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Business use of home as office

Posted by: edwinsmith on July 26th, 2013

As many small businesses operate from home, costs can be incurred where it is possible to obtain tax relief against business income. Detailed below are the various methods that can be used in determining the allowable expense for sole traders, business partnerships and small companies.

Sole traders and business partnerships

Flat rate deductions – business use of home

From 2013/14 HMRC have introduced some fixed rate expenses that can be taken advantage of by sole traders and business partnerships. One of these relates to business use of home (These simplified expenses will be detailed in an online article next month).

The flat rate deduction can be used as an alternative to recording actual expenditure and apportioning business element. This rate includes all household running costs such as heat, light, power, telephone and broadband/internet costs and is based on the number of monthly average hours worked at home. The monthly rates are detailed below.

25 or more hours worked per month  - flat rate of £10 per month

51 or more hours worked per month  – flat rate of £18 per month

101 or more hours worked per month – flat rate of £26 per month

It would be advisable to review the business proportion of home telephone and internet costs before using the flat rates.

If a business does not wish to use the simplified expenses for business use of home, then where private use of telephone/internet costs does not form a significant proportion of the service use, HMRC will accept that the full amount of expenditure can be claimed. However business will need to use the normal statutory method of calculating the business use of home costs as detailed below.

Normal method calculating – business use of home

You can claim a proportion of the annual home costs such as insurance, council tax, mortgage interest, rent, water rates and running costs each year such as heat, light and power. You need to be able to justify the claim and the calculation would normally be based on the number of rooms used for business use compared with number of rooms in the house. You should also take into account the number of hours worked in the room at home. If only one room is partly used at home for business then there should not be any capital gains tax implications (loss of private residence exemption) but care needs to be taken if claims are made where there is sole use of a number of rooms for business use.

Small companies

Unfortunately directors working from home for small companies cannot claim business use of home costs in the same way as sole traders/partnerships’ working from home as these costs are not incurred wholly, exclusively and necessarily for their employment.

If considering charging a rent to company then in order to obtain the same effective treatment as a sole trader you would need to set up a rental agreement between the company and individual (director). The rent in effect would equate to the ‘business use of home’ costs and as long as rent did not exceed commercial arm’s length amount then rent would be allowed as deduction in arriving at taxable profits for corporation tax. The rent received by the individual (director) would need to be declared  in self assessment tax return but would be offset by costs calculated for ‘business use of home’ leaving a nil profit from the office rent.

Again care should be taken with the rental agreement to avoid any loss of private residence relief. The agreement should state that the home room/facilities are only let to company for specific hours in the week.

Employee/ (directors) allowable tax relief for household expenses

If you wish to avoid problems associated with charging rents then HMRC have agreed rates that can be used by employees or directors to claim tax relief on household expenses.

These expenses cover extra cost of gas and electricity to heat and light your work area and business telephone calls. You won’t be able to get tax relief on mortgage, council tax, telephone line rental or Internet access. In order to obtain tax relief on land lines and broadband at home then it is important to have a designated phone line/broadband and the contract in the company name.

From 2012/13 the agreed HMRC rate for household expenses (without keeping documentation) amounts to £4 per week or £18 per month. For amounts above £4 you will need supporting evidence to show that the amount you are claiming is no more than the additional household expenses you have actually incurred.

The guideline rate for 2008-09 to 2011-12 was £3.00 per week and for 2007-08 it was £2.00 per week. For further details see HM Revenue & Customs: Tax relief for household expenses when working at home

Please contact us if you require any advice on expenses that can be claimed for business use of home.

Filed under: Employers, Self Assessment, Tax

Payment protection insurance compensation

Posted by: edwinsmith on July 19th, 2013

For the last few years, claims for mis-selling payment protection insurance or PPI have been common and are still ongoing. 

PPI is sold to those taking out loans or credit cards as protection against being unable to make the repayments. It includes those policies sold as an annual premium and added to the loan, and those paid on a monthly policy on credit cards for example. 

