Clothing: Wholly and Exclusively for trade purposes

When dealing with self-employment expenses, great care needs to be taken.
An expense needs to have incurred wholly and exclusively for the purpose of the trade in order to be considered allowable. Some expenses by their very nature have a non-trade use and so are disallowed by the Tax Man.
So it is the case with ordinary clothing worn by a trader during the course of their trade,the so-called civilian clothing.
This rule applies even when particular standards of dress are required by the rules of professional bodies.
The cost of clothing that is not part of an everyday wardrobe like for instance protective clothing for a builder or a nurse’s uniform are allowed as trading expenses. The cost of clothing acquired for a film, stage or TV performance incurred by an actor or other entertainers is also allowable. The clothing in this case is called a costume as it is used in a performance.
A well known case with regards to clothing expenditure is the case of Mallalieu v Drummond. The case was concerned with the issue of whether a barrister was entitled to a deduction for expenditure on purchase and laundry of professional clothing.
The barrister acquired and wore particular items of clothing, both in court and to and from the court to her chambers. She did not wear such clothes when she was not at work. Also, her personal wardrobe was made up of very colourful clothes.
The Inspector disallowed the barrister’s expenditure.The test whether her expenditure was ‘ wholly and exclusively’ incurred for the purpose of her profession was subjective.
Also,the General Commissioners considered that when a barrister purchased court clothes their purpose was to enable them both to earn profits in their profession and to be properly clothed, so it had a dual purpose (professional and non professional one at the same time).
Apportionment for business use can only be made when there is a objective benchmark by which any trade element can be distinguished from the non-trade element.
A common example of this approach is the running costs of a car used partly for the purposes of the trade and partly for other purposes.
If you are still confused with regards to what items you are entitled to claim back in your tax return come to Taxfile in one of their offices, either South London or Exeter branch to get help with this matter.

Pension Contributions and Tax Relief

Do I get tax relief on my pension contributions? This is something we hear a lot from our clients.
The answer is yes, you do get tax relief on pension contributions, being a good way to save for retirement.
The way you get tax relief on pension contributions depends on whether you pay into a company (known as Occupational scheme), public service or personal pension scheme.
•Company or public service pension schemes
Usually your employer takes the pension contributions from your pay before deducting tax (but not National Insurance contributions). You only pay tax on what’s left. So whether you pay tax at basic or higher rate you get the full relief straightaway.
•Personal Pensions
You pay Income Tax on your earnings before any pension contribution, but the pension payer claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.
If you are a higher rate taxpayer, you can claim the difference through your Self-Assessment tax return.
•Retirement annuities
Unlike personal pension providers, most retirement annuity providers – personal pension schemes set up before July 1988 – don’t offer a ‘relief at source’ scheme whereby they claim back tax at the basic rate. Instead you’ll need to claim the tax relief you’re due through your tax return or by getting in touch with your local Tax Office.
If you receive an age-related Personal Allowance or Married Couple’s Allowance HMRC will subtract the amount you contribute plus the basic rate tax from your total income and use the reduced figure to work out the value of your allowances. This may have the effect of increasing these allowances if your income was above the relevant ‘income limit’ that applies.
If you don’t pay tax you can still pay into a personal pension scheme and benefit from basic rate tax relief (20 per cent) on the first £2,880 a year you put in. In practice this means that if you pay £2,880 the government will top up your contribution to make it £3,600.
There is no tax relief for contributions above this amount.
You can put money into someone else’s personal pension – like your husband, wife, civil partner, child or grandchild’s. They’ll get tax relief added to it at the basic rate, but this won’t affect your own tax bill. If they’ve got no income, you can pay in up to £2,880 a year – which becomes £3,600 with tax relief.
If the pension scheme rules allow it you may also be able to put money into someone else’s company scheme. You’ll not get tax relief on your contribution but the other person can get relief either through their tax return or by making a claim to HMRC by telephone or letter.
You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension is subject to an ‘annual allowance’.
For the tax year 2008-09 the annual allowance is £235,000. You pay tax at 40 per cent on any contributions you make that are above the annual allowance
Also, when your pension matures you can take up to 25 per cent of it as a tax-free lump sum, provided your pension scheme rules allow it, you are under 75 and your total savings are within the ‘lifetime allowance’ for the year in which you take your benefit. For the tax year 2008-09 this is £1.65 million.
It is also important to know that you can usually only get your pension contributions refunded if you withdraw from a company scheme within two years of starting payments.
Certain events might shorten the time limit. Tax is deducted at 20 per cent for refunds of up to £10,800 and at 40 per cent on any excess above this. The scheme administrator deducts the tax before making the refund.
Tax experts argue that basic rate taxpayers are better off saving in an ISA rather than paying in a pension contribution scheme at least until they become 40% tax payers and they get a bigger tax relief.
In order to have a happy and care free retirement come to see Taxfile‘s tax agents in South London and Exeter to seek help if you are still unsure of the matter.

Taxfile will help you with tax & accounting

We thought it was about time to say a little about ourselves – TaxFile.

