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.

Advantages:

•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

Disadvantages:

•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.
Advantage:
•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.

Disadvantage:

•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.

Advantage:

• 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

Disadvantage:

• 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.

Advantage:

•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.

•Disadvantage:

•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.

Pension Credits

Pension Credit is a tax-free payment for people aged 60 or over living in Great Britain, giving them extra money each week.
In order to get Pension Credit you do not need to have paid National Insurance Contributions(NIC’s).
Pension Credit is made up two elements:

Guarantee Credit element which might be paid to people over 60 and adds up to their weekly income guaranteeing a certain minimum level.

Savings Credit element, which is an extra amount for people aged 65 or over who have some savings for their retirement. The savings Credit will add up to their Guarantee Credit.

If you live your husband,wife or civil partner than you will need to add up your income in order to have Pension Credit calculated.
You are likely to be entitled to Pension Credit if your weekly income is less than £124.05 if you are single and £189.35 if you have a partner.

You may still be able to get Pension Credit if your weekly income is more than these amounts if, for example, you or your partner:
• have a severe disability
• look after a person who is severely disabled
• have certain housing costs – for example, mortgage interest payments

Also, if you or your partner are 65 or over you may be rewarded for saving for your retirement, up to:
£19.71 if you are single
£26.13 a week if you have a partner

You can get Pension Credit even if you live with your grown-up family, you own your own home or you get financial support from friends, family or charity.
You can apply for Pension Credit by freephone by calling the Pension Credit application line 0800 99 1234 or follow the link for the application form .
You can only apply if you are 60 or over or if you are turning 60 in four months time.

If you need further help, Taxfile’s tax accountants in South London and Exeter would be more than happy to guide you through your application.

Revenue Determinations

Under Self Assessment, taxpayers are required to file their tax return by a certain filing date. If they fail to do so they face the risk of having the HMRC determine their tax liability by raising a so called Revenue Determination.
The Revenue Determination is meant to encourage the taxpayer to send in his/her return to the HMRC by estimating the taxpayer’s tax liability.
Once a Revenue Determination charge has been added to the taxpayer’s Self-Assessment record a notice known as ‘Determination of tax due’ will be issued to the taxpayer and his/her agent.

A Revenue Determination will automatically involve any payments on account for the following tax year. Also, where Revenue Determination and any overdue payment on account remains unpaid, interest and surcharge will be added to the taxpayer’s record.

There is no right of appeal against a Revenue Determination but the submission of the completed tax return will take the place of the Determination and the determined amount of tax will be automatically amended to the return amount. Any related interest, surcharge and payments on account will also be automatically amended.

A Revenue Determination must always be raised for an amount equal to or greater than the previous or last year’s liability, and include where necessary an appropriate percentage addition to the previous year figure.
Very important to know is that Determinations can only be raised within 5 years from the filing date.
Taxpayers can displace the determination with their own self assessment at any time up to the fifth anniversary of the filing date for the year of assessment in question (or one year after the determination was issued, if later). After five years things become a little bit more difficult as a certain concept may need to be applied, that of equitable liability.
In order to avoid having to deal with a Revenue Determinations, self-assessment taxpayers need to make sure that they are familiar with the filing deadlines and seek help from tax companies like Taxfile when sending their tax return , especially now with a new 31st October paper return deadline in place.

Non-taxable payments and benefits

Under general tax law, expenses payments and benefits made to certain directors and employees are taxable earnings (better known as remuneration).
As it is the case with most rules, there are exceptions where benefits or payments to an employee are not normally taxed:
• Annual parties or similar functions provided that the cost incurred by the employer for every employee is less than £150.
• Living accommodation related to the work.
• Equipment provided for disabled employees like a wheelchair or hearing aid and their private use
• The provision of goodwill entertainment for an employee.
• Late night taxis where an employee is provided with a taxi paid for by his employer for a journey from work to home.
• Work-related training expenses
• Long service and suggestion scheme awards provided that the cost to the employer does not exceed £50 per year of service for the employee.
• Meals and food vouchers where the vouchers are non-transferable, they are used
for meals only and the value of vouchers issued to employees does not exceed 15p for each working day.
• Mobile phones unless the calls paid by the employer can be converted into money by the employee.
• Parking spaces
• Removals expenses and benefits which exempts from tax the first £8,000 of removal expenses.
• Re-training expenses and courses for an employee who is about to leave or has left within the
previous year.
• Pensions on retirement or death
• Sports facilities generally available to the employer’s employees and members of their families
and households but not to the public.
• Medical treatment abroad
For more information on each of the non-taxable payments and benefits mentioned above just follow the HMRC link.
Alternatively, you can contact Taxfile‘s tax accountants in South London and Exeter for any query that you might have.