If you have been successful in making a claim, then you would have received a repayment. This could be made up of the following:

  1. a refund of the PPI premiums paid
  2. historic interest (interest paid by the customer on the PPI premium if it was added to the loan or credit card)
  3. simple interest at a rate of 8% per annum which is to compensate the customer for being deprived of the money they had paid to the firm for the PPI.

You should be notified of the basis of the payment and how it is made up. 

Why does this matter? 

It is often overlooked that the simple interest noted above is taxable and should be included on your self assessment tax return. Depending on who made the payment to you, this may or may not have had basic rate tax deducted and so you will need to check your paperwork. If there has been no tax deducted, then depending upon your circumstances you may need tell HMRC. 

Higher rate tax payers will need to pay additional tax on the interest and if no tax was deducted at source then all tax payers will need to pay additional tax.

If you complete a self assessment tax return then you will need to include this on your return.

If you do not complete a tax return then you will need to contact HMRC and declare the additional income in writing (or this may be accepted over the phone).

What if it was a business loan? 

If the PPI was paid on a business loan and tax relief claimed on those premiums, the refunded PPI premiums will need to be included in your accounts together with the interest which will also be taxed. The refunded premiums will increase your profits and will be taxed in the normal manner.

What to do now?

If you received a refund in 2012/13, then you will need to include it on your next tax return or write to HMRC soon.

If you received the refund in an earlier year, then you will need to amend your return.

If you are not in self assessment, then you will need to write to HMRC to make the disclosure.

If we complete your return for you, you will need to tell us about any claim and we can then establish the taxable element and ensure you return is complete.

If you have any questions then please contact us .

Filed under: Self Assessment, Tax

Phishing emails increase in the tax credit renewal season

Posted by: CarolineMeredith on May 28th, 2013

HMRC are warning of an increase in phishing emails in the run up to the tax credit renewals deadline. Phishing emails usually promise money back and ask you to click a link which takes you to a replica website. Credit or debit card details are requested together with other personal and sensitive data.

This can often lead to identity theft and / or money taken from bank accounts.

HMRC have confirmed that they will never ask you to disclose personal or payment details by email. Suspect emails should be forwarded to phishing@hmrc.gsi.gov.uk and then deleted.

If you believe you may have acted upon this type of email, then you should report the matter to your bank or credit card issuer as soon as possible.

HMRC have provided a list of the emails and messages that may be sent out on the website and so if you are unsure, then check this list first. You can also contact us.

Filed under: PAYE, Self Assessment, Tax

Private residence – relief from capital gains tax

Posted by: edwinsmith on April 22nd, 2013

Private residence relief is available for capital gains tax on the disposal of your own home if you satisfy both of the following two conditions for the whole time you have owned it (subject to any restrictions below applying):

  1. The property has been your only home or main residence
  2. You have used it as your home and nothing else

 

This relief may also be available if you sell part of the garden without selling your home at the same time.

If you do not satisfy both the above conditions then you will need to work out the period of ownership for the purposes of calculating the relief. This commences on the later of the date of purchase or 31 March 1982, and ends on the date of disposal. As long as the property has been your only or main home at some point during your period of ownership, the last three years (36 months) always qualify for relief even if you did not live there in that period. From 6 April 2014 this has been reduced to 18 months for the final period of ownership - . Other periods of absence from the home may qualify for full relief, if for example you have been working away from home in certain circumstances or were unable to take up residence within the first 12 months of ownership.

There are restrictions to the relief if:

  1. The garden or grounds, including the site of the house, are larger than 5,000 square metres
  2. Part of the home has been exclusively used for business purposes
  3. You have let out all or part of your home – but you may qualify for letting relief
  4. The main reason you bought it was to make a profit from a quick sale

 

The maximum amount of letting relief due is the lower of:

  1. £40,000
  2. the amount of private residence relief due
  3. the amount of the gain arising by reason of the letting

 

If you have two or more homes, a nomination can be made to HMRC advising which property is to be treated as the main home as you are only entitled to private residence relief on one home. Nominations must be made within two years of the date from which you change the number of properties you live in. Each time you change the number of properties you live in a new nomination should be made. If a nomination is not made HMRC will decide which property to treat as your main home based on the facts.

