This topic can get quite complex. However it is useful to focus in on one point that is sometimes overlooked. This is the de minimis level for recovering input tax that relates to exempt supplies.
As you will probably be aware, life is quite simple for suppliers that make no exempt supplies. However where exempt supplies are made then input tax must be allocated to taxable and exempt supplies. This is done by first directly allocating input tax to exempt and taxable supplies that directly relate to these. You will then be left with a residual pot of input tax. You use the recovery % (discussed in another post) to apportion this pool.
Once this is done you will have a pot of input tax that relates to exempt supplies made up of directly allocated and apportioned. The de minimis rule says that if this is less than £625 per month on average (and is no more than 50% of all input tax) then this can be recovered even though it relates to exempt supplies.
An important point to remember when deciding on how much input tax can be recovered.
As always the above comments only lays out a broad overview of the de minimis test but should hopefully serve as a useful guide/reminder.
This is a very useful relief and this short note lays out the main workings.
This relief relates to Capital Gains Tax and specifically to any gain on the disposal of a taxpayer’s main private residence. However any loss is also not allowable (something that may have been relatively rare up until recently). The relief relates to the period of time that was actually occupied by the tax payer. As well as considering a time allocation where the property has been let out (you can ignore loggers) you may also have to consider a space allocation if part of the property has been let out.
However there are a number of cases of deemed occupation. This is where the tax payer may not actually be occupying the property but the time may be treated as if they were. The key times are i) where the taxpayer is absent for any reason for up to 36 months, ii) where the taxpayer is abroad due to his employment without limit and iii) where the taxpayer is working away from home (UK or abroad) due to their self employment or employment (UK only) up to 48 months. Each of these must have a period of actual occupation before and after it.
There are some other periods that may also be deemed occupation but the above are the main ones.
If you have more than one residence you should decide which one you wish to elect as your PPR. If not you may be left is a situation where HMRC decide for you and this may not be ideal.
One point to be specifically aware of is that as well as periods of occupation and deemed occupation being exempt, there is also a letting relief which can reduce any gain further where the property has been let out during periods of non occupation by the taxpayer. This is capped at £40,000 but may be lower under certain circumstances. However it is important to remember that this part of the relief is available.
Finally the last 36 months of ownership is always available for relief regardless.
Again the above is just a broad understanding of the key rules and, as always, the details of each case are very important. Where this relief applies to you then you should ensure that you take proper advice but hopefully the above serves as a useful guide.
Sometimes it can be quite difficult to decide whether an item is charged to VAT or not. Clearly for complex matters, or issues that you are unsure of, you should always consult your accountant but it is useful to have some understanding of the way in which VAT is charged.
It is often said that VAT is the simplest of taxes and in principle this is true but it is in the underlying detail that makes VAT fiendishly difficult. However as a starting point in deciding whether an item is subject to VAT or not your first port of call could be the VAT Act 1994 and seek out schedules 7A to 9. These will act as checklists and cover reduced rate, zero rated and exempt items.
You should be aware that there is no definition in the legislation for standard rated items. So you must check the above schedules and if the item is not there then there is a very good chance that it is subject to standard rated VAT. Watch out however as you can’t take the list at face value, you must read the detail to properly understand it. For example schedule 8 zero rates food but there are a number of excepted items i.e. items that are standard rated and these are excluded from the main zero rating. Then to make things even more confusing there is a list of items that override these excepted items i.e. they would be zero rated under the general principle but are standard rated as they appear on the excepted items list but are then turned back to zero rated again as they appear on the list of items overriding these excepted items.
The layouts are logical but can be tricky to follow. However they will give you a good grounding for a more detailed conversation with your accountant on their application or may even just help clarify a specific point that you have in mind. Again I hope this brief articles helps a little. More will follow.
Many small businesses will have come across the idea of capital allowances. These play a very important role in tax planning and in mitigating your tax bill. Here is a very quick overview of one aspect of capital allowances i.e. capital allowances verses depreciation and what’s the difference (more aspects of tax will be covered in later postings in this series).
When a business owner or an individual speaks to their accountant the idea of capital allowances will nearly always arise. The easy way of thinking about this is that capital allowances are HMRC’s equivalent of depreciation. In general the taxman does not accept depreciation as a tax reducing item. However they do accept capital allowances. Your accountant will allows take the depreciation charge out of your trading accounts before adjusting for capital allowances. However you can’t look at this as being a bad thing. For many businesses the capital allowance system brings significant benefits e.g. much faster relief for capital spends. Depreciation is meant to spread the cost over the useful life of the asset, say 3 or 5 years. Capital allowances can, in many cases, offer must more favourable treatment e.g. with the introduction of the Annual Investment Allowance in April 2008 immediate relief could be obtained for £50k of capital spend in many cases. This rose to £100k in April 2010 and now, that hard times have fallen, the taxman has reduced this to only £25k. This still offers a far better treatment than depreciation and £25k can cover a lot of capital for many small businesses.
