Use
of Home as Office
For
a self employed individual, where part of the home is used by their
business, they may be able to claim a deduction for the costs relating
to that use.
The
part of the home being used by the business must be used SOLELY for
business use. If part of a room is used for business and the rest
of the room is being used by the rest of the family at the same time,
then there is a duality of purpose for electricity, rate, heating
etc and none of those costs are allowable.
Once
you are happy that a claim can be made for use of home as office,
the claim needs to be quantified. You need to look at how much of
the area of the property is being used and what period of time that
area is being used for. This will impact on any appointment of rates,
electricity, gas/heating, insurance, mortgage interest, rent, repairs,
cleaning and water. Any costs directly attributable to the business
assets will be completely allowable. Any costs based on usage such
as internet or telephone must be apportioned on the percentage of
the business and non-business use.
Certain
expenses need to be reviewed before any apportionment can be made
such as repairs (only repairs which have some link to the business
use can be apportioned, so redecoration of a room not used for business
is not allowable), cleaning (again this must include the business
area) and water (water must be used by the business before any apportionment
is allowable).
Where
the business use is small, HMRC will not require further details for
what they call a reasonable estimate of the associated costs. A reasonable
estimate is likely to be £104 a year (£2 a week). Once
you exceed this figure, further analysis is required.
HMRC
give the following example:
A sole trader uses a room in their house between 8am and midday on
weekdays. The room is also used between 6pm and 10pm by the family.
The room represents 10% of the total area of the house.
Cleaning,
insurance, rates and mortgage interest (fixed costs) total £6,600
per annum. One tenth of this cost would be £660. Only 4 hours
a day are used in the room so 4 hours / 24 hours of the £660
is allowable (£660 x 4/24) = £110
Total
electricity (a variable cost) for the year is £1,500. Part of
this is for heating, lighting and power to the computer. Again 1/10
of this cost is £150 but this cost is apportioned by usage so
4 hours / 8 hours are allowable (£150 x ½) = £75
In addition
the sole trader uses the telephone to connect to the internet for
research purposes. If the internet costs are on a fixed monthly charge
then the proportion of the business time over the total time used
in the month could be claimed. If the internet costs are based on
actual usage, then the actual cost relating to the business use can
be claimed.
Additionally,
the itemised phone bill shows that a third of calls made are business
calls. Therefore the cost of those calls plus one third of the standing
charge can be claimed.
The
rules for claiming use of home for employed individuals are much stricter
and a claim is more difficult as, in addition to wholly and exclusively,
the expenses must be incurred necessarily in the performance of duties.
Finally,
it should be remembered that if a room in a home is set aside exclusively
for business use (a claim above for a room used 100% of the time for
business would imply exclusive business use) then principal private
residence relief for capital gains tax is likely to be denied on that
proportion of the property.
For
the amounts involved, it is not recommended that any VAT be reclaimed
on any home costs unless those costs are exclusive to the business
( such as a separate internet or phone line).
Travelling
from home to work.
If
you are employed:
There
are numerous legal cases establishing the principle that employees
cannot claim the cost of travel between home and their normal place
of work. H M Revenue & Customs consider this cost merely puts
the employee in a position to perform their duties. The definition
of employee in the examples that follow includes salaried directors
of private limited companies.
Exceptions
to this general principle, that home to work travel costs cannot be
claimed, are outlined below:
Travel
costs from home to a temporary workplace can be claimed - a temporary
workplace can be a place of continuous work for up to 24 months, if
this period is likely to be exceeded from the start, then the workplace
would be considered permanent from the start and no relief would be
due. (Note: If it isn't known that the contract will exceed 24 months,
then relief will be due up to the 24 month point, or up to the point
when it is known that the 24 months will be exceeded if earlier.)
A temporary workplace is one where less than 40% of working time is
spent; if this is the case, the 24 month rule doesn't apply and relief
will be available in full.
Travel
between two places of work required by the same employer.
Travel
to attend an appointment required by an employer. This cost is allowed
even if the journey starts at home.
Travel
between home and work where home is a workplace and the location of
home is dictated by the requirements of the job.
