Penalties Reform – The Next Stage

Hello self-employed taxpayers,

I hope you enjoyed your holidays. I’m sure it might be quite difficult for those of you who haven’t submitted your tax return yet with the the deadline coming soon.
Now, you might wonder what this Next Stage is all about!
Well, as part of ”The Review of Powers, Deterrents and Safeguards HMRC has been developing ideas and consulting on how to modernise and align civil financial penalties.[…]The first substantial measure,[…] was a single new penalty regime for incorrect returns for income tax, corporation tax, Pay As You Earn(PAYE), national insurance contributions (NICs) and value added tax(VAT)(the main taxes)”(HMRC and the Taxpayer, Modernising Powers, Deterrents and Safeguards, Penalties Reform:The Next Stage.Consultation Document 10 January 2008).
In other words, the Tax Office wants to make sure that people do pay the right amount of tax and at the right time. The payment of taxes together with the repayments and reliefs cannot be voluntary or arbitrary. They must be governed at all times by a framework of rules
and obligations. According to HMRC, these penalties should influence behaviour, should be effective and fair.
Penalties have been considered in the following categories:
•incorrect returns
•failure to notify a new taxable activity
late filing and late payment
•record keeping and information powers failure
•other regulatory failures.

There will be no penalty where taxpayers make a mistake or misinterpret the law despite taking reasonable care in completing their returns.
To make sure your tax return is submitted correctly and in time visit Taxfile‘s tax accountants in South London and they will do it on your behalf.

Rent a Room Scheme

If you’re thinking about letting furnished rooms in your home, you may want to take advantage of the special Rent a Room Scheme . Under this scheme you can be exempt from income tax on profits from furnished residential accommodation in your only or main home if the gross receipts you get (that is, before expenses) are £4,250 (£2,150 if letting jointly) or less. But you can’t then claim any of the expenses of the lettings.
A lodger can occupy a single room or an entire floor of your home. It does not apply if your home is converted into separate flats that you rent out. In this case you will need to declare your rental income to HM Revenue & Customs (HMRC) and pay tax in the normal way. Nor does the scheme apply if you let unfurnished accommodation in your home.
There are certain advantages and disadvantages of using this scheme –Taxfile in South London can help you choose the best option according to your specific circumstances. Their tax accountants will work out whether you’re better off joining this scheme or declaring all of your lettings income and claiming expenses on your tax return.
The main point to bear in mind is that if you are in the Rent a Room scheme you can’t claim any expenses relating to the letting (for example, wear and tear allowance, insurance, repairs, heating and lighting).
If you don’t normally receive a tax return and your receipts are below the tax-free thresholds for the scheme, the tax exemption is automatic so you don’t need to do anything.
If your receipts are above the tax-free threshold, you must tell your Tax Office – you can do this by completing a tax return and claiming the allowance.

That’s all for today. Next week we will discuss, in more detail, the allowable expenses that you can deduct from your lettings income, provided you don’t use the Rent a Room scheme.

CIS Contractor Monthly Return

CIS contractors must complete and file a tax return to the HM Revenue and Customs every month showing the payments made to all subcontractors as well as the tax deducted. The contractor needs also to show the verifications references against all those subcontractors from whom the contractor had to deduct a higher tax rate.
Even if no payments were made to subcontractors, contractors still need to submit a monthly return , in this case a nil return.
Starting from 19th October, HMRC will start charging building contractors penalties for late returns. The contractor monthly returns should be submitted to the Inland Revenue by the 19th of every month. After this date, any return not received from contractors by the due date will be liable to a fixed penalty of £100 and a further penalty for every additional month that the return remains outstanding.
There are three ways to submit the return:
•on paper through the post
•online through the HMRC website
•electronically through Electronic Data Interchange or through approved third-party software.

Yesterday, the 26th October, HMRC showed some sympathy towards contractors’ late returns due to the postal strikes. Those who file electronically have no problem submitting their returns. ”Nil returns can continue to be made by telephone and HMRC are also prepared exceptionally, during continuing disruption, to accept paper returns at their Enquiry Centres.
There are likely, however, to be some contractors whose returns, will not be received by the 19th October, even though posted in what would normally be good time to meet the deadline. HMRC are prepared to consider these cases sympathetically.
Contractors can make nil returns and get further assistance by telephoning the CIS Helpline on 0845 366 7899.”(HMRC)

Taxfile in South London can help you filing your monthly return making sure it is done in due time. Their tax accountants will also be able to verify your subcontractors with HMRC in order for you, the contractor to deduct the right amount of tax.

