To January's Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
A reminder that the most immediate issue to deal with for most businesses is of course the rise in VAT to 20% from 4th January 2011 and of course if you need any help with that at all please contact us.
If you need further assistance with anything just let us know or you can send us a question for our Question and Answer Section.
Associated Company Changes
Companies controlled by the same people plus their relatives are counted as 'associated' for corporation tax purposes. The upper profits limit for the small profits rate of corporation tax is divided by the number of associated companies. A company with no associates currently pays 21% tax on profits up to £300,000, but a company with one associate pays tax at 21% on profits up to £150,000, and 29.75% on profits above that up to £1.5 million. This tax rule is supposed to discourage large companies from splitting into smaller ones to take advantage of the lower tax rate, but it catches many smaller companies.
For periods ending before 1 April 2011 where spouses or civil partners own separate companies, those companies are automatically associated companies, even if there is no commercial relationship between them. For periods ending on or after 1 April 2011 the companies controlled by relatives are not associated companies unless there is substantial commercial interdependence between those companies. This change could lower a small company tax bill by up to £13,125!
Substantial commercial interdependence includes situations where one company is financially dependent on the other, where they have common customers or they share the same management, employees, premises or equipment. The commercial links between the companies must be significant before the companies will be treated as associated. Please discuss with us any commercial relationships between your company and companies controlled by your relatives.
Furnished Holiday Lettings Changes
Furnished holiday lettings have some specific tax advantages. On 9 December 2010 the Government released draft tax legislation that is expected to become law from April 2011. This draft law includes three major changes to the taxation of furnished holiday lettings.
1. Separate FHL businesses. In April 2009 the Government announced the tax reliefs that apply to property let as furnished holiday accommodation (FHLs) in the UK, would also apply where the property was located in a European Economic Area (EEA) country. These EEA countries comprise all 27 EU member states plus Iceland, Liechtenstein and Norway. From 6 April 2011 (1 April 2011 for companies), the profit or loss from FHL property let in EEA countries other than the UK, must be calculated separately from the profit or loss arising from UK holiday lettings. Profits and losses from any other overseas lettings must also be calculated separately and not mixed with the FHL profit or loss.
2. Restriction of loss relief. Losses made from FHL businesses after 5 April 2011, either in the UK or elsewhere, won't be available to set against your other income for the same tax year, or the previous tax year. The loss can only be set against future profits from the same FHL business (either UK or EEA based).
3. Change to lettings condition. The periods a property must be let to qualify for the FHL tax reliefs are extended from 6 April 2012 (1 April 2012 for companies). The property must be let commercially as furnished holiday accommodation for 105 days per year (previously 70), and be available for letting for 210 days (up from 140). If you let a number of FHL properties you can average let days across all your FHL properties in the UK for a tax year. You can also average the let periods for all your other FHL properties located in other EEA countries.
Once a property qualifies as furnished holiday lettings, it may fail the letting condition for up to two years and continue to qualify, if you elect for the FHL tax status to apply.
Take Care with VAT
The VATman expects all businesses to take reasonable care when completing their quarterly VAT returns. If you make a mistake, which results in the VAT being underpaid, the VATman is likely to charge you a penalty. Penalties can also be applied where a mistake results in you claiming a higher VAT refund than is due.
If the VATman believes your careless behaviour lead to the error, he will impose a penalty of between 15% and 30% of the underpaid (or over-claimed) VAT. If you can show that you took reasonable care when completing your VAT return, but still made a mistake, you should get away with a zero penalty.
Reasonable care can be demonstrated by taking any of the following actions, when faced with a VAT problem:
- Contact your supplier to query the VAT charged on their invoice.
- Read the VAT notice or VAT Information Sheet that relates to the issue, (if there is one).
- Speak to a VAT officer and make a note of the advice given.
- Seek advice from a competent adviser.
We can help you with your VAT problems, but please raise the matter with us as soon it occurs. Sometimes it can take a while to get to the bottom of a VAT issue, so its best not to leave the problem on the shelf until the day before the VAT return has to be filed!
