Category: Tax Relief

Is it time to get a lodger?

Woman working on laptop while man vacuums

Renting out a Room is a great way to earn some tax free cash and in the Summer Budget an increase in the tax free allowance was announced…

The government will increase the Rent-a-Room relief from £4,250 to £7,500 a year from April 2016. The value of this relief has been frozen since 1997, so this increase will allow individuals who rent a room in their main residence to do so tax free on income up to £7,500 to reflect increases in rent.

You can use the scheme if:

  • you let a furnished room to a lodger
  • your letting activity amounts to a trade, for example, if you run a guest house or bed and breakfast business, or provide services, such as meals and cleaning

You can’t use the scheme if the accommodation is:

  • not part of your main home when you let it
  • not furnished
  • used as an office or for any business – you can use the scheme if your lodger works in your home in the evening or at weekends or is a student who is provided with study facilities
  • in your UK home and is let while you live abroad
  • the whole of your home, rather than a part of it

You can get further details in HS223

Finding a lodger shouldn’t be too difficult and websites like Spare Room can help.

steve@bicknells.net

Have you reclaimed VAT on old unpaid supplier invoices?

Debt Envelope Scattered Stack

Unless you have opted for Flat Rate or Cash Accounting, VAT is normally reclaimed when you get an invoice from your supplier.

However, some invoices will be disputed and the disputes can drag on for months. Its easy to spot old supplier invoices by looking at your Aged Creditors Report.

But having reclaimed the VAT you might not realise that after 6 months the VAT will need to reversed on your next VAT return. The rules are in VAT Notice 700…..

VAT Notice 700: the VAT Guide

10.6A Repayment of input tax if you do not pay your supplier

For supplies received on or after 1 January 2003 you are required to repay any input tax you have reclaimed if you have not paid your supplier within 6 months of:

(a) the date of supply (usually taken as the invoice date), or if later (b) the due date for payment

Take a look at your Aged Creditors now and if you discover supplier debts older than 6 months provided the net value of errors is less than £10,000 you can simply correct it on your next return, if the error is more than £10,000 you will need to use Form VAT 652

There is a possible alternative, normally the 6 months is counted from the due date not the invoice date, so you could agree new terms on the disputed invoice and extend the due date.

steve@bicknells.net

What is Overlap Profit?

what

Overlap Profit affects Sole Traders and Partnerships, here are a couple of examples from BIM81080

Example 1 – one overlap period

A business commences on 1 October 2010. The first accounts are made up for the 12 months to 30 September 2011 and show a profit of £45,000.

The basis periods for the first three tax years are:

2010-2011 Year 1 1 October 2010 to 5 April 2011
2011-2012 Year 2 12 months to 30 September 2011
2012-2013 Year 3 12 months to 30 September 2012

The period from 1 October 2010 to 5 April 2011 (187 days) is an `overlap period’.

Example 2 – more than one overlap period

The business in Example 1 continues. In 2015-2016 the accounting date is changed from 30 September to 30 April. The accounts for the 12 months to 30 September 2014 show a profit of £75,000. The relevant conditions for a change of basis period are met (see BIM81045).

The basis periods are:

2014-2015 Year 5 12 months to 30 September 2014
2015-2016 Year 6 12 months to 30 April 2015
2016-2017 Year 7 12 months to 30 April 2016

The period from 1 May 2014 to 30 September 2014 (153 days) is an `overlap period’.

If the taxable profit for 2015-2016 is computed using days, it includes the profits for the `overlap period’ of 153 days (£75,000 x 153/365 = £31,438).

Adding together the overlap profits for the first overlap period of 187 days in Example 1 (£23,054) and the second overlap period of 153 days (£31,438), gives total overlap profits of £54,492 over 340 days.

Tax Cafe point out in their guide ‘Small Business Tax Saving Tactics‘

Why Hasn’t Everyone ‘Cashed In’ Their Overlap Relief Already?

There are two ways to gain access to your overlap relief: cease trading or change your accounting date.

Ceasing to trade is a drastic step: generally not something you are likely to do purely for tax planning purposes. However, it is worth noting that transferring your business to a company is also classed as ‘ceasing to trade’ for these purposes.

Changing your accounting date to access your overlap relief is less drastic, but the downside is that the relief only arises where you are being taxed on more than twelve months’ worth of profit. Despite this, however, there is still generally an overall saving to be made where current profits are at a lower level than the profits arising when the ‘overlap’ first arose. So, with the economy in the state it’s in, now could be a good time to ‘cash in’!