If you are self-employed:
Many
self-employed business people have set up their businesses to run
from their home address. If you are self-employed you can claim for
any travel expense which is required by your trade as long as the
business element can be separated from any private element. For instance
you may use your car for a trip into town to bank your business cheques
and call at the supermarket on the way home.
To meet
the HM Revenue & Custom's requirement of reasonable care in apportioning
such costs, you must keep appropriate records. For car users this
would normally be a written log of business miles and a record of
the vehicles recorded mileage at the beginning and end of each trading
year. In this way an accurate assessment of average business use can
be calculated and applied to total running costs.
And
don't forget, if you run your business through a limited company you
are not self-employed. The comments in the first section of this article
would apply to your business.
What
happens to your pension fund when you die?
The
quick, or perhaps not so quick answer to this question can be found
in the small print of your pension fund rules and regulations. The
tax position and the practical answers tend to fall into the following
broad headings.
Up to
age 75 you will have a degree of flexibility in the way in which you
choose to take benefits from your fund. After age 75 you will be required
to crystallise your fund - draw an income from your fund or buy an
annuity. Interestingly after age 75 you also lose the right to take
a tax free lump sum.
Usually
you can crystallise your pension fund from age 50 (until 5 April 2010),
55 after 5 April 2010. Once you have crystallised your fund, then
in the event of your death before age 75 your dependents have two
choices:
. your
spouse, civil partner or other dependants can use your fund to provide
a pension. Any pension received would be taxed as earned income in
the usual way, or
. your
beneficiaries could elect to take the entire fund less a tax charge
of 35%. (If you die before you have crystallised your fund, there
would be no tax charge.)
Once
you have taken an annuity (i.e. you have purchased the right to a
guaranteed income for the rest of your life) when you do die the right
to the income ceases unless:
. the
annuity provides for a guaranteed minimum period of payment and part
of that minimum period is unexpired, or
. the
annuity provides for a spouse or civil partner's pension.
In all
cases once an annuity is purchased the right to recover any of the
pension fund surrendered is lost.
After
age 75 the situation is a little more complex!
If an
annuity is purchased the above comments still apply. However it is
possible to take an alternatively secured pension, an ASP, This provides
for an income, a pension, but does not require you to part company
with your pension fund. If you die whilst taking an ASP the following
choices apply:
. the
fund may be used to provide a pension for a spouse, civil partner
or other dependent, subject to tax.
. on
the subsequent death of the spouse, civil partner or other dependent
the fund can be passed to a charity with no tax charge.
. if
the fund is not passed to a charity it is subject to inheritance tax
(at 40%). The residual 60% then remains unallocated. The legislation
is unclear on how the unallocated fund can be used or indeed how long
it remains unallocated. However if the pension scheme rules allow,
it may be possible to add additional members and benefit them accordingly.
So the
answer to the question, what happens to your pension fund when you
die, is complicated. If you need clarification regarding your own
scheme have a word with an Independent Financial Advisor, who we can
recommend. If you need advice on the tax consequences we would be
happy to take a look for you.
Important
Information for company & LLP officer
(These
notes apply whether or not your company or LLP is trading)
Accounts
& Annual Returns
1. On
1st February 2009 the Late Filing Penalty regime changed. The man
changes are:
All penalties to be increased to take account of inflation since 1992
Penalties for companies/LLPs who file more than one month late to
increase at a faster rate
Any company/LLP which files late having also filed late in the previous
year to attract a double penalty
For
late filing penalties levied from 1st February 2009 the new penalty
table is:
How
late are the accounts Private Co/LLP Public Co
<
1 month £150 £750
1 Month - 3 Months £375 £1500
3 months - 6 months £750 £3000
6 Months < £1500 £7500
Currently
when accounts are filed just prior to a filing deadline, but are found
to be unacceptable, companies & LLPs get a 14 day concession from
the date of rejection to re-submit acceptable accounts without incurring
a penalty. Please note that from 1 October 2009 this concession will
be removed.
2. All
limited companies & LLPs must deliver accounts to the Registrar
of Companies for each individual accounting period. Filing periods
for account beginning on or after 6 April 2008 have been reduced to
9 months for private companies & LLPs & 6 months for a public
company. The filing period for first accounts also changes accordingly
- 21 months from incorporation for a private company & LLP &
18 months for a public company.
