Here is the latest tax tips and news from Merchant McDonald & Company.
Cash Basis
From 6 April 2013 you can use two "simplifications" to make accounting easier for your unincorporated businesses: the cash basis and fixed rate deductions. If your business falls within the size criteria you can use one or both of these simplifications, or neither, the choice is yours.
To start to use the cash basis your business must have annual turnover of less than the VAT registration threshold (currently £81,000). There are slightly different rules if you also claim the Universal Credit benefit (successor to tax credits). You must stop using the cash basis if your turnover reaches double the VAT registration threshold.
You can opt to use the cash basis on a year by year basis and make that decision after the end of the year when you complete your tax return. For example you can opt into the cash basis for 2013/14 then and opt out for 2014/15. There are no specific rules to prevent you from doing this, but adjustments may need to be made to your taxable income when moving out of the cash basis to the accruals basis (normal accounting).
You can't claim capital allowances (CAs) for most assets you buy while using the cash basis, as a full deduction is given for the cost of the asset when it is paid for. But the cost of a car can't be deducted under the cash basis, so CAs for cars used for the business should be claimed, subject to a reduction for any private use of the vehicle.
However, claiming CAs for the car means that fixed rate deductions (45p or 25p per business mile) can't be claimed for that vehicle. It is possible to have some cars subject to fixed rate deductions (for which CAs haven't been claimed) and others that don't qualify for fixed rate deductions (where CAs are claimed) within the same business.
There are a number of confusing rules about capital allowances which have been claimed for assets that you hold when you start to use the cash basis. Our tax experts can talk you through those rules if they apply to your business.
R&D Enhanced Deductions
Companies (not unincorporated businesses), can claim enhanced deductions for qualifying costs they incur on research and development (R&D) projects. For small companies the deduction can be 225% of the qualifying costs, and since April 2012 there is no minimum spend required in an accounting period.
The major barrier to claiming this tax relief is working out whether your project qualifies as R&D. To qualify it must push the boundaries of scientific or technical knowledge. Ask yourself:
a) Has anyone else done what we are trying to achieve with this project?
b) If another business has achieved that goal, have they kept their discovery secret?
If the answers to those questions are a) no and b) yes, then you probably have an R&D project, but you need to monitor the point where R&D turns into regular production of the new product or process.
Some R&D projects can attract grant funding. If this applies to your company you need to be careful as a Government funded grant can disqualify the project from R&D tax relief for small companies. Your company may still qualify under the large company scheme for R&D tax relief but the maximum deduction under the large company scheme is 130% of the qualifying costs rather than 225%.
If your accounts show a loss after the enhanced deduction for R&D costs, you can claim a payable tax credit by surrendering that loss to HMRC. This will only apply if you have claimed the R&D deduction under the small company scheme, not the large company
We can help you jump through the hoops necessary to claim R&D enhanced relief, but we will need to talk about your R&D projects in detail.
Let Property - Repairs or Improvements
If you let out residential property you need to know whether you can receive a tax deduction for the cost of replacing or repairing furniture and fittings provided inside that property. The cost of equipment used to maintain the outside of a property, or used in the communal areas of a building containing multiple dwellings, is always deductible.
When you fit something for the first time to a property, such as a fitted kitchen, that cost will form part of the capital cost of the building and will only be deductible when you sell the property. If you repair a fitting or replace the fitting with something of the same quality, the cost counts as a repair which can be deducted from the rental income.
If the fitting is replaced with items of a higher quality, the whole cost must be treated as a capital improvement, which is only deductible from the proceeds of selling the property. This does not apply if the replacement is superior just because the modern equivalent of an outdated material or design is used. For example when you replace an old central heating boiler with a new condensing boiler, which does the same job but with greater energy efficiency, that will be a tax deductible repair not an improvement.
Let Property - Furniture and Fittings
When your property is fully furnished you can claim a wear and tear allowance (10% of the net rents), each year to cover the cost of replacing furniture and furnishings such as carpets and curtains. You can only claim capital allowances for furniture used inside a property which is let out commercially as furnished holiday accommodation for at least 140 days a year (other conditions also apply).
Before 6 April 2013, the taxman allowed landlords of unfurnished and partly furnished properties to claim for the cost of items provided in those properties under the "renewals basis". Now the taxman has changed his guidance, saying that claims for "renewals" can only apply to small items such as toasters, lamps, or rugs.
This denies a tax deduction for the cost of larger loose items such as fridges, cookers, carpets and curtains. The cost of replacing items which are fixed to the building, such as a fitted oven or hob in a fitted kitchen, are counted as "repairs", and are deductible as described above.
However, law still allows deductions for "any implement, utensil or tool" used for the rental business. The taxman is interpreting this to mean only small value items, but the law makes no reference to the value of things that qualify as an "implement, utensil or tool".
If you want a tax deduction for say the cost of the washing machine you have replaced in your let property, you can choose whether to follow the taxman's opinion or the law. If you chose to go against the taxman's opinion and deduct the cost in your accounts, we recommend you explain what you have done in the white space on your tax return.
Talk to us about the risks and benefits of claiming for items against the taxman's guidance.
December Questions and Answers
Q. HMRC has reminded me to claim the employment allowance for 2014/15 worth £2000. My company doesn't pay any employers' NI on my very low salary, so I thought I couldn't claim the employment allowance. But the Government website referred to in the HMRC letter says I can get a refund of my VAT, PAYE or corporation tax as I haven't used the full employment allowance for the year. How do I get my hands on this money?
A. Unfortunately the GOV.UK website is wrong. The employment allowance can only be set against employer's class 1 national insurance contributions due in respect of wages or salary paid. It cannot be set against any other tax such as VAT, corporation tax or PAYE. The unused portion of any allowance cannot be carried forward to the next tax year.
As your company has not paid any employer's NI for this tax year, due to your low salary, it has nothing to set against the employment allowance. You can claim the employment allowance by submitting an Employer Payment summary (EPS) to HMRC under RTI and ticking the employer allowance box on that EPS, but it will have no effect until the company is due to pay employer's class 1 NI.
Q. I started my new business this summer and raised my first invoice on 1 August, with no VAT added. I realised I would need to register for VAT very soon, so I applied online. The VAT registration confirmation said my business is VAT registered from 4 August 2014. Do I need to do anything about invoice number 1?
A. As your VAT registration date fell after the date of your first invoice you don't have to do anything about that invoice. It has been issued correctly without VAT added. When you do your first VAT return, be careful not to include that invoice. However, you can claim for VAT you incurred on services used by the business in the six months before VAT registration date.
Q. My company is closing down. All the bills are paid and I want to close the PAYE scheme. How do I do that under the RTI system?
A. You can simply close the PAYE scheme by submitting an Employer Payment Summary (EPS) or full payment submission (FPS) indicating that it is the 'final' for the year and tick the box to say the PAYE scheme has ceased. You complete the end of year questions on the EPS as if you were at the end of the tax year, and that's it - job done!
December Key Tax Dates
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/12/2014
30 - Deadline for 2013/14 self-assessment online returns to be filed if you are an employee and want tax underpaid to be collected by adjustment to your 2015/16 PAYE code (for underpayments of up to £3000 only)
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