Chartered Certified Accountants London Aydan Smith.

VAT

1. When do I have to register for VAT?
You could voluntarily register for vat at anytime as soon as you start supplying a taxable product or a service. However, you must register for vat as soon as your taxable supplies turnover reached £77,000 in the past 12 months or you think that your taxable supplies turnover will reach £77,000 within the next 12 months.
2. Is it beneficial for me to register for VAT?
Generally, businesses registered for vat do pay vat to HMRC every quarter. However, it could be beneficial for some businesses to register for vat depending on their trade (such as a bakery) as they could recover the vat they paid on their purchases and expenses. This is because they do not charge vat on their sales but pay vat on their purchases.
3. What is the current rate of VAT?
The coalition government increased the rate of current vat to 20% from 4 January 2011. If you are registered for vat you must add vat to your sales figures and show this on your sales invoice.
4. When do I have to pay VAT?
You should declare your vat to HMRC on a quarterly vat returns. However, there are few circumstances where you can request to do your vat return monthly. In addition, there is a schemes called annual accounting scheme where you do an annual vat return.
5. What other vat schemes are there to benefit my business?
There are few vat schemes that could benefit you to reduce your paper work such as flat rate scheme, annual accounting and cash accounting. VAT is a complex area of tax and it is impossible for us to answer all questions here.

Rental Income

1. My business is an agency that provides rented holiday accommodation to UK holiday-makers. My commissions are less than the VAT registration threshold, so I am not VAT registered. What contracts and invoices do I need to put in place to avoid charging VAT to either my clients (the landlords) or to the holiday-makers who rent the properties?
You want to stay under the VAT threshold, so you need to prove to the VATman that you are an agent working on behalf of the landlords, and are not a re-seller of holiday accommodation.

You should have a written agreement with each of the landlords that clearly states that the landlord is the principal who is making a contract with the holiday-maker, and you are their agent.

All invoices you issue should show your fees as separate items to the cost of the holiday accommodation.

If the holiday-maker pays you for the use of the holiday-let, the bill they pay should clearly show the amount due to the landlord, and the amount due to you as the agent. Ideally the two amounts would be shown on separate invoices.

2. What happened to the Furnished Holiday Lettings rules in the Budget?
The tax rules and exemptions for furnished holiday lettings (FHL) remain in place and unchanged at least until 5 April 2011 (1 April 2011 for companies). However, the Government has said that it will consult on changes to the FHL rules to be introduced from 6 April 2011.Those changes are likely to include a restriction on how losses from FHL can be set off, and a tightening of the conditions which will allow the tax relief’s for FHL to be claimed.

3. My family has invested in rental properties over a number of years. Some properties are held in my name alone, others are owned jointly with my sister. The properties held with my sister have made losses in the last year. Can I set those losses against the profits made on letting the properties held in my own name?
Yes you can. All your UK property interests are treated as one property business. So the net income from your own properties is amalgamated with your share of income and expenses from the jointly held properties, and the total needs to be reported on the property pages of your tax return. The Taxman will not treat jointly held let properties as being a partnership, unless the letting of the property is ancillary to a proper trading business.

4. I have a holiday cottage that just managed to qualify as furnished holiday lettings as it was let for 70 days in 2010/11. How will it be taxed in 2011/12 and what tax relief will I get for any loss I make on that property?
The Government is expected to announce changes to the way profits and losses from furnished holiday lettings are taxed, with effect from 6 April 2011. The proposals include increasing the number of days the property must be let per year from 70 to 140. Unless you manage to let your holiday cottage for the new number of qualifying days (expected to be 140) in 2011/12, it will be taxed just like any other let property. This means any loss you make on the letting can only be carried forward and set against a profit you make from your lettings business in the future.
5. Have the rules on Furnished Holiday Lettings (FHL) changed?
Historically, income from Furnished Holiday Lettings(FHL), in the UK has broadly been treated as trading income, with certain specified tax advantages, although it remains chargeable as property income. The rules are to be changed, partly to encompass the requirement to extend relief to FHL in the European Economic Area (EEA).
The law will be changed by the Finance Bill 2011 so that:

  1. FHL in both the UK and EEA will be eligible as qualifying FHL within the (revised) special tax rules. This is the current situation but is not within the legislation
  2. The minimum period over which a qualifying property must be available for letting to the public in the relevant period is increased from 140 days to 210 days in a year with effect from April 2012
  3. The minimum period over which a qualifying property is actually let to the public in the relevant period is increased from 70 days to 105 days in a year with effect from April 2012
  4. Losses made in a qualifying UK or EEA FHL business may only be set against income from the same UK or EEA FHL business (existing rules allow set-off against general income)
  5. A ‘period of grace’ will be introduced to allow businesses that do not continue to meet the ‘actually let’ requirement for one or two years to elect to continue to qualify throughout that period

