Your main home benefits from Principle Private Residence Relief which means you don’t pay Capital Gains Tax, but what if you have a second home?
If you don’t make an election HMRC will decide which is your main residence, that might not be the best option from a tax perspective.
So how do you make an election?
Firstly you must make the election within 2 years from the date of acquiring the second home.
Then you need to write to HMRC giving the date you acquired the second property and stating your election under the provision of s222(5) Taxation of Chargeable Gains Act 1992.
Once you have an election in place you can change it whenever you wish.
Capital Focus purchased Tintern House in Banbury, Oxfordshire in August 1994, it was a commercial building and they intended to create one large residential building so they started work and reclaimed the VAT, however, they changed their mind and decided to create an HMO instead.
HMRC allowed the £45,000 input tax claim on the basis that it would be supply of a non-residential building converted to residential use and therefore zero-rated under Item 1(b), Group 5 of schedule 8 to the Value Added Tax Act 1994 (“VATA”)
On 22 April 2015 HMRC wrote to the Company stating that, because it had been converted for multiple occupancy, the sale of Tintern House
was not a zero-rated but an exempt supply and any input tax incurred that was directly attributable to it was not recoverable.
In April 2016 the PSA (Personal Savings Allowance) came into force.
The PSA applies to all non-ISA cash savings and current accounts, and will allow some savers to receive a generous portion of their interest totally free of tax.
95% of savings will no longer be taxed.
Basic rate taxpayers will receive £1,000 in savings income tax free, higher rate taxpayers get a band of £500 and additional rate tax payers get nothing.
Sounds great but the key word is ‘Interest‘
Some banks have been giving ‘Rewards‘ instead of interest and these fall outside of the scope of the new PSA and as such will be taxable, for example..
Following a sentencing hearing at Milton Keynes Magistrates’ Court on 8 January 2016, Mr William To, a company director from Beaconsfield in Buckinghamshire, has been sentenced to 33 weeks imprisonment after pleading guilty to 3 counts of failing to preserve company books and accounting records for a period of 3 years, for three separate restaurant management companies.
Mr To’s conviction follows an initial investigation by the Insolvency Service and a full criminal investigation and Prosecution by the Department for Business Innovation and Skills (BIS).
The three BMBQ Ltd, ,Shef Ltd and Broads Cat Ltd, based in Sheffield and Birmingham, went into liquidation with an as-yet-unpaid combined debt of £302,105.89 to HMRC.
The investigation found the director had failed to ensure the companies’ were in order, as such, they could not be delivered up to the liquidator as required.
Also in Tips & Advice Tax 14-07-2016, the case of Denise Perry (Quantity Surveyor) was reported. She ceased trading in 2012 but in April 2013 HMRC launched an investigation into her expenses. The Law requires that you keep documents for at least 4 years, but she told HMRC she had no records and in the end produced a spreadsheet full for round sums and estimates, the First Tier Tribunal wasn’t impressed and allowed HMRC to estimate her expenses and retrospectively bring a claim for unpaid tax covering the previous 4 years.
The Companies Act states
4)Accounting records that a company is required by section 386 to keep must be preserved by it—
(a)in the case of a private company, for three years from the date on which they are made;
(b)in the case of a public company, for six years from the date on which they are made.
Section 386 Duty to keep accounting records
(1)Every company must keep adequate accounting records.
(2)Adequate accounting records means records that are sufficient—
(a)to show and explain the company’s transactions,
(b)to disclose with reasonable accuracy, at any time, the financial position of the company at that time, and
(c)to enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).
(3)Accounting records must, in particular, contain—
(a)entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place, and
(b)a record of the assets and liabilities of the company.
(4)If the company’s business involves dealing in goods, the accounting records must contain—
(a)statements of stock held by the company at the end of each financial year of the company,
(b)all statements of stocktakings from which any statement of stock as is mentioned in paragraph (a) has been or is to be prepared, and
(c)except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and sellers in sufficient detail to enable all these to be identified.
We now use it with all of our Limited Company clients, once you learn how to use it, its fantastic it makes submitting returns and forming companies really easy and produces excellent company registers.
Many businesses under estimate the importance of company secretarial work.
I recently read an article in Tips & Advice – You and Your Business in June 2016, which reported on the case of Mr & Mrs Parmar – Whitford (UK) Ltd. they failed to prepare any Dividend paperwork having incorporated their partnership. HMRC took the view the payments taken from the company were subject to PAYE due to the lack of Dividend paperwork, First Tier Tribunal agreed.
