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Welcome...
To February's Tax Tips & News, Hanley & Co's monthly newsletter designed to bring you tax tips and news to keep you one step ahead.
We are 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 in your own specific circumstances. We're here to help!
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| Penalties for Late Payment of PAYE |
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PAYE and other payroll deductions need to clear Taxman's bank account by 19th of the month, if paid by cheque. Electronic payments can arrive by 22nd of the month, or the last banking day before that date.
If you use the faster payments service (FPS) to make your PAYE payment, the amount transferred will clear the Taxman's bank account the same or next day. However, there are limits on the amounts that can be transferred per day and per transaction using FPS, which vary from bank to bank. So check what limit your bank applies.
Late payments of PAYE will result in an automatic penalty of up to 4% of the PAYE that was paid late. You are permitted to make one late payment of PAYE during the tax year, but two or more late payments will mean that a penalty will be charged after the end of the year.
In addition, if you have still not paid after six months you may have to pay a further penalty of 5 per cent. A further penalty of 5 per cent may be charged if you have not paid after 12 months. These apply where only one payment in the tax year is late.
The Taxman has already issued many penalties for late payment of PAYE in 2010/11, and some of these penalties have been calculated incorrectly. If you receive a penalty notice, please ask us to check it as soon as it arrives. Any appeal must be submitted within 30 days.
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| Confessing to Tax Fraud |
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The Taxman is currently writing to taxpayers who are suspected of tax fraud, asking them to make a full disclosure of their wrong-doing under the contractual disclosure facility (CDF).
If you receive a letter offering the CDF, it is a very serious matter. The Taxman has taken a view that he could launch a criminal investigation into your tax affairs, but has decided that a criminal case is not cost-effective. Instead he is offering you a binding agreement to come clean, with the promise of low penalties.
You only have 60 days to decide whether to accept the CDF. If you don't reply in that period, the Taxman will start a formal investigation into your tax affairs, which could result in a criminal case. The CDF letter will also contain a denial letter, which you can sign and return if you believe you have no involvement in tax fraud.
Before you make any response to a CDF offer, please discuss the matter with us in confidence.
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| Spreading Household Income |
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This is a good time to look forward to 2012/13 and assess who will be earning what in your family. The level of personal allowances (tax free income) have increased significantly over the last two years, and are expected to increase again in 2012/13 to at least £8,105 per person.
This allowance cannot be transferred between family members, so if some people in your family are earning less than this, their personal allowance is going to waste.
Strategies you may consider to avoid wastage of the personal allowance include:
- Employing your spouse or children in your business, perhaps on a part-time basis.
- Transferring an income-producing asset, such as a let property or savings account into the name of the lower earning spouse.
- Taking on a family member as a partner in your business, so they can share some of the profits.
- Ensuring the higher earner makes all the Gift Aid donations to charities from the family.
These changes should be made as soon as possible to gain the maximum advantage in 2012/13. The strategies need to be implemented correctly so please contact us for advice before proceeding.
Remember the Government plans to withdraw child benefit in 2013 from parents where either person pays tax at 40% or higher. To retain your child benefit (worth at least £1,055 per year) you need to ensure your taxable income is below the 40% threshold, which is set at £34,370 after allowances for 2012/13.
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| Tax Efficient Investments |
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Most allowances for tax efficient investments are fixed for each tax year and cannot be carried over to the next year if not used. If you have money to invest you may want use your allowance for 2011/12, or in some cases wait until 2012/13 when new rules and new limits apply.
Here is a brief summary of the 2011/12 and 2012/13 investment limits:
EIS
Investors who subscribe for shares under the Enterprise Investment Scheme (EIS) can currently receive income tax relief at 30% of up to £500,000 invested in one year. This annual cap will rise to £1 million from 6 April 2012. However, any amount can be invested in EIS shares to defer tax due on a capital gain made in the period up to three years before the EIS shares were acquired, or to up to one year later. An investment in EIS shares can be treated as if it was made in the previous tax year, to apply the income tax relief against the taxpayer's tax due for the earlier year.
The conditions companies need to meet to raise funds using EIS are also being relaxed from April 2012. These conditions are still very complex so talk to us first before making a decision to use the EIS scheme.