Savings Income and Tax

Savings income is added to your other income and taxed . Banks and building societies are required by law to deduct income tax at 20% from interest before they pay it to you. They pay this to HM Revenue & Customs. This is confirmed by the entry ‘net interest’ on your bank or building society statement.
If you’re a higher rate (40%) taxpayer you owe tax on the difference. If you have a low income you may be able to claim tax back.
If you are a basic rate taxpayer you do not have to take any action as no extra tax is due and 20% tax has already been deducted at source by the bank or building society.
If you are a higher rate taxpayer than you have to let the Tax Office know what interest you have received so they can collect the extra tax either by asking you to fill in a tax return( if you are self-employed and normally have file self assessment) or adjust your tax code if you are employed or you receive pension. Then they will also send you a form called Tax Review P810 in order to check your level of savings income and then a change your code if necessary.
Your interest is taxable in the tax year that it is paid to you, or credited to your account, even if part of it has accrued in the previous tax year. So you do not have to include any interest earned this year when working out your taxable income if it hasn’t been paid yet.Your bank/building society may send you a ‘Certificate of Tax Deducted’ or a statement containing this information after the end of each tax year.
Also, if you have a joint account with a husband, wife or civil partner you should declare half of the income as yours. The second half should count towards their income.
On some types of savings income you do not have to pay any tax. Among them, we can mention the following:
Cash mini ISA;
• all prizes received from Premium Bonds;
• interest received from Fixed Interest Savings Certificates;
• interest from Index Linked Savings Certificates;
• interest, including bonuses, received from Children’s Bonus Bonds.
Also the interest paid by HMRC on over-payments of tax (so called repayment supplement ) is non-taxable.
If you are not due to pay any tax you can register your bank or building society account to receive your interest without tax taken off. You do this by completing form R85 and giving it to your bank or building society.
If you need to know more about the interest on savings and whether it is taxable or not, Taxfile’s tax accountants are here to help.

Data Protection Act and HMRC

As a tax agent you might have found it quite difficult trying to deal with subcontractors’ tax returns (those working in the Construction Industry Scheme) for the year ending on the 5th April 2008. The main reason behind this situation is the struggle of gathering all the relevant data in order to submit an accurate, complete and compliant tax return to HM Revenue & Customs.
In the past years we used to be able to ask the tax office for a so called ”captured voucher list” for our subcontractor clients quite easily. We cannot say this is happening this year, now when the construction scheme has changed and we need their help even more. According to the HMRC, excessive demands were placed before on their resources when requests were made for payment details for scores of subcontractors at a time.
Their refusal of giving away information is normally stated in a letter and we can quote:
Under Section 12(B) 1 Taxes Management Act 1970 your client must keep all records they need to enable to make a correct and complete tax return.They may receive a penalty of up to £3000 for each failure to keep or to preserve adequate records they need for future reference.[…] If they have lost any of their deduction statements given to them by the contractor(s) or they think they were not given a deduction statement(s), your client must in the first instance go back to the contractor concerned and ask for either a duplicate, or the missing deduction statement.”
That said, unless we can provide evidence that contact has been made to the contractor(s) concerned the HMRC will not be able to release any information. The evidence in question can be either a letter from the contractor(s) confirming why that they are unable to provide the documentation or a letter with the name of the contractor(s) and the dates the client worked for him/them.
As we needed to know more about this subject, we asked one of our legal associates to do some research on this matter. Under Data Protection Law 1998 s.63(1) it is required by all Government departments to reveal information held by them on our clients. However s.29 of the Act states that the right to disclosure of personal data and to have copies of it does not apply to to data collected for the assessment or collection of any taxes:
Personal data processed for any of the following purposes[…](c) the assessment or collection of any tax or duty or of any imposition of a similar nature are exempt from the first data protection principle.” It looks as if there is a clear statutory right for hmrc to refuse to reveal the information requested.
However, there is nothing in the Taxes Management Act 1970 requiring the client to go back to the contractor for a duplicate copy of the missing document(s) in the first place. As there is no policy stating that that the client or agent should first contact the contractor, it appears as if the policy has no status in law.
Taxfile‘s tax accountants in South London would like to know your opinion on this matter. Have you found it difficult this year to deal with your subcontractors’ tax return? Have you gathered all your data from the contractors or you managed to get some help from HMRC? Write your comments, your opinion matters to us.