There is also some useful advice in Helpsheet HS222

steve@bicknells.net

Can you save tax by transferring your self employed losses to a company?

business man in a crisis

If you are self employed and your business makes losses you have the following options to use the losses:

  1. You can reduce your current year tax bill
  2. You can offset it against earlier years (up to 3 years)
  3. You can carry your loss forward

You can’t claim:

  • if you use cash basis
  • where you don’t run your business commercially for profit
  • for part of a loss (you must claim the loss in full) – so it could wipe out your personal allowance
  • if you are part of a limited liability partnership
  • where your losses are tax-generated

If you transfer your business in exchange for shares to another company, you can use any unused losses against your income from the new company.

Further details in HS227

What this might mean is that as a sole trader you waste your personal allowance because your profits are offset to zero by losses, however, if you had a company that paid you £10,600 you would keep your personal tax free allowance and be able to use the losses against the remaining profit.

The rules for company losses are noted below.

Trading losses that you’ve not used in any other way will be offset against profits from the same trade in future accounting periods. You don’t have to make any claim for this to happen. It’s done automatically if you fill in your Company Tax Return.

Corporation Tax Act 2010, Section 45

Carry forward of trade loss against subsequent trade profits

(1)This section applies if, in an accounting period, a company carrying on a trade makes a loss in the trade.

(2)Relief for the loss is given to the company under this section.

(3)The relief is given for that part of the loss for which no relief is given under section 37 or 42 (“the unrelieved loss”).

(4)For this purpose—

(a)the unrelieved loss is carried forward to subsequent accounting periods (so long as the company continues to carry on the trade), and

(b)the profits of the trade of any such period are reduced by the unrelieved loss so far as that loss cannot be used under this paragraph to reduce the profits of an earlier period.

(5)In this section and section 46 references to profits of the trade are references to profits of the trade chargeable to corporation tax.

(6)Relief under this section is subject to restriction or modification in accordance with provisions of the Corporation Tax Acts.

 

steve@bicknells.net

Would a Partial Capital Allowance Claim reduce your tax bill?

Businessman get idea

It is not necessary to claim the maximum capital allowances available or even claim them at all, crazy as it might sound there are situations when not claiming capital allowances can reduce your tax bill!

Sole Trader Example

The personal tax allowance is currently £10,600 (2015/16)

Lets assume profits are £15,000 and Capital Allowances available are £5,000, so that would reduce taxable profits to £10,000 which would waste £600 of the personal tax allowance.

It would therefore be better to only claim £4,400 in capital allowances and claim the remaining £600 in the following year.

Company Example

Companies within a Group can only offset losses in corresponding tax periods, so if the the capital allowances increase the loss in one part of the group beyond the profits of the rest of the group then there would be no benefit to claiming them in that period.

Companies can claim capital allowances in any of the following 3 tax years.

There is an excellent example of this in the following blog http://taxnotes.co.uk/a-basic-introduction-to-capital-allowances/

steve@bicknells.net

How does s455 tax apply to Directors Loans? what if you ‘bed and breakfast’ the loan?

Scaring amounts

Directors (participators in a closed company) often borrow money from their companies with the intention of paying a dividend to repay the loan.

If the loan is outstanding more than 9 months after the company year end, then an extra 25% corporation tax charge is due, this is the s455 tax which is refunded when the loan is repaid as explained in this blog

New tax procedure for Directors Loans (s 455)

HMRC were concerned that some participators were avoiding this tax by raising funds short term to repay an outstanding loan.  They would then draw a new loan very shortly afterwards – HMRC refer to this as “bed and breakfasting”. New anti-avoidance rules were therefore  introduced in 2013.

These new rules incorporate two provisions – the “30-day rule” and the “intentions and arrangements” rule.

30-day rule

This applies where within a 30-day period:

  • a shareholder makes repayments of their s455 loan; and
  • in a subsequent accounting period, new loans or advances are made to the same shareholder or their associate.

So basically prevents the use of ‘Bed & Breakfasting’

‘intentions and arrangements’ Rule

Relief is denied regardless of the 30 day rule, if prior to repayment there is an outstanding amount of at least £15,000 and at the time the amount is repaid to the company, any person intended to redraw any of that amount or had made arrangements to make a new withdrawal; and a new withdrawal is made.
The relief denied is the lower of the amount repaid and the amount redrawn.

 

steve@bicknells.net

How does Principle Private Residence Relief work?