Payroll/ Employees

1. My PAYE tax code shown on my payslip, P45 and P60 is 647L, but HMRC website say it should be 747L, which is correct?
The personal allowance for individuals aged under 65 for the tax year 2012/13 (which ends on 5 April 2013) is £8,105. If you have no deductions to set against your personal allowance your tax code for 2012/13 should be 810L. The standard personal allowance for the tax year 2011/12 (from 6 April 2011 to 5 April 2012) was £7,475, so your tax code for 2011/12 was 747L.
2. I work through my own UK company that has secured a 8 week contract to be performed in Germany. I plan to stay with my relative in Germany while working on that contract. As I won’t have receipts from a hotel, what can I claim as expenses?
HMRC set benchmark scale rates for business trips in most countries. These cover costs for accommodation, meals, and other sundry expenses known as the residual rate. Your company can reimburse your expenses at the benchmark scale rates without receipts. However, if you are staying with a friend or relative and do not pay for accommodation or meals you can only reclaim 10% of the residual rate for the area. Where you pay for some meals (e.g. lunch) you should claim the specific meal rate or the actual expense supported by receipts. On top of these expenses you can also claim personal incidental expenses of £10 for every night that you are working abroad.

Company

1. Is it better for me to set up a limited company?
There is no simple answer to this. It really depends on what your aim and goal is. But carefully consider the following:

    • Set up proceedures
    • Tax and NI to pay
    • Record keeping and responsibilities
    • Financial and personal liability
    • Financing the business
    • Management and control

There are many structures you can choose to do business. If you are not sure which best suits your business and personal needs, you can get advise from us.

2. What is my company’s responsibilities for tax?
Companies pay corporation tax on their profits. This is currently at 20% for small companies (generally means if profits below £300,000) and 24% for large companies.
3. What other responsibilities does my company have?
The company must prepare and submit its annual accounts to Companies House and its tax return together with its accounts to HMRC nine months and one day after its year end. If not done, you could face financial penalties as well as a fine.

Residency and Tax

1. How do I work out if I am resident in the UK?
In order to be liable to UK income tax, an individual must either be resident in the UK or else have a source of income derived from the UK. Generally, if an individual is resident in the UK, he is taxable in the UK on his worldwide income wherever it arises; a non UK resident will however, only be liable on his UK income.It is therefore important to establish the meaning of residence.

  1. Residence.
    You are UK resident in any year in which you spend more than 183 days in the UK.
    You are resident if you are regularly in the UK for more than 91 days. HMRC consider each year and the average number of days spent in the UK over the last four years. (You may ignore some days spent in the UK, for example, dealing with family bereavement)
    From 6th April 2008 each day that an individual is physically present in the UK at midnight will be counted as a UK day, therefore days of departure are not counted. Prior to 6th April 2008 both days of arrival in and departure from the UK were ignored.
    You may be treated as being UK resident if you owned or leased accommodation in the UK for three years or more.
    You are resident if, when you came to the UK, you intended to remain for two years or more.
    You can be resident in another country at the same time as being resident in the UK
  2. Ordinary Residence
    There is no legal definition of Ordinary resident.
    Broadly it denotes more permanent residence that the term “resident” (above).
    If you are resident year after year you are “ordinarily resident”.
    In any year you may be ordinarily resident but not resident, or
    In any year you may be resident without being ordinarily resident If you have already lived in the UK for three years or more, then you would normally be regarded as ordinarily resident.
    If you have lived in the UK for less than that it does not mean that you are not ordinarily resident, an individual can become ordinarily resident from the first day they arrive in the UK
2. What is Domicile??
There are many tests for Domicile and there is no legal definition.
You cannot be without a domicile.
You can only have one domicile at a time.
Your existing domicile will continue until you can prove you have another one
You normally acquire your domicile of origin from your father, it need not be the country in which you were born
Your domicile of origin can be replaced by your domicile of choice. This will be the country in which you live if you can show that you intend to stay there.
Other factors in determining a domicile of choice will include your intentions, your business interests, your social and family interests, your ownership of property, the form of the Will that you have made.
You will have difficulty in displacing a domicile of choice after living in the UK for seventeen years.

3.What is my residence status in years of arrival or departure from the UK?
  1. Residence
    An individual who comes to the UK to take up employment that is expected to last for at least two years will be regarded as resident only from the date of his arrival.An individual arriving in the UK for a period expected to last less than two years “especially if he only lives in temporary furnished accommodation” will only be regarded as resident in the UK in any tax year in which he spends more than 182 days in the UK.

    An individual leaving the UK permanently or taking up full time employment abroad will only be deemed to be resident up to the date of his departure.

