Tax Saving Tips

As everybody is aware the Coalition Government is planning a number of measures to cut the deficit including tax rises and measures to prevent tax avoidance. So what advice can we give in order to avoid paying as much tax as possible.

Here a number of tips which can save you some tax:-

PERSONAL TAX

Individual Savings Accounts (ISAs)

On 6^th April 2010, the annual subscription limit for ISAs rose to £10,200. The whole sum can be placed in a stocks and shares  ISA or half could be placed into a cash ISA and the remainder into a stocks and shares ISA.

Therefore, a couple could potentially shelter £20,400 worth of savings from either income tax or capital gains.

Pensions

 If you are an higher rate tax payer (and earn less than £130,000) the Inland Revenue will effectively give you £40 tax relief on every £100 of pension premium paid.

Taxpayers  can invest 100% of their earnings in their pension plan each year up to a maximum of £255,000 (the lifetime investment allowance is £1.8m).

Enterprise Investment Scheme

Subscribers to shares in an enterprise investment scheme will receive 20% income tax relief on the amount they subscribed for up to a limit of £500,000. To obtain the relief, the taxpayer must hold on to the shares for at least 3 years.

Husband and Wives

 If one of the partners in a marriage is a basic or lower rate taxpayer while the other partner is a higher rate taxpayer, then the higher rate taxpayer should consider transferring income producing assets (i.e. savings accounts, property and stocks & shares) to the spouse.

Obviously, the person who is a basic rate or lower rate taxpayer will pay less tax on these assets than the higher rate taxpayer.

PAYE Codes

In January of this year, the Inland Revenue issued a large number of PAYE codes to employers which were incorrect.

It is vital that taxpayers check the information on their PAYE codes is correct otherwise they may be overpaying tax.

If you believe that the wrong PAYE code is being used then write to the Tax District dealing with your employer’s PAYE scheme notifying them of the errors on their calculation.

Children Under 16

Children who are under 16 and receive any income which is less than their personal tax allowance do not have to pay any tax. Therefore, the child can claim back any tax deducted. If the child is not workings but receives income from a savings account then the parents should complete and submit the Form R85 to the Inland Revenue requesting that such income is paid to the child without tax being deducted.

Gift Aid Relief

If you a paying money to charity in whichever form, plus tick the Gift Aid box to ensure that the Charity can receive the basic rate deduction on the ‘gross’ equivalent o f your donation.

CAPITAL GAINS TAX

Each person has a capital gains tax allowance of £10,100 per annum. To ensure proper use of these allowances, a taxpayer should consider transferring assets to his spouse in order to use the spouse’s allowance.

Taxpayers who sell business assets should make sure that they claim entrepreneur’s relief, which means that the taxpayer will pay tax at 10% on the gain (rather than 18% for basic rate taxpayers and 28% for higher rate taxpayers on non-business gains).

A higher rate taxpayer may consider using some of the proceeds from the sale of an asset to fund a pension premium which could attract tax relief of 20% plus a further 20% for higher rate taxpayers.

INHERITANCE TAX

The most important thing to say is that taxpayers should make a will!

That way the taxpayer can plan how there estate is to be divided and use all of the various Inheritance Tax reliefs and exemptions to minimise any potential inheritance tax liability.

The correct planning will lead to reductions in inheritance tax liabilities.

BUSINESS TAX

VAT

If you gross trading income is less than £150,000 then the business can apply to use the flat rate scheme.

The scheme may not work for everyone, but it may result in lower quarterly VAT liabilities and a reduction in administration expenses.

Business Expenses

Business should look at their expenses and look at the most tax efficient ways of claiming then. In particular, should the business be basing its motoring expense on fuel, insurance and repair bills or instead claim a mileage allowance.

Trading Losses

If a sole trader makes a loss then they can set that loss off against other income in the year or carry it back to the previous year. If the loss was made during the first 4 years of trading then the trader can carry back the loss to the PREVIOUS three tax years.

