Payment of Expenses to Employees
Q: I run a small partnership, and we have a number of employees for who we reimburse for business expenses. Do you have any advice on the type of records we should keep for this, as we believe we should be completing a form P11d for these payments?
A: A small business 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, you must always pay careful attention to anything incurred in the name of an individual employee, but paid or reimbursed by the business.
The legislation states that you must include all travel, subsistence, and entertaining expenses that have been reimbursed on annual forms P11d at section N, even if it is incurred wholly for business purposes. You must have supporting documentary evidence in the form of a formal expenses claim form made by each employee, and where possible all receipts should also be included with these claims. Remember that if you are registered for VAT, your P11d records must be VAT inclusive.
The forms are required to be submitted to HM Revenue & Customs by 6 July after the end of the tax year, and you must also issue a copy of the P11d to each employee by this date. However, if expense reimbursement are the only payments you are making, it may be advisable for you to consider a dispensation from reporting these to cut down on your paperwork. This can be obtained by completing form P11d(X) available on www.hmrc.gov.uk .
It is also required that you retain all records and information relating to payroll, benefits and expenses for six years, which is the period for which the HM Revenue & Customs has powers to investigate your business accounts.
Reducing Payments on Account in July
Q: I have now received the demand from the Inland Revenue for my tax payments on account due at the end of July. Last year my business made substantial profits, but this year I have incurred lots of redevelopment expenditure and as a result my business profits have fallen. Is there any scope to reduce these payments and what are the ramifications if I do not pay on time?
A: Payments on account are represented by 50% of the individual’s net tax liability for the previous year, and are used to “prepay” the tax liability due in the following January. The are made up of two payments which are due in January and July. 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 and subsequent tax liability for the 2006/07 tax year is likely to be significantly less than the previous 2005/06 tax year on which the payments on account are based, you can make a claim to reduce. The amount that you reduce these too should reflect your estimation of your tax liability for the 2006/07 tax year, which is due for payment on the 31st January 2008. Either you or your accountant can make this claim using a form SA303 available from www.hmrc.gov.uk .
However, be warned if it is later found that you have overestimated the fall in your income, and consequently reduce the payments on account by to much, you will be liable to pay interest on the difference between the amounts paid as payments on account and the amount actually due. Equally, if you have underestimated the fall, and paid to much, you will be due a refund and will receive an interest supplement.
Part time employment and State pension
Q: One of my full-time employees has recently switched to a lower paid part-time job due to family commitments. She is concerned that this change may affect her entitlement to the basic state pension and other state benefits. Is this the case?
A: For each week that she earns between £87 (the lower earnings limit) and £100 (the primary threshold) in 2007/08, she will be treated as paying National Insurance contributions even though no contributions are deducted from her pay. This means that she will continue to build up entitlement to contributory benefits such as the basic State Pension and Incapacity Benefit, even though she is not paying standard rate National Insurance contributions.
However, if she earns less than the lower earnings limit of £87 per week, she will not pay National Insurance contributions and will not receive credit for state pension and benefit purposes. She may still be able to protect her entitlement to the basic State Pension if she pays NI class 3 voluntary contributions, gets certain benefits or if she is a carer who receives Home Responsibilities Protection.
Free Sample of Goods to Customers
Q: I am planning to send out to existing customer base a sample of a new product I am looking to sell in my health food shop. Am I able to claim a deduction for this in my accounts, as I am aware that gifts to clients are in some cases not tax deductible?
A: Yes, you will be able to claim a deduction for the cost of these free samples and gifts, as, providing they include a conspicuous advertisement for your business, they will be treated as being used for the purpose of advertising.
This does not apply if the gift is food, drink or tobacco, or a token or voucher exchangeable for goods. You must ensure that the cost of the gift (together with the cost of any other such gifts given to the same person in the tax year) does not exceed £50. Remember that the advertisement must be on the gift itself, and not just on the wrapping.
Advantages of filing VAT forms online
Q: I spoke to the VAT office recently and they suggested that there is substantial benefits of filing my quarterly VAT returns online. Is this true and what are they?
A: Yes, the eVAT system has substantial benefits for small business like yours. As with all other online filing systems, one of the main advantages is that the process is simple and very user friendly, with the added advantage that you will not need to file any more paper VAT returns by post. With the eVAT system you actually get an on-screen acknowledgement and a unique reference number, so that you know that the HMRC have received your details. Other advantages of the system include email alerts to keep you up-to-date on developments that affect your business, and the ability to request an amendment to a VAT registration online.
Also, if you pay your VAT bill by Direct Debit you will also receive 7 calendar days from the standard due date for your return to reach us. It will be a further three working days before we collect payment from your bank account. Generally anyone with a UK VAT Registration number will be able to pay by Direct Debit. This is 10 day extension will create be a substantial cash flow benefit to your small business. To register for the scheme you should speak to your accountant.
Mortgage Interest Relief
Q: I would like to start up my own property business and I plan to re-mortgage my residential property so that I can use the funds I release to purchase my first ‘buy to let’ rental property. Will the interest payable on the additional part of my mortgage be considered a tax deductible expense against the rental income I would receive?
A: This falls under the “purpose of loan rules”. Although the loan will be financed on another property, as it will be used wholly and exclusively to fund the ‘buy to let’ property, it is an allowable deduction in tax terms, when establishing the net profit from renting the property.
However, you can only claim a deduction for the amount of “qualifying interest” which applies to the rental property. Any interest payable on the mortgage relating to your existing residence is not deductible against the profits from the rental property.
Non Resident Renting Property In The UK
Q: I have recently emigrated to Australia, but I have kept a property I used to live in the UK to rent out. I have engaged a letting agent to act on my behalf who will deal directly with the tenants. Are there any UK tax implications I should be aware regarding this arrangement?
A: If a tenant pays rent of more than £100 a week (£5,200 per annum) to a non-resident landlord via a letting agent, the agent has an obligation to deduct basic rate tax from the landlord’s UK rental income and pay the tax to the HM Revenue & Customs’ Accounts Office, Cumbernauld.
For tenants who pay rent of £100 a week or less, the agents does not have to operate the scheme unless they are told to do so by the HM Revenue & Customs. When working out the amount to tax, the agent can take off tax deductible expenses that are incurred for the purposes of letting the property.
However, you can apply as the landlord on form NRL1 to the Centre for Non Residents for approval to receive your rental income gross. This is usually given if your tax affairs are up to date or you do not expect to be liable to UK income tax for the tax year, which is usually when your rental income doesn’t exceed your UK personal allowance.
All non resident landlords will need to include this information on a UK self assessment tax return. For further information on the landlords and agents responsibility see the information on www.hmrc.gov.uk/cnr website or contact your local TaxAssist Accountant.
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