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 08.

Although the changes in income tax rates (abolishing the 10% rate and reducing the basic rate from 22% to 20%) were announced in March 2007, most people took very little notice at that time. When the new rates took effect in April 2008 there was an almighty fuss. Due to the loss of the 10% band those on lower wages began to pay more tax, and as the basic rate had been cut to 20% those with taxable incomes between about £18,000 and £35,000 had lower tax deductions.

After much dithering the Chancellor proposed a crude solution, which will not fully reimburse those on the lowest incomes who have lost out. The personal allowance for 2008/09 has been increased by £600 to £6,035 and the higher rate tax threshold has been reduced by £1,200. These changes are effective for the current tax year that started on 6 April 2008, and should result in a tax reduction of about £120 for basic rate taxpayers for 2008/09.

There are 4 main effects to consider...

1. If you run a payroll you are not expected to implement these changes until at least September 2008. HMRC have said they will issue instructions in the next few weeks on how the higher allowance and lower 40% threshold should be handled for PAYE purposes. The most straightforward solution would be to reissue all 22 million PAYE code numbers for 2008/09, but that would be very expensive for HMRC. We will let you know as soon as HMRC have decided what to do.

2. If you are self-employed you will not feel the full effect of the tax reduction until 31 January 2010, when you pay your final tax bill for 2008/09. You may be able to reduce your tax instalment payments due on 31 July 2008 and 31 January 2009, but that will be risky unless you know the level of profits that will be taxed for that year. We will only be able to work this out accurately once your accounting year finishes and your accounts are finalised.

3. As a shareholder/ director you may be used to drawing a salary exactly equal to your personal allowance, which is now £503 per month. However, if you increase your current salary above £453 per month you will pay more NICs as the earnings threshold, where NICs become payable at 11%, has not moved up with the personal allowance.

4. If your total income exceeds £41,435, you will see no difference in the tax you pay in 2008/09, but if you try to keep your income within the basic rate band you need to revise your calculations. As the higher rate tax threshold is now £34,800 not £36,000, you will need to restrict your dividend income to stay within that lower limit. Alternatively you could increase the pension contributions you pay by £480 (net).

Newsletter issue - June 08.

There has been much discussion in the quality newspapers about the taxation of wealthy non-doms, but what does that mean?

A person is non-domicile (non-dom) if they have a domicile of a country outside of the UK. Your domicile is not the same as your nationality or residence. It is the country that is your real or permanent home. This is generally the country your father considered to be his home country at the time of your birth. If you were born in the UK but your father was South African you have probably inherited the South African domicile of origin of your father. If you never intend to live in the country of your domicile of origin and you make your permanent home in the UK, the Taxman may assume you have chosen a UK domicile and have abandoned your domicile of origin.

Having non-dom status has some advantages for UK tax purposes, but many of those advantages have diminished since new tax rules were introduced on 6 April 2008. The main advantage was that income and gains you make overseas were not taxed in the UK unless you brought those funds into the UK. This is called the remittance basis.

The remittance basis can still apply for you if you are non-dom in three separate circumstances:

1. You have less than £2,000 of overseas income and gains per year.

2. You have lived in the UK for less than 7 out of the previous 9 tax years and you claim the remittance basis.

3. You have lived in the UK for more than 7 out of the previous 9 tax years and you pay an annual tax charge of £30,000 to be permitted to claim the remittance basis.

Remember, using the remittance basis means you can protect your overseas income from UK tax. Without the remittance basis you must declare all of your overseas income and gains on your UK tax return and pay UK tax on those funds even if they have already been taxed in another country, and have not been brought into the UK. Some relief for foreign tax paid may be possible. However, if you do claim the remittance basis for a particular tax year you will lose your UK personal allowances and annual capital gains allowance for that tax year.

This is a very complex area of tax law, so we need to discuss your personal situation before we can advise you fully.

Newsletter issue - June 08.