Tax Credits

If a claim is being made for tax credits, then for a sole trader, a particular year’s claim is based on the previous year’s profit. If the actual profits for the year are a lot lower (maybe because you invested in a capital asset and claimed a 100% Annual Investment Allowance on the purchase) then you can ask the officials dealing with tax credit claim to recalculate you tax credit based on the lower profits.

This may result in the sole trader receiving an higher tax credit amount.

If you want any further advice on the matters raised above then please contact Mark Hewitt at Trueman Brown on 01708 854943 or www.truemanbrown.co.uk.

THE AGE OLD QUESTION... SOLE TRADER OR LIMITED COMPANY

What factors should you consider when deciding whether to be self employed or operate through a limited company.

FACTOR 1 – LIMITATION OF LIABILITY

The main commercial advantage of running a business through a limited company is the limited liability status. This status protects the owner-managers own personal assets against commercial risk unless, in their capacity as company directors,  they knowingly continue to trade and incur liabilities when they knew the limited company was insolvent.
This advantage that a limited company would have over a sole trader is eroded by the following points:-

• The owner-manager of a limited company may find that the only way to obtain bank finance or another form of credit is to give a personal guarantee thereby negating totally the limited liability status of the company; 
• The sole trader may obtain sufficient public liability insurance to negate any commercial risk.

Nevertheless, most entrepreneurs find the limited liability status the most important factor in deciding whether to run their business through a limited company.

FACTOR 2 – FINANCIAL STATEMENTS

The records that a sole trader needs to maintain can be very basic and, therefore, a formal accounting system may not be required.
The records can just be a basic list of sales and purchases supported by invoices.
The final account prepared by the sole trader may consist of a simple income and expenditure account with no balance sheet.
The accounts of a sole trader do not become public record.
Due to this simplicity, the services of an accountant may NOT be required.
The records that a limited company has to maintain are far more formalised. The limited company will have to use a double entry bookkeeping system because the final accounts that the business will need to prepare will include a profit and loss account and a balance sheet together with statutory notes and statements.
Also, if the limited company’s turnover is greater than £6.5 million, then the business will require an audit for which the cost will be in the thousands.
Furthermore, the accounts of the limited company are required to be filed at Companies House so that they become public record.
To summarise, limited companies are faced with additional administrative burdens which may result in increased professional fees.

FACTOR 3 – ADMINISTRATION, MANAGEMENT AND BUSINESS STANDING

A sole trader basically pleases themselves with regard to the administration and management of the business. A company director is responsible for adhering to company administration according to statutory regulations in regard to both the limited company accounts (as described above), statutory records and management function as stated in the articles of association. The duties of a director are more formal than a sole trader.

Forming a private limited company is an indication that a business is both serious, has a long term objective and is correctly managed. This perception can increase the business standing of a business. In addition, any funding requirements are more likely to be met as the lender to a sole trader has to consider the absence of a balance sheet statement in the basic accounts and the financial influences personally affecting the sole trader. A private limited company advantages concern the published financial statements, protection of the financial position from personal influences and the option of increasing security by virtue of asking directors to provide additional personal guarantees.

A private limited company advantages over self employment also extends to long term finance. Companies tend to retain more funds within the business to meet future financial commitments which aids year on year growth, a more sustainable business and medium term profits growth over a sole trader.