This has been a brief overview of capital allowances verses depreciation and we hope it’s been helpful. More will follow. In the mean time if you need more help with your business tax, then we’re happy to help and remember a few minutes spend on a conversation can very often do the trick.
The flat rate scheme is a useful and time saving method for VAT accounting. Many small businesses use this scheme but some care is required to ensure that you get the most out of it. In theory, the overall impact is nil but this is overall from HMRC’s point of view. It may well be the case that many businesses can make a VAT saving. The scheme is particularly useful for businesses that have only a small amount of input VAT. The FRS works by applying a fixed % to the VAT inclusive FRS turnover figure. You must remember to use the VAT inclusive amount to calculate the correct VAT due. However, the down side is that you cannot reclaim your input VAT. This may make the scheme unsuitable for some but for others, who may have little VAT to reclaim anyway, it can work well. However the advantage that is often overlooking is that it dramatically reduces the administration related to accounting for VAT. This is often not seen as a major upside but you will be very pleased to be on the scheme when you get a VAT audit! Finally, some quick wins – register early and you get a 1% discount on the rate that applies to your industry. This discount applies in the first year of VAT registration. Also do not forget that not all input VAT is excluded. You can reclaim input VAT on capital purchases over £2,000 (gross). Also it is worth planning these as the £2,000 does not apply to a single asset but applies to assets purchased at the same time and from the same supplier! One to remember.
The AIA is changing (again) but this time there is a reduction in the allowance. From April 2012 it moves from a very respectable £100,000 per 12 month period to £25,000. This large of a reduction means that it is likely to catch a number of businesses with medium level spends. The impact of this reduction is already being felt however even before the April 2012 introduction. The rules require that the calculation of the total AIA for any period ending after April 2012 to include a proportion of the lower limit. Therefore the AIA for a company with an accounting period ending on, say, 30 June 2012 will be: (£100,000 x 9/12) + (£25,000 x 3/12) = £81,250. So even if they purchase the item before the reduction it will be the £81,250 limit that applies and not the £100,000. The reduction in the limit is certainly something to bear in mind if you have flexibility as to which year to purchase the capital items as it is likely that an earlier purchase will have a larger tax reducing impact.
Enterprise Investment Scheme:- The EIS scheme is one possible way of helping to reduce the cost of investment. The scheme is designed to encourage the investment in the ordinary shares of unquoted companies. Where a qualifying individual subscribes for shares (remember these must be new shares and not existing shares purchased from another shareholder) then there is a tax reduction on the value of the amount invested. The reduction used to be 20% up to a maximum of £500k. However from April 2011 the % reduction has increased to 30% and from April 2012 the £500k limit will increase to £1m. This means that where an investment of £30,000 is made in a qualifying company a tax reduction of £9,000 will be available, depending on the individual’s tax liability before the reduction. This is a very useful incentive and one not to be missed but like all investment decisions, tax efficiency should certainly not be the only consideration.
Children’s allowances:- It is a useful one to remember that children (of whatever age) qualify for their own personal allowance. This applies to both income tax and capital gains. However you need to be careful as a child’s income that derives from funds supplied by a parent that exceeds £100 in a tax year may be taxed as income of the parent. However this £100 limit applies to each parent. You should also remember that a parent can put up to £3,600 per year into a pension plan for their children and this will still qualify for basic rate tax relief.
Property tax:- A simple one to remember for anyone who has property income; furniture within a residential dwelling cannot be deducted from rental income. Also the normal capital allowances that a trade may receive are also not available. However relief for this expenditure may be obtained either via a 10% wear and tear allowance or on a renewals basis. The renewals basis is where the initial cost of the furniture is not claimable but any replacement furniture is deductable. The wear and tear allowance is a straight forward deduction based on 10% of rents. But remember that rents will need to be adjusted for any costs that the landlord pays which would normally be paid by the tenant e.g. council tax. One not to be forgotten if you wish to minimise tax.
Pension contributions for everyone: – It is an ongoing issue as to what is the correct balance between salary and dividend when a small company owner is considering remuneration. There are a number of things to consider in order to make the right decision. However one consideration that can often be overlooked is that dividends do not count towards relevant earnings for personal pension contributions.
The rules say that a taxpayer may contribute up to 100% of relevant earnings towards a pension. However as dividend income is not part of relevant earnings, this can limit contributions made. Something to consider in making this decision. However also bear in mind that regardless of relevant earnings, £3,600 is always allowed to be contributed to a personal pension.