  2. Ordinary residence
    As stated above, individuals who came to the UK with the intention of remaining in the UK for at least two years but who had no clear intention of remaining in the UK for at least 3 years, would have been regarded at not ordinarily resident form the date of their arrival. They would remain Resident & Not Ordinarily Resident until the beginning of the UK tax year following the third anniversary of their arrival unless they formed an intention to remain in the UK for a period of at least 3 years prior to this date.HMRC 6 which replaces IR 20 with effect from 6 April 2009, confirms a change in approach. It now states that individuals who have been regarded as Resident & Not Ordinarily Resident and who are still in the UK on the day after their third anniversary of their arrival, will be regarded as Resident & Ordinarily Resident from the beginning of the UK tax year in which the third anniversary of their arrival falls.

    This is an important change as this reduces by one year the period that relevant individuals will be able to claim “Overseas Workday” relief in respect of earnings attributable to any duties performed outside the UK.

4. What happens if I am only temporarily absent from the UK in full time employment abroad?
If an individual leaves the UK to take up a full time employment overseas then providing the absence for the employment includes a complete tax year the individual is by ESC A11, treated as not resident and not ordinarily resident from departure until return. Visits to the UK during such a period must not break either the 183 day or the 91 day average rules.
5. Do I need to advise HMRC if I am leaving the UK?
You will need to notify HMRC of your departure from the UK and what your future intentions are. There are various forms that you may need to complete depending on your circumstances. This will enable them to determine your residence status and how any future liabilities will be calculated.

6. What about if I am returning to the UK?
Again, HMRC will need to be informed of your arrival and there are specific forms to be completed. These will ensure that any UK income is taxed correctly according to your circumstances.

7. How are earnings taxed in the UK?
Your earnings are taxed in the UK depending on your residence and domicile status. You should be aware that all earnings in the UK will be taxed in the UK regardless of whether you are regarded as resident or not unless the work undertaken is incidental to your work overseas.

If you are resident in the UK, you will be taxed in the UK on all your worldwide earnings.

There are occasions when you may be able to get tax relief on overseas workdays. However you should be aware that there are a number of important conditions which need to be met. In particular, you must not remit these earnings to the UK otherwise they will become taxable.

8. What is Remittance basis?

UK residents are normally liable to UK tax on the whole of their worldwide income arising and gains accruing in a tax year – the arising basis. The remittance basis is available to UK resident individuals who are not domiciled here or not ordinarily resident. It provides for foreign sourced income (including republic of Ireland) and gains to be charged to tax by reference to the extent to which they are remitted to or receive in the UK. Where remittance basis applies it allows the taxpayer to defer tax on income or gains that have arisen until amounts in respect of the income or gains are received in the UK. There is no time limit between the income or gains arising and the receipt in the UK.
The remittance basis is available on relevant foreign income, employment income and capital gains. It is up to UK individuals who are UK resident but not domiciled or not ordinarily resident to decide whether they wish to be taxed on remittance basis for each tax year. Those eligible will be able to choose from one tax year to another whether they wish to be taxed on this basis.
This will not apply to those whose un-remitted income and/or gains for a tax year are less than £2,000. They will be taxed on remittance basis for that year automatically without the need for a claim.

Personal allowances

Under the new legislation those who make a claim to be taxed on the remittance basis (S809b) will lose their entitlement to various personal tax allowances. For income tax purposes this will include, personal allowance, blind person’s allowance, tax reductions for married couples and civil partners and payments for life insurance and for CGT the annual exemptions. This does not apply to individuals who are eligible to use the remittance basis without a claim in a tax year because their un-remitted income/gains for a tax year are less than £2,000 (S809c). They retain their entitlement to all these various allowances and reliefs

9. What happens if I rent a property in the UK while I am overseas?
If you are a non-resident landlord you must pay UK income tax on your UK rental income. You should also be aware that your tenant or your letting agent will need to deduct basic rate tax from your rental income. However by completing the relevant form and submitting this to HMRC you can obtain exemption from this, subject to certain conditions being met. Please be aware though that this application is only to stop tax being deducted at source from your rental income. If you are still liable to UK tax on this income, you will still need to pay this to HMRC via your self-assessment tax return.