FACTOR 4 – TAXATION

In recent years, the lower rates of Corporation Tax has given a private limited company an advantage over self employment.
The £10,000 tax free limit was cancelled several years ago. Corporation tax rates have increased from 20% to 21% for small limited companies over the last three years compared with the basic rate tax for a sole trader which has reduced from 22% to 20%. Despite these changes, incorporation does still offer tax saving advantages dependent upon the net profit before tax.
The limited company also offers the flexibility of the owner-manager determining the proportion of dividends and salary that they can draw from the business while a sole trader is subject to fixed tax rates and thresholds.
Even when profits are fairly small, the use of the limited vehicle seems to give the owner-manager an advantage over a sole trader. This advantage is increased due to the flexibility of how and when the owner-manager draws that profit for his own personal use.
However, there are a number of other points concerning taxation that need to be factored into the equation:-

PENSION CONTRIBUTIONS - Pension contributions of a sole trader are personal and, while they may be deducted from the personal income liability of the sole trader, they  do not form part of the basic accounts.
The pension costs including any company contribution to a pension scheme by a limited company is a deductible business expense as an employee cost.

MOTOR VEHICLES - Using a car for business purposes may have an impact. The sole trader basic accounts would include the business proportion of the vehicle running costs or the mileage allowance.
If that vehicle is used by a director of a limited company then that director is receiving a taxable benefit potentially resulting in a higher tax burden depending upon the type of vehicle as taxable benefits vary.
An alternative for the owner-manager of the limited company may be to leave the company vehicle privately owned and the director claim mileage allowances rather than vehicle running costs.

GOODWILL AND OTHER INTANGIBLES – Limited companies have a far more generous system for deducting the cost of goodwill and other intangible assets.

ACCOUNTING TREATMENT OF DEDUCTIBLE EXPENSES - There ARE differences in the accounting treatment of deductible expenses such as charitable donations, entertaining expenses and use of home as office.
 A limited company has a more generous deduction system consisting of being able to claim such expenses as valid business expenses which, otherwise, would not be claimable in the sole trader basic accounts.
IR35 – Knowledge based businesses (i.e. IT Consultants) need to be aware of the IR35 legislation which may render the tax advantage of paying a nominal salary and substantial dividends unobtainable.

CHILD AND WORKING TAX CREDITS – The owner-manager needs to consider the impact of dividends received just within or just outside of a tax year.
Consideration also needs to be given to the rules concerning the impact of an increase of income would have on a taxpayer’s tax credit claim. The original tax credit claim based on the taxpayers previous year’s income will not be altered unless the actual income for the year has increased by more than £25,000.

INCOME SPLITTING - After the Inland Revenue lost the Artic Systems case, many owner-managed companies have paid dividends to the owner-managers spouse.

The Inland Revenue announced that they were going to introduce legislation to combat this income shifting.

However, it seems the Inland Revenue are not going to introduce legislation for the foreseeable future so planning involving payments to non-working/low income family members can be implemented.

OTHER TAX MATTERS – The owner manager also needs to consider:-

• The extent to which borrowed monies need to be repaid out of post tax profits;
• The extent to which monies will be required to fund the acquisition of fixed assets;
• Any imminent changes in tax rates. 

A magnitude of factors should be taken into account before deciding whether or not to incorporate. Professional advice should be received in all cases before a decision is made. Maybe, it is worthwhile deferring that decision for a short period to establish whether the businesses proposed model actually works.

LIMITED LIABILITY PARTNERSHIPS

In 2001, legislation was passed to allow for another business vehicle to be established the “Limited Liabilty Partnership”. It is a hybrid of a sole trader and a limited company because:-

• The partnership receives its limited liability status and is subject to strict statutory requirements;
• It is taxed similar to a sole trader. 

This type of business vehicle is gaining in popularity and is especially popular with professional concerns such as accountants and lawyers.

If you would require any further information then please contact Trueman Brown on 01708 854943 or please use our website at http://www.truemanbrown.co.uk/.

Pre-Trading Expenses

At Trueman Brown, we are often asked whether expenses incurred prior to the commencement of trade can be included in that businesses accounts.

The answer is yes, if it can be shown that the expense was specifically for the business.

Generally, qualifying pre-trading expenditure should be treated as incurred on the first day that the business started to trade.

We, at Trueman Brown would recommend that you keep all receipts / invoices for any amounts that you spend in getting our business up and running.

At Trueman Brown we are also asked that if you register for VAT can you reclaim VAT on expenses incurred before registration.

