Questions and Answers - February 2008
Can I Change My Tax Return?
Q: I recently filed my 2006/07 tax return close to the 31st January deadline, and noticed I had not included an allowable subscription I paid to my professional institute. As I am a Higher Rate tax payer this should give me some additional tax relief. How should I let tax office know of my error?
A: Just as HM Revenue & Customs has the right to repair an obvious error or mistake on a tax return, the taxpayer also has the right to amend it, within 12 months of the original filing date. In your situation, you have until the 31st January 2009 to amend the 2006/07 tax return.
The amendment may be in the form of a letter or an amended return showing the additional income in the correct box or supplementary page. If the error relates to a tax return which was filed more than 12 months previous then you have to make an “Error and Mistake” claim by including details in a letter. You cannot just send in an amended tax return.
You should also let them know as soon as you realise of your mistake, as if it was income which was omitted from the return, you will have an additional tax liability, and would receive interest and surcharges.
Interest is applied on a daily basis at the rate in force at the time the tax was originally due, so if you missed the income off the 2006/07 tax return then you will have interest applied from 1 February 2008 until the day HMRC receive your payment. The interest rate is currently set at 7.5%.
Rental Property Expenses
Q: I have been renting a property out for a number of years, and in the current tax year incurred lots of expenditure replacing worn out items including the bathroom, windows and kitchen. Can I offset this against my rental income in the year?
A: A useful Tax bulletin was published by the Inland Revenue in June 2002 to clarify the position on these types of expenses for rental property. It explains that to decide whether expenditure incurred on `repairs' to property is allowable against your rental income, you need to determine whether the expenditure is incurred wholly and exclusively for the purposes of a Schedule A business and is not capital expenditure.
Even if the repairs are substantial, that does not of itself make them capital for tax purposes, provided the character of the asset remains unchanged. For example, in your situation you have removed the existing kitchen and provided this is replaced with a similar modern standard kitchen then this is a repair and the expenditure is allowable.
With regard to the windows, in the past HM Revenue & Customs took the view that replacing single-glazed windows with double-glazed windows was an improvement and therefore capital expenditure. But as building standards have improved and the types of replacement windows available from retailers have changed, they now accept that replacing single-glazed windows by double-glazed equivalents counts as allowable expenditure on repairs.
In summary, assuming the expenditure can be classed as a repair or replacement, rather than an improvement, then it is likely that you can treat it as Revenue expenditure, and offset it against the rents in the same tax year. You can consult your local TaxAssist accountant for further advice on this area.
My Wife Signed My Tax Return
Q: At the end January I was out of the country on business and to avoid a late filing penalty of £100, I asked my wife to sign my tax return and send this in. It has recently been rejected by the HMRC and returned to me. Surely as I gave permission for my wife to sign it should have been accepted?
A: Unfortunately, there is only very few instances where someone else can sign your tax return. Unless your wife is a Receiver appointed by the Court of Protection, or an Attorney appointed under an Enduring power, she is unable to sign on your behalf. The other instances include death. When someone dies, an executor may sign a return for the tax period from 6 April up to the date of death on behalf of a taxpayer.
Therefore, I’m afraid that it will need to be your signature that is on the declaration on page 10 of the return. If not, HMRC are within their rights to reject the return. Remember, however, the £100 late filing penalty is only charged where there is tax to pay at 31st January, so if you actually paid all of your tax by the due date, they you can successfully reduce the £100 late filing penalty to nil.
Reducing Payments on Account in January
Q: I couldn’t pay all of my tax liability for the 2006/07 tax year, as I wasn’t aware I had to make a payment on account in advance of the 2007/08 tax liability. I know that my profits will be down in the next tax year due to a poor trading period and obviously I will not have as much tax to pay. Is there any possibility that I can reduce the amount that is due?
A: Payments on account represent 50% of the individual’s net tax liability for the previous year. All individuals are liable to make these payments unless their net tax liability is less than £500 or more than 80% of the tax due was deducted at source.
Given that your income is likely to be significantly less than the previous year which the payments on account are based on, you can claim to reduce these payments on a form SA303. The amount that you reduce these to should reflect your estimation of your tax liability for the year of the claim.
However, if it is later found that you have overestimated the fall in your income, and consequently reduce the payments on account by too much, you will be liable to pay interest on the difference between the amounts paid as payments on account and the amount due. Equally if you have underestimated the fall, you will be due a refund and will receive an interest supplement.
