Tax obligations of Business Start-ups

When you are starting up a business, one of the most important considerations, which is always ignored, is to decide the legal structure of the business. There are various legal structures in place and each of them has various tax implications. I have highlighted few important points in regards to those structures and the implications thereon.

Sole traders

If you are sole trader, your tax obligations are simpler than if you are working through a partnership concern or a limited company. You need to pay income tax, national insurance and register for VAT but only if your turnover exceeds a certain threshold.

But you must inform HMRC because only then they can send self employment tax return and set you up as self employed on their systems. You will then have to declare all your income and claim all the business expenses.

You will also have to notify National Insurance Contributions Office and potentially pay Class 2 and 4 national insurance based on the level of business profits. But you do not have to pay Class 2 national insurance if your earnings are less than £5,595 whereas Class 4 national insurance does not trigger if your earnings do not exceed £7,605 per annum.

Key dates

  • The tax year runs from 6 April to the following 5 April
  • The due date of filing paper return is 31 October after the end of tax year whereas your online tax return must reach HMRC by 31 January after the end of tax year

But please note that you will also have to make the payments on account for the following tax year in two equal instalments if your tax liability for the previous year exceeds £1,000.

Partnership

If you are contemplating joining a partnership or start a business with a partner or partners, then actually, you have three options: forming a conventional partnership, a limited liability partnership or form a limited company with your fellow partners as directors of the company.

For tax purposes, conventional partnership and limited liability partnership gets the same tax treatment and all the above deadlines are applicable to all the partners of the partnership as they are classed as self employed.

However, if partnership employs staff, it would have to operate PAYE and deduct income tax and national insurance as well as employers’ national insurance from their salaries.

Limited companies

The directors of a company are not self employed. In fact, they get paid a salary which is taxed in the same way as other member of staff. But the important point is that a director can get dividends from the company profits. However, a limited company will have to pay corporation tax on its profits.

Key dates

  • If the profit of the company does not exceed £1.5m, corporation tax is payable nine months and one day after the end of company’s accounting period.
  • Corporation tax return must be submitted with HMRC within 12 months of the end of its accounting period.
  • Large companies are liable to pay corporation tax in instalments. A large company is one with taxable profits exceeding £1.5m a year.
  • A company must notify HMRC within three months after the beginning of the accounting period.

Before taking a decision on any of the above structures, you should bear in mind your resources, administrative capabilities and other financial commitments. If you need to explore more to find out which structure is more suitable to your personal requirement, then please do not hesitate to contact me on 020 8543 1991 or drop me an email on mateen@askaccountantsukltd.co.uk

 


 

Professional training costs: Deductible or not?

As we deal with various medical professionals, one of the questions raised quite frequently is if the cost of training an allowable deduction. You can imagine how exciting those conversations are.

Training is a professional requirement and many employed medical professionals pay for those from their own pockets. Hence, they want to know if the above costs can be deducted from their total income.

The case of CRC v Dr Piu Bannerjee (heard in the Court of Appeal) has actually answered some of those questions. The taxpayer worked for the NHS as a specialist registrar in dermatology. For those who are not familiar with the exact medical terminologies, a registrar is still in training. Under the terms of her contract, she was required to attend the external training courses. She claimed those expenses against her income which were rejected by HMRC.

The issue was whether the expenses incurred in attending the training courses and paid by the taxpayer were wholly, exclusively and necessarily in the performance of the duties of her employment. HMRC argued that attendance at the course was simply a means to better performing her duties, improving her professional skills which meant that there was a duality of purpose behind the training and therefore, it would not meet the test of exclusivity.

The Court of Appeal held that the taxpayer had been ‘employed exclusively for training purposes’, not just to attend to patients on the ward, but she was also to attend the compulsory training which was part of her obligations to her employer and therefore, there was no ‘dual purpose’ in incurring those expenses. The result was that HMRC’s appeal was dismissed.

This case could have consequences not just for other medical professionals but for other professions too with extensive professional training requirements (such as architects, surveyors, solicitors, accountants and actuaries). Each case needs to be considered in future and it might be possible in some cases to amend previous returns in light of the above decision.

Finally, it also emphasizes the importance of proper advice in preparing tax returns.

