November 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 - November 08.

If your business is feeling the pinch in this general economic downturn, it's more important than ever to look at what you can do to help your business. Here's 10 ideas to get you started...

1. Get paid sooner! Encourage your customers to pay more quickly, by giving small discounts or just by chasing them promptly. Send out invoices for completed work as soon as possible, and for long term projects ask for stage payments on account.
2. Promote best value products. If you have a range of products or services, look at giving more prominence to the best value items in your marketing.
3. Talk to your bank. Keep your bank informed, especially if you are going to have a need to secure extra funding or even renew existing arrangements. If fees are being increased it may pay to shop around for facilities.
4. Take advantage of the crunch. If you are cash positive, turn the crunch to your advantage. Some businesses may be keener to make a sale so those with cash to spend may be able to negotiate some great bargains, especially for early payment!
5. Staffing needs and working hours. Consider asking staff to change their working hours to part-time or flexi-time, with an appropriate drop in total pay. Or to take their holidays now if business is slow. If a skilled member of staff is about to retire ask them to stay on part time, as this may be cheaper than recruiting a new employee.
6. Office rent. Ask your landlord if you can change from a quarterly payment in advance to a monthly payment. Or with improvements in technology perhaps now is the time to consider if you could run your business from home and make use of home workers and lose the office rent altogether!
7. Don't forget the marketing. Whilst cutting back on costs can be necessary in a recession and it may be tempting to cut the marketing budget, it may prove a false economy if sales suffer. Whilst others cut back on their marketing, you may be able to use this to your advantage and keep on marketing to get a larger share of the present market.
8. Renegotiate with suppliers. Review the agreements you have with suppliers for continuing services, such as; security, energy, or cleaning. Can you renegotiate any of these contracts to get a better deal?
9. Reduce tax payments on account. Review the projected tax payments for your business. Payments on account for unincorporated businesses can be reduced and reclaimed if you are confident of the final taxable profit figure. This is a good reason for getting the accounts completed quickly after the year end.
10. Carry back losses. If your business is likely to make a loss for the current year, quantify that loss as soon as possible and submit a claim to carry back the loss to get a refund from HMRC.

If you would like to meet up to discuss these and other ideas as to what your business should be doing in the credit crunch, please contact us.

Newsletter issue - November 08.

In these turbulent times, losses on property lets may be increasing, so it's worth taking a look at how those losses are treated for tax purposes, to help get tax relief for any losses.

Where property is held in your own name
If you let a property you own personally, even it was previously your own home, you must report the rental income and expenses on your tax return. This applies whether you make a profit or loss from the letting.

Where you own several let properties all of the income and expenses relating to your UK properties are thrown into the same pot to establish the overall profit or loss for the year. Properties which are located outside of the UK are excluded from this property pot, as are properties which are let as furnished holiday homes on short lets. The profits and losses from overseas properties must be shown on the foreign income pages of your tax return. Furnished holiday lettings have special rules for dealing with losses and have some advantages.

It is important to declare the loss, if that is the result from the general property pot. Although you can't set that loss against your other income, it can be carried forward without time limit. If you do make a profit from letting your properties in a future year the loss you have made this year will reduce the tax you have to pay in that future period. If you don't claim the loss you won't be able to use it in the future.

Where property is held through a company
Where you hold let properties through a company the mechanism for calculating the profit or loss from the lettings is rather different. The interest paid on any borrowings taken by the company to fund the properties is not deducted directly from the rents, but it is treated as a separate expense.

The rental income from all the properties the company owns is set against the costs relating to those properties, excluding interest paid. Only at that stage is the interest payment set-off against all of the company's profits for the year. If those profits do not cover the whole of the interest paid, the excess interest cost is carried forward to the next year. The carried forward interest can only be set against the company's non-trading profits, such as from property or interest received. This means that it is not easy to get tax relief for excess interest where the borrowing relates to let property.

Newsletter issue - November 08.

In the present climate where house builders are stuck with properties they can't sell, they may be tempted to rent them out.