Adoption Leave and Statutory Adoption pay
Q: One of my employees is currently looking to adopt a child. The have asked me whether I can allow for a period of time away from work when they adopt a child. Do I have to agree for this time off and do I have to continue to pay the staff member concerned?
A: Adoption leave and pay may allow one member of an adoptive couple to take paid time off work when their new child starts to live with them. Assuming your staff member has worked for you continuously for 26 weeks ending with the week in which they are notified of being matched with a child for adoption, and are paid above the Lower Earnings Limit (£87 per week for the 2007/08 tax year).
From 1st April 2007, adopters are entitled to up to 39 weeks’ ordinary adoption leave followed immediately by up to 13 weeks’ additional adoption leave - a total of up to 52 weeks’ leave. Only ordinary adoption is covered by Statutory Adoption Pay.
Statutory Adoption Pay is paid by employers for up to 39 weeks. The rate of Statutory Adoption Pay is the same as the standard rate of Statutory Maternity Pay – from April 2007, this will be the lower of £112.75 a week or 90% of average weekly earnings.
There is a useful calculator on the HMRC website (www.hmrc.gov.uk) for employers to work out how much Statutory Adoption Pay an employee is entitled to.
Selling Products to Europe
Q: We are thinking of setting up a business which will involve selling our products in Europe. The best way to do this is to attend various trade fairs, especially in the European Union. Will we be able to claim back the equivalent VAT in the various state of the EU on our VAT return?
A: Only VAT charged by UK companies can be claimed on your UK VAT return. In order to claim the VAT paid in various member states, you will have to submit a claim form in the country that you incurred the expense. A special form must be completed in that country’s language and must be submitted with the original invoices.
There is a useful H. M. Customs & Excise booklet, VAT Notice 723 that covers the procedures. If you are dealing with a number of EU countries you may find it advantageous to register in one of them and thus, subject to certain conditions, claim back the VAT for all the countries.
You need to be aware that the countries involved do have differing rules on what VAT can be claimed on, again leaflet 723 will give you further guidance on this.
Self employed mileage rates
Q: I recently replaced a car that I use for my self-employed business. I have heard that instead of keeping all of the receipts for petrol, tax, repairs that I incur there is a simpler method? Can you explain this?
A: Self employed taxpayers are allowed to use mileage rates as an alternative to keeping detailed records of actual motoring expenses if their turnover is below the Vat threshold, which is currently £64,000.
Taxpayers can only use the mileage rate basis if they apply it consistently from year to year,
but as you have recently replaced your vehicle, you change to the mileage rate from the ‘actual' calculation method. It is always worth reviewing this whenever you change your vehicle, as the scheme is designed to make record keeping simpler for small business.
To use the scheme, all you need to do is keep log of all your business miles during the accounting period, and apply a fixed amount of 40p for the first 10,000 miles and 25p thereafter as an expense in your accounts.
The mileage rate covers the costs of running and maintaining the vehicle, such as fuel, servicing, repairs, insurance, road tax, MOT costs. It also covers the depreciation of the vehicle which is normally included in the accounts, together with capital allowances which would have been included on the tax return.
It doesn’t cover specific costs to a particular journey such as tolls, congestion charges and parking fees, and the business proportion of the interest on a loan or hire purchase agreement can be claimed also.
Rent a Room Scheme
Q: I have a spare room in my house and both my wife and I have considered letting this out. I've noticed that an annual rent of less than £4,250 is tax exempt. Is this correct?
A: The £4,250 tax free amount is available if you are using the “Rent A Room” scheme. Under “Rent A Room” a taxpayer can be exempt from income tax on profits from furnished accommodation in their only or main home if the receipts they get (that is, before expenses) are £4,250 or less.
If the receipts exceed the £4,250 exemption limit, you can choose to be taxed on the gross receipts as an alternative to preparing the standard profit and loss account for the rents received. This may in some case be more favorable if the rents only slightly exceed the exemption limit.
Unfortunately, as you rent the property with your wife, you cannot both benefit from the exemption limit of £4,250. If more than one person is letting a room in the same home, the limit is reduced to £2,125 for each person receiving rental income.
The “Rent A Room” scheme only applies to ordinary lettings of living accommodation in the taxpayer’s own home. You cannot apply it where the rooms(s) are let as an office or for other business purposes.
You should ensure that when claiming “Rent A Room”, this method is more beneficial than establishing your profit after expenses, as you have the a choice of which method to use.
