the repayment of the capital borrowed. If you have a repayment mortgage you must be careful only to include the interest part of the monthly payments on your tax return. The lender should break down the total you pay over a year into interest and capital repayments, and show this on your annual mortgage statement. We can help you make the right claim on your tax return for all your letting expenses.

Newsletter issue - July 07.

The compulsory VAT registration threshold is now£64,000 for sales made in any twelve month period. If your sales are expected to top that threshold in the near future you need to apply to be registered for VAT without delay. On the VAT1 application form you need to set the commencement for your VAT registration at a date that is no more than a month after your sales reach£64,000. As it currently takes up to three months to get VAT registered, you need to be able predict your future sales quite accurately, and keep a close eye on your past sales for a rolling 12-month period.

These problems can be avoided if your sales stay just below the£64,000 threshold. Where you have one particular successful strand of your business, you may consider splitting-off that line of sales into new business to keep your core sales below the VAT threshold. However, business splitting must be done on a fully commercial basis as the VATman takes a dim view of any artificial division that is purely designed to avoid VAT registration.

A business split works best if the two new businesses are run through separate legal entities, such as a partnership and a limited company, and each services a different set of customers. For example, commercial customers buy from one business and private individuals from the other. The purchases for each business should be made completely separately, and separate accounting records and bank accounts set-up. If one business owns the premises that they both trade out of, the second business should pay a market rent for its use of the space.

The VATman can challenge a business split if he can show the separation is artificial, the two businesses are closely bound by financial, economic or organisation links, and the split results in VAT avoidance. However even if he does decide that the two businesses actually operate as one, he can only insist that they are combined for VAT purposes from the date of his decision. That may mean that both businesses must immediately become VAT registered.

Newsletter issue - July 07.

If you want to borrow some funds temporarily from your own company, there is not much in practice that will prevent you from doing this.

However, company law prohibits a company of any size from making loans to its directors, unless those funds are needed by the director to pay expenses incurred on behalf of the company, or to allow the director to perform his duties as a director. The loan must also be approved by the shareholders in a general meeting and be repaid within six months of that meeting. There is a general exemption from these conditions where the amount of the loan does not exceed £5,000.

So you can borrow up to £5,000, but you also need to think about the tax consequences however much you actually borrow. If you do not repay the loan within nine months of the company's year end, the company will have to pay an extra corporation tax charge equivalent to 25% of the loan. That charge will be set-off against the next corporation tax payment due after you finally repay the loan.

When you borrow more than £5,000 there will also be a benefit in kind tax charge due from you personally, if you do not pay interest on the loan of at least 6.25%. This tax charge applies however long you borrow the funds for: 5 months or 5 years.

Newsletter issue - July 07.

Paying National Insurance contributions (NICs) builds up your entitlement to the state retirement pension, and to certain social security benefits, such as the jobseekers allowance, if you lose your job. However to receive most benefits you must have a complete NI record covering at least two tax years, and to get a full state retirement pension you must pay NICs (or been credited with them) for up to 40 years.

If you don't pay NICs for a significant period, because you are studying, travelling, bringing up children, or caring for relatives, your NI record will have gaps. However some state benefits such as the carers allowance or child benefit, should plug these gaps with NI credits, but that credit system does not always work perfectly.

The Taxman's computer system should automatically send you a letter if you have a gap in your NI contributions. The letter recommends that you pay some voluntary NI contributions to complete your NI record for a certain tax year. If you receive such a letter ask us to check the details. Even if do you have a gap in your NI record you may be better off contributing extra funds into an independent pension scheme, rather than paying more for your state pension. It all depends on your personal circumstances and your retirement plans.

Newsletter issue - July 07.

Q. I'm a driving instructor and operate through a limited company. The Taxman wants to tax me for using my instruction car and fuel as a taxable car benefit. I don't think that's fair as the car is necessary for my business. Is he right?

A. Essentially the Taxman is correct. If you use the instruction car for even one mile of a private journey, there will be an income tax charge. It is irrelevant whether the car is necessary for your business or not. Taxi drivers who run their businesses through limited companies have the same problem. If you can show that you make absolutely no personal use of the instruction car, perhaps because you use another car for all private journeys, the Taxman may be persuaded to treat the instruction vehicle as purely business. However, he may want to see an insurance policy that prohibits private use.

Q. My company has recently applied for gross payment status under the new CIS, but the application was rejected as the Taxman says my personal income tax was paid late for 2005/06. I sent the tax payment on 24 January 2007, so how can this have been late?

A. This is a problem with the new CIS computer system, as one late payment of income tax should not make your application for gross payment fail. The tax office also should have received your cheque before 31 January 2007, the deadline for that payment. Unfortunately your only option now is to appeal against the decision, although in this case the Taxman appears to be completely in the wrong.

Q. My husband has been seconded to the Dubai office of his company for six months, but I won't be joining him, as we don't want to disrupt our children's schooling. Do I need to tell the Taxman?

A. If you are claiming tax credits you do need to tell the Tax Credit Office as soon as possible. You will be counted as a single parent while your husband is away and your tax credits claim needs to be reassessed.

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.