The above is a brief summary of relief. Further information can be obtained from HMRC website or if you require further help please contact us

Filed under: Self Assessment, Tax

Registering for self-employment and national insurance

Posted by: edwinsmith on April 15th, 2013

If you have commenced self-employment you should register with HMRC as soon as you start business. This can be done online with HMRC. If you are taking on employees in your new business you can also register for a PAYE scheme at the same time as your online registration. 

The latest date to register is by 5 October after the tax year has ended so any self-employment which started in 2012/13 must be registered with HMRC by 5 October 2013. Normally, paper tax returns must be then be filed by 31 October after the end of the tax year or by 31 January after the end of the tax year if your return is done on line.  Any tax outstanding is also due by 31 January after the end of the tax year. For 2012/13 and assuming the return is done on line the tax return and payment of tax is due by 31 January 2014. If you register late you may incur a penalty. 

If you are self-employed you normally have to pay class 2 and class 4 national insurance contributions and you register for this when you register your business as above. 

Class 2 national insurance contributions are due at a flat rate per week, £2.70 for 2013/14. You can choose to pay your class 2 contributions either by monthly or six monthly direct debit, or you can pay in January and July in response to payment requests from HMRC which each cover a period of 26 weeks. Exceptions to class 2 NIC liability are detailed at HMRC along with further information.

Class 4 national insurance contributions are due on annual profits over a certain amount and are calculated and paid when calculating your annual tax liability. For 2013/14 the class 4 is calculated as 9% of annual profits between £7,755 and £41,450 plus 2% on profits over £41,450. Exceptions to class 4 NIC liability are detailed at HMRC along with further information. 

If you require further help please contact us

Filed under: National insurance, Self Assessment, Tax

Student loans

Posted by: edwinsmith on March 15th, 2013

Do you have a student loan but are not making loan repayments via your employer? Are your employment earnings less than £16,365 per annum from 6 April 2013 (£15,795 per annum from 6 April 2012) but savings income over £2,000 per annum? Are your self-employment earnings over £16,365 per annum from 6 April 2013 (£15,795 per annum previously)?

If so, your student loan repayments are calculated at the time you complete your self assessment tax return. You need to tick the relevant box on page 2 of your self assessment tax return and the student loan deductions are due by 31 January following the tax year along with your tax payment. If the relevant box is not completed then interest and penalties can arise from an incorrect return. The amount of student loan is calculated at 9% on relevant income above the starting limit above.

If you are employed with earning above the starting limit, £16,375, from 6 April 2013, then your employer should collect the repayments by deducting them from your salary each pay day. HMRC should tell your employer when to start the deductions from your pay and they will continue until HMRC notify your employer to stop. 

Student loan repayments are due to start on 6 April after you leave your course and once your income exceeds the starting rate limit. You can also make voluntary payments to the Student Loan Company at any time and regardless of your income level.

The Student Loan Company is only notified once a year of the loan repayments you have made through the tax system. If you are within two years of repaying your outstanding balance, the Student Loan Company should write to you and give you the option to continue to repay the loan through direct debits direct to the Student Loan Company rather than through the tax system. If this option is taken it reduces the chances of the loan being overpaid through the tax system.

If the loan is overpaid then you will need to contact the Student Loan Company for a refund rather than HMRC or your employer. It is therefore important to retain records of the student loan repayments made through the tax system whether by self assessment or by deduction by your employer.   

If you require further help please contact us

Filed under: PAYE, Self Assessment, Tax

Employed and self employed? Are you paying too much national insurance?

Posted by: edwinsmith on February 26th, 2013

If you are employed and also have a self employment you can avoid overpaying national insurance contributions by deferring some of your class 2 and/or class 4 national insurance contributions. 

You can apply to defer class 2 contributions if you expect to pay

  1. Both class 1 and 2 contributions in a tax year
  2. Class 1 contributions on weekly employment earnings of at least £797 in 2013/14 for the whole tax year, (£817 in 2012/13)

You may be able to defer your Class 4 National Insurance contributions if you can show that you're likely to pay too much in Class 1, Class 2 and Class 4 contributions. However, you will still have to pay class 4 contributions at the rate of 2% on any profits over the lower profits limit £7,755 in 2013/4, ( £7,605 in 2012/13).

