Notification of Rental Income
Q: I have owned a buy to let rental property for the last two years but have yet to make a profit as rental income I received does not cover the mortgage interest payments and other expenses. I haven’t received a tax return to fill in as I am in PAYE employment. Should I wait until I get a tax return from the Inland Revenue to let them know about the income?
A: If a taxpayer receives any taxable income in a tax year of which HM Revenue & Customs is unaware, then they have a legal duty to “notify of chargeability” by 5 October following the end of the tax year in which the income was received. Notification can take the form of a letter to your tax office, or a telephone call. Also, from April 2004, if the amount was £15,000 or less, then they are likely ask for 'short' tax return to be completed.
You also mentioned that you made a loss on the property in the last year. You should still notify the HMRC of the position, as you will benefit once you begin to make a profit from the rental business. By completing a tax return, the HMRC will receive a note of the loss you have made, and relief can be claimed for this once you have made a profit as it can be set against your first available rental profits in future years.
Even if you were set up under self assessment and have already submitted a Tax Return, you can submit a revision to the land and property pages within 12 months of the filling deadline for the tax return to declare the loss. If the time limit for revisions has passed, then you can submit a revised Tax Return under the error or mistake provisions and hope that the Revenue accepts this late revision.
However, do not be too surprised if you find the Revenue opening an enquiry into your Return as a result of the submission as they will want to know when the letting of the property commenced and may take the opportunity to review all aspects of your Return.
Completing end of year Benefit In Kind forms.
Q: I am a director in a small limited company, and we have a number of employees who receive company cars and other who receive various expense payments. We are currently completing our end of year forms P11d. Do you have any advice on the type of records we should keep, and what the HM Revenue and Customs might target in an investigation?
A: A small company is now more likely than ever to be subject to a full review of their compliance systems and procedures by HM Revenue & Customs. In completing your end of year forms P11d and P11d(b) employers declaration, pay careful attention to anything incurred in the name of an individual director/employee, but paid or reimbursed by the business.
You must include all travel, subsistence, and entertaining expenses in the information you enter on annual forms P11D, even if it is incurred for business purposes (unless you have an official HM Revenue & Customs dispensation). Even if you are registered for VAT, your P11D records have to be VAT inclusive.
You should keep full mileage logs for every vehicle, whether owned privately or by the company as they are likely to challenge all doubtful claims on the business mileage limit. If you were to receive an inspection they would ask for evidence of business mileage. Also ensure you keep separate figures for each car where there is a change during the year, or where more than one vehicle is available to a director/employee. The fuel benefit is an 'all or nothing' benefit, so if the business pays for any private fuel and is not fully reimbursed by the director, the director must accept the corresponding fuel benefit.
We would suggest you retain all records and information relating to payroll, benefits for six years, which is the period for which the HM Revenue & Customs has powers to investigate your business accounts.
Maternity Benefits for the Self Employed
Q: I am expecting a baby in July, and will temporarily ceasing my sole trader business. I need to know if I am entitled to any benefits such as statutory maternity pay, which I assume I am entitled to based on the fact that I have been paying regular National Insurance Contributions in respect of my business. Can I claim for this even though I am self employed?
A: To qualify for maternity leave and statutory maternity pay, a woman must be an employee, that is to say, she must work under a contract of employment. In the same way that individuals who are self-employed are not bound by statutory legislation on, for example, sick leave or holidays, any period of leave to cover the birth of a baby will be a matter of personal decision.
However, as a self employed person you may be able to claim maternity allowance (as opposed
to the statutory maternity pay due to employees) to fund the period that you will not be working, assuming you satisfy the criteria outlined in the claim form.
You should contact your local TaxAssist Accountant or local jobcentre plus office for further details, or alternatively visit their website www.dwp.gov.uk.
Business mobile phones supplied to employees
Q: Due to the nature of my business some of my employees are required to be on call 24 hrs per day, and consequently use their personal mobile phones to make business calls. Can I supply them with mobiles to make these calls?
A: Class 1 NICs and tax are payable through the payroll if you;
1. reimburse the cost of the mobile telephone, service charges or the cost of private calls
2. provide the employee with a voucher for use in relation to the mobile telephone or private calls made on it.
Where you only reimburse the costs incurred by an employee in making business calls only on his or her own mobile telephone, you can ask for a dispensation from the HM Revenue and Customs. This will avoid the need to report the payments on the end of year forms P11d for each employee. If you do not have a dispensation you must return the full cost on form P11D at section O.
No Class 1 or Class 1A NICs are payable on this expense payment, but the employee will have to pay income tax on this payment. However, as the calls were incurred for business they can claim tax relief against the payment, either on a Self Assessment tax return, or a form P87 if not required to complete a tax return.
An alternative option you have is to provide these employees with a mobile telephone and enter into a service agreement with the telephone company as there is no liability for NICs or tax. This applies to the provision of the telephone, the service and all calls made, including personal calls. However, you must ensure there is a restriction to one mobile provided per employee, as the exemption, with effect from April 2006, only applies to one mobile phone, and does not extend to members of the employees’ family or household.
State pension entitlement for Part time employees
Q: I have recently reduced the number of hours I work as I am nearing retirement age. I am slightly concerned that my reduced hours may affect my entitlement to the basic state pension and other state benefits. Is this the case?