Confused about your tax code?

A tax code is usually made up of one letter and several numbers, for instance 161L or K567 . A tax code is used by your employer or pension provider to calculate the amount of tax to deduct from your pay or pension. If you have the wrong tax code you could end up paying too much or too little tax.
The letters in your tax code have different meanings:
• L- for those tax payers that are eligible for the basic personal allowance or those that are on the emergency code.
• T-if there are any other items HM Revenue and Customs (HMRC) needs to review in your tax code.
• P- for persons aged 65 to 74 and eligible for the full personal allowance.
• V-for persons aged 65 to 74, eligible for the full personal allowance and the full married couple’s allowance (for those born before 6 April 1935 and aged under 75) and estimated to be liable at the basic rate of tax.
• Y-for persons aged 75 or over and eligible for the full personal allowance.

If your tax code has two letters but no number, it normally indicates that you have two or more sources of income and that all of your allowances have been applied to the tax code and income from your main job:
•BR-Is used when all your income is taxed at the basic rate – currently 22 per cent (most commonly used for a second job)
•D0-Is used when all your income is taxed at the higher rate of tax – currently 40 per cent (most commonly used for a second job)
•NT-Is used when no tax is to be taken from your income or pension.

Your employer will use an emergency tax code when you start a new job and your pay is above the PAYE threshold or when you declare on your P46 that this is your only job. Also your employer will use the emergency tax code if you don’t give him/her a P45 when starting a new job.
Taxfile in South London can help you sort out your tax code and make sure you pay the right amount of tax.
If you have paid too much tax under the PAYE code , Taxfile‘s tax accountants in Tulse Hill you will get in touch with the Inland Revenue and request a refund on your behalf.

Is Your Estate Excepted From IHT?

(for UK domiciliaries only)

From 6 April 2004, there are two types of estates are qualified to be excepted from IHT for UK domiciliaries.

1. Low valued estates
When the total value of estates does not exceed the inheritance tax threshold, then those estates do not suffer IHT.

Which threshold should be applied is determined by the date of deceased’s death. If the death was between 6 August and 5 April in any one tax year, or between 6 April and 5 August with the grant of representation taken after 5 August, you should use the threshold of that tax year in which the death happened. If death was between 6 April and 5 August, but the grant of representation was taken before 5 August, the threshold should be used is the one from the tax year of one year earlier.

2. Exempt estates
No IHT is payable when either Spouse/Civil Partners Exemption or Charity Exemption applies and the gross value of the estates is less then £1 million.

Spouse/Civil Partner Exemption can only be deducted if both spouses or civil partners have always been domiciled in the United Kingdom, if one of the spouse/ partners is domiciled outside of UK at the time of transfer of estates, the exemption is limited to £55000. And charity exemption can only be deducted if the gift is an absolute gift to the organisation concerned.

Both types of estates must be subject to the following conditions in order to be exempted from IHT:

• the deceased died domiciled in the United Kingdom,
• if the estate includes any assets in trust, they are held in a single trust and the gross value does not exceed £150,000 (unless the settled property passes to a spouse or civil partner or to a charity when the limit is waived),
• if the estate includes foreign assets, their gross value does not exceed £100,000,
• if there are any specified transfers(transfer the estate to somebody as a gift, the value does not exceed £100,000 if the transfer is within 7 years of death, and this transferred estate does not get involved into any trust), their chargeable value does not exceed £150,000, and
• the deceased had not made a gift with conditions attached
• the deceased did not have an alternatively secured pension fund, either as the original scheme member or as the dependant or relevant dependant of the original scheme member

Well financial planning with the help of Taxfile will significantly save your IHT, just feel free to visit our offices in
South London to get professional advice from our
tax experts.

