The Taxman likes to encourage small businesses to join the flat rate VAT scheme. This scheme simplifies your VAT return as you apply the relevant flat percentage applicable for your trade sector to all your total business income each quarter, (including the VAT charged), and pay the resulting amount as VAT to the Taxman as VAT. You don't have to worry about reclaiming VAT charged on purchases.
However, the flat rate VAT scheme does not suit all small businesses. The flat rate must be applied to all business income, including interest received from business bank accounts, rents, and sales of assets where VAT was not reclaimed, such as cars or property. This means you effectively pay VAT on the gross receipts of sales on which you have not collected any VAT.
If you are a sole-trader the flat rate should be applied to any letting income you receive in your sole name, as lettings are regarded as a business for VAT purposes. Lettings undertaken as a partnership, perhaps jointly with your spouse, are not counted as part of your sole-trader business income. When you sell a let property the flat rate should be applied to the total proceeds. You can withdraw from the flat rate scheme before you sell a high value item such as a property, but you have to stay out of the scheme for at least 12 months.
Remember the flat rates for most business sectors changed on 1 December 2008, when the standard rate of VAT was reduced to 15%, so check you are using the correct flat rate for your sector.
It's time for employers to complete the annual form P35, and this year section 6 of part 3 is causing confusion once again. This asks two questions which require yes or no answers:
Guidance on how to answer these questions is found on page 18 of the leaflet E10 (2009): Finishing the Tax year up to 5 April 2009. A service company in this context can also be a partnership or LLP, if it has employees. If the business has no employees it will not be completing a form P35.
The introduction the guidance to section 6 says:
The first question narrows those employers who need to consider whether the second question applies.
This is a helpful statement as it leads you to believe that if your business is not a Managed Service Company (MSC) and is not affected by IR35 you can answer "no" to both the first and second questions. However, the detailed guidance to question 1 indicates that you should answer "yes" to question 1 if the owners of the business perform any services in person for the customers of the business, and the income from that work forms at least half the total business income. Services are generally anything that is not the provision of goods.
It is clear that you should only answer "yes" to question 2 if the IR35 or MSC rules do apply to your business, all other businesses should answer "no". However, a "yes" to question 1 and "no" to question 2 may give the Taxman cause for concern as it will not be what he is expecting.
We believe the Taxman wants businesses that are not subject to IR35 or the MSC legislation to answer "no" to both questions 1 and 2 in section 6 of part 3 to the P35 form for 2008/09. If you are concerned that IR35 could apply to your business please contact us.
Company cars still used by company directors, sales representatives, car dealership staff, and certain disabled workers. All of these employees will be affected by changes concerning car benefits coming into effect from 6 April 2009.
It's the London Marathon this month and thousands of people will be running to raise money for their favourite charities. Most of this money will come from individuals, but how should a company give to charity?
The most tax efficient way for individuals to make charitable gifts is under the gift aid scheme. All the individual has to do is declare to the charity that they pay enough UK tax to cover the basic rate tax deemed to be deducted from the gift. The charity can then reclaim this tax. For a gift of £80 the individual must pay at least £20 in UK tax.
A company cannot make donations whereby the charity reclaims the tax, but it can receive tax relief for the gross value of the charitable gift it makes. The donation is deducted from the company's total profits before corporation tax is calculated, so the company receives tax relief at its highest marginal tax rate. This gift is treated as a non-trading charge against profits, which cannot increase a trading loss, or be carried over to another accounting period. The company must be making profits in the year it makes the donation to get tax relief for the gift. There are restrictions on the tax relief if the company or a connected person receives benefit back from the charity, with special rules for companies that are controlled by charities.
Whether it is more tax efficient to give as an individual or through your own company depends on your relative marginal tax rates. A small company currently pays tax at 21%, but could have a marginal rate of 29.75% for profits over £300,000. Individuals pay income tax at 20%, and tax relief at this level is built into the gift-aid scheme. Higher rate taxpayers who pay tax at 40% can reclaim the additional 20% tax relief on their donations through their annual tax return.
However, if you need to take the funds out of your company first in order to get the funds personally to make the gift you will also have to consider the tax to pay in taking the funds out of the company. In this situation the calculations get more complex depending on your tax rate and whether you extract funds as dividend or salary and whether a loss is created as a result. Therefore, please talk to us if considering a large donation using funds presently in your company.
Q. I formed my own IT contracting company in 1987, which made good profits. In 2006 that company bought the assets of several small record labels which were making a loss. In May 2008 I gave up IT contracting and my company has concentrated on music since then. The music business will probably make a loss in 2009. Can I set that loss back against the profits made by the combined music and IT businesses in 2008?
A. Yes you can. As both trades were active in 2008; the IT consultancy and the music business, there is no restriction on the amount of music business loss you carry back from 2009 to set against the profits made in 2008.
Q. In 2005 I retired from my architectural practice and sold my share of the business to the remaining partners. I invested the proceeds in Enterprise Investment Scheme shares (EIS), which I am about to sell, so I understand the gain from 2005 will now be taxed. Are there any reliefs I can claim to reduce that gain?
A. If the gain you made on selling your share in the architectural practice in 2005 would have qualified for entrepreneur’s relief, which is possible if you were a partner for at least a year, you can claim entrepreneurs relief on that 2005 gain when becomes taxable in 2009. Entrepreneur’s relief actually came into effect from 6 April 2008, but we pretend it was in place in 2005 for this test.
Q. A member of my staff has had a serious operation and will be away on sick leave for some weeks. If I send her flowers from the company will this be taxable as a benefit in kind?
A. The Taxman is cool about small gifts like flowers or chocolates to valued members of staff. They are classified as trivial benefits and are not taxable. If you were to send her a cash gift, or a gift voucher that would be taxable.
5 - End of 2008/09 tax year. Last day to use up your annual exemptions for capital gains tax, inheritance tax and ISA's.
14 - Return and payment of CT61 tax due for quarter to 31 March 2009.
19/22 - PAYE/NIC due for month to 5/4/2009 or quarter 4 of 2008/09 for small employers. Interest will run on any unpaid PAYE/NIC for the tax year 2008/09.