Questions and Answers - October 2007
Losses incurred in opening years of business
Q: I started my own business last year, and have recently prepared my first years set of accounts. Due to lots of start up costs and slow sales I have incurred a substantial loss. What are my options with regard to this loss? In previous years I was employed paying tax at higher rates?
A: Losses that you incur in your business receives tax relief by reducing your taxable income, thus decreasing the amount of tax you pay at your highest tax rate. Loss relief can be allocated in a number of ways, and as it is your first year of business you have the following options:
You can offset the loss against your total other income in the same tax year, or against income in the preceding tax year. This is referred to as a s380 claim. Alternatively, you can make a s381 claim and offset the loss against total income in the tax year 3 years previous. This claim can be made every year for the first 4 tax years of your business if it is loss making. The final option is a where the loss is carried forward against profits arising in later tax years from the same trade. This s385 election is automatically applied if the loss it not utilised by another claim.
You have mentioned that you paid tax at higher rate in previous years. It would seem beneficial to offset the losses against these years using a s381 or a s380 claim rather than carrying it forward as this will give a tax refund of up to 40% of the loss. Also, you do not necessarily know if you will create a profit from the business in the next tax year so carrying the loss forward may not create a tax refund for a number of years.
You do not have to make a loss relief election immediately, as there are various time limits applicable to each loss relief claim. Therefore you can consider which year gives the greatest tax refund before sending your claim through to the Inland Revenue. Your local TaxAssist accountant can advise on which option is most beneficial for your situation.
Relief for pre-trading expenditure
Q. I started my own business last month, but over the last two year I have purchased lots of equipment before I was ready to start. Can I still claim tax relief on this? I have receipts for virtually everything but they obviously dates before I have commenced on them?
A: Provided you paid for the assets and the equipment qualifies under the normal capital allowance rules, any expenditure which is incurred 7 years prior to trading are treated as being incurred on the first day of your new business.
Also, if you introduce any assets previously used for a private purpose, such as a laptop, into the business you can also claim tax relief against these. You must introduce these items into the business at their market value, but be warned that you cannot claim First Years allowances on these assets if they were acquired from a connected person, or previously used for another purpose (which includes using them privately).
When you register for VAT, you can reclaim the VAT paid on goods and services that you bought to set up your business. You can go back three years before registration for goods and capital items still held on the date of your registration, but only 6 months for services. Depending on who your customers will be, you might think of registering for VAT early to get back the VAT on these goods.
Carrying Back Pension Contributions
Q: My accountant has just finalised my 2006/07 tax return and I am paying higher rate tax at 40% on a proportion of my earnings. In previous years he has suggested I make an additional pension contribution to reduce my tax liability in January. This year he has not suggested this, is there a reason why?
A: I’m afraid your accountant can no longer suggest this, as under the new pension rules that were introduced in the 2006 Budget, and commencing on 6th April 2006, you do not have the ability to carry-back contributions paid after the end of the tax year. This was a useful planning option for people in your situation who are unaware of their tax liability until after the tax year, as they could contribute a sum which would obtain tax relief at 40% against the preceding tax year’s income. The rules that allowed a contribution to be based upon the best earnings in the preceding five years has also been removed under the new legislation.
However, one advantage of the new rules is that the complicated structure of basing the allowable contribution on a percentage of earnings that vary with age has been removed. These have been replaced with new rules that allow you to contribute what you want, when you want subject to certain contribution limits. This may be useful to consider if your earnings are likely to be of a similar again in the current 2007/08 tax year which ends on the 5th April 2008.
These new rules allow you to make contributions to a registered pension scheme and get tax relief on the lower of 100% of net relevant earnings or the annual allowance (2006/07 £215,000 rising to £255,000 in 2010/11). If you have no earnings in a year, or earnings are less than £3,600, you will be able to pay contributions with relief up to that amount. You should speak to your accountant to discuss your options and how the new rules will affect you.
HMRC online services - VAT
Q: I recently purchased a new computer and now want to start filing my quarterly VAT returns online. How do I register for this and are there any benefits?
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.
To register for the scheme, you will initially need to register as an organisation for the HMRC online services by obtaining a government gateway (www.gateway.gov.uk) number. Once you have received this, you will need to visit www.hmrc.gov.uk and log in to your account and activate the online VAT filing system.
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 payments are collected from your bank account. Generally anyone with a UK VAT Registration number will be able to pay by Direct Debit. This 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.
Payments Received from Employer to Relocate
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.
Death of an Employee
Q: One of my employees recently passed away after a short illness. I have continued paying him up until his death under the terms of his contract, but I don’t know what I need to do with regard to the payroll now?
A: When you learn of the death of an employee you should complete a form P45 as normal for any employees who leave, write D in the box at the bottom of the form, and send all four parts of the form to your Inland Revenue office.
Obviously there may be some of the payments due to this employee made after the date of death. In this situation, you should make the payments of the outstanding wages to the personal representative of the deceased employee. Pay As You Earn deductions will need to be made on this, using tax code BR on any payments after you have completed the form P45 as advised above. Also all payments made after the date of death should continue to be detailed on the PAYE working sheet (form P11)
If the payments you are making fall into a later tax year than the one in which your employee died, you should deduct PAYE using the code BR and record details on a new form P11 in the name of the deceased employee. Again these payments should be made to the personal representative of the deceased.
Rental Property Refurbishment
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 expense, 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.
Do School fees qualify for tax relief?
Q: I am sending my youngest son to a private school. The school fees are in the region of £10,000 per annum and on the correspondence I have recently received I noticed the school states that it is a registered charity. Does this mean that the payments I make for the fees each year qualify for tax relief under the gift aid scheme?
A: The school has become a registered charity so it can reclaim basic rate tax on the donations it receives on donations it will receive from United Kingdom resident individuals and companies. These gifts will qualify under the gift aid scheme.
Unfortunately, outright payments to a charity in return for services, rights or goods are not gifts, and do not qualify for gift aid. HM Revenue & Customs specifically state in their gift aid guidance booklet that “Payment of school fees for a specific person do not fall within the gift aid scheme” so your £10,000 will not qualify for tax relief.
