October 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 - October 07.

When you live in the UK you must declare all of your taxable income on your tax return form, including any foreign income; such as rents from overseas properties, interest from off-shore bank accounts or dividends from foreign companies. Some people believe that foreign income does not have to be shown on a UK tax return, because the basic tax return form and the short version tax return form do not have boxes for foreign income, but it does.

If you receive any sort of foreign income you need to answer question 6 on page 2 of the tax return and complete the foreign income pages, which have a pale green tab top. These extra pages can be ordered from HMRC. If you normally complete your own tax return online, reporting foreign income can cause a problem, as the tax return software provided free by the Taxman does not currently support the foreign income pages. In this case you need to use some third party software to complete the foreign income pages or complete your whole tax return on paper instead of online or just let us do it all for you.

There is an alternative if your foreign income consists of less than £300 of dividends from an overseas company such as Bank Santander (who own Abbey National Bank). In this case you can enter the foreign dividends in box 5.5 on short form tax return form, or on page 3 of your tax return form, even on the online version. There will be no difference in the tax you pay as a basic rate taxpayer, but as a higher rate taxpayer you will not get the full benefit of the overseas tax deducted from the dividends.

If you receive other types of foreign income, you must complete the foreign income pages to report the gross amounts and any expenses to set against the income, even if the money has not been paid into a UK bank account. If you have the special 'non-domicile' status (see below) you are not taxed on foreign income that is kept outside of the UK, but you must still make a special claim for this treatment to apply on your tax return each year.

If you feel you have incorrectly declared foreign income in the past and so potentially liable to tax, interest and penalties please speak to us about the best way to deal with this.

Newsletter issue - October 07.

Your domicile is broadly the country that is your natural home. This is normally the country where you live permanently such as the UK, but if you were born in another country, or your parents were born in another country, your domicile may be that other country. In this case you are treated as not having a UK domicile, i.e. be non-domiciled in the UK.

There are advantages to being non-domiciled while living in the UK...

1. Income and Capital Gains. If you have income or capital gains that arise outside of the UK, those amounts will not be taxable in the UK unless you bring the money into the UK. This process of bringing funds into the UK is called a making a remittance. It is easy to accidentally remit money to the UK from off-shore sources, for example when a cheque passes through the UK banking system it is treated as being remitted to the UK, even if the funds are immediately paid out of the country again. If you do have non-domiciled status you need to fully understand the remittance rules to ensure you keep your off-shore funds completely separate from any UK earnings.
2. Inheritance Tax. If you have lived in the UK for less than 17 tax years, and you are non-domiciled in the UK, any assets you have which are located outside of the UK are not subject to UK inheritance tax, although they may be taxed in the country where they exist. This advantage for inheritance tax disappears once you have been resident in the UK for more than 17 tax years out of the previous 20 years, so any action required to protect those off-shore assets from UK tax needs to be taken before that 17 year deadline is reached.

It is possible to change your domicile, but it is not a straightforward process. Say you emigrate to France, and cut all your ties with the UK, you could be said to have given up your UK domicile and taken on a French domicile. However, if you later express a desire to return to live in the UK, the Taxman will argue that you never gave up your UK domicile. This has implications for inheritance tax as your worldwide estate is subject to UK inheritance tax if you die with a UK Domicile, even if you have lived outside of the UK for many years.

If you believe you could be not domiciled in the UK please talk to us about tax planning as soon as possible.

Newsletter issue - October 07.

Whether you or your company should buy your next car depends on many factors including the cost the car, its CO2 emissions rating and the level of your business and personal mileage. When you own the car personally, the company can pay you a tax free mileage allowance of 40p per mile for the first 10,000 business miles per tax year, and 25p per mile for additional journeys, but this allowance may not cover the vehicle's running costs and so you may be tempted to put the car into your company.

If the company owns the car it can claim a tax deduction for all the running costs, and claim an annual capital allowance to provide tax relief for the purchase cost. Currently the capital allowance is 25% of the cost of the car, restricted to £3,000 per year for cars that cost £12,000 or more. From April 2008 the allowance is likely to be 20% of the cost for cars with a CO2 emissions rating of 165g/k or less, but only 10% for more polluting cars. Cars with CO2 emissions of 120g/k or less qualify for a 100% first year allowance and will continue to do so. These changes mean it will take longer to get full tax relief for the cost of cars that have higher CO2 emissions ratings, making them more expensive for the business to buy. The cost of leasing more polluting cars will also be affected from next year.

However, when the company owns the car you pay a tax charge for using the car privately. When you buy your own fuel the company can pay you a fuel rate for business miles driven, which also changes with the petrol prices. If you give us all the facts we can help you calculate what is best for you.

Newsletter issue - October 07.

An overdrawn directors loan account is where a company loans money to the director. This is generally bad news from a tax angle and causes 2 problems which in summary are...

1. A benefit in kind is due on interest free loans in excess of £5,000.
2. A corporation tax charge of 25% of the amount of the loan is due if the loan is not repaid within 9 months of your accounting period end but is repayable 9 months after the end of the accounting period in which the loan is repaid.

It can often happen quite innocently when the director treats the company bank account as his own personal bank account, and whilst this shouldn't happen it often does in practice.

Assuming you don’t have the funds to repay the overdrawn account, the traditional way of clearing an overdrawn directors loan account has often been to pay a dividend to clear it. This is generally a cheaper method than voting a salary bonus which would incur large national insurance costs. However, what if the company can't pay a dividend because it doesn't have enough retained profits or a dividend is not wanted because other shareholders would also benefit, this can cause problems.

One potential answer is to look to get the company to formally write off the loan account. The amount written off can then be treated just as if it were a dividend for tax purposes. It should be written off because of your position as a shareholder rather than as remuneration from your position as an employee to avoid the Taxman trying to suggest the write off is an emolument liable to NI. Expert advice as always is essential before trying this.

Newsletter issue - October 07.

Q. I'm selling part of my business, and the buyer has asked for the VAT records relating to purchases and sales made by that section. It would be difficult to separate out those records, so do I have to hand them over?

A. If the assets you are selling can be operated as a separate business the whole sale should be treated as a transfer of a going concern to avoid charging VAT on the sale, in which case you as the seller should hang on to the VAT records. The law was changed on this point for sales of businesses made from 1 September 2007. You need to provide the buyer with any information that may affect his VAT returns, such as details of assets under the capital goods scheme. Otherwise you should only hand over VAT records if you are also transferring your VAT number, but that is very unlikely with the sale of only part of your business.

Q. I have heard the state pension age has increased again. When will I get my state pension? I am a woman aged 42.

A. The state pension age, when you receive your state retirement pension, has already been aligned at 65 for both men and women who retire from 2020, but the Pensions Act 2007 has increased this age to 68. The change is applied in stages so if you are currently aged 42 you will get your state pension from age 66. There is an online calculator to help you work out your new state pension age on The Pension Service website at: http://www.thepensionservice.gov.uk/resourcecentre/statepensioncalc.asp

Q. Can I claim the cost of travelling to work against my taxable income?

A. If you are a permanent employee based at one site the cost of commuting to work is not tax deductible. However, if your work requires you to travel to different sites and you attend each site for a limited period or temporary purpose, and you do not attend one site for more than 40% of your time for more than 24 months, the cost of travel may be tax deductible. Strictly you should claim the cost of the travel from your employer, which may be your own company. The Taxman sometimes treats a large area as 'one site', so it is best to ask for special advice for your circumstances.

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.