A: For each week that you earn between £84 (the lower earnings limit) and £97 (the primary threshold) in 2006/07, you will be treated as paying National Insurance contributions even though no contributions are deducted from you pay. This means that you will continue to build up entitlement to contributory benefits such as the basic State Pension and Incapacity Benefit, even though you are not paying standard rate National Insurance contributions. A qualifying year for the basic State Pension is a tax year in which you have received (or are treated as having received) qualifying earnings of at least 52 times the Lower Earnings Limit for that year.
To qualify for full state pension entitlement you will need to have a full 49 qualifying years of your working life if you are male, and between 44 and 49 years depending on when you are born if you are female. Your working life is counted from the start of the tax year in which you reach the age of 16 to the end of the tax year before the one in which you reach State Pension age.
However, if you are employed and earn less than the lower earnings limit of £84 per week, you will not pay National Insurance contributions and will not receive credit for state pension and benefit purposes. In this situation you may wish to protect your entitlement to the basic State Pension by paying NI class 3 voluntary contributions. You should speak to your accountant to discuss NI class 3 contributions, and also the submission of state pension forecast which will detail how many qualifying years you currently have.
Late paying customers
Q: I have a number of clients who are really poor payers. This is causing me a significant problem with my cashflow, as sometimes I have had to pay my supplier for the materials, before I have received any payment for the work I have done. Can I charge interest if my clients do not pay me within say 1 month of undertaking the work?
A: All businesses have a legal right to claim interest from late-paying customers. The statutory right to interest applies to all contracts agreed after 7 August 2002 and gives you the right to charge interest at the Bank of England base rate plus eight per cent. For example, the base rate is for the current period to 31 December 2005 is 4.75%, so you could charge interest at 12.75% per cent.
The statutory right to charge late-paying business customers interest applies to contracts which do not already include their own arrangements for 'substantial' interest. If there is no agreed credit period, the law sets a default period of 30 days. You can charge interest 30 days after you delivered the goods or provided the service, or 30 days after you notified the purchaser of the amount of the debt - whichever is the later. Ideally, to notify the purchaser of the amount of the debt, you should send an invoice that includes details of the credit period, but any other form of notification would do, including a phone call - though that might be difficult to prove if there is a dispute.
All organisations also have a right to claim reasonable debt-recovery costs. Creditors can claim an extra £40 for debts of up to £1,000, £70 for debts from £1,000 up to £10,000 and £100 for debts of £10,000 or more.
Working in the UK
Q: I arrived in the UK on a 6 month work placement from Australia in February. I will be living and working in the UK for approximately 6 months over the summer, returning to Australia in August. My employers advised that I would be paying UK income tax on this employment income. I thought I wouldn’t have to pay any tax in the UK, as I am only here for 6 months and not a UK citizen? If I do have to pay, how do I claim back my tax rebate for this period of work before I leave at the end of August?
A: As you are employed by a UK based employer you will be subject to the same standard deduction of Income Tax and National Insurance under PAYE as all other UK based employees, irrespective of where you originate.
When you arrive in the UK you should complete a Form P86 to notify the HM Revenue & Customs of your arrival and before you leave you should obtain a form P85 to notify of your departure. These are vitally important for the authorities to decide on your liability to tax in the UK. For each year they will need to work out your liability to UK income tax on your earnings for the two tax years you are in the UK. As you are a commonwealth citizen you can claim the normal UK personal tax allowances, (for the 2005/06-tax year is £4,895 and 2006/07 is £5,035), and depending on how much you earn may entitle you to a tax refund for the 2005/06 and 2006/07 tax years.
Living Accommodation provided to employees
Q: I own a chain of off licences and have advertised for a new manager for one of these. Part of the package I am offering is that they can live in a flat above the shop, as due to the new licensing laws we are open for almost 24 hours per day. Are there any tax implications I need to consider for this as I am not going to be charging the new manager any rent?
A : If you allow an employee to live in accommodation supplied by you, they are liable to a benefit in kind on the annual value of that property. They will however be exempt from this charge if the accommodation is provided for the customary and better performance of the job, proper performance of the job, or is provided for security reasons. Managers of traditional off-licence shops, that is those with opening hours broadly equivalent to those of a public house like yours, but not those only open from 9 until 5 or similar will qualify under the customary and better performance test and exempt from a benefit in kind.
Usually in the scenario you have suggested, the accommodation in the supplied for security purposes and assuming the contract of employment specifies this, it will be job related accommodation.
However, if you are also paying the bills for the gas, water, electricity and other ancillary services such as redecorating, on behalf of the manager, he will be assessed on a benefit in kind. This amount chargeable is equal to the lower of: the total of all bills paid or 10% of manager’s earnings in the tax year. Also, if you provide the flat furnished, then there is an additional benefit based on 20% of the market value of the furniture at the beginning of the tax year that the accommodation is first provided.
Require Expert Help?
If you have these questions about your business then you should be using a better Accountant! TaxAssist Accountants are answering these kinds of questions for their clients all the time. Contact us now to become a part of this growing number.
By TaxAssist Direct Ltd. Both answers and advice are offered strictly on the basis that no legal liability is created thereby. Personal circumstances may vary and TaxAssist Direct Ltd advises that individuals seek personal professional advice in all situations.
Printable 'Questions & Answers - June 2006' Page
