Topic: Uncategorized

HMRC has published a list of popular misconceptions that taxpayers have about letting property. We have listed below a summary of situations where you will need to declare rental earnings to HMRC:

• If you inherit property and let it out.
• If you buy a property as an investment and let it out.
• Divorcing partners, who decide to let out their jointly owned property, will need to declare their share of any rental profits on their individual tax returns.
• You may move to a new house due to employment considerations and let out the house you are moving from.
• You may move into a care home and let out your present home to help pay for the fees.
• You may buy a property for your son or daughter to use while at university, and they may sub-let to friends on an informal basis and charge a nominal rent, which you use to defray costs. Any surplus monies received from this sort of arrangement will still need to be declared.
• Moving to tied accommodation can create problems if you keep your existing home and let it out. If the rents you receive cover your mortgage repayments (capital and interest) you may consider that you have not made a profit, but the capital part of your mortgage repayments are not an allowable deduction for income tax purposes.

Also, watch out for the effects of the changes to the rules for repairs and finance costs (interest) that we have covered in recent issues.

If you are concerned that you may be required to declare your rental income, and you have not yet done so, we can help. There is a tried and tested process to bring matters up-to-date. Please call for more information.

If you use standard VAT accounting – pay VAT on sales when invoiced and claim back VAT on purchases when invoiced – you may have availed yourself of the six months claim for bad debt relief on unpaid invoices. This would have allowed you to claw back VAT paid to HMRC on invoices that are more than six months old and still unpaid.

This is a welcome relief, as it returns to your bank account VAT you have paid to HMRC, but never received from your customer.

Unfortunately, this is not the whole story.

As indicated above, you will also need to take a careful look, prior to completing your periodic VAT return, to see if there are old invoices in dispute on your purchase ledger – invoices that you receive from suppliers. If they are more than six months old you will have to pay any VAT input tax you have previously claimed back to HMRC.

Accordingly, vetting your sales and purchases in this way should be part of the process you undertake before submitting a VAT return.

An alternative approach to VAT accounting may be available to you. If your turnover, before VAT, is £1.35 million or less, you could change to the VAT cash accounting scheme. Using this scheme, you will only pay output VAT, or claim back input tax, when payment is received from a customer or paid to a supplier. This generally works best if your business is consistently owed more from its customers than it owes to suppliers.

Please call if you would like more information about the VAT special schemes, or help more generally with completing your VAT returns.

If your employment requires that you obtain and maintain membership of a professional organisation, you can make a claim to set the cost against your taxable earnings for income tax purposes. As you would expect there are a few hoops you will need to jump through to claim this relief. They are:

• You must have the professional membership to do your job or if membership helps you with your work.
• You can only claim back subscriptions to organisations approved by HMRC.
• You cannot claim back fees for life membership subscriptions.
• You cannot claim subscriptions you have not paid yourself, for example, your employer has paid them for you.

To see the full list of professional organisations and other learned societies that are approved by the tax office visit this page on the GOV.UK website:

https://www.gov.uk/government/publications/professional-bodies-approved-for-tax-relief-list-3/approved-professional-organisations-and-learned-societies

If you are a client, and registered to submit a Self Assessment tax return, we can provide you with a statement that you can use as evidence of earnings for mortgage purposes.

If you are not a client, there are many ways you can obtain this data direct from employers and other sources. For example, you could use the following as evidence of earnings:

• A P60 from your employer, you should receive this on or before the 1 May following the end of each tax year.
• Alternatively, you can contact HMRC and request a tax year overview. This will take approximately two weeks to arrive so you should possibly request this information before you apply for your mortgage or loan.

If you submit your own tax return using HMRC’s online portal, you should be able to download and print the evidence you need.

The evidence of earning that you should request from HMRC is called an SA302. You should be able to obtain copies for up to four years in this format.