The answer, again, is yes! You can claim for the following:

•for goods: you can reclaim VAT up to three years before you registered for VAT

•for services: you can reclaim VAT up to six months before you registered for VAT

To able to make this claim, the following conditions have to be met:-

•the goods were bought by you as the entity (for example, the individual, business or organisation) that is now registered for VAT

•the goods are for your VAT taxable business purposes, which means they must relate to VAT taxable goods or services that you supply

•the goods are still held by you or they have been used to make other goods you still hold

For example, prior to registering for VAT the business purchased 10,000 widgets and sold 3,000 of these products. The business can, therefore, claim back VAT on the remaining 7,000 items in stock at time of registering for VAT.

If you require any further information, then please contact us at Trueman Brown http://www.truemanbrown.co.uk/

Employees/Directors - Working From Home

If you are an employee or director of a company working from home you can claim an expense for using a room as your office.

Practically, the expense must be wholly or exclusively in the perfomances of the employees/directors duties. Therefore, the employee/director could only claim for the:-

•additional gas and electricity consumed by the director/employee for use for work;

•the metered cost of water in the performance of duties;

•the unit costs of business telephone calls (including dial up internet access).

If the employee/director cannot calculate the above figures then the Inland Revenue will accept a deduction of £3 per week (excluding business telephone calls) for use of home as office.



If you would like any further advice then please contact Trueman Brown http://www.truemanbrown.co.uk/

VAT Increases to 20% - What should I do?

From 4 January 2011, VAT will increase from 17.5% to 20%. It will be an unpopular measure but businesses should be preparing NOW for the increase. In particular, businesses should be looking at the implications of the VAT increase on their pricing and on their cost control.


So what should all businesses be doing to prepare for the increase in the VAT Rate. They should be looking at the following matters:-

ANTI – FORSTALLING LEGISLATION

Businesses should be looking for opportunities for pre-invoicing and payment at the lower VAT rate of 17.5%. However, businesses should ensure that they are complying with allowable legislation.

The Government has introduced Anti-Forstalling Legislation to prevent arrangements which will be set up to apply the 17.5% rate of VAT to goods or services to be delivered on or after 4 January 2011. In some circumstances, a supplementary charge to VAT of 2.5% where the 17.5% rate has been declared.

This measure will affect business which either:-

• receive a prepayment or issue an advance VAT invoice before 4 January 2011 for a supply of goods to be delivered or services to be performed on or after that date; or

• make supplies of rights or options to receive goods or services before 4 January 2011, where the goods or services are supplied free or at discount and will be delivered or performed on or after that date.



The supplementary charge will apply where the customer cannot recover all of the VAT and one of the following conditions is met:

• the supplier and the customer are connected;



• the value of the supply exceeds £100,000, unless prepayment or the issue of an advance VAT invoice is normal commercial practice;



• the supplier or someone connected to the supplier funds a prepayment for the goods or services; or



• an advance VAT invoice is issued where payment is not due in full within six months.



If the supplementary charge is levied, it will not become due until 4 January 2011 and will be chargeable in addition to standard rate VAT on the supply at 17.5 per cent.

It is vital that the business gets this right because fines levied by HMRC have never been harsher.

TAX POINT RULES

Following on from the Anti-Forstalling Legislation, it is vital that businesses learn, if they don’t already know, the tax point rules.

The tax point is the date when a transaction takes place for VAT purposes. This date is not necessarily the date when the supply physically took place. You must pay or reclaim VAT in the VAT period (usually quarterly) in which the time of supply occurs, and use the correct rate of VAT in force on that date. This means you'll need to know the time of supply for every transaction, so you can put it on the right VAT Return.

The date of the supply is called the ‘basic tax point.’ This is overridden when an invoice is issued if that is within 14 days of the basic tax point, or if a payment is received before the supply is made. However, some industries have special rules governing the tax point. It is vital that the business knows the tax point rules.