When you make an error in your VAT return, you can include the under or overpayment of VAT in your next VAT return, as long as the net error is not more than £2,000. If the VAT difference is more than £2,000 you should write to the VAT office and confess your mistake. We can help you with this as its essential to get the error pinned down exactly. If the error is a net underpayment of VAT, the VAT office will normally reply with a demand for interest on the late paid VAT.

The good news is for accounting periods beginning after 30 June 2008, that's your next VAT quarter, the error-reporting threshold is being increased dramatically. The new limit is the greater of £10,000, or 1% of your reported turnover for the VAT quarter, subject to a cap of £50,000. So VAT errors within this much higher limit can be included on the VAT return without having to write to the VAT office.

If you have overpaid VAT in the past, perhaps due to a misunderstanding over the correct VAT rate to apply to certain goods (such as tea cakes), you can reclaim that overpaid VAT from HMRC. The VAT office previously insisted that you make all such claims within three years of the end of the period in which you made the mistake. This three year cap was introduced on 1 May 1997 for purchases and on 4 December 1996 for sales, but the House of Lords has ruled this time limit is illegal. Now you have until 31 March 2009 to reclaim overpaid VAT from periods before 4 December 1996 and to reclaim VAT on purchases for periods prior to 1 May 1997. If your business is in this position we can help you to draft the claim.

Newsletter issue - July 08.

As you prepare to set up your company you may buy assets ready for that company to use, or pay for services such as legal or accountancy, that relate to the new business. You can reclaim the VAT incurred on those goods and services you purchased personally for the company if all of the following conditions apply:

1. You become a director, company secretary or employee of the company, and the company fully reimburses you for the goods and services you bought on its behalf.

2. You were not VAT registered when you made the purchases and have not used those items for any other purpose.

3. You have not reclaimed the VAT on those purchases through another business.

4. The company must reclaim the VAT in its first VAT return after becoming VAT registered.

There are also some restrictions on the goods and services on which the VAT can be reclaimed.

Goods must be:

• held at the date the company becomes VAT registered;
• purchased within 3 years of the date of that VAT registration;
• used by the company for its trade.

Services must be:

• purchased for the purposes of the company's business;
• acquired within 6 months of the date the company becomes VAT registered;
• not recharged on to a customer before the company became VAT registered.

Newsletter issue - June 08.

Q. I gave a personal guarantee for the overdraft of my property development company. Unfortunately the company went bust and I had to repay the overdraft personally. Can I get any tax relief?

A. It is possible to get tax relief when you are called on to honour a guarantee made for an overdraft of a UK trading company. The amount you had to pay to the bank under the guarantee is treated as a capital loss for the tax year in which you made that payment. This will not reduce your income tax liability, but you can set the loss against capital gains you make in the same year or subsequent tax years. The Taxman may argue that the company was an investment company and was not actively trading to try to deny you the tax relief.

Q. I have just started my own company to provide consultancy services. Can the company pay for me to attend a presentation skills course? Will the cost be taxable on me personally?

A. If you are an employee of your own company, and as the owner/ director you normally will be, the company can pay for any training that is relevant to your work, and claim tax relief for the cost incurred. As you will be required to make presentations as part of you job with the company, then the training is definitely relevant to your work. The cost is not taxable on you. If you had set-up your business as a self-employed consultant the training may not be tax deductible as different rules apply.

Q. For the last few years I've paid into a personal pension scheme but I have never shown those payments on my tax return. Is it too late to get higher rate tax relief for those pension contributions?

A. As a higher rate taxpayer you should enter on your tax return the gross amount of personal pension contributions you paid in the tax year, to claim the additional 18% tax relief available, for the tax years up to and including 2007/08. So for every £78 you paid (equivalent to £100 gross), you should receive tax relief of £18. You are still within time to make a claim for 2006/07. Just write to the tax office where you submitted you tax return saying you are making an amendment to your 2006/07 return and provide details of the gross pension contribution paid. For the years back to 2000/01 you could make so-called error and mistake claim. We can help you with this, but the Taxman is not obliged to accept this special claim.

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.