Your personal tax allowance

Everyone who lives in the UK is entitled to a personal allowance. This is the amount of income you can receive each year without having to pay tax on it. Depending on your circumstances, you may also be able to claim certain other allowances.
There are three levels of personal allowance for 2007/2008 tax year:
•Basic rate, which is 5225 (with no income limit)
•age 65 to 74, which is 7550 (with an income limit of 20900)
•age 75 and over 7690 ( with an income limit of 20900).
It is important to bear in mind that if your income is over the income limit, the age related allowance reduces by half of the amount (£1 for every £2) you have over that limit, until the basic rate allowance is reached (you’ll always get the basic allowance, whatever the level of your income).
If you become 65 or 75 during the year to 5 April 2008, you are entitled to the allowance for that age group.

So if, for example, you are 69 and have an income of £22,000( £1100 over the limit) your age-related allowance would reduce by £550 to £7,000.

If HM Revenue & Customs (HMRC) knows your age you should get the personal allowance automatically. But bear in mind they won’t know your age unless you’ve told them or shown your date of birth on a tax return or claim form. If you haven’t done this already and you are 65 or over you need to contact your Tax Office.
If you want to claim a tax refund because you didn’t use your personal allowance (or for any other reason), you need to do so within five years from the 31 January following the end of the tax year concerned. Taxfile in South London can help you claim the overpaid tax . Their tax advisers deal with the Inland Revenue on your behalf , taking the strain off you at a taxing time, making sure that you never pay more than your minimum tax liability, whether this be income tax, capital gains tax (CGT) or inheritance tax(IHT).

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) sets out the rules for how payments to subcontractors for construction work must be handled by contractors.

A contractor is a business or other concern that pays subcontractors for construction work. A subcontractor on the other hand is a business that carries out construction work for a contractor.
Under the Scheme, all payments made from contractors to subcontractors must take account of the subcontractor’s tax status as determined by HM Revenue & Customs (HMRC). This may require the contractors to make a deduction, which they then pay to HMRC.

As of 6 April 2007 the new Construction Industry Scheme replaced the previous scheme. The main changes in the scheme are the following:

• There are no more CIS cards, certificates or vouchers.

• Contractors have the responsibility to ‘verify’ new subcontractors by contacting HMRC.
•Subcontractors are still paid either net or gross, depending on their own circumstances, but it is HMRC who tell the contractor during verification which treatment to use.
•There is a higher rate tax deduction of 30% if a subcontractor has not registered with HMRC.

• The standard rate of deduction for those registered with the Inland Revenue is 20% .
• There are no more CIS annual returns. Now contractors must make a return every month to HMRC, showing payments made to all subcontractors. Returns must be made using official forms. Photocopies are not acceptable.
• Contractors must declare on their return that none of the workers listed on the return are employees. This is called a Status declaration.
•Nil returns must be made when there are no payments in any month. These can be made over the telephone as well as over the Internet or on paper. If made by paper, this must be on an official form. Photocopies will not be accepted. There will be financial penalties for failure to submit a return (including nil returns).

For most of subcontractors, the new CIS is still a puzzle. For this reason, the tax accountants at Taxfile in South London can unveil the mystery behind it. You can pop in to see one of our tax advisers in our office in South London, just two minutes away from Tulse Hill station or you can visit us on www.taxfile.co.uk.

Types of tax-free investment

There are a number of ways investors can reduce their tax liability. Here are the most popular:

Cash Mini ISAs
These are basically ordinary saving accounts but the interest you accumulate is free from tax.
Anyone over 16 can put up to £3000 per tax year into a cash mini Isa. The good news is that from April 2008 you would be able to place up to £3600 each year in a mini cash Isa.

Share ISAs
These are accounts in which you can hold stock market-type investments such as shares. The money grows free of capital gains and income tax. Higher rate taxpayers also avoid paying extra tax on dividends payments from shares, and they don’t have to declare their Isas on their tax returns.

There are two types of shares Isas – maxis and minis. For the 2007/08 year you may invest £7,000 in a maxi equity Isa. If you have a cash mini Isa you may also invest £4,000 in a mini equity Isa.

For 2008/09, the overall limit increases to £7,200. So if you have used the new maximum cash mini Isa allowance of £3,600, the maximum you may place in a stocks and shares Isa is £3,600, bringing your total Isa investment to £7,200.