3. Directors
& Designated Members risk a criminal record, fine & disqualification
if they do not ensure that documents are delivered on time.
4. In
addition, each company must also deliver an annual return to the Registrar
each year. The safest & most secure way is to use the Companies
House online filing service.
For
further advice call 0161 655 2000 & ask for the tax department
or
contact us via the website.
Paternity
leave extension deferred
The
UK Government had planned to give fathers the right to claim up to
6 months paternity leave from April 2010. Because of the economic
slowdown, they have decided not to bring the changes in that soon.
As a result fathers are still only entitled to two weeks leave which
is usually taken immediately after the baby is born.
The legislation is already in place to give the extra leave but it
will not be implemented until the economy can cope.
Mothers and adopters were also going to have the right to additional
statutory pay (up from 9 to 12 months) but it looks as though this
is also on hold.
The
legislation in more detail:
The
Work and Families Act 2006 already allows regulations to be made that
would permit working fathers to take up to 26 weeks of paternity leave,
some of which can be paid, if the mother returns to work before the
end of the one-year maternity leave period to which she is entitled.
The
new provision would be available during the second six months of the
child’s life, so in effect, fathers would be able to ‘share’
some of the maternity leave which is currently only preserved for
the mother. The entitlement would also extend to couples who are adopting
and to partners and civil partners of mothers.
A Government
spokesman has now said that the Department for Business Enterprise
and Regulatory Reform is continuing to review the appropriateness
of all new regulations due to come into force in the current economic
climate and as a result, a date has not yet been announced for extending
paternity rights.
At the
same time, the Government had proposed to extend statutory maternity
pay and statutory adoption pay from nine to 12 months (to coincide
with the period of maternity and adoption leave) and it looks as if
this is also on hold
Buy
or lease to equip your business?
Should
you buy or lease the major items of equipment and vehicles yourequire
for your business? There are pros & cons to both. This year’s
reform of capital allowances, which give tax relief for equipment
purchases, may alter your decision.
From
April 2008, you can claim immediate tax relief on up to £50,000
a year that your business spends on buying any type of plant and machinery,
including many fixtures in buildings and vans, though not motor cars.
The
£50,000 annual investment allowance (AIA) is proportionately
reduced if your accounting period started before April 2008. For example,
a company with an accounting year starting on 1 January can claim
the AIA on up to £37,500 in 2008 (9/12 x £50,000). Purchases
in the two years before April 2008 qualify for the old first-year
allowances of 50% for a small business and 40% if your business is
medium-sized.
The
AIA favours the purchase of equipment. However, if you do spend more
than the AIA, the excess will only qualify for writing down allowances
at 20%, instead of 25% before April 2008. A hybrid rate of writing
down allowance will be applied for accounting periods straddling 1
April 2008. 20% is also the current rate for most cars. Tax relief
for purchases will therefore take longer.
If you
lease, you cannot normally claim capital allowances unless the agreement
is effectively a hire purchase contract. But the lease rentals are
an allowable expense, though relief is restricted on leasing payments
for a car costing more than £12,000.
Of course,
tax is not the only consideration. If you buy outright, you will usually
pay less overall than on a leasing agreement, but youmay need to borrow
the money to make the purchase, which could be costly in itself. Leasing
could tie you into long-term agreements that might be difficult to
terminate, but buying could leave you with equipment that you might
not need in the future.
If
you are planning to buy or lease major equipment, please talk to us,
and let us help you understand the costs.
Unfair
Dismissal - Don't Get It Wrong
You
may have had to cope with a whole host of personnel-related issues
over the years, and almost certainly played it by the book. However,
even experienced employers can get it wrong. Here is a case in point.
Pushing
the boundaries
An employee's
performance and attitude were deteriorating and so she was spoken
to by her manager. Six months prior she had suffered a miscarriage
and although distressed had returned to work and appeared her usual
self. Another 'pull your socks up' chat ensued three days prior to
her announcing she was pregnant again.