Self Employed

1. I am working for my own business. What should I do?
You need to register as self employed with HMRC for income tax and national insurance contributions.
2. What tax and national insurance contributions will I pay?
As a self employed individual you are liable to income tax at different rates (between 20% and 50% income tax) depending on your profit. However, first £8,105 is exempt tax as this is your personal allowance for a year. You will also have to pay Class 2 NI at £2.65 per week. This is standard for all and payable no matter what your income is for the year unless your income is below £5,595 and you claim small earnings exemption. You will also have to pay Class 4 NI at 9% on your profits between £7,605 and £42,475.
3. What is the latest date for submitting my self assessment tax return?
31st October if submitting a paper return and 31st January if submitting your return online.
4. What happens if I fill my tax return in late?
You will be fined a £100 late filing penalty. A further £100 penalty is charged six months after the deadline if your return is still not filed. The Revenue can also request daily penalties of up to £60 per day. The £100 late filing penalty will remain even if your tax liability for the year is less than £100. However, the daily penalties will remain due irrespective of your final liability.
5. What expenses can I claim against my income to reduce my tax?
There are many expenses that can be claimed against taxable income. Everyone runs their business in a different way and they will usually incur some expenditure that is particular to them. The following list is not exhaustive but gives an indication of the general expenses that can be claimed by a self employed person:

    • Motor expenses.
    • Travel expenses.
    • Advertising.
    • Postage & stationary.
    • Computer consumables.
    • Bank charges on a business account.
    • Telephone/mobile phone charges.
    • Accountancy charges.

If you have expenses that are not on this list you may be able to claim them. Keep a full record of all expenses and discuss them with us. They may be tax deductible.

6. I bought some clothes for work. Can I put this expense through my accounts?
Yes, possibly. If your clothing is protective or has a business logo embroidered on it, the cost of buying these items could be claimed. The clothing is clearly identifiable as work wear, and is “wholly and exclusively” used for the business. You would not wear it other than for work. Cleaning costs may also be shown in the accounts. However if you bought ordinary, everyday clothing from, say, BHS the answer is “No”. Under current legislation these items are regarded as having a dual purpose. You could wear them outside of work. They would therefore not be classed as tax-deductible expenses.
7. Can I pay my partner to reduce my tax bill and if so how much?
Paying your spouse or partner is possible but rules apply. Where a spouse or partner has little or no other income there may be tax advantages in paying them for their assistance in running the business. It is fairly common. However, this has to be treated in exactly the same way as you would any other person working for you.
The wages have to be for actual work done; the wages have to be physically paid and the rate of pay must match the duties performed. In order to justify any such payments, it may help to create a job specification first. Simply list the tasks that are involved, making appointments, doing the bookkeeping, arranging tests etc. Then you need to establish the market rate for such a job. How much would you have to pay someone else to do these tasks for you? Keep a simple diary note of the hours worked per week, then make regular payments via cheque for the wages due in relation to the hours worked. As mentioned above, you need to pay the going rate for the job. If this exceeds either £96 per week or £419 per month you may need to operate a full payroll scheme, which would need to be registered with HMRC. If you do set up a payroll there may have advantages as your spouse or partner could receive some much needed National Insurance credits. It is recommended that you speak to your accountant before you make payments to ensure you do not breach of rules. Whilst speaking to your accountant you should also ask about forming a partnership to help reduce your tax bill – it may be a better option than specifically paying your spouse / partner.
8. What records should I be keeping for HMRC in case of a tax investigation?
You should keep comprehensive records with supporting receipts. Anyone who has undergone an investigation will know that HM Revenue & Customs can spend months looking through your records, asking probing questions and wanting what might seem as meaningless information about your business affairs. This can be both time consuming, stressful and very expensive, not just in terms of tax but in terms of lost lessons due to the time spent dealing with any investigation. Prevention is of course better than cure. One recommendation is to have a separate business bank account. If a credit card is preferable, then again, separating business and personal transactions into two separate cards could be helpful. Separating your business and personal life will not only help your accountant but it will also help in the event of an HMRC investigation. There are three general forms of transaction to record:

    • Bank transactions, including payments from and deposits into the bank.
    • Cash payments and receipts
    • Credit card payments

When deciding on how to record these transactions provision should be made to identify which receipts / payments are cash, bank or credit card. For cash receipts, it is important to identify any cash not deposited in the bank but used for sundry cash expenses or general living expenses. Personal drawings from the business should also be easily identified. One area HMRC looks at is funding of personal expenses. If you have separate business and private accounts, either make transfers between accounts or write yourself a cheque from the business account. Mileage records are also important. Even if you use your car almost exclusively for business some form of record should be kept to validate this. HMRC are keen to challenge business mileage where records are not complete. Given that a high proportion of your mileage will be business related, one method is to record your car’s total mileage at the start of your accounting year and only record your private journeys made during the year.
At the end of the accounting year, work out the total mileage and deduct the private mileage. The difference is your business miles. If you do not have sufficient evidence to support your business expenses then an investigation can mean an increased tax bill. HMRC may also make similar adjustments to the previous years tax bills, add on interest charges and impose penalties. Please also bear in mind that bookkeeping records and supporting receipts should be retained for 5 year 9 months after being submitted to HMRC.