Capital Gains Tax (CGT)-2008 Budget

The 2007 Pre-Budget report issued in October 2007 announced major changes to the way in which Capital Gains Tax will be calculated for disposals after 5th April 2008.
Among the most important changes related to CGT we can mention:

removal of the link to income tax rates and bands, meaning that various rules providing for the interaction of income tax and CGT rules are no longer required.

•introduction of a single rate of CGT of 18%, replacing the current rules that charge CGT at income tax rates as though the gains were additional income. The flat 18% rate applies irrespective of the type of asset disposed of and the period for which it has been held by the taxpayer.There is one important exception for certain types of business gains that may attract the new Entrepreneurs’ relief. This relief is based on taxing the first £1 million of the gains at 10 %, but even this is achieved by reducing the amount of the relivable gain (by 4/9ths), so that the resultant chargeable gain can still be taxed at 18%!
abolition of taper relief which normally has the effect of reducing the effective rate at which CGT is paid. It operates by reducing the amount of a gain which is charged to CGT, the amount of the reduction being determined by whether the disposed asset on whose disposal the gain was a “business” or a “non-business” asset, and the length of time that the asset had been owned before the disposal. and

abolition of indexation allowance for non-corporate tax payers (currently frozen at April 1998) that normally compensates for the effect of inflation by reference to increases in the retail prices index;

The abolition of the kink test for CGT purposes which means that in future the ”gains accruing on all disposals of assets owned at 31 March 1982 will be based on their market value at that date, so effectively “rebasing” all allowable expenditure to 31 March 1982”(HMRC).

• great simplification of the computation of chargeable gains due to the abolition of indexation allowance and taper relief.
As a large number of entrepreneurs and business owners aim to dispose of their businesses/companies for substantially more than £1 million, they are the biggest losers of the CGT reforms since their CGT rates will generally be much higher than 10%. (Before the 6th April 2008 CGT rate was often below 10% due to the benefit of indexation relief.)
Taxfile‘s tax accountants in Exeter and South London can help you make the most of every opportunity to minimize your tax liability, making sure you are paying the right amount of tax and all this for at very reasonable rates.

Lump sums, redundancy & compensation payments

When dealing with lump sums, redundancy and compensation payments great care needs to be exercised. The reason behind this is that this type of income will not necessarily be taxed as normal employment income.
Up to the first £30,000 of any compensation payment can be paid to you without deduction of tax if it is made in connection with the termination of your employment. This also applies to statutory redundancy payments. This tax exemption applies whether the payment is made as a result of an unfair dismissal claim or for breach of contract.
In order to qualify for compensation for loss of office relief, strict criteria must be met.
For instance, if your contract of employment gave you a right to compensation on ceasing to be employed or payment in lieu of notice (i.e. the employer pays in lieu of notice instead of the employee working the notice period), then the lump sum you receive will be taxable under PAYE scheme, regardless of the amount.
Also, even if the contract says nothing about pay in lieu of notice but there is an expectation of payment because it has been routinely paid to others, that constitutes an implied contractual term and the payment will still be liable to tax and NICs.
HMRC
often challenges this aspect, trying to prove that the payments were contractual in nature therefore they need to be fully taxed.
Very important to remember is that the limit of £30,000 relief relates to each employment but employments with employers under common control only count once. If a payment was received in the previous fiscal year for the same employment but the relief was not used, than the balance can be claimed against any relevant payments in a subsequent year.
Some employees with redundancy payments that exceed £30,000 choose to pay some or all of the excess into their approved occupational pension scheme. As long as the payment is within the scheme’s rules, it has no liability for tax or NICs.
As different rules apply to different lump sum payments connected with an employment it is very important to seek advice from professionals like Taxfile‘s tax accountants in South London and Exeter. They will make sure that your circumstances have been carefully considered before submitting your tax return to HMRC.