Tax Numbers for 2011/12
Most of the tax rates and thresholds for 2011/12 were announced on 2 December 2010 as follows:
Under 65: £7,475
75 and over: £10,090
Minimum marriage allowance*: £2,800
Maximum marriage allowance: £7,295
Blind person's allowance: £1,980
Income limit for under 65 personal allowance: £100,000
Income limit for allowances for those aged 65 or more: £24,000
* given at 10% rate and only where one partner was born before 6 /4/1935.
Income Tax Rates
The tax rates for 2011/12 have been frozen at the 2010/11 levels but the threshold at which the 40% tax rate is applied is reduced to £35,000. This introduces a subtle tax increase as it pulls more people into the 40% tax bracket, and increases the amount of income subject to tax at 40%.
Savings rate* (10%): £0 - 2,560
Basic rate (20%): £0 - 35,000
Higher rate (40%): £35,001 to 150,000
Additional rate (50%): Over £150,000
* Only applies to savings income such as interest where earned income is covered by allowances or is also within this range.
The rates and weekly thresholds for NI contributions will be:
Employer's class 1 above primary threshold (above £136): 13.8%
Employer's contracted out for money purchase schemes (from £136.01 to £770): 12.4%
Employer's contracted out for salary related schemes (from £139.01 to £770): 10.1%
Employees' contracted out for both schemes (from £139.01 to £770): 10.4%
Employee's class 1 not contracted out (from £139 to £817): 12%
Employee's additional class 1 (above £817): 2%
Self-employed class 4 (annual figures from £7,225 to £42,475): 9%
Self-employed class 4 additional rate (above £42,475 per year): 2%
Self-employed class 2: £2.50 per week
Voluntary contributions class 3: £12.60 per week
January Question & Answer Section
Q. My employees earn an average of £490 per week, how much more NI will I have to pay for each employee from April 2011?
A. For an employee on average earnings of £490 per week you currently pay employer's NIC of £48.64 per week in 2010/11, but from 6 April 2011 this NIC bill increases to £48.85 per week. That adjustment appears small but it amounts to £10.92 per year per employee. The increase in NIC costs will be much larger for higher paid employees, but smaller for lower paid employees. For an employee on £210 per week, you pay employer's NICs of £12.80 per week in 2010/11, but this will drop to only £10.21 per week in 2011/12.
Q. I had taxable income of about £60,000 in 2009/10, made up entirely of dividends and bank interest. I also pay £2,400 per year into a personal pension. Will I get 40% tax relief on that pension contribution?
A. You will receive higher rate tax relief on your pension contribution if you make the claim on your tax return for 2009/10. A contribution of £2,400 is worth £3,000 to your pension fund as the pension scheme trustees reclaim £600 basic rate tax from HMRC. Your basic rate tax limit will be expanded to £40,400 by the gross value of your pension contribution. Which means £3,000 of dividends which would have been taxed at the higher rate applicable to dividends of 32.5%, will be taxed at 10%, saving you an additional 22.5% in tax, or £675.
Q. Our trade body charges a membership fee in advance for each calendar year, but from 1 December 2010 new members who join online can pay the annual fee for 2011 and become a member immediately, effectively receiving the balance of the 2010 membership period for free. The organisation is VAT registered and the membership fee is subject to standard rate VAT. Is it correct to charge new members 20% VAT when they join online in 2010?
A. The organisation should charge VAT at the standard rate in force at the date of the tax point for the membership subscription. This tax point is the earlier of the date the membership fees is received or the VAT invoice is issued. For new memberships paid for before 4 January 2011, the correct rate of VAT to charge is 17.5%, even where the membership covers the whole of the year 2011.
January Key Tax Dates
1 - Due date for payment of Corporation Tax for the year ended 31 March 2010
14 - Return and payment of CT61 tax due for quarter to 31 December 2010
19/22 - PAYE/NIC and CIS deductions due for month to 5/1/2011 or quarter 3 of 2010/11 for small employers
31 - Deadline for filing 2010 Self Assessment personal, partnership and trust Tax Returns - £100 first penalty for late filing.
Balancing self assessment payment due for 2009/10.
Capital gains tax payment due for 2009/10.
First self assessment payment on account due for 2010/11.
Interest accrues on all late payments.
Much More from Mr P!
Don’t forget that the standard rate of VAT has risen to 20% from 4th January 2011. For further information please see the HMRC website.
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