This could have been easily avoided had dividend vouchers and board minutes been prepared. Inform Direct has templates for the documents needed.
There are lots of new requirements now coming into force such as the PSC register and the change from Annual Returns to Confirmation Statements so now more than ever you need to make sure you comply with the requirements.
Residential letting of property is exempt from VAT, so can’t charge VAT on the Rent.
The VAT rules say, if you only sell or otherwise supply goods or services that are exempt from VAT then yours is an exempt business and:
you cannot register for VAT
you cannot recover any VAT you incur on your purchases or expenses
However, if an Individual (Sole Trader), Partnership or Company has other vatable supplies, it could register for VAT and be partly exempt.
Partly exempt business
Your business is partly exempt if your business has incurred VAT on purchases that relate to exempt supplies. This is known as exempt input tax.
Generally, you won’t be able to reclaim exempt input tax. However, provided the amount of exempt input tax is below a certain amount, it can be recovered in full.
Non-business use in a partly exempt business
You can’t reclaim VAT you pay on goods and services that aren’t for business purposes. If your business is partly exempt and you buy goods or services that you use partly for business and partly for non-business purposes you must split the VAT accordingly. You then use your partial exemption method to work out how much of the business VAT you can reclaim.
Keeping records if your business is partly exempt
If you make both taxable and exempt supplies, you must keep a separate record of your exempt sales and details of how you’ve worked out how much VAT to reclaim.
De Minimis Limits
To stay below the de minimis limits, the following two conditions must both be met:
the input VAT attributed to exempt supplies must not exceed £1,875 for the quarter (£625 for a monthly return and £7,500 for an annual calculation); and
the input VAT attributed to exempt supplies must not exceed 50% of the total input VAT incurred in that quarter.
Effectively, this allows up to £7,500 of input VAT, relating to exempt supplies which would not otherwise be recoverable, to be recovered each year by a partially exempt business.
Vatable Business Activity
You could
Provide Freelance Services
Rent out vatable commercial property
Let property as holiday accomodation
Or provide other business services
Generally, my recommendation would be to keep your business activities in separate businesses so you need to be careful not to focus on a small VAT saving for the sake of the overall business structure.
HMRC doesn’t regard lottery winnings as income, so all prizes are tax free, hooray!
But the problems start when you give the money away, as reported in the Guardian in 2012
The cash will form part of your estate and be liable for 40% inheritance tax (IHT) if it takes the value of your estate above the current threshold of £325,000.
Gifting millions will not save you from paying IHT either: HMRC will tax you on a sliding IHT scale should you die within seven years of gifting any cash to friends and relatives – a 20% reduction in tax if you die between three and four years after gifting, a 40% reduction between four and five years, etc). You can get around this by making sure the recipient signs an agreement that they will pay any IHT due if you do die within seven years.
The IHT issue also applies where you have a syndicate without a syndicate agreement.
The solution to this is to have a syndicate agreement , then you can look forward to spending your fortune.
The reasoning behind HMRC’s thinking goes back to the case of Graham v Green [1925] 9TC309 and concerned a man whose sole means of livelihood came from betting on horses at starting prices.
The basic position is that betting and gambling, as such, do not constitute trading. Rowlatt J said in Graham v Green [1925] 9TC309:
A bet is merely an irrational agreement that one person should pay another person on the happening of an event.
This shows that having expertise or being systematic (“studying form”) is not enough to create a trade of being a ”professional gambler”.
Some ”professional gamblers” do carry on a trade, for example, where they receive appearance money for appearing on television programmes. They are providing a service to a customer (the television production company) for reward. Whether their gambling winnings are proceeds of that trade would depend upon the facts. BIM22017
The other problem for HMRC is that if you tax ‘winnings’ you would have to allow tax deductions for ‘losing’ and there are more losers than winners.
Things get complicated when it comes to sporting events, in general, amateur sporting prizes are tax free, here are HMRC’s examples for Community Amateur Sports Clubs:
Clubs may wish to arrange prize competitions where the nature of both the competition and the prize is such as to promote participation in the sport. In strictness there is nothing to permit this but where the value of prizes, are commensurate with amateur participation in the particular sport these would not prevent club from being registered. Competition prizes of sufficient value to attract professionals or such frequency that could be equated with payment to players would preclude qualification as a CASC.
Example 1 A Cycling club promotes races in which members and others, particularly local juniors, are encouraged to participate. Modest cash prizes are awarded and funded from entry fees and local sponsorship. This would be acceptable.
