Income tax is payable on taxable income, such as earnings, pensions, investment and rental income. Individuals pay income tax each year, net of personal allowances and other reliefs they may be entitled to. The tax is payable at various rates depending upon your level of income.
Employees pay tax via the PAYE system before they receive their salary. Tax on benefits in kind is collected via a restriction to the notice of coding.
The self-employed generally make payments on account of their tax liabilities on 31 January and 31st July each year. Any balancing payment becomes due on 31 January following the year of assessment.
Some forms of income are exempt from income tax, for example, National Savings Certificate interest, interest on ISAs, income from Premium bonds and student grants/scholarships.
Self employment
If you are self-employed, you must keep detailed records. The information contained in financial statements and your accompanying tax return must be retained for a minimum of 5 years from the 31 January following the year of assessment.
Value Added Tax (VAT)
A person who is registered to charge VAT in the course of a business carried on in the UK charges VAT on the taxable supply of goods and services. They are able to claim the VAT back on the business expenses incurred.
There are currently three rates of VAT, being the zero rate, standard rate (17.5%) and the special rate (5%) for domestic supplies of power and fuel.
Quarterly VAT returns must be completed and submitted to Customs & Excise with any payments of VAT being made to them or repayments claimed from them. Small business can opt for annual accounting of VAT rather than quarterly.
Capital allowances
Capital allowances give a taxpayer relief for certain types of capital expenditure, as shown below.
Capital allowance rates
Plant & Machinery:
Normal rate at 25% and then reducing balance or straight line method.
First year allowance at 40%
Plant and Machinery with long life, capital allowance
at 6%, reducing balance method.
Motor Cars:
normal rate 25%, reducing balance method to a maximum of £3000.00 pa
Low emission and
electric cars:
100%, i.e. cars registered on or after 17th April 2002
Industrial Buildings &
Qualifying hotels:
4% of cost per year.
Agricultural buildings:
4% of cost per year
Scientific Research:
100%
Industrial Buildings
at enterprise zone:
100%
Corporation tax
Corporation tax is payable by UK resident companies and unincorporated associations on the tax adjusted profits that they make for each accounting period. There are various rates depending on the level of the profits.
A company is required to complete a self-assessment tax return form and submit this to the Inland Revenue one year after their accounting year end. They are also required to pay any corporation tax due 9 months and 1 day after the end of the accounting period. Large companies must make quarterly payments on account of their estimated corporation tax liability.
If a company has taxable profits of over £1.5 million it must pay its corporation tax quarterly under the self assessment rules for companies.
Inheritance tax
Inheritance Tax is relevant where an individual makes a gift resulting in a fall in value of their estate.
Depending on the type of gift, lifetime tax (currently 20%) may be payable by either the person making the gift or the person receiving it.
For some gifts, tax is not payable unless the donor dies within seven years of making the gift.
If inheritance tax becomes payable there are annual exemptions and various reliefs that may be available to set against any chargeable gifts.
Capital Gains Tax (CGT)
Capital gains tax is payable by individuals who are resident or ordinarily resident in the UK and who make a disposal of an asset in a tax year.
Not all assets are chargeable to capital gains tax. The main exemptions include your only or main residence, private motor cars, chattels bought and sold for less than £6,000, shares held in an ISA, gambling winnings etc.
There are various deductions to be set against the disposal proceeds of the asset(s). These include, the cost of sale, original cost of asset, current year capital losses, capital losses from earlier years, indexation allowance (if applicable), taper relief and annual exemption.
There are additional rules where part of an asset is disposed of, where there are losses brought forward or in the year of disposal and where assets were originally held before 31 March 1982.
Annual exemption
Everyone resident in the UK is entitled to an annual exemption to set against his or her total capital gains in the tax year. The rate for 2005/2006 is £8,500.
Payment of tax due on capital disposals
If there is a chargeable gain, after all allowable deductions have been made, tax will be payable on this amount at either 10%, 20% or 40%, depending on the taxpayers total income for the year. The liability will be due for payment on the 31 January following the year of assessment. For any gains in 2005/2006, the tax becomes payable on 31 January 2007.
news INCREASE ENQUIRIES BY HMRC - 15 / 01 / 2009 POWER TO REQUEST FILES AT A SHORT NOTICE
As we all know H M Revenue and Customs are becoming far more sophisticated in their selection of Enquiry cases. We are aware of several initiatives that target trades associated with the Construction Industry.
