Questions and Answers - February 2007
Do I still need a tax return?
Q: Last year I completed my tax return but received a letter from my tax office stating that I do not need to complete a tax return in the future. However, I purchased a rental property during the last tax year and have been renting this out for a small profit. Do I still have to complete a tax return?
A: There is a requirement to notify the tax office by 5 th October following any tax year where you owe further tax in addition to any tax that has already been deducted at source. As you have made a small profit form your rental income activities then you should have notified the HMRC. This gives them enough time establish if a tax return is required and to issue you with one to fill in.
However, under the new guidelines issued for Self Assessment for the 2004/05 tax year onwards, HM Revenue & Customs are trying to reduce the burden of Self Assessment on taxpayers who have straightforward affairs and have identified some areas where a tax return will still not required.
If your income from rents is less than £2,500 for the year and your other income is from employment where tax is deducted at source, you can just contact the tax office and they should be able to settle your additional tax liability through an adjustment in your PAYE code, and collect it through deductions in your wages each month. This will avoid the onerous task of completing a tax return to show this small amount of income.
Capital allowances on Driving School vehicles
Q: I started a driving instruction business last year and business has been so profitable that I am now looking to employee my son as an additional instructor and purchase another vehicle. I am looking to purchase a new vehicle for an “on the road price” of £18,000. How is the cost dealt with for tax purposes?
A: The total cost of the vehicle will qualify for Capital Allowances, and cars used by a driving school which are fitted with dual control mechanisms, it is a “qualifying car” it will qualify as Plant and Machinery for this purpose.
First Year Allowances will therefore be available on the full cost of £18,000 in the period the vehicle is acquired. If the vehicle is acquired prior to 5 April 2007 it will qualify for an increased First Year Allowance of 50% applicable to this tax year only. However, if you delay the purchase until after this date it will qualify for the reduced 40% First Year Allowance.
You must also remember to ensure that if your son receives private use of the vehicle, however small a percentage it may be, he will be assessable to a benefit in kind based on the CO2 emissions level of the car. Equally, if he receives private fuel in addition to the use of the car, a benefit in kind for this will also be applicable. You will need to produce and submit end of year forms P11d and P11d(b) disclosing these benefits to the HMRC by 6 July after the tax year end in which the benefits are received.
Relocation expenses paid to move jobs
Q: I have been offered a job in another area of the country with my current employer which means that I will have to move house. As well as a salary increase they have offered to pay my relocation expenses but I am concerned that this will be taxed, and as I am a higher rate taxpayer it may not be worth my while?
A: Whether or not the amount is taxed depends on what your new employer is actually paying you for. The salary increase will obviously be taxed at your current tax rate, but where employers provide employees with financial assistance when they have to move home to take up a new job, an amount up to £8,000 can be paid tax free to meets these allowable costs.
The HM Revenue & Customs do specify that the assistance provided must meet the costs of relocation, and this includes paying the fees connected with house sale and purchase, meeting the cost of travel to the new location for house hunting trips and paying for the costs of moving household furniture and effects.
They can also meeting the costs of a bridging loan where the relocation takes place before you sell your old home. To qualify as tax free, the relocation expenses must be incurred, or the relocation benefits provided, before the end of the tax year following the one in which you start your new job.
However, some costs which are not treated as tax free include compensation paid for any loss on sale of the employee's home, interest payments for the mortgage on the employee's existing home, re-direction of mail, and Council Tax bills incurred on your old home.
Tax Relief on Losses
Q: I started my own business last year, and due to some significant initial start up costs I made a substantial loss in my first period of trading? Can I claim relief for these losses, and get some tax back? Prior to starting my new venture I was employed over the last 4 years paying tax at 40%.
A: You have a number options with regard to claiming relief for your losses. You can offset the loss against the income you earned in previous tax years. The options you have is to:
- carry the loss back against other income you received in the tax year arising 3 years previous or
- set it against other income in the tax year of the loss , or
- set it against other income in the previous tax year.
You will reduce your total taxable income by the amount of the loss and as you are a higher rate tax payer in all of these years you will effectively receive up to a 40% tax refund for the losses you have made. If circumstances were different, and neither of these are beneficial, you can instead chose to carry the loss forward and set it against future profits from your business.
One other useful point to note is that you are also entitled, under any of the options above, to obtain National Insurance Class 4 relief for the losses. This can provide you up to a further 8% relief through a reduction in your National Insurance liability on future profits from your business.
