Tax

Tax relief on wear and tear of furniture – let property

Posted by: edwinsmith on August 2nd, 2013

Dwelling houses that are let are excluded from claiming capital allowances on the cost of furniture and furnishings but there are some tax reliefs available to cover the cost of wear and tear of furniture, chattels (including white goods) etc if it is a furnished let property.

If letting a furnished property there are two alternative ways to claim tax relief for the cost of furniture: an annual wear and tear allowance; and the renewals basis – the replacement cost of an item. You need to decide which basis to use when calculating the expenses for the first period of let. Once chosen you cannot switch between the two methods. If you are a landlord with more than one furnished let property then the basis used on first letting will determine the treatment on your other properties. An outline of the alternative tax reliefs is detailed below.

Wear and tear allowance

The wear and tear allowance that may be claimed when calculating rental profits is 10% of rents received less any rates (or rent) paid. If rents received in tax year £10,000 and no rates paid then an allowance of £1,000 can be claimed. If rates paid of £1,000 then £900 may be claimed (£10,000 - £1,000 X10%).

You cannot claim repairs or replacement costs of furnishings. Therefore no deduction can be claimed on items replaced such as living room suite, beds, carpets, curtains, linen, crockery, cutlery, washing machine, cookers etc. This is not a definitive list and some judgement needs to be used on whether the item replaced could be classified under furniture, furnishings and chattels.

However the costs of replacement or repairs to integral parts of the building such as windows, kitchen and bathroom fittings can be claimed as a tax deductible expense. Care needs to be taken on whether the repair constitutes an improvement in which case it would be deemed a capital expense and therefore not deductible against rental profits but this area will be outlined in further detail in a later online article.

In order to claim the wear and tear allowance it is important that the conditions to be classified as a furnished property are met. The dwelling must have sufficient furniture, furnishings, and equipment for normal residential use and although no specific list of items are given for this purpose it should include bed, chairs, table, fridge and cooker.

Renewals basis

An alternative to wear and tear allowance is to claim the actual cost of renewing furniture, furnishings and chattels. The amount allowed is the actual cost of the replacement excluding any additions or improvements and after deducting the scrap value or sale price of the items replaced. The cost of the original items is not expenditure on renewals and is not allowable.

This relief, compared to wear and tear allowance, is more difficult to manage in terms of records to be kept and the relief is delayed until items are replaced. Tax relief tends to be obtained earlier using the wear and tear allowance but would be dependent on individual circumstances.

Please contact us if you require further advice concerning tax implications of let properties.

Filed under: Self Assessment, Tax

The ‘My tax return catch up’ campaign

Posted by: edwinsmith on July 31st, 2013

HMRC has recently released details of its latest campaign which has been termed the ‘My tax return catch up plan’. Being similar to last year’s tax return initiative, it encourages late self assessment filers to get up to date.

If you are behind with your affairs and wish to take advantage of this latest campaign, you will need to:

Tell HMRC that you want to join;
1. Complete and submit all your outstanding returns; and
2. Pay what you or if you are lucky, claim the repayment you are owed.

I am behind but why should I take part?

If you are behind with your tax returns then you will be incurring penalties. If you take part in the campaign then you will increase your chances of obtaining a reduced penalty. By getting up to date you also avoid receiving an estimate of the tax you owe together with the associated telephone calls and court visits.

If you owe a significant amount in tax you may be able to spread the payments on agreement with HMRC.

HMRC has created a dedicated helpline on 0845 601 8818 which is open Monday to Friday 9am to 5pm.

How to take part

If you wish to take part, you will need to tell HMRC by completing a notification form. More details on the HMRC website.

Once you have made the notification, you will need to complete and submit your returns by15 October 2013.

Details of other campaigns can be found on our website. If you need any assistance with your tax affairs then please do contact us for a free initial consultation.

Filed under: HMRC campaigns, Self Assessment, Tax

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:

a refund of the PPI premiums paid
historic interest (interest paid by the customer on the PPI premium if it was added to the loan or credit card)
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

Inheritance Tax – Gifts made from income as part of normal expenditure

Posted by: edwinsmith on July 12th, 2013

Following on from the previous online article Inheritance Tax – Make use of lifetime exemptions, further information is detailed below to explain the rules concerning gifts made from income.

Gifts that are made as part of the donor’s normal expenditure, if accepted, will be exempt from Inheritance Tax (IHT) and it is possible that significant tax savings can be obtained from this type of gift if it is supported with information to meet the following criteria:

1: The gift must form part of the donor’s normal expenditure;
2: It must be made from the donor’s income; and
3: It must leave the donor with sufficient income to maintain their normal lifestyle.

In order to meet the first criteria you must show that the gift is part of the donor’s settled pattern of expenditure (habitual gifts rather than special) and not irregular amounts or to various individuals. This can be established by keeping a record of expenditure over a period of time (see below) or the donor making a commitment and thereafter complying with it.