One such project looks at accounts where all or most of the sales are received under CIS. HMRC have details of all payments and can see if purchases have been paid for by the main contractor. In most cases the answer is negative as these are provided by the main contractor. Assuming a claim has not been made in the accounts there will not be a problem.
However we have seen a number of cases that fall into two distinct categories:-
Estimated Purchases
Some accountants think they are doing their client a favour by estimating a figure for purchases. This is fine if there are some non-CIS sales and the purchase figure is consistent with those sales. If not and the case is taken up for enquiry it will be difficult to justify the claim. We all have to prepare accounts from incomplete (or non- existent) records so it is imperative that any estimated expenses can be reasonably justified.
Actual Purchases
If purchases are all provided by the main contractor then it follows that none will be need to be supplied by the subcontractor. No matter what we do some tradesmen will work for cash, claim the expenses in their accounts but omit the income. However, it sticks out like a sore thumb when comparing the CIS vouchers with the accounts. So be vigilant when letting staff loose on preparing accounts for those in the building trade. Make sure that if there are purchases these are consistent with the income.
Tax and Finance Deadline - 06 / 06 / 2008 June 1:
Due date for payment of corporation tax for accounting periods ended 31 August 2007. Changes to the VAT ‘option to tax’ rules for land and buildings come into force. For full details, see VAT Information Sheet 03/08 VAT: Land and Buildings – New Schedule 10 of the VAT Act 1994 accessible via http://www.hmrc.gov.uk
June 7: End of the week of grace allowed by ESC B46 for the receipt of CTSA returns for accounting periods ended 31 May 2007.
June 19:
PAYE: Remittances for the month ended 5 June 2008 due. CIS: Return of payments to subcontractors for month ended 5 June 2008 due to reach HMRC.
June 30:
Accounts for private companies to 31 August 2007 and public companies to 30 November 2007 due to be received at Companies House.
July 1:
Due date for payment of corporation tax for accounting periods ended 30 September 2007. VAT: The £2,000 ceiling on corrections to errors in past returns is revised to £10,000 or, if more, 1% of turnover within the return period, subject to a maximum of £50,000. EU Withholding Tax: The rate of tax withheld from interest on offshore bank accounts increases from 15% to 20%.
July 6:
Forms P11D due to be received by HMRC. Copies should be supplied to the employees concerned. Payment of Class 1A NIC is due by 19 July.
July 7:
End of the week of grace allowed by ESC B46 for the receipt of CTSA returns for accounting periods ended 30 June 2007.
£2.7 billion for 10p
The chancellor has, as we all know, announced his intention of borrowing £2.7 billion to fund a £600 increase in the personal allowance, in order to compensate low income taxpayers for the increase they currently have to pay because of the abolition of the 10p tax band. This appears to have silenced his critics in the short term, but does in fact leave some people on relatively low incomes (between £6845 and £10505) worse off by up to £61. Meanwhile, most basic rate taxpayers have an unexpected £120 bonus. The Basic Rate limit reduces from £36,000 to £34,800. This effectively ensures that higher Rate taxpayers do not benefit from this exercise. The increased personal allowance will be reflected in PAYE codes from the end of September and this will generate a refund. Note however that anyone on a BR tax code will not benefit from the refund unless and until they are allocated a weekly/monthly tax code.
Tax credits
H M Treasury has published a consultation paper on the Tax Credit system, inviting comments by 5 September. We have already commented about the difficulty of providing final figures of profit for those who started self-employment in the final quarter by 31 January following, and members may wish to express their own views on problems with the system.
Fixed deductions for expenses Some fixed deductions for employees’ expenses are increased with effect from this year. These deductions need to be claimed in tax returns and are often incorrect in PAYE codes. The full table is in HMRC’s Employment Income Manual (http://www.hmrc.gov.uk/manuals/eimanual/EIM32712.htm).