SEIS
The Seed Enterprise Investment Scheme (SEIS) is a new scheme due to start from 6 April 2012, subject to the law being passed by Parliament. This will operate like a mini version of the EIS, but the scheme will only be available for five years. The maximum investment by a taxpayer in one tax year will be £100,000, with income tax relief given at 50% of the invested amount. Any gains made on the SEIS shares will also be tax free as long as the investment conditions are not broken and the shares are held for at least three years. In addition if you make a capital gain in 2012/13 (on any asset), you can invest that gain in SEIS shares and achieve 100% tax exemption on that gain. Thus the maximum tax relief for investing in SEIS shares could be 78% of the amount invested.
VCT
Investing in shares issued by a Venture Capital Trust (VCT) will give you 30% income tax relief on the amount invested, capped at £200,000 per tax year. This investment limit is not expected to increase in 2012/13. Dividends and gains from the VCT are tax free if the VCT shares are held for at least five years.
ISA
Individual Savings Accounts (ISAs) can be taken out as cash only accounts (maximum £5,340) or stocks and shares accounts up to £10,680. These limits are for 2011/12. The investment limits for 2012/13 are £5,640 for cash only accounts and £11,280 for stocks and shares.
You can now open a Junior ISA (up to £3,600 per year) for children aged under 18, who do not already have a child trust fund account in their name. Individuals who are aged 16 or 17 can also open a standard cash only ISA in addition to the Junior ISA.
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If you work from home as an employee or director of your own company, or for any other employer, you can claim £3 per week (tax free) to reimburse you for the costs of running your home as your work-base. This claim needs to be made to your employer directly, not to the Taxman.
If the additional costs of running your home while you work there exceed £3 per week you can put in a higher claim for the costs incurred, but you do need to back-up that claim with copies of energy bills etc. You also need to work out the additional costs quite precisely, which can be tricky, but is possible if you are methodical. We can help you calculate the amount to claim and advise on what evidence you need to keep. If you just claim the flat £3 per week, you don't have to provide any calculations or evidence in the form of bills.
The Taxman has just announced that the £3 per week expense limit for working at home is to increase to £4 per week from 6 April 2012. It was last increased from £2 to £3 per week on 6 April 2008, so an increase is well over-due.
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| Capital Exemptions and Losses |
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You can make up to £10,600 of capital gains in 2011/12 and pay no tax on that amount, as it should be covered by your annual capital gains exemption. If you have not used this annual exemption in 2011/12, check whether you can make any disposals which will crystallise gains before 6 April 2012. Individuals who have non-domicile status may not qualify for this annual exemption.
The annual exemption limit will be frozen in 2012/13 at £10,600. Any unused exemption for 2011/12 cannot be carried forward or passed on to a spouse. However, you can pass assets to your spouse or civil partner tax free. Then on the sale of the asset your spouse's annual exemption can be set against the gain.
The gift of the asset to your spouse must be done well in advance of the sale, with the correct legal documents drawn up. Take legal advice if you are not sure how to change the ownership of an asset.
If you have assets that have reduced in value so they are now worth almost nothing, you can make use of that loss by making a negligible value claim. If you submit the claim in 2011/12 you can ask for the loss to be treated as arising in 2010/11 or 2009/10 if the asset was also virtually worthless at that earlier date. This is useful, as capital losses can generally only be carried forward, not backwards.
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| Beware Phone Calls from 'Microsoft!' |
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This scam has been around since 2008 but seems to be on the increase recently. One of our own staff has received four separate private phone calls in the last few months.
The phone calls come from someone knowing your name and phone number, pretending to be from Microsoft in a bid to dupe people out of their cash for fixing their computer.
They say they have received reports of "serious virus problems". The householder is asked to allow remote access to the computer.
They supposedly fix all the problems and then demand a large fee for the software they have installed.
If you receive a phone call from someone claiming to be from Microsoft, don't fall for it because Microsoft never calls anyone.
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| Question & Answer Section |
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Q. What records do I need to keep to claim travelling expenses? Do I also need to keep receipts for petrol?
A. You should record the date, destination and distance of each business journey you drive in your own car. It is good practice to record the total on your car's milometer at the start and end of each journey. Your employer can pay you up to 45p per mile for each business related journey you drive. Business journeys do not include normal commuting between your home and your permanent workplace. If your employer is VAT registered it will be able to reclaim VAT on part of the mileage allowance you receive, if you provide VAT receipts to the value of the fuel used. The VAT receipts do not have to exactly match the dates of your journeys. When travelling by public transport keep the receipt for the ticket.