However, when building firms rent out newly built homes instead of selling them, this can cause VAT problems. This is because new residential properties are zero rated for VAT and letting residential property is exempt from VAT. The amount of VAT charged to the buyer in both cases is the same: nil, but the seller's ability to reclaim VAT on its costs is not. Briefly you can reclaim VAT on costs associated with something you sell which carries zero-rate VAT, but you can't reclaim the VAT when the thing you sell is exempt from VAT.

Where your business has only a small proportion of VAT exempt sales, you may be able to ignore the ban on reclaiming VAT, if the VAT relating to the exempt sales is less than both:

• £7,500 per year; and
• 50% of the business's VAT on purchases for the year

Working out how much of the VAT you paid relates to the new properties which are let is not straight-forward. The total amount of VAT on the purchases that relate to those buildings must be spread over 10 years. If the properties are let for say 2 years before they are sold then 2/10ths of the VAT on the costs is regarded as relating to exempt sales. If this total is within the limits shown above, you have no VAT problem.

However, in real life the calculations are rarely that simple. If you are forced to let newly-built residential property please ask us to check your VAT position.

Newsletter issue - November 08.

Although single companies can normally only carry losses forward, where there are several companies in a group the losses made by one company can be set against profits made by other companies for the same year. Companies are regarded as a group when either 75% of the ordinary shares from one company are owned by the other company, or two or more companies are each owned at least 75% by a holding company.

Where a group exists all the trading losses, property losses, and excess charges (but not capital losses) arising in the loss-making company can be transferred to another company in the same group, to reduce the corporation tax that company pays for the same accounting period. You can opt to move as little or as much as the loss as you wish.

If you have more than one company it is therefore worth considering if they should be arranged in a group structure to take advantage of group loss relief.

Companies pay corporation tax at different rates according to the level of their taxable profits, so it makes sense to move the losses to the company that pays the highest marginal rate of corporation tax. The calculations can get quite complicated where there are a number of different types of income and various sizes of company in the same group, but we can help you reach the most tax efficient solution.

Newsletter issue - November 08.

Q. I'm worried that the cash my company has on deposit is not covered by the Government's guarantee for personal bank accounts. Should I pay my corporation tax early so the money is secure and I know that debt will be paid?

A. Deposits made by small companies in UK banks are covered by the Financial Services Compensation Scheme, for up to £50,000 per bank. A small company is one that meets at least two the following three conditions:

• Not more than £6.5 million annual turnover;
• Not more than £3.26 million net assets on the balance sheet; and
• No more than 50 employees

You could pay your corporation tax early in which case HMRC will eventually pay interest at 4.25% on the amount paid before it is due, when the corporation tax return for the year is submitted and agreed. This interest will be taxable in the company's accounts. Remember to use the correct reference when paying the corporation tax.

Q. I bought a 100 year lease on a retail unit in 1988 for £20,000 and spent about £40,000 converting it into a property I could trade from. I sold the lease in March 2008 for £125,000 when it had 80 years to run. Can I get a deduction for the £40,000 I spent on making the property useable?

A. You had a right to use the property absolutely for 100 years under the lease and spent £40,000 improving that property. This expenditure also made the property more attractive to the person who has purchased the lease from you, and certainly enhanced the amount the purchaser was prepared to pay to acquire the lease. The improvement costs are thus fully deductible from the sales proceeds of £125,000. If the Tax Inspector refuses to allow you this deduction, point him to the example in his own Capital Gains Manual at para CG 71148.

Q. I am a self-employed author, mostly working from home, but I also give after dinner speeches for which I have to travel some distance. Some of these talks are for charitable organisations, in which case I only ask for travelling expenses. As I am VAT registered do I have to add VAT on to the travel expenses I charge to the charities?

A. Your VAT registration covers all of your business activities including your speaking engagements, so any fee you charge for speaking, even only to cover travel costs must have VAT added. This applies even though the underlying cost to you - the train ticket, is zero-rated for VAT.

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.