If you would like any advice on claiming the right business expenses or regarding your tax return, please contact Mateen Imtiaz on mateen@askaccountantsukltd.co.uk or 020 8543 1991.

Investment in residential properties by non-residents

Tax liability of residents and non-residents

Any individual’s liability to UK tax depends on whether he is resident, ordinarily resident and domiciled in the UK. An individual who is resident in the UK will be taxed on his global income whereas non-residents are liable to UK income tax only on income that arises in the UK, unless it is specifically exempted etc.

Therefore, rental income arising from the investment property purchased in the UK by a non-resident will be taxed in the UK. If you have rental property in the UK but your usual home is outside the UK, your tenants or the letting agents you use will need to operate the Non-resident Landlord (NRL) Scheme. They need to deduct basic rate tax from rental income before they pass it onto you.

Background

The Non-resident Landlords Scheme is a scheme for taxing the UK rental income of non-resident landlords.

The scheme requires UK letting agents to deduct basic rate of tax from any rent they collect for non-resident landlords unless the agent has authority to pay the particular landlord his rental income gross (without deduction).

Non-resident landlords

Non-resident landlords are persons (this term includes individuals, companies and trustees) who have UK rental income, and a “usual place of abode” outside the UK.

When working out the amount to tax, the letting agent can take off deductible expenses and HMRC will tell an agent not to deduct tax if non-resident landlords have successfully applied for approval to receive rents with no tax deducted.  But even though the rent may be paid with no tax deducted, it remains liable to UK tax. So non-resident landlords must include it in any tax return HMRC sends them.

Applications to receive rent with no tax deducted

Non-residents who are eligible can apply at any time for approval to receive their UK rental income with no tax deducted. This includes applying before they have left the UK or before the letting has started.

Allowable Expenses

Broadly, in calculating the profits of a rental business, expenses are allowable where

  • they are incurred wholly and exclusively for the purposes of the rental business; and
  • they are not of a ‘capital’ nature.

Examples of expenses incurred by landlord which will normally be allowable expenses include accountancy expenses, advertising costs, cleaning and gardening costs, costs of rent collection, Council Tax while the property is vacant but available for letting, ground rent, insurance on buildings and contents, interest paid on loans to buy land or property or to build or improve premises, legal and professional fees, maintenance charges and repairs which are not significant improvements to the property, including mending broken windows, doors, furniture, cookers, lifts, etc., painting and decorating and replacing roof slates, flashing and gutters.

Capital Gains Tax

You are not liable to capital gains tax on any disposal of assets you make during the tax years for which you are wholly not resident and not ordinarily resident here, providing they are not assets held for the purpose of a trade, profession or vocation carried on through a branch or agency in the UK.

Stamp Duty Land Tax

From 21 March 2012 SDLT is charged at 15 per cent on interests in residential dwellings costing more than £2 million purchased by certain non-natural persons. This broadly includes bodies corporate, for example companies, collective investment schemes and all partnerships with one or more members who are either a body corporate or a collective investment scheme.

Consultation

In addition, the government is consulting on a new annual charge on residential properties valued over £2m owned by certain ‘non-natural’ persons, and a proposed extension of capital gains tax to the disposal by non-resident, non-natural persons of residential property for more than £2m.

Budget 2012 announced measures to tackle the ‘enveloping’ of high value properties to avoid the payment of a ‘fair share’ of tax. Non-natural persons are broadly ‘companies, partnerships including companies, and collective investment schemes’.

Property valuations for the annual charge would be self-assessed and submitted to HMRC as part of an ‘annual charge tax return’. The annual charge would be £15,000 for a property valued at between £2m and £5m, and £140,000 for a property worth over £20m.

Tax deductible expenses by Medical Professionals

Where the appropriate conditions are satisfied, any employee as well as self employed consultant, who incur expenses without reimbursement, may claim a deduction against his taxable earnings.

Travel expenses

A general practitioner who also works as a part-time consultant is on call and if issued instructions by phone before leaving home to travel to the hospital. It has been held that he commenced his employment duties when he took the phone call, and so his travel expenses are deductible. (Pook v Owen (1969)

Subscriptions

Two types of subscriptions are allowable as a deduction from earnings, where the performance of the employment duties:

  • requires membership of a certain organisation and it is a condition of employment, or
  • is directly affected by the knowledge concerned or involves the exercise of the profession concerned.