The type of gifts made from income can include:

Monthly or other regular payments to someone;
Regular gifts for Christmas, birthdays or wedding /civil partnership anniversaries; and
Regular premiums on a life insurance policy for you or someone.

The donor’s income in the second criteria must not include capital but will include income after tax such as earnings (employed/self employed), pensions, and property income etc.

The third criteria means that after making the gift, the donor must be left with enough income to maintain their normal standard of living. As everyone has different lifestyles then you will need to establish the normal living expenses in order to assess the surplus income that was available at the time gift was made. If you do not have sufficient income for normal expenditure and you reduce capital to meet these living costs at the time of the gift then the exemption will be lost.

In order to obtain this type of gift exemption, it is important that a record is kept of income and expenses and there is a specific IHT form 403 which includes a schedule for this purpose. This form is usually for the executors etc. to complete but is a useful schedule if planning to reduce Inheritance Tax, as it will assist you in keeping sufficient records over a period of time to show these gifts were made out of income and obtain IHT exemption.

It would be advisable to seek professional advice in this area so please contact us for any of your IHT planning needs.

Filed under: Inheritance Tax, Tax

Inheritance Tax – Make use of lifetime exemptions

Posted by: edwinsmith on July 5th, 2013

Some basic inheritance tax (IHT) planning can save substantial amounts of tax. Everyone when they die is able to leave assets free of tax with a value up to the Inheritance Tax threshold (nil rate band) of £325,000 for 2013-14. This threshold is currently frozen until 2017-18. If the value of your estate exceeds the nil rate-band then you will be subject to tax at 40% on the excess.

Gifts made to individuals will be exempt from Inheritance Tax as long as you live seven years after making the gift. If you die within the seven years then the gift maybe subject to Inheritance Tax. These gifts are known as Potentially Exempt Transfers (PETS).

If you give an asset away at anytime but still retain an interest in it, then the gift will not be a potentially exempt transfer (PET).

Some gifts are exempt from Inheritance tax even if made within seven years of death. One way to reduce the tax liability is to make full use of these lifetime exemptions or gifts. The following transfers available to tax payers which are exempt from inheritance tax are detailed below:

Annual exemption - £3,000 can be given away each year and be exempt from Inheritance Tax. Any unused part of the £3,000 exemption can be carried forward to the next year but only for one year. If you don’t use the carried forward amount in that year then the exemption expires.

Small Gifts Exemption – small gifts up to the value of £250 to any one individual can be made per tax year - these small gifts are not counted towards the annual exemption but you can’t use small gifts allowance together with any other exemption when giving to the same person. You can’t give more than £250 and claim that the first £250 is a small gift and if you do the small gift exemption is lost altogether.

Gifts to charities and UK political parties – Gifts can be made to charities and political parties free of inheritance tax. It must be a qualifying charity established in the EU or other specified country. The UK political party must have at least two elected members to the House of Commons or one elected member (with the party having at least 150,000 votes). Certain national institutions such as museums, universities and the National Trust may qualify for exempt IHT gifts.

Gifts to your husband, wife or civil partner – Gifts to spouse or civil partner can be made exempt from Inheritance Tax as long as they have a permanent home in the UK.

Gifts on consideration of marriage – Wedding or civil partnership ceremony gifts that are made on condition of marriage/civil partnership agreement can be made free from Inheritance Tax with the exemption amount dependent of donor’s relationship with the couple as follows:

£5,000 - gift from parent

£2,500 - gift from grandparent or remoter ancestor (great grandparent)

£2,500 – gift from bride/groom to each other

£1,000 - gift from anyone else

In order to obtain the exemption, the gift must be conditional and be made (or the promise to make gift) on or shortly before the marriage ceremony.

Gifts from normal income– regular gifts that are made from income (after tax), such as earnings and pensions, which leaves enough income for your normal life style are exempt from Inheritance Tax. This does not include gifts made out of capital. Further information will be provided in next online article.

Gifts for family maintenance – These include maintenance payments for:

Your husband, wife and civil partner

Your ex spouse or former civil partner

Relatives who are dependent on you because of old age or infirmity

Your children, including adopted and step- children who are under 18 or in fulltime education

Please contact us if you would like further advice on all aspects of IHT planning.

Filed under: Inheritance Tax, Tax

Employer payrolled benefits and P11d forms

Posted by: edwinsmith on June 21st, 2013

Employers can make arrangements with HMRC to payroll benefits in kind. This means that benefits in kind and expenses would be put through the payroll for employees. The employees would then be taxed in ‘real time’ rather than be taxed at some future time via their PAYE tax code or if applicable through their self assessment form.

In practice the cash equivalent of the benefit in kind would be calculated on an annual basis and split over 12 months if employee paid monthly or 52 weeks if paid weekly and the appropriate amount added to the payroll.

This can be done for all benefit in kinds or the employer can choose specific benefits to be payrolled which can be agreed with HMRC.

