To July's Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
If you need further assistance just let us know or you can send us a question for our Question and Answer Corner.
We are committed to ensuring all our clients don't pay a penny more in tax than is necessary.
Please contact us for advice in your own specific circumstances. We're here to help!
Tax Savings on Incorporation
You can still save tax by operating your business through a company rather than as a sole trader or partnership, but the level of tax savings will depend on the range of salary, dividends and benefits that you want to take out of the company.
If you take a salary equal to the personal allowance of £6,475, and extract the rest of the profits as dividends, you could make the following tax savings in the current tax year. This salary level involves paying some NICs as the NIC threshold is £5,715, but a lower salary would waste part of the dividend tax credit. Salary is also tax allowable for the company whereas dividends are not.
For 2009/10 the following shows for different profit levels the tax payable as a sole trader, by incorporating as a company and the total saving...
Profits £15,000: Sole trader: £2,573 - Company £1,951 - Total saving: £622
Profits £30,000: Sole trader: £6,773 - Company £5,101 - Total saving: £1,672
Profits £50,000: Sole trader: £13,169 - Company £9,463 - Total saving: £3,706
Profits £100,000: Sole trader: £33,669 - Company £29,838 - Total saving: £3,831
Profits £150,000: Sole trader: £54,169 - Company £50,213 - Total saving: £3,956
There are other tax factors to consider. For example...
- If the company owns a car that is used privately by the business owner, this can seriously reduce the tax savings. However, the answer is not straight forward as it depends on the cost, age, and CO2 emissions of the car (see below).
- The amount of profits left within the company for future use. If dividends are only taken to take your income up to the level of basic rate tax, substantial further savings of many thousands are possible!
- The availability of tax-free benefits such as childcare vouchers.
Tax rates are due to increase from 2010/11. Individuals will pay a top rate of 50% on income over £150,000 and the personal allowance will be withdrawn for those with income over £100,000. The tax rate paid by a small company will also rise to 22%. These changes will reduce the tax savings to be made by operating through a company. The calculations summarised as follows for 2010/11 assume a salary equal to a personal allowance of £6,635, which is reduced to nil when profits exceed £113,000.
Profits £15,000: Sole trader: £2,530 - Company £2,004 - Total saving: £526
Profits £30,000: Sole trader: £6,730 - Company £5,304 - Total saving: £1,426
Profits £50,000: Sole trader: £12,998 - Company £9,704 - Total saving: £3,284
Profits £100,000: Sole trader: £33,448 - Company £30,273 - Total saving: £3,215
Profits £150,000: Sole trader: £56,642 - Company £53,633 - Total saving: £3,009
Please talk to us about the savings possible for you. We can provide a calculation specific to your circumstances and outline the many other factors you will need to consider when incorporating.
Are you Trading in Properties?
Low property prices are tempting some people to acquire residential properties to develop and sell when the market improves. If you intend to do this, the Tax Inspector may argue that you are actively trading in properties, rather than just investing and letting.
If you are considered to be trading in properties it will have the following tax consequences:
- All the gains you make on selling the properties will be subject to income tax at 20%, 40% or 50% rather than capital gains tax at 18%.
- NI will also be due on top of these income tax rates.
- You will not be able to set your annual capital gains exemption (£10,100 for 2009/10) against the gains made from selling properties.
- If you run the property business through a limited company the difference in tax rates will be far less.
- You may need to register for VAT.
- Any rents received may be taxed as incidental trading income.
- The value of your business should attract a 100% exemption from inheritance tax as business property.
- You can get tax relief for indirect or abortive expenses connected with buying and selling properties.
- Any losses you make by trading in your own name can be set against your other income.
- You may qualify for entrepreneurs' relief if you sell your whole property business.
Please talk to us about your plans so we can advise you on the tax strategies which will fit your business.
Tips for Quick VAT Registration
There are a number of reasons why you would want to, or need to, register for VAT quite quickly. Once your turnover for the last 12 months exceeds £68,000 you must register for VAT within 30 days. If you start a new business, incorporate your current business (see above) or buy an existing business you may also need to register for VAT immediately.
The VAT office aims to issue a VAT number to 70% of businesses within 13 working days of receiving the application for VAT registration. However, the remaining 30% of businesses may suffer delays, which can endanger the viability of the business. If you need to register for VAT follow these tips to speed up the process:
- Use the correct form: VAT 1 - this form was revised about a year ago so make sure you use a new version.
- Include the bank account number for the business that is registering for VAT. Do not include a bank account number for a different business. No bank account will delay the registration.
- Show a contact telephone number for the business. Although it is not a legal requirement to have a telephone number, the VAT registration will be delayed if you don't include one.
- If the business is a company you must include the date of incorporation and the company number.