One family house for sale

Principle Private Residence Relief (PPR) is useful relief that saves you capital gains tax (18% for basic rate tax payers and 28% for higher rates tax payers) on your main residence, but how does it work, lets take a basic example

Property Purchase Date 30/04/2001
Property Purchase Price £100,000
Date Moved Out 30/10/2010
Letting Start Date 01/11/2012
Date Sold 31/10/2014
Sale Price £200,000

Capital Gains tax calculation

Sale proceeds 31/10/2014 £200,000
Cost (assuming no improvements) -£100,000

Gross capital gain £100,000

Reliefs available
Principle Private Residence Relief

Actual Occupation 9.5 Years
Started 30/04/2001
Ended 30/10/2010

Plus last 18 Months of Ownership 1.5 Years
The Property was empty prior to letting
Up to 18 months could be by ‘absence for any reason’

Total period where private residence relief is
available 11.0 Years

Total Period of ownership 13.5 Years

Principle private residence relief
£100,000 x (132 mths/162 mths) £81,481

Gain after principle private residence relief £18,519

Letting Relief
01/11/2012 to 31/10/2014 2.0 Years

Lettings relief is to lower of
£40,000 statutory maximum
£81,481 the principle private residence relief in this example
The gain for the letting period

Gain attributable to letting 2/13.5 x £100,000 £14,815
This is the lowest figure

Capital gain after reliefs £3,704

Annual Exemption for 2014/15 £11,000

So in this example there is no tax to pay

For further details see the HMRC Helpsheet 283

For gains on sales prior to 6 April 2014, PPR is available for the last three years of ownership of a property that has been a main residence at any time.  This is the case regardless of whether or not it has been occupied during the last three years of ownership.

But as a result of the 2014 Budget, from 6 April 2014 the automatic exemption from tax on gains in relation to the final years of ownership is now restricted to cover the last 18 months rather than three years.

steve@bicknells.net

 

Widening of Qualifying Loan Interest Tax Relief Rules

Entrepreneur startup business model

Often when you start a business you will need to borrow money personally to lend to your new company or buy shares.

You might borrow by increasing your mortgage.

You may be entitled to claim tax relief for interest paid on a loan or alternative finance arrangement used to buy:

  • shares in, or to fund, a ‘close’ company (contact your HM Revenue & Customs (HMRC) office if you are not sure if the company is ‘close’)
  • an interest in, or to fund, a partnership
  • plant or machinery for your work (but make sure you do not claim this interest twice, you will do if you have already deducted it as a business expense)

If you receive a low-interest or interest free loan from your employer for one of the above purposes you may be able to claim relief for any benefit taxable on you.

This is called ‘Qualifying loan interest relief’, HMRC have a helpsheet which gives further details HS340

In the 2014 Budget Qualifying loan interest relief was changed to include EEA state companies

steve@bicknells.net

 

What tax allowances can childminders claim?

Nurture

Childminders work in their own homes and are paid by parents for looking after their children, often while the parents are at work. Profits from childminding are usually chargeable to Income Tax as trade profits, although some occasional childminders’ profits may be chargeable as miscellaneous income.

Many childminders are members of the Professional Association for Childcare and Early Years (PACEY), formerly known as the National Childminding Association (NCMA). HMRC entered into an agreement with the NCMA on the expenses that will be allowed as deductions from childminding income.

Household expenditure

The agreement is based on the hours that childminders work and not on the number of children they care for. A childminder looking after a child on a full time basis for 40 or more hours each week is entitled to claim the full time proportion of expenses.

How this works is illustrated in the following table:

 

Hours worked % of Heating and lighting costs % of Water rates, Council Tax and Rent
10 8% 2%
15 12% 4%
20 17% 5%
25 21% 6%
30 25% 7%
35 29% 9%
40 (full time) 33% 10%

The full time figures shown in the table should be scaled down from depending on hours worked.

Wear and tear of household furnishings

A deduction of 10% of total childminding income may be made to cover the wear and tear of furniture and household items. This is intended to include household items which are not used wholly and exclusively in childminding. A childminder claiming this deduction may not, however, claim relief for the cost of replacing such household items. Reasonable costs of cleaning household items where the need for cleaning is as a result of childminding activities may be allowed as a separate item.

The agreement also covers the following expenditure:

Food and drink

Reasonable estimates for the costs of food and drink provided for the children being cared for are acceptable and receipts are not required.

Car expenses

Where appropriate, childminders can use the simplified expenses mileage rates. However, if the childminder wishes, the actual cost of car expenses for childminding purposes can be claimed instead.

Other costs

Also allowable – the cost of toys, outings, books, safety equipment, stationary, travel fares, membership fees or subscriptions to your childminding organisation, public liability insurance premiums and the actual cost of telephone use for childminding purposes.

You can find further details in BIM52751

steve@bicknells.net