June 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 - June 07.

When you run your own company you have a good deal of flexibility over how and when to extract profits from your business. You may take a basic salary and top up your income with a dividend or bonus once or twice a year. Which of these alternatives is more tax efficient depends on your highest tax rate, and the tax rate paid by your company. But these tax rates are changing, so the policy that saved tax previously may not work in the future.

If you pay tax at the basic rate of 22% and your company pays corporation tax at 20%, the tax saved by you and the company combined is significant where those funds are extracted as a dividend. This is because the dividend is free of national insurance and income tax in your hands.

Where the bonus or dividend you receive pushes your personal income into the higher rate tax band (taxed at 40%) there is still a combined tax saving by paying a dividend, if the company pays tax at 20%. However this tax saving will reduce as the corporate tax rate rises to 22% in 1% stages in 2008 and 2009.

If your company pays the higher or marginal rates of corporation tax, (currently 30% to 32.5%) and you are already paying 40% on part of your income, there is no tax saved overall by paying a dividend rather than a bonus.

Although a dividend is a tax efficient way to extract profits in most cases, there are alternatives. For example if the company uses a property, which is held in your own name, it can pay you a market rent which is free of national insurance. Ask us to look at how you could extract more profits from your company in tax efficient ways.

Newsletter issue - June 07.

Some benefits are really worth having, such as childcare vouchers or free parking, but they can be expensive for the employer to provide. A solution is for the employee to voluntarily reduce his or her salary by the value of the benefit or some other agreed sum, and the employer pays the benefit directly. The agreement to reduce salary must be made in advance and in writing, perhaps as an adjustment to the employment contract, but this arrangement can work to the advantage of both parties.

Take the example of car parking; which is often in short supply, and expensive, in city centre locations. If the cost of car parking is £10 per day, this adds up to £2,400 for 48 working weeks. An employee on basic rate tax needs to earn £3,582 gross to have £2,400 net after deduction of tax at 22% and NICs at 11% to pay for this parking.

Where the employer pays for a parking permit for the employee to park at or near the place of work, the employee is not taxed on that benefit. Note the parking must be at or near the actual place of work, not at the railway station near the employee's home.

In this example the employee chooses to reduce their salary by £2,400 and the employer pays for a parking permit. The employer gets a tax deduction for the cost of the permit in its own accounts, and saves 12.8% employers NIC on the reduced salary. The employee now gets this benefit tax free plus the remainder of the taxable salary that wasn't sacrificed (£1182) so everyone wins - except of course the Taxman!

Newsletter issue - June 07.

Completing P11Ds to report employees' expenses and benefits is a tedious job, but if the forms are incomplete or late in reaching the Taxman you could be landed with penalties of up to £300 per form. To help you along this year we have complied a list of tips to ease the process:

• Preparation is the key so make sure you have all of the following to hand before you start:
  • Copies of the P11D forms submitted for 2005/06;
  • Any agreement or dispensation reached with the Taxman that may eliminate the need to include some or all expenses;
  • Software needed to complete the P11Ds or compile schedules;
  • Copies of the Taxman's guidance: leaflets 490, 480 and CWG5;
  • Access to the "List 3" of approved bodies for subscriptions (on HMRC website: http://www.hmrc.gov.uk/list3/index.htm)
  • A complete list of all the directors and employees who received expenses or benefits in 2006/07.
• Check your software is working correctly. The P11D form changes every year, so you must use the latest version. You can submit P11D information to the Taxman on a single spreadsheet, such as when the only benefit provided is medical insurance, but you need to agree this format with your PAYE tax office first.
• The benefits and expenses must be calculated for the tax year to 5 April 2007, not for the employer's accounting period. However where the company year-end is 31 March that can be taken as equivalent to 5 April.
• Report the value of expenses and benefits including the VAT charged on the invoice, even if some or all of that VAT has been reclaimed by the company.
• Include the full cost of any travel tickets, meals or accommodation purchased by the employer and used by the employee. The Taxman insists that even where the company has bought the tickets rather than the employee, the cost must go on the form P11D, unless a dispensation covers those expenses.
• Allow yourself plenty of time for the task. The 2006-07 P11Ds must be with the Taxman by 6 July 2007, but you may want to send a copy of the draft P11D to the effected employees in advance so they can check data agrees with the benefits they have received in the year.

Do advise your employees that they need to report the P11D figures on their own tax returns and make claims for the expenses that had a business purpose, on the employment pages of the return, or by letter to the Taxman. This year there is a new automatic system for processing P11D information into the employee's PAYE code. So the your employees may find their tax code is altered in August or September to tax the expenses they have received, but this tax charge will not be removed until they have claimed a deduction for the business expenses.

Newsletter issue - June 07.

If you are claiming tax credits you should have received a renewal pack by now to renew your claim for the current tax year: 2007/08. You need to return these papers by 31 July 2007 including, if possible, an accurate statement of your family income for the year to 5 April 2007. If you don't return the renewal papers by 31 July your tax credit payments will stop.

Where your income is primarily profits from your own business you may need to wait until your 2006/07 accounts are completed, before you can give an accurate figure for your family income. If this is the case you should include an estimate of your income on the renewal papers and supply the final figures by 31 January 2008.

Where there are changes in your family circumstances, your working patterns or in the number of children that qualify for tax credits within your family, you need to report these changes to the Tax Credit Office within one month of the change. For example if you split up with your partner, so they cease living in the family home, you must report this change within one month. As a single person supporting children your tax credit claim will need to be recalculated based only on your income and your working hours.

Newsletter issue - June 07.

Q. I started a new business last year and have only just begun to make profits after a year of losses. Can I set the losses made in the first year against the profits made in the second year?

A. Yes you can, but if your business is run as a sole-trader rather than through a company you can set the first year losses back against your other income made in the four years before you started the business. If the business is operated through a company the use of losses is more restricted as they can only generally be set against income made by the same company in the future.

Q. Before I married I lived in a small flat, which is now let. I would like my wife to receive the income from this flat to use up her personal tax allowances, as she is no longer working. How can I arrange this?

A. To share the income from the flat the property must be held in your joint names. Ask a solicitor to transfer ownership of a defined share in the property to your wife. There will be legal charges and possibly Stamp Duty Land Tax to pay if the property is subject to a mortgage.

Q. I am setting up a café in a local gym to sell hot and cold drinks including fruit smoothies made on the premises. Do I have to charge VAT on the smoothies?

A. Assuming you are or need to be registered for VAT, then Yes. Smoothies and juices are a drinks subject to standard rate VAT. If you sell the fruit unprocessed it is a zero-rated food.

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.