Example 2 A Golf club holds regular competitions for members throughout its season. Although individual events may be limited by gender or handicap, all members are able to participate in some of the competitions. Prizes of golf equipment, for example bags, shoes, balls or vouchers redeemable at the club shop are awarded. Again, this would be acceptable.
Example 3 A Bowling club organises frequent competitions for club members with cash prizes subsidised by a brewery. Senior players derive significant benefit from these arrangements. A club that subsidised its members in this way would be unlikely to qualify as a CASC.
When it comes to professional sporting events the tax can be significant and has led to problems attracting sporting stars.
Like most countries, the UK charges tax on appearance fees and prize money when non-resident athletes compete in Britain but, unlike many other countries, it also seeks to tax the athlete’s global endorsement income.
Based on the number of days spent competing in the UK, Her Majesty’s Revenue and Customs charges tax on a percentage of the athlete’s income earned elsewhere.
“It’s like me asking you to come to work today and pay three times in tax what you’re getting”
Prizes and prize money awarded to, and appearance money paid to competitors, are always treated in the same way, regardless of whether the entry fees for the competition are exempt or taxable.
Prizes and prize money are outputs and appearance money is an input. Details of their treatment are shown in Notice 701/5 Club and associations.
Entrepreneurs Relief when you sell your business is one of the major reasons not to have property in your trading business as significant Non Trading Activity will be a problem, if a business contains investments and if these were more than 20% in terms of turnover, net assets, time spent by directors or profit it could mean that your business is not counted as a trading business.
What is Entrepreneurs Relief
Entrepreneurs Tax Relief applies if you sell or close your business and means that you only pay 10% Capital Gains Tax on any qualifying profits.
There’s no limit to how many times you can claim Entrepreneurs’ Relief, and you can claim up to £10 million of relief in total during your lifetime.
Companies
To claim Entrepreneurs’ Relief you must:
own at least 5% of the shares in the business for a year
be a director, partner or employee of the business
Sole traders
To claim Entrepreneurs’ Relief you must have been trading for at least a year.
Financial software firm XERO issued the research, which revealed that:
Over half (52%) of UK business owners worry about unpaid invoices
Worst affected regions found to be London where businesses spend 1.5 days per month chasing payments, followed by 1.3 days by businesses in Wales
The business sector spending the most time chasing payments was found to be HR (3 days), followed by IT & Telecoms (1.8 days) and Manufacturing & Utilities (1.7 days)
It also showed that the two main reasons cited by small business as being the causes of late payments were that their customers were also waiting for payments themselves (32%), as well as a lack of consistency on payment terms (27%). In response to the growing concern over late payment of invoices, the company has produced a music video to showcase the frustrations felt by ordinary small firms when faced with late payers.
To get paid faster why not include a pay now button on your invoice
Contact HM Revenue and Customs (HMRC) as soon as possible if you can’t pay all your tax on time.
You may be able to either:
get more time to pay
pay your bill in instalments by direct debit
But HMRC are generally reluctant to agree time to pay unless there are exceptional circumstances.
So an alternative might to use interest free credit cards.
Here is some great advice from Martin Lewis
Do it right and credit cards are the cheapest way to borrow. You can get 0% for up to 27 months – yet get it wrong and you’ll be stuck in debt for years.
Done right, it’s possible to borrow at no cost.
Make at LEAST the minimum repaymentsEnsure you set up a direct debit for at least the minimum repayment as soon as you are accepted. Even though you’re paying 0%, you still need to make repayments. If you miss one, you will lose your 0% deal, so the rate will jump and you’ll get a £12 charge.
However, don’t almost clear your card in full – clear it IN FULL if you can. For example, if you’ve £1,000 debt from spending on a credit card and pay off £999, the fact it’s not cleared IN FULL means you pay a month’s interest on the whole amount.
So if you can nearly clear your card, do what you can to totally clear it (even if it’s a 0% spending card it’s a good habit to get into).
Clear the card within the 0% periodGo even one month beyond the promotional period and the rate rockets, so calculate the amount needed to clear the balance by then. For example, borrow £600 on a year’s 0% card, divide the spend by the number of months (£600 / 12) to get the monthly repayment – in this case £50 – and set up a direct debit to do that.
Diarise the end datesIt’s incredibly vital you make a note of the 0% end dates (or use the Tart Alert) to make sure you pay off the debt in time, or be ready to switch to a new Best Balance Transfer deal. If you forget to switch when the deal ends, the interest cost will swiftly outweigh the card’s benefit.