Subscriptions to the following are allowable:

  • General Chiropractic Council
  • General Dental Council
  • Association of General Dental Practitioners
  • British Society for General Dental Surgery
  • General Medical Council

Employee’s liability and indemnity insurance

Where an employee has incurred a liability (to the employer or a third party) as a result of negligence in his capacity as an employee, he will be able to obtain a deduction for the following types of expenses:

  • Insurance premiums paid to indemnify the employee against liability for his acts or omissions whilst undertaking his employment duties,
  • Payments to settle an uninsured liability for the same acts and omissions mentioned above,
  • Payments of costs incurred which relate to the liability, such as court fees.

An employee may also claim relief for payments made within 6 years following the tax year in which a previous employment ceases.

Please call me on 020 8543 1991 or drop me an email on mateen@askaccountantsukltd.co.uk to find out more about allowable expenses for medical professionals.

Taxation services for Medical Professionals

ASK Accountants is one of the very few accountancy firms where your tax returns and tax refunds are processed by the qualified Accountants and the Tax specialists who are members of the ACCA and the ATT.

We have developed a wealth of experience in the specific needs and requirements of medical practices and are fully conversant with all aspects of the NHS. We also understand the pressures of running a practice and can confidently advise on all the financial and taxation matters, including:

  • Income Maximisation
  • Cost control
  • Budgets and Cash Flow Forecasting
  • Partnership Agreements
  • Income Tax Planning
  • Inheritance Tax and Capital Gains Tax

We have also been providing expert tax return services for UK medical workers including doctors, consultants, surgeons, dentists and pharmacists.

The amount of unclaimed tax by medical professionals runs into hundreds of millions of pounds every year. People who work in the medical industry is one of the classes of the taxpayer who are likely to be due tax refunds. We look at any work-related expenses you may be due to claim back including subscriptions to journals and uniform costs.

Please call us on 020 8543 1991 or drop us an email to mateen@askaccountantsukltd.co.uk to find out more about our services.

Directors Salaries for 2012-13

Company Directors can have a nominal salary put through their limited company on which no national insurance is due, and in many cases no tax is due, depending on their other sources of income.

This salary reduces the profits on which Corporation Tax is payable, meaning a reduction in the amount of corporation tax to pay.

This simple  is often referred to as directors salary planning, tax efficient salary, personal allowance salary, minimum salary for directors etc.

In the 2012/13 tax year, the earnings threshold is set to £144 per week. This means that an individual can earn up to £144 per week, where no National Insurance or tax, depending on other income, is due. However, the individual still gets their stamp towards their state pension and are still able to receive SSP and other government benefits.

This equates to a monthly salary of £624 and therefore we should advising the majority of our director clients to take a monthly salary of £624, which equates to an annual salary of £7,488.

In many circumstances, in fact most circumstances, this will save corporation tax of £1,497.60 without costing a penny in tax and national insurance.

If you are using our payroll services, you will be automatically put onto the most tax efficient salary according to your own precise circumstances.

If you would like to know more information or would like to discuss using payroll service, please do not hesitate to me on 020 8543 1991.

Investment Property: To buy or not to buy through a Limited Company

Advantages of buying through a Limited Company

Annual Tax

Net rental income (after expenses) is normally taxed at 20% in 2012/13. Compare this to Income Tax – if your personal income is within the Basic Rate Band (£34,370: 2012/13) then the profits are taxed at 20%, however, tax is payable at 40% if your income is above this amount and 50% on income above £150,000.

Passing the assets on

If you wish to pass on the property to your children, it will be simple share transfer, which can be done by our Accounts Team.

Stamp Duty Land Tax (SDLT)

SDLT would be charged at 0.5%, rather than up to 7% if the property was in your own name.

Limited Liability

The company is a distinct separate legal entity, and you are not liable for its debts, however in our experience, a lender will require a Personal Guarantee from the director, so for security purposes, the mortgage is effectively in the directors own name in any event.

Advantages of buying Personally

Annual Tax

As mentioned above, if your income falls below £34,370 (2012/13) then your annual tax bills remains the same.