Deferment applications should be done before the beginning of the tax year to which they relate. HMRC will accept late applications until the end of the tax year to which they relate. However, applications received AFTER the end of the tax year will only be considered for deferral of class 4 contributions. You have to re-apply for each tax year that you want to defer contributions and renewals for 2013/14 are currently being sent out. By 5 April 2013 you should submit your 2012/13 and 2013/14 applications.

You can obtain form CA72B for 2012/13 on HMRC website to complete. If your self employed earnings are lower than the small earnings exception limit of £5,595 you should complete form CF10.

If you require further help please contact us

Filed under: National insurance, Self Assessment

Capital expenditure and the 2013 Annual Investment Allowance

Posted by: edwinsmith on February 15th, 2013

The Annual Investment Allowance, AIA, was reduced on1 April 2012 for and 6 April 2012 for income tax from £100,000 to £25,000. The draft Finance Bill 2013 includes a measure to increase the AIA from 1 January 2013 for two years to 31 December 2014 to £250,000. The AIA enables small and medium size businesses to claim full tax relief on most plant and machinery. 

There are now two changes within a year so the transitional rules for businesses with a chargeable period that spans both dates above are complex. If your business is in this category then please contact us for more information. If your accounting period ended after 6 April 2012 and on or before 31 December 2012 please see our earlier article on how the changes in April 2012 affected your allowance. 

To determine the amount of the AIA available to a business, two calculations need to be performed. Firstly, a calculation to evaluate the overall maximum AIA that may be claimed for the whole period and secondly to evaluate any cap for expenditure incurred in each of the notional periods that the accounting period is divided into to take account of the different amounts of AIA. 

For periods ending on 31 December 2012, the transitional rules mentioned in our earlier article will apply. For businesses with a year end of 31 December 2013 the AIA will be £250,000. For businesses with an accounting periods ending in 2013 other than 31 December, the accounting period will be divided into two or three notional periods to make up the chargeable year:-

  1. Firstly, a notional accounting period beginning before1 April 2012and ending on 31 March 2012 / 5 April 2012 – period A
  2. Secondly, a notional period commencing on1 April 2012/6 April 2012 and ending on31 December 2012– period B
  3. Thirdly, a notional period commencing on1 January 2013 through to the end of the accounting period – period C 

 

For accounting periods divided into two notional periods, the maximum AIA will be calculated by taking the number of months in period B at the AIA rate of £25,000 and adding the number of months in period C at the AIA rate of £250,000. A cap will then apply for period B such that the maximum AIA is calculated as if the 2013 rate was not introduced, so that the rate of £25,000 applied for the whole period. There is no cap for period C other than the overall maximum.

For example a company with an accounting year end of 31 March 2013 will have a maximum available allowance of £81,250 (£18,750 for period B and £62,500 for period C). For any capital expenditure incurred in the nine months to 31 December 2012the allowance will be capped at £25,000. There is no cap for period C, the three months to 31 March 2013, subject to the overall maximum of £81,250. So a business which has purchased equipment costing £30,000 in the nine months to 3 1 December 2012 will only be able to claim an allowance of £25,000 for that period but will be able to incur capital expenditure of £56,250 in the three months to31 March 2013 if they wish to use their maximum AIA of £81,250 in full. 

These rules are based on the draft 2013 bill which has yet to receive Royal Assent so there may be some changes yet. The transitional rules for when the AIA reduces from 1 January 2015 will also be complex when the chargeable period straddles 31 December 2014and we will write another article on this at the beginning of 2014 assuming the reduction is not delayed to a later date. If you would like further information please contact us.

Filed under: Self Assessment, Tax

Pension payments before 5 April 2013?