Q. I've always calculated my business income for a full year to 30 April. On my tax return for 2010/11 I've recorded my business profits, income and expenses for the year to 30 April 2010. But when I rang the Tax Office with a query the adviser told me that my accounts should always be drawn up to 5 April. Have I been doing it wrong for 20 years?
A. The adviser at the tax office is wrong. You can draw up your business accounts to any date you please. The year end of 30 April gives you a long delay between the end of your accounting year and the date on which you need to pay tax on the profits for that period.
Q. A friend told me I'd pay less tax if I held my let properties through a company. Is that true?
A. The answer depends on whether you need to get your hands on the proceeds from your lettings business and your current highest tax rate. Let's assume you need the cash and your highest tax rate is 40%.
If the properties are in a company, the company will probably pay tax at 20% on the rental profits. But its tax rate could be up to 27.5% if the annual profits exceed £300,000, or you control a number of companies. When you extract the profits from the company as dividends you will pay a further 25% income tax. So for rental profits of £100, you will end up with £60 in your hands.
If you hold the properties personally, and pay tax at 40%, for every £100 of rental profits you will receive £60 in your hands. No different to holding the properties in a company. However, if you had not extracted the profits from the company until a later year when you are a basic rate tax payer you would then be paying less tax. It can also be beneficial to keep the profits in the company to re-invest in further properties.
However, when you sell the property (and hopefully make a gain) you need to consider Capital Gains Tax. The company may pay tax of 20% on the gain it makes when it sells the let properties. You may have to also pay further tax when extracting the profits out of the company. If personally owned you will probably pay tax at 18% or 28%, but you will be able to set-off a tax-free allowance of £10,600 against the gain, which is not available to the company. If you own the property jointly with your spouse, the tax free allowance can be doubled.
Q. I've received a £100 fine for not submitting my tax return, but I don't remember receiving a form to complete. All my income is taxed under PAYE, so surely I don't need to complete a tax form, do I?
A. You should first ring the Self Assessment helpline on 0845 900 0444. Have to hand your NI number and your unique taxpayer reference number (UTR), if you know it. The Tax Officer will confirm whether you need to complete a tax return for the year to 5 April 2011 or not. If you do need to complete a tax return for that year you should do that online, if you submit a paper form now you will receive an even higher penalty. We can help you submit your return online, if one is due.
Q. I hold the lease of a property comprising of a shop on the ground floor and offices above. The shop is vacant and only one of the offices is let. I've received a good offer from a property developer to purchase the lease of the whole building. If I invest in another commercial let property can I rollover the gain and avoid paying tax on the sale of the lease?
A. It is possible to rollover gains made on land and buildings used by trading businesses or which are let to trading businesses that are connected to the building owner. However, letting of property is not regarded as a 'trade', so you can't rollover the gain you make on selling the lease of this building. Even if your own trading company occupied a part of the building, rollover relief would only be available on the proportion of the building it occupied.
Q. My bakery shop is VAT registered, but I don't add VAT to the bread and cakes I sell. I'm going to start selling take-away filled rolls, fizzy drinks and hot pies. Will I have to charge VAT on these items?
A. Most food is zero rated for VAT, which for a VAT registered business such as yours, means you add no VAT to your bakery products but you can reclaim VAT on your business purchases. However, once food is supplied in the course of catering, or as hot food to eat straight away, the standard rate of VAT (20%) may apply. The rules of what must be standard rated and what should be zero rated are quite complicated, and are set out in detail in the VAT notice 701/14: Food. We can advise on what products you should apply standard rate VAT to.
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| We Want To Help More Clients |
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If you have received this newsletter and are not already a client of Hanley & Co we would be delighted to hear from you.
If you are already a client you may know someone who is setting up in business or who is looking to change accountants for their existing business, please be sure to pass on our details so we can offer them a Free Unlimited Initial Consultation - with Absolutely No Commitment.
We feel sure they will also benefit from receiving our FREE 73 page 'New Business Start Up' report or the easy to read 'How To Pay Less Tax 2011' guide.
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Hanley & Co provide personal advice to all clients based on twenty year's experience as practising accountants. We have clients across the North West of England and some even further a-field.
Visit our website http://www.hanleyandco.co.uk for more information.
HANLEY & CO - ACCOUNTANTS YOU CAN TALK TO
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