In all cases it is best to seek professional advice from an accountant on this subject, as they can establish which option is most tax efficient, and provides you with the greatest tax refund.
Tax relief on a new kitchen for a rental property
Q: I recently purchased a buy to let property which is in need of some refurbishment before my new tenants can move in. I have decided to install a new kitchen into the property. Will I be able to claim tax relief on the cost of a new kitchen?
A: You can claim tax relief on this expenses, but to decide whether it is relief for Capital Gains Tax purposes, or for Income Tax purposes will depend on how the HM Revenue and Customs classify the expenditure.
The main issue you face here whether the expenditure you have incurred is defined as “Revenue”, which means it is allowable for tax purposes against the rents you receive from your new tenants, or “capital”, which means you receive Capital Gains Tax relief when your sell the property.
According to the HM Revenue & Customs guidelines, it would seem that your new kitchen will be treated as a capital expense, because the property was unable to be let out until the new kitchen was installed. Also a new kitchen is likely to have increased the value of your property.
However, if the property was in a position to be let, or actually being let when you installed the new kitchen, and the kitchen was just reinstating a worn out or dilapidated asset, you should be able to argue it is a “revenue” expense.
As the rules relating to rental expenditure are broad, and you should always take advice from your local TaxAssist Accountant on property related tax issues.
VAT incurred before registration – is it re-claimable?
Q: My business is has been growing very steadily and I am very close to reaching the threshold for becoming VAT registered. A close friend - who also runs a small business – mentioned that once I reach the threshold for becoming VAT registered, I will be eligible to claim back all the VAT from my previous three years of trading. Is this true?
Unfortunately not, you can only claim back the vat on goods that you have acquired in the 3 years prior to registration which are still held in stock (or used to make other goods which are still held in stock) and originally acquired for the business purposes. This also applies to any capital assets which you still hold for use in your business. You can also recover the vat incurred on services, which have been supplied within 6 months prior to becoming registered, assuming they were also supplied for the purpose of the business. Therefore, any VAT suffered on goods which have been sold on to customers, or capital assets which you have sold or scrapped cannot be re-claimed once you have registered
Company Vans – New Rules
Q: I understand the rules regarding the use of Company Vans are changing in April 2007. I work for a local courier and a take a van home after work. I don’t use the vehicle privately but just use it to get to the depot in the morning and back home at night. Will I have to pay any tax on this?
A: The government changed the benefit in kind rules for company vans on 6 April 2005. From this date, employees will only pay tax on a company van made available to them for private use only if they actually use it for private journeys other than commuting. Previously, employees still had a benefit in kind charge applicable if they received any form of private use of the company van, including home to work travel.
With effect from 6 April 2007, the amount for unrestricted private use will increase to £3,000, with an additional fuel scale charge of £500 if the employer pays for private fuel. This could mean that from the 2007/08 tax year, a basic rate taxpayer who has private use of a van with company fuel will pay tax of £770. For example private use can be classified as using the van to do the supermarket shopping or using the van for social activities outside of work.
Therefore, as you only receive use of your van for commuting, your employer should ask you to sign an agreement stating you are permitted to use the van for ordinary commuting from home to your place of work, but all other private use is strictly prohibited. You must also ensure you keep mileage logs recording the reason for the journey and the number of business miles travelled.
Obviously, the tax charge for private use of a van is much increased for employees who, unlike you, use the vehicle for more than just commuting, so it is important your employer has all of the above procedures in place before the start of the new tax year to avoid an unwanted tax charge for their employees.
VAT implications of Staff Teambuilding
Q: I have recently employed a number of new employees and am looking to take all my staff away on a team building exercise so they can create a better working relationship. Can I reclaim the VAT incurred on the costs for this event?
A: Where an employer provides entertainment such as staff parties, team building exercises, staff outings and similar events for the benefit of employees to reward them for good work or to maintain and improve staff morale, they are not blocked from input tax recovery under the business entertainment rules, as it provides the event wholly for business purposes.
However, there are 2 exceptions to the general rule. These are where:
The entertainment is provided only for directors or partners of a business, the VAT incurred cannot be recovered as the goods or services purchased are not used for a business purpose.
However, where directors and partners of the business attend staff parties together with other employees, the vat is not blocked from recovery.
Employees acting as hosts to non-employees incur costs that are for the sole purpose of entertaining a non-employee, the tax is blocked under the business entertainment rules.