Posted by: edwinsmith on February 8th, 2013

From 6 April 2011 the rules changed on tax relief on pension savings. The annual allowance, which is the maximum amount of pension saving that benefits from tax relief each year per individual, became £50,000 (£40,000 net of basic rate tax). If you have been saving in a registered pension scheme since 6 April 2008 and your pension savings were less than £50,000 per annum in any of the tax years since then, then you will have an unused annual allowance to carry forward from that year/years. Unused allowances can only be carried forward for three years so the unused allowance from 2009/10 will not be carried forward after 5 April 2013.  There is a strict order in which you use up your annual allowance. You use the current tax year annual allowance first, then use your unused annual allowance from earlier years, using the earliest tax year first.Hence, to use any unused allowance of 2009/10 you must have pension savings in excess of £50,000 for the current year. The annual allowance is set to reduce in 2014/15 from £50,000 to £40,000 together with the lifetime allowance.

If however, you have not been a member of a registered pension scheme in earlier years then you will not have unused annual allowance to carry forward.

Any member can make contributions up to the ‘basic amount’ of £3,600 (£2,880 net of basic rate tax). Contributions above this amount on which a member can claim relief in any tax year is subject to the member not exceeding the lifetime allowance, currently £1.5 million, and is the lower of:

  1. the amount of the individual’s relevant UK earnings (broadly salary, self employment and other earned income) that are chargeable to income tax for the tax year, and
  2. the annual allowance, currently £50,000 (£40,000 net of basic rate tax).

If you are self-employed, contributed into a pension scheme in 2011/12 and have made no contributions so far in the current tax year, then your payments on account for 2012/13 are based on your 2011/12 position. If your 2012/13 total income is similar to 2011/12 and you do not make a pension contribution by 5 April 2013 then you may have a large balancing payment of tax due by 31 January 2014 together with a higher payment on account for 2014/15.

Your pension savings in a tax year is the total of the increase in value for each scheme of which you are a member.

For personal pensions, the increase in value is the amount you have contributed in the period, grossed up to cover the basic rate tax added by HM Revenue & Customs (HMRC), for example if you pay £500 a month into a personal pension, this is grossed up to £625 a month and your pension savings for that scheme will be £7,500.

For workplace pension schemes, the value of contributions made by your employer is also included in your pension savings. Where the scheme is a money purchase/defined contribution scheme, the increase in value for the period is the gross amount you have contributed out of your pay together with amounts contributed by your employer. For defined benefits schemes, the amount of your pension savings is the increase in the value of your promised benefits over the pension input period ending in the tax year. The valuation is based on a notional ‘capital ‘ value broadly based on 16 times the amount of annual pension achieved to date and any additional separate lump sum . Your pension scheme administrator will be able to provide you with a pension savings statement if you think your savings will be over the £50,000 allowance.

Please note that your payment should be received by your pension saving scheme by 5 April to obtain tax relief in 2012/13.

There are a number of wrinkles in the general situation set out above that may apply in particular unusual situations, so you should always check with us before making decisions.

Filed under: PAYE, Self Assessment, Tax

Direct Selling Campaign – just a month to go

Posted by: edwinsmith on January 31st, 2013

The Direct Selling Campaign, as included on our news feed in September 2012, will close on 28 February 2013.

This campaign is focused on those who are selling directly to customers such as door to door for example. You might call yourself an agent, a consultant, a representative or perhaps a distributor and your selling may involve leaving brochures for later collection, demonstrating products in the home or at a party organised by the homeowner.

Even if you only sell to friends and family, it makes no difference. Tax may still be due on any earnings you generate.

Your disclosure and the payment of any tax must be made by 28 February.

HMRC are writing to direct sellers to make them aware of the campaign now. After the deadline, HMRC will start to make contact with those who did not come forward, where HMRC believe that they owe tax.

On 7 February, HMRC (@HMRCgovuk) is holding a live Twitter question and answer session between 1pm and 2pm.

If you know you need to make a disclosure under the Direct Selling Campaign, then complete the Direct Selling Campaign disclosure form today.  If you need any assistance or more advice on your own circumstances then please contact us.

Filed under: HMRC campaigns, Self Assessment, Tax
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