Reduced Accountancy Fees

You will have to pay your Accountants less each year, as the costs associated with preparing rental accounts are much cheaper than a Limited company. Also, filing deadlines are much stricter with companies.

Lower Capital Gains Tax

If you have lived in the property for some time before you sell, then you may be able to claim Principal Private Residence Relief (PPR) and Lettings Relief, which could extinguish a great proportion of the gain. These reliefs are not available to Limited Companies, however, companies are able to claim Indexation Relief on the original costs and improvement costs to the date of sale.

No Benefit in Kind (BIK)

If the property is owned by a Limited Company, and you allow it to be occupied by yourself or a family member at below market value, then additional income tax could become payable. This is not the case if you own the property.

Avoidance of Double Tax Charge

There can be double tax charge in a Limited Company when you have sold the asset, paid corporation tax on the chargeable gain, and then when you wish to extract the funds out of the company. This can be avoided with careful planning, however, is not an issue if the property is owned personally.

No need for an audit

If the accounts are large, then a Limited Company may need an annual audit.

How to use a Limited Company for Investment Property

If you wish to use a Limited Company, here is the important information:

  • Any existing properties you own would be treated as disposed of by you to the company, and you would be liable to pay Capital Gains Tax and Stamp Duty Land Tax on the transfer. For these reasons, it is generally regarded as better to keep any existing properties in your own name.
  • Find a lender that is willing to finance a property owned by a Limited Company.
  • Any funds you introduce personally (i.e. the mortgage deposit) you can draw back out of the company by way of your Director’s Loan Account, when the company has funds.
  • If you want to sell the business or retire, then you will need careful planning of how to extract your cash from the company in a tax efficient manner. Usually, the preferred method is to sell your shares to another individual, however, they may be reluctant to buy shares in a company rather than the property itself.
  • If the shares in the company are owned by yourself and your spouse, you could get the benefit of two CGT Annual Exemptions (£10,600 for 2012/13)

Conclusion

You will need to make up your own mind as to which method is beneficial for your circumstances, however, it is generally regarded as better to use a Limited Company when you are looking to build up a large portfolio of properties over a long period of time.

Careful consideration should be made before you buy your properties, as the advantages of using a Limited Company can be restricted once you have purchased the properties.

Should you require any further advise on this matter, please contact Mateen Imtiaz of ASK Accountants UK Ltd, mateen@askaccountantsukltd.co.uk or call on 020 8543 1991.

Are you due a tax refund

ASK Accountants is one of the very few accountancy firms where your tax rebates are calculated and processed by the qualified Accountants and the Tax Accountants who are members of the ACCA and the ATT.

Why would I have overpaid tax?

There are a number of reasons why you may have overpaid. The most common are:

  1. You have only worked for part of a tax year.
  2. You have worked for more than one employer in a tax year.
  3. You have had two or more jobs concurrently.
  4. You were taxed on a basic rate tax code.
  5. Where an international student has worked only 20 hours per week and the PAYE has been operated.
  6. You did not claim the allowable business expenses.

Who would have overpaid tax?

  1. Overseas visitors: If you have left the UK in the last four years, or are leaving the UK in the future, you are almost certainly due a tax rebate!
  2. Car Mechanic or Vehicle Technician: We can help you reclaim tax relief for the cost of tools, equipment and protective clothing purchased for work use.
  3. Nurse, Doctor or Health Professional: We can help you reclaim tax relief for work related expenses.
  4. Teacher or Educational professional: We can help you reclaim tax relief for work related expenses.
  5. Construction workers on the CIS scheme: We will use our experience in dealing with HM Revenue and Customs to reclaim the Maximum Possible Tax Rebate on your behalf.
  6. Other Professionals: We have the experience and the right expertise to help reclaim tax rebates for work related job expenses and overpayments of tax. The most common reasons why someone could be due a tax rebate are for the washing of uniform, professional fees, purchases of tools and equipment and for using your own vehicle for business use.

We offer a NO REFUND, NO FEE service, so please call us on 020 8543 1991 or drop us an email to mateen@askaccountantsukltd.co.uk to find out more about the above.

Follow

Get every new post delivered to your Inbox.