1 September 2017 – Due date for Corporation Tax due for the year ended 30 November 2016.

19 September 2017 – PAYE and NIC deductions due for month ended 5 September 2017. (If you pay your tax electronically the due date is 22 September 2017)

19 September 2017 – Filing deadline for the CIS300 monthly return for the month ended 5 September 2017.

19 September 2017 – CIS tax deducted for the month ended 5 September 2017 is payable by today.

1 October 2017 – Due date for Corporation Tax due for the year ended 31 December 2016.

19 October 2017 – PAYE and NIC deductions due for month ended 5 October 2017. (If you pay your tax electronically the due date is 22 October 2017.)

19 October 2017 – Filing deadline for the CIS300 monthly return for the month ended 5 October 2017.

19 October 2017 – CIS tax deducted for the month ended 5 October 2017 is payable by today.

31 October 2017 – Latest date you can file a paper version of your 2017 Self Assessment tax return.

We are often asked by self-employed clients to explain why their tax bills are high in proportion to the amount they withdraw from their business as “wages”.

In truth, the self-employed do not take a wage, this would imply that the cost of their “wages” is a deduction for tax purposes, and this is not the case. What happens is that self-employed traders draw down against the profits they have made, after any tax and NIC charges have been deducted.

On this basis, a thrifty self-employed person may find that their annual income tax bill is a significant amount if compared to their annual drawings from the business.

For example, if your profits are £75,000 this will create a tax and NIC bill of almost £23,000. This would leave after-taxed profits of £52,000. You now have a choice: to take less than £52,000 as drawings and retain the difference in your business, or, withdraw the £52,000. If you can manage on an annual draw of say £30,000 this would leave £22,000 in your business, but your tax bill would almost be as high as your drawings.

Of course, there is a third choice, you could draw more than your after-tax profits as drawings. Commercially, this is not a good idea especially if you have no retained profits to draw against, in effect you would be on a one-way road to insolvency.

However, if you have built up capital reserves over many years, and they are no longer required to finance future trading, or if you are winding down, it is perfectly fine to withdraw these funds. Drawing on retained profits from past years will not create additional income tax liabilities, the profits you are drawing against are already tax paid.

Planning for profit withdrawal is often overlooked by self-employed business owners. If you have never considered these issues before we could help you adopt a strategy that suits your goals.

The government has proposed a wide-ranging ban to prevent pension scams. The consultation listed the sorts of phone conversations that the government intends to fall within the scope of the ban. These included:

• offers of a ‘free pension review’, or other free financial advice or guidance
• assessments of the performance of the individual’s current pension funds
• inducements to hold certain investments within a pensions tax wrapper including overseas investments
• promotions of retirement income products such as drawdown and annuity products
• inducements to release pension funds early
• inducements to release funds from a pension and transfer them into a bank account
• inducements to transfer a pension fund
• introductions to a firm dealing in pensions investments
• offers to assess charges on the pension

The government intends to work on the final and complex details of the ban on cold calling in relation to pensions during this year. This will ensure, according to government sources, that we get draft legislation to ban cold calling in relation to pensions right. The government will bring forward legislation when Parliamentary time allows.

In the consultation, the government also proposed limiting the statutory right to transfer:

• transfers in to personal pension schemes operated by firms authorised by the Financial Conduct Authority (FCA)
• transfers in to authorised Master Trust schemes
• transfers where a genuine employment link to the receiving occupational pension scheme could be evidenced.

The government therefore proposes to require all new pension scheme registrations to be made through an active company, except in legitimate circumstances, where HMRC will be given discretion to register schemes with a dormant sponsoring employer. This requirement will extend to existing pension schemes if they are registered with a dormant sponsoring employer, with the same discretion so that HMRC can decide not to de-register a scheme in legitimate circumstances. This change will be legislated for in a Finance Bill in 2017. The existing right of appeal if HMRC rejects a scheme registration will apply to this new requirement.

This is a question we are regularly asked by clients. Usually, the conversation is triggered when we discuss the end of year accounts.

Before we explain why profits are not always represented by cash in the bank, we need to define the term “profits”. Profits are the difference between what you sell and the costs associated with making those sales.