Now,
not only was her work rate particularly slow, but her punctuality
was wanting.
She worked part time on Friday, Saturday & Sunday but booked all
her ante-natal appointments for Fridays. This was apparently the only
time her midwife was available. She would arrive at work at 9am, and
then leave at 10am for her appointment and not return until lunch.
At the time there were eight people working at various times, so her
absence at such short notice caused significant issues. Furthermore,
when she had time off due to sickness, she failed to produce a sick
note, maintaining that her doctor refused to until she had recovered!
She
was written to by her employer on numerous occasions but never responded
and even when disciplined failed to react.
After
yet another bout of sickness, she was asked to attend a 'return-to-work'
meeting. This was not a disciplinary hearing and was never described
as such. When questioned by her boss regarding her behaviour, she
simply sat smirking and produced a letter for her manager to read.
Although reluctant her boss finally agreed and left the office to
read this letter. On returning she told her employee that she did
not appreciate her accusatory tone and then sacked her!
In the
letter the employee made several allegations professing that she had
been discriminated against because of her sex and pregnancy. Her boss
had been pushed to the limit and on returning to the meeting was unable
to think rationally. But by dismissing her without following a procedure,
the damage had already been done.
The
employee as expected claimed unfair dismissal and discrimination.
With regard to the unfair dismissal the employer was guilty as charged
and acknowledged this. However they strongly denied any discrimination
or victimisation. Sadly, they were confronted with a real issue here
as they had stated that they never intended to dismiss her at the
meeting and it was the allegations towards them that pushed the boss
to do so. The tribunal considered the letter to be the reason for
her dismissal and she won.
TIP:
This above case proves how vital it is to not allow emotions to impede
decision making. Always stick to the correct procedures, even if it
pains you to do so!
Overdrawn
directors loan accounts
If you
are a director it is contrary to the Companies Acts, except in specific
circumstances, for you to borrow money from your company. Ironically
there are no fines payable if you break this particular aspect of
company law! However there are a number of tax consequences, two of
which are outlined below.
Benefit
in kind
If
a director's loan is overdrawn by more than £5,000 (you owe
the company money) you will be deemed to benefit from this arrangement
and suffer a benefit in kind charge as a result. This charge can be
avoided if you allow the company to charge you interest on the overdrawn
position. The rate of interest charged needs to be at the official
HMRC rate or higher. This will of course increase the amount you owe
if simply charged to your loan account and will potentially increase
the company's taxable profits.
Corporation tax
If
the overdrawn position continues for more than 9 months after the
end of a relevant accounting period your company's corporation tax
bill will be increased by 25% of the loan amount. For instance if
the company year end was 31 December 2007 and at that time the overdrawn
director's loan amounted to £20,000, and this amount was still
outstanding at 1 October 2008, you would have to pay over an extra
£5,000 in corporation tax at that later date. This Section 419
liability could be reclaimed if the loan was subsequently repaid -
the tax paid would actually be repaid 9 months after the accounting
year end, during which the loan repayment occurs.
Beating
recession and the credit crunch
We seem
to be coming to a break point in a long, sustained period of growth
in the UK. It's as if someone had pushed a button and notched up the
incline on the running machine - all of a sudden more effort is required
to sustain forward momentum. We need to get financially fitter!
Part
of this fitness regime needs to be a fresh look at the tax and VAT
strategies that are available to slow down payments to the taxman.
It's
beyond the scope of this article to give detailed advice, as each
business will have different needs. What we have done is outline in
general terms some of the strategies that are available - if we have
not reviewed your tax affairs recently do call and make an appointment.
VAT
The
legislation that sets out the way in which you calculate the VAT to
pay each quarter offers a number of opportunities to ease cash flow.
-
Cash Accounting - if your VATable turnover is under £1.35m
and you are not using cash accounting, now would be a good time
to switch. A few companies will not benefit, especially if you are
paid for the goods or services you sell at point of sale, a retailer
for instance. If you sell goods on credit and you are usually owed
more than you owe (to suppliers etc) cash accounting would probably
reduce at least the first payment you make when you join the scheme.
Essentially you only pay VAT when it is collected from customers.