TaxFile can help with your accountancy and tax issues whether you are an individual needing help filling in your self-assessment tax return, are someone needing assistance with a tax rebate, or are a large organisation needing full accounts work and payroll services. So if you need professional tax help, just drop into the shop or contact TaxFile.

Workers in Construction Industry Scheme

We recently came across a client who got very confused about becoming a limited company and his tax position.

If people are both self employed and/or employed and they only work part of a tax year on that basis, it is likely that they would not have time and understanding of the implications of becoming an employee of their own limited company to organise their own salary in the first few months of trading.
The situation will then exist that they have a tax return to do for April 5th which has only a part years earnings, which gives rise to a personal tax rebate.
The limited company then has a payroll scheme of its own for future tax efficient drawings.
So year one of setting up a limited company can appear very beneficial (contact Taxfile to set up an ltd as a one stop shop for all your tax needs).
Year two may then give rise to a profit which can be taxed as employee’s drawings (director) and if the director is prudent by leaving a tax reserve in the firm at the year end, then a potential tax efficient dividend may be possible (remember you can choose your year end to be a point when adequate reserves are in hand, you can only change it once in every five years. (Come to Taxfile to make sure you get the best year end solution).
The scheme for the taxing of the directors drawings and the subcontracted workers can be easily administered by the director, if there is a good margin between the gross works done and the labour costs then it is usual to see a favourable set off position at the end of each month.
To sum up, the business may have had 20% stopped on more of the income than the tax it has stopped from the subcontracted worker, this being the case then no tax needs to be handed to HMRC that month, the contractor/director must complete a CIS 300 list every month to state the tax stopped from every verified subcontractor ( HMRC do a great DIY course which is free to attend).
Any surplus tax suffered can be reclaimed back to the company at payroll year end 5th April on the companies p35 (it can take a few months for HMRC to agree the repayment as sometimes they ask for proof of the tax suffered, so good records of the work done and tax suffered are essential), once the tax is rebated then it comes back to the company to bolster the reserves.
The company accountant (come to Taxfile for the best in service from a Taxfile accountant) will then advise you of your corporation tax assuming you have supplied your banking records (preferably quarterly by online bank downloads which can be easily uploaded for analysis) . The corporation tax is due 9 months after the year end, so a good CIS rebate can often cover the corporation tax if the company is a labour only supplier which makes a reasonable margin after retentions.

If you are still confused about the way the Construction Industry Scheme (CIS) works you can always rely on Taxfile’s tax specialists in South London and Exeter to guide you through any potential tax issues.

VAT Accounting Schemes

Using Standard VAT Accounting, we must complete four VAT returns each year. Any VAT due is payable quarterly, and any VAT refunds due are also repayable quarterly.
In contrast to standard VAT accounting, there are several alternative ways we can account for VAT that could save us time and money. Each of the schemes has advantages and disadvantages.

Among these schemes we can mention the following:

Annual accounting for VAT

Using this method, VAT is paid on account throughout the year in nine monthly or three quarterly instalments. These instalments are based on the VAT paid in the previous year. If the business has been trading for less than a year, the instalments are based on an estimate of the VAT liability.


•we only have to send a VAT return once a year

•reduces the amount of time spent in sorting out paperwork

• improves the cash flow of the business


•this method is not suitable for businesses that regularly reclaim VAT as they would only get one repayment at the end of the year.

• if the turnover of the business decreases, the payments may be higher than under the standard VAT accounting.

Cash accounting for VAT

When using the standard VAT accounting, the VAT is payable when an invoice is issued.
•If we use the cash accounting scheme, we do not need to pay VAT until the customer has paid us.

• it is a beneficial method because it improves the cash flow

• we do not need to pay the VAT if the client never pays us.


•we cannot reclaim VAT on purchases until we have paid for them.

The flat rate VAT scheme

The flat rate VAT scheme is designed to help small businesses reduce the amount of time they spend accounting for VAT.


• we do not have to calculate the VAT on each and every transaction but just pay a flat rate percentage of the turnover as VAT


• one minus using this scheme is that we cannot reclaim VAT on our purchases, especially if we buy a lot of goods and services.

VAT schemes for retailers

Retailers, especially those who sell a high volume of low value goods to the general public, can find it very time consuming and costly to issue VAT invoices for every sale. The VAT retail schemes enable retailers to aggregate their sales and account for VAT on the total.

The main retail schemes are: apportionment schemes, direct calculation schemes and the point of sale scheme.

Margin schemes for second-hand goods, art, antiques, collectibles

The VAT we can recover when buying and selling second-hand goods is quite limited.


•This scheme comes in handy because it calculates the VAT on the difference between the purchase price and the sale price , that is the margin.


•we need to keep very detailed records, otherwise we will be liable for VAT on the full selling price.

Tour operators’ margin scheme

Tour operators often buy goods and services from businesses in foreign countries, and cannot often reclaim their input tax. The Tour Operators’ Margin Scheme solves this problem by allowing tour operators to calculate the VAT on just the value that they add.

As every method comes with pros and cons, it is better to seek guidance from tax accountants like Taxfile in South London and Exeter to analyse your circumstances and tell you which scheme suits you best.