Employers making payrolled benefits still need to complete and submit P11d forms and will be liable to penalties if forms not submitted. Detailed below is an extract from HMRC on the steps to take when submitting forms - HMRC - P11d forms

If all benefits have been payrolled and P11ds filed online.

notify HMRC that you will be sending P11Ds for directors or employees where payrolling has taken place in that year, in order to avoid incorrect processing of the data - there's an HMRC online form payrolled benefits you can use to do this or you can telephone HMRC's Employer Helpline.
complete the 'amount made good or from which tax deducted' boxes (where this box is available for the relevant benefit).
complete the P11D(b) form as normal, ensuring that the total expenses and benefits provided are included irrespective of payrolling.

If some benefits have been payrolled for some or all employees and P11ds filed online.

complete the 'amount made good or from which tax deducted' boxes (where this box is available for the relevant benefit).
submit P11D information, either online/electronically or on paper for non-payrolled benefits.
submit P11D information, either online/electronically or on paper for payrolled benefits, where the benefits that have been payrolled have a corresponding entry for 'amount made good or from which tax deducted'.
submit separately on paper, P11D information for other payrolled benefits - these separate P11Ds and lists must be clearlymarked 'PAYROLLED' .
complete the P11D(b) as normal, ensuring that the total expenses and benefits provided are included, irrespective of payrolling .

Benefits have been payrolled for some employees and paper P11ds.

clearly mark all relevant paper submissions 'PAYROLLED', whether they be individual P11Ds or in list format .
complete the P11D(b) as normal, ensuring that the total expenses and benefits are included, irrespective of payrolling .

Please contact us if you require any further advice on payrolling benefits in future or completing p11d forms.

Filed under: Benefits, Employers, PAYE, Tax

Stamp Duty on Shares and Completion of Stock Transfer Forms

Posted by: edwinsmith on June 14th, 2013

If you buy shares (unless the shares are bought electronically) then you will need to complete the stock transfer form J30 and since 5 April 2012 there has been a new version of the form.

If you buy shares valued above £1,000 using a stock transfer form then unless the share transaction qualifies for a relief or exemption then you will need to get the form stamped by HMRC and pay stamp duty. Stamp duty is charged at the rate of 0.5 % of the value of chargeable consideration.

The stock transfer form should be sent with the payment to HMRC for stamping within 30 days of the effective date of transfer to the address detailed on following link HMRC Applying to get stock transfer form stamped which has further details on payment methods and information to provide. Penalties and interest may be charged for sending the form late.

If you buy shares for £1,000 or less then you don’t have to tell HMRC about the transaction. Normally no stamp duty will be payable on the transaction. However you do still need to complete the stock transfer form with the usual information (detailed below) together with following.

Making sure the first exemption certificate is completed on the back of the form (if you have not paid anything for shares then certificate does not need completing).
Send the stock transfer form and old share certificate to the registrar of the company shares bought regardless of how much paid - it would normally be the registered office address of the company.

When completing the stock transfer forms there are two certificates on the back of the form that need to be considered. The front page will need completing with all the details of the sale including consideration, buyer, seller and date of transfer. There are two certificates on the back of the form.

Certificate 1 – This should be completed if the consideration you give for the share is £1,000 or less and the transfer does not form part of a larger transaction or series of transactions that exceed £1,000.
Certificate 2 – The second exemption certificate should be completed where the transfer exempt or the consideration given is not chargeable consideration. Exempt transfers include transfers in connection with divorce or dissolution of civil partnership HMRC - Stamp Duty reliefs or exemptions and how to apply
No certificate is needed if no consideration is paid for shares or a claim for relief from stamp duty is being made. If claim for relief then details of claim needs to be sent to HMRC with stock transfer form (see HMRC link above for reliefs).

Please contact us for further advice on stock transfers and form J30.

Filed under: Tax

PAYE Settlement Agreements (PSA)

Posted by: edwinsmith on June 7th, 2013

Are you preparing your P11d forms for 2012/13? Have you incurred expenditure on an annual event(s) for your employees but went over the threshold of £150 per head for tax exemption and you do not want your employees to suffer tax on the event? If so, a PAYE settlement agreement may be for you.

What is a PAYE settlement agreement or PSA?

A PAYE settlement agreement or PSA is a flexible scheme an employer can use to settle any PAYE tax and NICs due to HMRC on three groups of expenses and benefits:

Minor items: e.g. a small present for an employee in hospital or an employee's use of a pool car where the conditions for tax exemption don't apply; or
Irregular items: e.g. expenses of a spouse occasionally accompanying an employee abroad, or relocation expenses in excess of the £8,000 tax exemption threshold; or
Impractical items: e..g items where it is impracticable to operate PAYE on or determine a value for P9D or P11D purposes, such as shared benefits (like shared cars or taxi journeys, for example) that are difficult to attribute to individual employees.

If HMRC agrees to include an expense or benefit in a PSA, you will not have to include the item on an employee's form P11D or P9D and pay Class 1A NICs on the item at the end of the tax year, or put the item through your payroll to work out any PAYE tax or Class 1 NICs due. Read more ›

Filed under: Employers, National insurance, PAYE, 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

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