One law for them … It has become evident recently that Members of Parliament are able to benefit from generous expense allowances for their second homes, without apparently having to demonstrate that their constituencies are outside reasonable daily travelling distance from Westminster Bridge. For the ordinary taxpaying employee who necessarily performs some of his or her duties at home, HMRC has raised the amount allowable in the absence of 4 specific vouchers from £2 per week to £3 per week from 6 April 2008. The manual suggests that strictly speaking holiday weeks should be disallowed. http://www.hmrc.gov.uk/manuals/eimanual/EIM32815.htm
Penalties As previously reported, a new penalty regime comes into force for SA returns for 2008-09 and for CT returns for periods beginning after 31 March 2008. HMRC has published guidance on the application of the new penalty regime at http://www.hmrc.gov.uk/about/new-penalties/index.htm
Backdated pensions
A pensioner who has lost part or all of an occupational pension due to the winding up of an underfunded superannuation scheme may be entitled to a payment under the Financial Assistance Scheme. The payment may relate to pension losses arising over a number of tax years. HMRC has confirmed that in such cases the payment will be taxed by reference to the rates for the years to which it relates and not treated as a single payment taxable in the year of receipt. http://www.hmrc.gov.uk/news/tax-treatment.htm.
Tax clearance for businesses
HMRC has a long-standing non-statutory clearance procedure for large corporations, where it will give its view on the tax treatment of a proposed or completed transaction where there is ‘material uncertainty around the tax outcome of a real issue of commercial significance to the business.’ This procedure is now extended on an experimental basis to businesses of all sizes, and ‘commercial significance’ is defined by reference to the size of the business and the impact of the ‘real issue’ on it. Where IHT is involved, the trial period is intended to run until 31 October 2008; for other taxes no closing date is currently fixed.
Residence and non-residence
HMRC have published an interim revised version of booklet IR20, incorporating developments since 1999. It can be downloaded from http://www.hmrc.gov.uk/pdfs/ir20.pdf. There will be a further revision to incorporate the Budget changes in due course.
Low income non-domiciles
The Chancellor appears to be unaware of the problems the new proposals for non-domiciled taxation may cause. Attention has concentrated on the wealthy, but the Low Income Tax Reform
Group points out that the proposals as drafted are likely to bring overseas students’ vacation earnings into the charge to UK tax. This may be somewhat theoretical, but the provisions could be used to charge tax, interest and penalties on a foreign student whose vacation earnings are already taxed in the country of origin, especially if some overzealous HMRC officer had a grudge against overseas students.
Changes to P46 procedure
From the start of this tax year it is no longer necessary for an employer to obtain a completed P46 for new employees with no P45 and earnings below the NIC threshold. Employers need to obtain the appropriate information from such employees and keep a copy of any documentation or a note of how the information was provided.
TAX CASES
Tomlinson v HMRC An appellant attempted to quash a Section 95 penalty. He had submitted a form R40 to HMRC on 6 April, and on the same day HMRC served notice to make a Self-Assessment return for the same year. They lost the R40 and in due course charged a penalty for failure to make the tax return. The High Court upheld the penalty on the grounds that a form R40 is not a selfassessment. The appellant was saddled with costs of £3,520 as a result of taking his appeal to Court.
Walsh v HMRC
This appeal concerned an enquiry case in which no evidence was offered and the agent who prepared the accounts and tax return was uncooperative. The Commissioners simply held that the appellant had failed to show to their satisfaction that the amendment to the return was excessive, and that it must therefore stand good.
McCall and Ors v HMRC
In this IHT appeal it was held that agistment (the letting of agricultural land for grazing) constituted a business of investment and not a business within the meaning of the provisions for Business Property Relief. There is a useful discussion of the meaning of the word ‘business’ and how it relates to Business Property Relief in the judgement.
Smith v HMRC
This enquiry appeal concerns unexplained bank deposits and the use of a company credit card for private expenditure. Its main interest lies in the fact that one of the assessments under appeal was described as a ‘jeopardy’ assessment; although the conditions for such an assessment did not exist the assessment was held to be valid.
Grace v HMRC
This case concerned the residence status of an airline pilot who owned a house near Gatwick Airport but was domiciled in South Africa and claimed to be resident and ordinarily resident there. His appeal was successful on the grounds that he only came to the UK for a temporary purpose (i.e. to carry out the duties if his employment) and had no other connection with this country apart from holding a British passport and having an estranged wife in the country. There is a useful discussion of the concepts of residence and ordinary residence, including a review of several earlier cases, in the judgement.