Consider Jeremy, who runs a small shop selling clothing. He started his businesses by introducing £5,000 of his own money and at the end of his first trading year his summarized results were as follows:

• Sales £100,000
• Goods purchased and sold in the year £60,000
• Other costs paid for in the year £15,000
• Stock at end of year valued at cost £7,000
• Drawings for personal use £16,000
• Bank balance £7,000

His accounts show profits of £25,000 (This is made up of sales of £100,000, less cost of goods sold of £60,000 and less other costs £15,000).

So why, Jeremy asks, is there only £7,000 in his bank account?

The answer is that at the end of the year Jeremy had withdrawn £16,000 for his own private use and he had purchased £7,000 of stock that was unsold at the end of the year. We also need to consider that Jeremy introduced £5,000 of his own cash when the business started.

The reconciliation of his profit and the bank balance is therefore: Profit for the year £25,000, less personal drawings £16,000, less stock £7,000, plus own capital introduced £5,000, equals £7,000 – his business bank balance.

We can deduce from this explanation that to reconcile profit and cash flow you need to factor in receipts and payments that are not considered when calculating profit. In Jeremy’s case: his capital introduced, stock at the end of the year, and his personal drawings.

On the face of it, the rent-a-room relief is straight forward: if your gross rents from letting are not more than £7,500 in the current tax year, there is nothing you need to do, this income is free of tax; but beware the small print.

Gross rents are defined as the rental income you receive (before deducting expenses) plus any additional contributions you receive from your lodger towards: meals, cleaning, laundry or similar costs.

You cannot use the rent-a-room scheme if:

• The house where the room was let is not part of your main home when you let it.
• The room was unfurnished.
• The room was used as an office or for any business – you can use the scheme if your lodger works in your home in the evening or at weekends or is a student who is provided with study facilities.
• The room is let in your UK home and is let while you live abroad.

If your gross rents exceed £7,500 there are two ways you can work out how much tax is due.

1. Method one is to declare your actual profit on your tax return – rents less expenses.
2. Method two is to pay tax on the difference between your actual rents received and the tax-free limit of £7,500.

The best method will depend on amount of your rents and expenses. Whichever method produced the lowest taxable income is the one to use.

Although you are exempt from any tax liability if your gross rents are less than £7,500 (£625 a month), if your costs of letting the room are more than the rents you receive – in other words, if you make a loss – you may be better declaring your rents and expenses, method one above, as the losses may be carried forward and used in future years.

And finally, if you want to use method one or two, you must advise HMRC by the 31 January following the end of the relevant tax year. For the current tax year, 2017-18, you would have until 31 January 2019.

If you are unsure which is the best option for you to use, we can help.

Whilst it is possible to involve your children in your business, this is a strategy that should be approached with caution.

Giving shares in your company to minor children is perfectly possible, but any dividends that you pay to under eighteens will be treated as if the income belonged to the relevant parent. HMRC would invoke the settlements legislation to do this. You could employ an under eighteen-year-old son or daughter, but you will need to be mindful of commercial considerations. These would include:

• You would have to observe the minimum wage regulations.
• The hourly rate paid should be a commercial rate for work undertaken. It would be hard to justify paying your children £50 an hour to deliver leaflets.

Once your child reaches the age of eighteen more opportunities arise: the possibility of issuing shares and paying dividends, if your business is a company, may be possible. At present, this is a useful option, as the first £5,000 of dividend income is completely tax free. If appropriate, this may be an attractive way to provide a tax-free allowance to reduce the need to extend student debt for example.

If you operate as a self-employed trader, you will not be able to issue shares, but you could employ your son or daughter if you are mindful of the commercial considerations listed above.

However, whether self-employed or incorporated. there are issues that should be resolved before transferring or issuing shares, or employing offspring, not least, that you may be diluting your ownership of your business. We can help. Planning in this regard is best done prior to making any decisions to involve children in this way.