Example

In the letting industry it is normal commercial practice for rentals to be demanded (invoiced) in advance.

So if a rental invoice was sent out on the 1 December 2010 to cover the period 1 December 2010 to 28 February 2010, what rate of VAT would be used, 17.5% or 20%?

In this example, VAT charged on this supply can be at the rate of 17.5% because it is normal commercial practice for rents to be paid in advance although the period covered by the invoice cannot exceed one year.

BOOKKEEPING AND ACCOUNTING RECORDS

The business should ensure that its accounting records are correct and that it does not fall foul of any bookkeeping errors.

In particular, the business should be looking to ensure that where credit or debit notes are issued, businesses should know that any VAT credit or debit is applied at the correct rate (i.e the rate which is applied as the same as for the original supply).



It is vital that the business accounting records are accurate. It is believed that HMRC will be less lenient with accounting errors arising as a result of the VAT rate increase because of the similar increase of VAT from 15% to 17.5% in January earlier this year.

SALES PRICINGS, COSTS OF GOODS AND PROMOTIONS

It is vital that businesses look at their margins. The business should be trying to reduce the cost prices for their goods and increase their selling prices to compensate for the lower margins that they will achieve.

Retailers, for example, may wish to consider boosting their pre-Christmas sales by advertising the lower VAT rate currently in place. Post-January, "no VAT rise" pricing can be compensated for by boosting margins on other lines to compensate.

Similarly, businesses should be wary of promotions, from their suppliers, which advertise the lower VAT rate. Remember, the business will only incur an additional VAT charge of £2.50 for every £100 spent. Unless cash flow is very tight or the VAT is irrecoverable, for whatever reason, then the business should not be spending too much on pre rate rise promotions.

Businesses, especially retailers, need to ensure that the resources are in place in January to manage the changeover to the new higher rate. January, with the Christmas period just ended and the New Year sales underway will be a very busy time.

HMRC will not likely accept any excuses if they were to find any errors on a VAT Inspection, so you must get it right!!

VAT EXEMPT BUSINESSES

The businesses to be worst hit by the increase in VAT will be those who are exempt (including charities) from VAT which are, therefore, unable to recover VAT on any purchase they make.

Such businesses will find that their budgets will stretch 2.5% less far in 2011 than 2010.

So if such a business was contemplating making a capital investment, they consider bringing the purchase forward to ensure that they benefit from the lower rate.

FLAT RATE SCHEME

Introduced in 2002, the flat rate scheme was introduced to simplify the calculation of VAT for small businesses.

In essence, instead of the business paying HMRC the total VAT charged on invoices minus any Input VAT you may reclaim, you instead charge a fixed percentage of your GROSS turnover and pay that amount over to HMRC.

The main benefits of the scheme are twofold:-

• Less administration required in preparing the VAT Returns because liability is calculated by reference to sales only;

• The calculation of VAT under the flat rate scheme may result in a lower VAT liability due to HMRC.

However, businesses that provide zero-rated or exempt supplies need to be particularly careful when considering the flat rate scheme.

Example

A vehicle repair shop is considering registering for the flat rate scheme. During the quarter ended 31st March 2010 its results were as follows:-

Sales income from standard rated supplies: £23,500 (including VAT of £3,500)

Sales income from exempt supplies (i.e. MOTs): £5,000

Total Gross Sales: £28,500

VAT incurred on expenses: £1,750

Under the normal rules, the VAT liability would be £1,750. However under the flat rate scheme the VAT would calculated upon a percentage (for a vehicle repair shop 7.5%) of gross sales (£28,500) leading to a liability of £2,317.50.

The above example shows that the business should consider all sources of income before it decides whether to join the scheme.

If the business decides to join the scheme then it should be aware of the following:

• Businesses in their first year of VAT registration can benefit from a 1 per cent reduction in the flat rate.