MKM Computing Ltd v HMRC
The Special Commissioner reviewed a number of relevant factors and concluded that on the balance of probabilities the legislation applied in this IR35 case.
Nelson Dance Settlement Trustees v HMRC
In this IHT case, the Special Commissioner held that Business Property Relief applies to the disposal of business assets where in a lifetime transfer the value of the business was reduced. http://www.bailii.org/uk/cases/UKSC/2008/000682.html
NATIONAL INSURANCE
Peter Arrowsmith’s Tip of the Month Since the introduction of Capital Gains Tax taper relief it has been good NIC planning to ensure that where land and buildings owned outside a company are used by that company in its trade full market rent is paid. Rent of course attracts no NIC liability unlike salary, nor the opprobrium that dividends attract. In fact the justification for paying rent is (apart from what follows) unassailable. The reason that this was not the case before taper relief was the restriction that applied for CGT retirement relief. Now the position has again reversed as the same restriction once again applies in the case of the new CGT entrepreneurs’ relief. Where there is any possibility that entrepreneurs’ relief will be required in the future the payment of rent should cease. If the rent is being paid under a lease or other formal, binding agreement that lease or agreement will need to be varied (with all the consequences that may ensue) – it will not be sufficient to merely stop the payment of rent. The position is not quite so clear cut as with retirement relief. If an individual has sold one business and used all their relief then started another business the question of entrepreneurs’ relief on the next disposal does not arise – unless the next chancellor increases the lifetime limit or reintroduces retirement relief! Similarly (as was the case with retirement relief also) if the disposal of the company shares alone is expected to use up all the available relief, there will be none available to use against the associated disposal of the separately owned land and buildings in any event – so rent could still be paid (subject to the usual crystal ball re future changes).
As the Finance Bill is presently drafted, the payment of rent before 6 April 2008 will also impact on the future entrepreneurs’ relief that will be available. Lobbying is taking place to remove this retrospective effect. Only time will tell whether there is any success on this point.
Budget 2008 Analysis - 17 / 03 / 2008 Comparing 2008/9 with 2007/8, we can see that the loss of the starting rate band leaves those with lower incomes considerably worse off. Many employed earners on low incomes will, however, receive more Tax Credits in 2008/9. A single person earning £10,000, for example, will receive an additional £372 in Tax Credits leaving them £265 better off overall. Where the employee is earning the second wage in the household, however, the tax increases may not be offset by Tax Credit increases and, in the worst case, someone with a salary of £7,455 could be as much as £158 worse off in 2008/9 (a lot of money to them). Those with moderate income are a little better off (but perhaps not in real terms when you take inflation into account). Those with a salary of £40,000 make a saving of just £9. This is due to the large increase in the upper earnings limit for National Insurance meaning that these people have to pay National Insurance at 11% on over £5,000 more of their salary than in 2007/8. In fact, there is a small band of salary level from £39,721 to £39,906 for which employed earners will be slightly worse off in 2008/9, with the worst affected on a salary of £39,825 losing £9. Self-Employed Earners The self-employed pay National Insurance at the main rate at 8% instead of 11%, In addition to the above taxes, most self-employed earners also have to pay Class 2 National Insurance, which is increasing from £2.20 to £2.30 per week from 6 th April 2008. Landlords For those whose income is derived solely from rental income, the tax burden over the next few years will will also increas dramatically The burden here is lower due to the fact that National Insurance is not due on rental income. Pension Income Pension income received by a person aged under 65 at the end of the tax year will suffer the same rates of tax as rental income in the previous table. As explained above, persons aged over 65 are benefitting from significant increases in personal allowances for 2008/9. The tax burden on a person aged between 65 and 74, but born on or after 6 th April 1935 (and not married to, or in a civil partnership . A large number of reforms to the system of capital allowances claimed by businesses are to take place from April 2008. Most of the changes apply to capital expenditure by companies on or after 1 st April 2008 or to capital expenditure by sole traders or partnerships on or after 6 th April 2008. The main changes are as follows: • The 50% first year allowance for qualifying expenditure by small businesses (or 40% for medium-sized businesses) will cease to apply.