Outputs and inputs are based on monies received and paid, rather
than amounts invoiced.
-
Flat rate scheme - another of the special schemes offered to small
businesses is the flat rate scheme. If your turnover is under £150,000
and you have small amounts of input tax to reclaim each month, this
scheme may increase your retained profits. Each business sector
suffers a different rate of VAT so the only way to see if this scheme
would be beneficial is to crunch the numbers.
Even if you don't qualify for a special scheme, don't forget to
claim bad debt relief. Any debt that is over 6 months old qualifies
as a bad debt and you can reclaim the output tax you will have paid.
(Note: the flip side also applies. If you have invoices unpaid from
your suppliers more than 6 months old, you should repay any input
tax you have claimed!)
It is
also worth filing your VAT return online. You are given an extra 7
days to file the return and if you pay your VAT by direct debit the
payment will not appear on your bank account for a further three days.
Making
losses, or less profit.
One
of the more obvious effects of recession is a downward trend in profit
creation, and if your business is badly affected, making losses. The
notes that follow set out a few ideas for capitalising on the tax
planning opportunities this affords.
-
Self assessment payments on account - if your current years profit
is likely to be lower than the previous year, you may be able to
elect to reduce the payments on account for the current year. The
claim should be based on realistic trading results.
-
Losses - if your business is currently making losses it may be possible
to carry these losses back to previous years, when you may have
paid significant tax. Any tax overpaid as a result can be reclaimed.
-
Change of accounting date - in some circumstances it may be beneficial
to either extend or reduce a company's accounting period end to
make use of a fall off in profitability. There are limitations to
this type of planning so careful consideration of the facts is required.
Need
more time to pay
Generally
speaking if you are late paying your tax or VAT, interest and in some
cases penalties will be applied. If you can justify the reasons for
your inability to pay it is usually advisable to contact HMRC and
agree a payment timetable that your cash flow can afford. Burying
your head in the sand is not a useful strategy!
If your
business is starting to feel the pinch, pressure on profits and cash
flow, do keep in touch. As mentioned at the beginning of this article
each business is unique and there are a number of strategies we have
not had the space to showcase in this article. Please call if you
need help.
Declining
with the recession
Advice to counter the present economic climate
The
economy is uncertain and risk is ever increasing; many people have
never encountered the rocky ride that they are currently facing.
Experts say this is only the beginning - a result of many years
of virtual stability and economic growth with low interest, consumer
demand, available finance, and property growth. The situation is
rapidly changing with-
1.
Pressures from customers to cut what they perceive as discretionary
spend
2. Personal and business credit tightening but rising prices
3. Simplifying of credit assessment and funding by banks and lenders,
but reduced access to money
4. Supplier payment terms being stretched resulting in difficulty
getting paid
None
of these factors are new. They simply come faster and thicker when
the economy is uncertain and combined can swiftly weaken confidence,
stretch cash flow and be a hidden time bomb.
Businesses
at a higher risk in these circumstances are those with-
1.
Dependence on one/very few customers and suppliers
2. Poor or unstructured communication - resulting in a perception
of poor service or lack of control with key customers, suppliers,
backers etc
3. Disaffected or de-motivated staff who are not looked after.
4. Weak structures that have not been examined for change (too much
debt payable short term, high fixed costs that could be made more
flexible etc)
A
drop in confidence understandably occurs when the economy is in
recession. Seeking practical advice and support from financially
experienced people can help put these difficult issues into perspective
and divert the risks.
Key
Tips:
1. Act, confront the truth and do not constantly defer difficult
decisions
2. Stay alert; do not assume you can just trade out of problems
- work out solutions and options to problems so you can discuss
remedial actions with creditors and banks - deals can be negotiated
3. Cash is king; businesses fail without it so treat it as the most
important tool in your business
4. Do not hold old stock, it ties up cash; discount it out and turn
over to new and relevant stock that customers want now- but do not
discount prices unnecessarily
5. Be open with your trusted advisors and treat them as a partner
so you can get the best of other people's experience and contacts;
listen to ideas as they may produce unexpected leads
For
further advice call 0161 655 2000 or contact
us via the website.