Venture capital trusts
VCTs have traditionally offered one of the best tax breaks available, although they have recently lost their shine as tax breaks were cut and extra restrictions imposed.
VCTs are high risk – they are effectively companies quoted on the stock exchange which invest mainly in unquoted companies or ‘start-ups’.
At the time of writing, investors were entitled to 30% income tax relief. It means that every £10,000 you invest will only cost you £7,000 because of the tax break. There is no income tax to pay on any dividends, nor capital gains tax to pay on the increase in your stake in the trust.
To check these figures are up to date and for current rules about tax breaks offered to investors in VCTs visit the HMRC website at http://www.hmrc.gov.uk/guidance/vct.htm.

Offshore investing
Investing offshore provides opportunities for tax suspension, reduction and avoidance.
The attraction is ‘gross roll-up’. This means assets can grow without being taxed and could therefore outperform investments at home. However, gains or income are liable to tax in Britain when they are brought back to the UK. You will also need to pay tax of another country if you take the money there.
The trick is to take into account how long you are going to be away if you are emigrating, your residency for tax purposes, your will, property and more liquid assets such as savings.
Always seek professional advice from a tax company like Taxfile with offices in South London when it comes to ways of minimizing your tax liability.

Welcome to the Inheritance Tax Blog

Inheritance Tax (IHT) is a tax on the value of a person’s estate on death and on certain gifts made by an individual during their lifetime.

There is a certain threshold when it comes to inheritance tax. This is defined as the amount above which inheritance tax becomes payable. If the estate, including any assets held in trust and gifts made within seven years of death, is less than the threshold, no inheritance tax will be due on it. Starting from April 2007 the threshold, also known as the nil-rate band is £300 000. For transfers on death, the value of an estate above the mentioned band is taxed at a rate of 40%. For lifetime transfers the tax rate is 20%.

There are a few things to consider when dealing with IHT:

• Gifts between husband and wife are generally exempt for IHT. It may be desirable to use the spouse exemption to transfer assets to ensure that both spouses can make full use of lifetime exemptions, the nil rate band and the potentially exempt transfers (PETs). With a PET the gift will be exempt from IHT if the donor survives for seven years.
• Gifts to individuals not exceeding £250 in total per tax year per recipient are exempt. The exemption cannot be used to cover part of a larger gift.
• £3,000 per annum may be given by an individual without an IHT charge. An annual exemption may be carried forward to the next year but not thereafter.
• Gifts in consideration of marriage are exempt up to £5,000 if made by a parent with lower limits for other donors.
• Gifts to registered charities are exempt provided that the gift becomes the property of the charity or is held for charitable purposes.
• Trusts can provide an effective means of transferring assets out of an estate whilst still allowing the donor to retain some control over the assets. Provided that the donor does not obtain any benefit or enjoyment from the trust, the property is removed from the estate.

A good planning is essential when dealing with Inheritance Tax. Any plan must take into account your personal circumstances and aspirations. Taxfile in South London can help you find the best solution to minimize your tax liability.

Let Taxfile introduce you to VAT

Value Added Tax is a tax on consumer expenditure. It is collected on business transactions, imports and acquisitions.
There are three rates of VAT:
•standard rate, 17.5%
•reduced rate, 5%
•zero rate.
Businesses charge VAT on their sales and this is known as output VAT and the sales are referred to as outputs. Similarly, VAT is charged on most goods and services purchased by the business and this is called input VAT.
The output VAT is collected from the customer by the business and must be regularly paid to HMRC.
The input VAT on goods and services purchased can be deducted from the amount deducted from the amount of output tax owed. It is worth mentioning that certain types input tax can never be reclaimed such as business entertainment expenses and for most of business cars.
You are required to register for VAT if your turnover is over 64000.
You can apply for voluntary registration that would allow you to reclaim your input VAT which could result in a repayment of VAT if your business was principally making zero rated supplies.
It is very important that a VAT registered business maintains complete and up-to-date records including details of all supplies, purchases and expenses for 6 years.
Taxfile can assist you with registering for VAT and with completing your VAT return.
We will discuss VAT in more detail next week!