• You can apply if your annual taxable turnover (not including VAT) will be £150,000 or less; and your annual total turnover (including VAT) will be £187,500 or less.

• If you buy a single capital asset with an invoice value, including VAT, of £2,000 or more you can claim the input tax on your VAT return in the normal way.

• You continue to invoice clients at the normal VAT rate (currently 17.5%).

• You can voluntarily leave the flat rate scheme at any time.

• You can continue in the scheme unless your turnover breaches the £225,000 mark.

Smaller business which do not use the flat rate scheme presently should take this opportunity to review their position.

Businesses already using the scheme should also review their position because the various industry rates will be revised when the higher rate of VAT comes in on 4 January 2011 and there may be a chance to use a lower banding leading to an improvement in cash flow.

IMPORTERS

When a business imports goods into the UK a number of taxes which may have been levied included Import VAT, Customs Duty or Excise Duty. Many businesses set up a deferment account that allows them to ‘defer’ paying Import VAT and Customs Duty until the 15th of the month following for goods brought into the UK in the previous calendar month. There is a similar arrangement for Excise Duty, although the relevant dates are different, with payment required on the 29th of a month for goods imported in the preceding period of 15th of last month to 14th of the current month.

To protect itself against possible non-payment by a business HMRC require that the business sets up a guarantee against non payment via an approved bank or insurance company. The guarantee ensures that HMRC receives payment from the guarantor should the business default. The downside for a business is that the guarantor will charge them a fee for acting as guarantor.

However, Simplified Import VAT Accounting (SIVA), which was introduced on 1 December 2003, allows businesses to apply to HMRC to seek to reduce the financial guarantee required in connection with Import VAT but not for Customs Duty or Excise Duty. Any reduction in the level of guarantee will therefore reduce the charge levied on a business by the guarantor. Should the business incur Import VAT and have a deferment account set up then the business consider whether SIVA would be beneficial.

It should be noted that HMRC do not automatically allow the business to benefit from SIVA but a number of conditions must be satisfied before they enter any agreement with a business.



The increase in the VAT Rate from 17.5% to 20%, although unpopular, should give businesses opportunities to review their particular circumstances and seek a solution to any cash flow problems that the increase would bring. It is vital that the review is done now.

For any further information, please contact Trueman Brown http://www.truemanbrown.co.uk/

UK PAYE Bombshell - What should you do?

Last week, the Inland Revenue announced that up to 5.7million taxpayers will receive a P800 assessments statement stating that they have underpaid income or capital gains tax for 2008/09 and/or 2009/10.


So if you are one of the unlucky ones receiving this assessment in the next few days, what should you do?

The obvious thing I would say is not to make payment immediately because they are a number of ways that the taxpayer can have the amount to be collected cancelled or reduced.

STEP ONE

If you receive a statement stating that you have underpaid income and/or capital gains tax for the year ended 5th April 2009 and all the information that the Inland Revenue require to correctly calculate your tax has been supplied to them then I would write to the Inland Revenue and ask them to cancel the amount now collectible under the terms of Extra-Statutory Concession A19.

STEP TWO

If you receive a P800 assessment for both years and it was the fault of your employer and/or pension provider because they failed to apply the correct PAYE Tax Code to your income, then the Inland Revenue should make the first call on payment to your employer and/or pension provider NOT you.

If the Inland Revenue try to collect from you and you believe that your employer and/or pension provider was at fault then please challenge the Inland Revenue.

STEP THREE

Please review the P800 assessment very carefully. It may not reflect the taxpayers affairs and may omit tax reliefs, such as pension contributions or personal allowances, or include income which does not relate to the taxpayer.

If, after going through the above steps, you still disagree with the Inland Revenue's assessment then the taxpayer can refer the matter to the independent Adjudicator, although you cannot appeal.

I would advise that you consult an accountant if you receive a P800 assessment. If you would like further advice then please contact Mark Hewitt http://www.truemanbrown.co.uk/