Summer 2008 – Current Issues

Welcome to our Summer 2008 newsletter, we are using this quarter’s newsletter to highlight some ideas on ways to mitigate your tax liabilities, and some ongoing issues identified in relation to HM Revenue & Customs.

Personal Allowances

Personal Allowances are the amount of income an individual can receive each year without having to pay tax. The Chancellor, Alistair Darling, has put up the personal tax allowance by £600 to £6,035, this means anyone earning up to £40,835 will gain £120 this year. This amendment to the personal allowances has been design to appease those people adversely affected by the axing of the 10% tax rate.

The additional money being received will come via a £60 lump sum in September pay packets, followed by a £10 monthly increase until the end of the tax year. So those paying tax at the 40% tax rate won’t benefit from this additional £600 personal allowance as the Chancellor has also lowered the level at which people pay the higher rate of tax, which will counteract the change to the personal allowance.

Use of Home as Office

Many sole traders, partnerships or small corporate bodies choose to operate from home. Whatever the chosen trading vehicle, it should be possible to establish a claim for tax relief on part of the home expenses. There is no specific legislation in relation to these claims; it is instead a question of applying general principles to create a valid claim.

It is easier to establish a claim where a self-employed person uses his homes as his business base, with the usual requirement applying of the expenses being wholly and exclusively incurred for the purposes of the business. For clients trading through a company this treatment is possible, but they need to set up a rental agreement between the company and the individual. A valid claim should be able to be made for apportioned mortgage interest, telecommunications, insurance and repairs and maintenance. These costs can be apportioned for the use and cost of a home on a time basis to allow the expenses of the room during the hours in which it is used exclusively for business purposes.

The key points in relation to these claims are to ensure the room used by the business is used “exclusively” for business activity during the working day, but is used for none business purposes in the evening. As the room is not exclusively business, full principle private residence relief should still be available when selling the property.

Should you wish to discuss the options available to you please don’t hesitate to contact your relevant practice partner for further advice.

Changes to your business circumstances

If your business circumstances change, then you must tell your VAT office straight away, because certain changes can affect your VAT registration, or even require you to cancel your VAT registration. In most cases, you need to tell your VAT office within at most 30 days, or you could face a financial penalty. It's very important to let the VAT office know as soon as your bank details change, because these details are used to make repayments to you.

If any aspect of the business circumstances change from those stated on your VAT registration, then use a “Change of Details – Variations” form to tell your VAT office about the changes in a timely manner so as to avoid any unnecessary financial penalties being levied against your business.

HM Revenue & Customs Hot Topic

HM Revenue & Customs have recently been reviewing professional sole trader and partnership accounts’ in relation to their add backs for private expenditure, when calculating tax on trading profits. The majority of our clients add back a flat percentage of expenditure which is deemed to be a private cost, rather than expenditure wholly and exclusively for the business, for example private use of motor vehicle expenditure.

HM Revenue & Customs are asking businesses to prove the level of deemed private expenditure which is added back to calculate tax, to prove it is accurate and fully reflects all private expenditure. If these add backs can’t be proved to be accurate HM Revenue & Customs are entitled to go back 6 years to reclaim the tax they are owed, as well as charging interest and penalties on the underpaid tax.

In order to avoid any problems in relation to these private costs paid by the business we are recommending clients review the level of private expenditure to ensure any add backs calculated can be substantiated should HM Revenue & Customs review these figures, therefore avoiding the likelihood of HM Revenue & Customs looking into a businesses last 6 years trade.

Scam emails

HM Revenue & Customs (HMRC) have recently become aware of a scam that involves an email with a fake HMRC heading. The email asks customers to provide banking details so that a repayment can be issued. This type of email scam is known as a ‘phishing’ exercise and it should always be ignored and deleted. If you have any concerns about anything received supposedly from HMRC Charities please contact the HMRC helpline.

Should you wish to discuss any of the details mentioned or discuss the potential impact of any of the changes being implemented currently and how it will effect your business, please don’t hesitate to contact your relevant practice partner for further advice.

KEY DATES

Whilst all due care and attention has been taken in the preparation of this review, we cannot accept responsibility for loss occasioned by any person acting or refraining from action as a result of material contained therein. There is no substitute for professional advice specifically tailored to your personal circumstances. We can give that advice and welcome the opportunity of assisting you. If you would like to discuss any of the issues raised further, or for us to arrange a review of any of your procedures, please contact Alan Cohen or Darren Swann as follows:-

Tel: 0161 249 5040 Fax: 0161 448 9287
Email - alanc@leonherman.co.uk or darrens@leonherman.co.uk