- The business address must be a UK address where the business will be carried on. A 'care of' or PO box address is not acceptable.
- The business activity description must be clear and not generalised. Consultancy businesses need to state their area of expertise, such as 'business management' or 'information systems'.
- You must include an estimate of the annual turnover. This gives the VAT office an idea of the risk profile of the business.
- If any of the business owners have been involved in any other businesses in the last two years the full names of those businesses, including VAT numbers, must be given.
- If you are registering for VAT on a voluntary basis complete box 13 and specify the date you require to be VAT registered from.
- The VAT 1 form must be signed by an appropriate person, such as partner or director. Remember to state in what capacity that person is signing.
Company Cars Getting more Expensive
If you drive a company car you need to keep an eye on the tax you pay for using the vehicle, as this is likely to increase year on year.
The tax charge is related to the car's CO2 emissions and its price. An average car has CO2 emissions of around 160g/km, which means for a petrol car the driver is taxed on 20% of the vehicle's list price every year. This percentage will increase to 21% from 6 April 2010, and will be 22% from 6 April 2011.
The list price is the show-room price for the car, not what your employer actually paid including discounts. Currently the list price used for the tax calculation is capped at £80,000, but from 6 April 2011 this cap is removed. This will hit drivers who get their own companies to pay for top range cars.
Say you drive an Aston Martin DB6 costing around £160,000, which has CO2 emissions off the scale. In 2009/10 you are taxed on £28,000 (35% x £80,000). At the 40% tax rate this amounts to a tax bill of £11,200. From April 2011 you will be taxed on £56,000 (35% x £160,000). At the top tax rate of 50% that will apply in 2011/12, this will produce a tax bill of £28,000.
If you are drive an alternative fuel car, such as a hybrid, bio-fuel, or E85 fuel, you currently get a reduction in the tax charge compared to normal cars. This discount will be removed from 6 April 2011 for all alternative fuel cars, except for pure electric cars, which will still be taxed on 9% of their list price.
So the message is: get that expensive car out of your company ASAP, and if you must drive a company car, may be it's time to start thinking electric, or at least very low CO2 emissions.
Question and Answer Corner
Q. My company submitted a claim for a tax refund for £15,000 in January, but it still hasn't materialised. We really need those funds now. I've chased the Tax Office but get some excuse about security checks. How long will I have to wait for this money?
A. HMRC have imposed extra security checks on many tax refunds in an attempt to block fraudulent claims that have been flooding the system. These extra checks are slowing up refunds to genuine businesses. A six month delay is quite exceptional. Try writing to your Tax Office suggesting you will take the matter to your local MP if you do not receive the tax refund within 10 days.
Q. In the last two years I have lent my company in excess of £40,000, but now the company is insolvent and I will not receive any of that money back. Can I claim any tax relief for that loss?
A. Assuming your company was a trading company, as opposed to a company that just holds investments; you can claim a capital loss for your loan. The Tax Inspector may ask you to show the funds were used for the company's trade, rather than simply use to pay dividends, so be prepared to supply the company's accounts if requested.
Q. I was made redundant on 27 February 2009 from where I was paid £16,000 a year. Almost immediately I found a part time position that pays about £9,400 a year. I made a claim for Tax Credits as I am working 30 hours a week now, but I've received a Nil award. What should I do?
A. Your initial Tax Credits award is based on your income for 2008/09, which was too high for you to qualify for Tax Credits, assuming you are a single person with no children. However, on your current wage you should qualify for about £1,200 a year in Tax Credits. Just ring the Tax Credits Office and tell them your current wage rate. They should revise your tax credits award within weeks.
Key Tax dates for July 2009
5 - Deadline for PAYE settlement agreement for 2008/09.
6 - Deadline for 2008/09 forms P11Db, P11D and P9D to be submitted and copies of P11D and P9D to be issued to relevant employees.
Deadline for employers to report share incentives for 2008/09 - form 42.
14 - Return and Payment of CT61 tax due for quarter to 30 June 2009.
19/22 - PAYE/NIC and CIS deductions due for month to 5/7/2009 or quarter 1 of 2009/10 for small employers.
19 - Class 1A NIC due in respect of the tax year 2008/09.
31 - Second self assessment payment on account due for 2008/09.
Second 5% penalty surcharge on any 2007/08 outstanding tax due on 31 January 2009 still unpaid.
Second £100 penalty if 2007/08 tax return due for filing on 31 January 2009 is still outstanding.
Deadline for Tax Credits to finalise claims for 2008/09 and renew claims for 2009/10.
The information contained in this newsletter is of a general nature and no assurance of accuracy can be given. It is not a substitute for specific professional advice in your own circumstances. No action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a consequence of the material can be accepted by the authors or the firm.