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 your existing residence is not deductible against the profits from the rental property.
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 £82 (the lower earnings limit) and £94 (the primary threshold) in 2005/06, 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 £82 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.
Gift of goods and samples to customers
Q: I am planning an exhibition evening in my shop for some new products I am selling. I will be inviting members of the public and regular customers to my shop for an open evening, and will be providing small samples of this new product as a gift to everyone attending. 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.
Energy Efficient Machinery
Q: I currently run a small business growing organic food and I am looking to expand my business by building two new greenhouses to grow new products. I have been advised by my supplier that if I purchase a special product from him to improve the energy efficiency of the greenhouses my investment will qualify for a special tax relief. Is this true?
A: In 2001, the government introduced a scheme which allows businesses investing in qualifying energy saving plant and machinery investments to reclaim 100% Capital allowances on the expenditure incurred.
Various types of expenditure qualify for the 100% allowance, providing they meet the required energy-saving standards as outlined by the Enhanced Capital Allowances scheme. To see if your item qualifies for the increased allowance visit www.eca.gov.uk .
Each year the government adds further items to this list in their annual budget update so it’s worth checking whether any plant and machinery items you are purchasing qualify. Your accountant will be able to advise you further.
Issuing a National Insurance Number
Q: In the run up to Christmas, I am looking to employ some part-time teenagers to help with the increase in business. One of the girls I am hoping to employ is 15 years old. Does she have to pay National Insurance and should she have a National Insurance Number?
A: Only persons aged between sixteen to retirement age are liable for National Insurance. Children aged fifteen are automatically sent a number shortly before their sixteenth birthday provided that they live in the UK and their parents/guardian receives child benefit. Deductions will be made from the date of her 16 th birthday.
Bad paying customers
Q: I have a particular customer who has a history of bad payments with me. I am considering taking legal action against this customer to try and recover this debt. Can my solicitor’s fees and other legal costs be regarded as a legitimate business expenses for tax purposes and are there different procedures depending on the size of the debt?
A: Legal and professional costs that a business incurs are allowable when they directly relate to trading. Therefore the legal fees incurred in attempting to recover trade debt owed by this customer are therefore allowable as expenditure in establishing your business profit for the year. In addition, as it is a specific customer against which the bad debt has arisen this will be also be allowable as a deduction when establishing your business profits for this period.
Claiming back VAT
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 the VAT from my previous two years of trading. Is this true?
A : 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. 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 cannot be re-claimed once you have registered.
Relocation expenses
Q: I am a director in a small Limited company who have made a decision to open a new office in another part of the country, and asked one of our senior employees to manage the office. As they will be running this new office, we have asked them to relocate their family to the area. We have offered the manager a relocation package but he is concerned that he might need to pay tax on this? Is this true
A: No, certain expenses incurred on moving such as paying the fees connected with house purchase and the costs of moving household furniture and effects will not be chargeable to Tax or National Insurance up to a limit of £8,000.
However, there are some expenses which are not covered by this exemption such as paying compensation to your client for any loss incurred on selling the home quickly, or cost in redirecting the mail.
There are other various criteria to be met for this exemption to apply, and it would therefore be advisable to take further advice from your accountant.
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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.
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