With effect from 9th October 2007 spouses and civil partners will now be able to make full use of the nil rate band belonging to each spouse. This is retrospective and applies to anyone with a spouse or civil partner previously deceased. That gives a total inheritance tax exemption for a married couple of £650,000 (for 2010/11). The new rules allow any unused part of the nil rate band on the death of the first spouse or civil partner to be passed to the surviving spouse or civil partner for use on their death.

Say Fred dies on 1 October 2010 with an estate worth £650,000 and his wife did not use her nil rate band when she died previously, he now has the benefit of two nil rate bands totalling £650,000. Now Fred’s executors will pay no IHT at all.

The amount of the nil rate band that can be transferred is the proportion of the nil rate band that was unused on the death of the first spouse or civil partner. For example if on the first death, 50% of a 325K nil rate band was unused, if on the second death the nil rate band is 350K at that time, then 50% x £350K = £175K is available for use in addition to their own nil rate band.

There is a maximum of an amount equal to the nil rate band in force at the time of the second death that can be used in addition. Therefore, it doesn’t matter how many ex-spouses or civil partners there are, it is not possible to have a total nil rate band of over 650K in 2010/11.

Please contact us for futher help.

It is very important to get any legal tax saving schemes right from the start. Otherwise it may mean paying thousands of pounds to the taxman.

This is another step Southside Accountants has taken to exceed client expectations. To see what our clients think about us, please click here.

Please feel free to contact us to help you with your tax savings.

If you’re in business or receive income from property renting, you’ll have to keep the back-up records for five years and ten months (in other words, 70 months) after the end of the tax year when the income was received.

If you don’t have business or rental income, the period of record-retention is reduced to 22 months.

From April 1996:

• the law requires you to keep records of information received from your employer and other records so that you can complete a tax return fully and accurately if you are asked to do so;

• employers must provide their employees with certain information that they need to help them fill in their tax returns (if they get one).

You should keep the following information you receive from your employer:

• P45 which contains details about your pay and tax. If you leave your job during the tax year, your employer will give you form P45. You should keep part 1A of this form.

• P60 containing details about your pay and tax. Your employer should give you this by 31 May after the end of the tax year (if you were in your job at 5 April).

• Details of your taxable expenses and benefits in kind (sometimes known as ‘P11D details’). Your employer should give you these by 6 July after the end of the tax year (if you were in your job at 5 April).

• Your employer may also give you information about expenses and benefits in kind you received which were included in a ‘dispensation’ or ‘PAYE Settlement Agreement’. These do not need to be included on your tax return.

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Please  contact us for further help.

• To keep a mileage record on the use of your van

• Sign an agreement with your employer saying that the van is only to be used for business and insignificant private use and for travelling between your home and the main place of work.

Where the company van is available for private use and you use it for private journeys, this will raise a taxable benefit in kind of £3,000 per annum. For a basic rate tax payer, this would result in £600 tax bill per year. Further, if you are also allowed free or subsidised fuel, this will result in additional benefit in kind of £500 per annum, resulting in a further tax bill of £100 per year if you are a basic rate tax payer.

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The taxman  may issue  form 810 every three years. on some ocassions he may issue it more frequently. If you are issued this form, there is no penalty for not filling the form.  However, if more tax is due to the Taxman you may end up with interset to pay plus penalties for late payment. By not completing the form you could lose tax refund that may be due to you.  So it is good practice to keep HMRC informed of change in your income.  Where you do not complete the annual Self Assement  form, form 810 is a good way to keep the taxman informed.

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Tax Centre for tax help sheets.

If the amount up the level at which national insurance becomes payable of £5,715 in 2010/11 was paid to them as wage, they would pay no tax on it and your business profits could be reduced.

Please note that children under the minimum school leaving age can only work a limited number of hours per week and local by-laws may restrict their working hours further.

If you pay just 20% income tax and 8% Class 4 National Insurance this would save you £1600 every year on each salary. And how many children do you have?

STOP! It’s not quite that simple. To pay wages like this you need to follow the following rules:

• It must be for work actually done. Now it’s going to be tough to argue your 2-year-old son is working for you but many wives/husbands do work and mature children may also help out.

  May be they do the books, answer the phone, stuff envelopes, etc. Keeping out of your way so you can get on doesn’t count, as valuable as it may be. Draw up a list of their responsibilities to help your case.

• At present they do it for free because it’s a family business but they should and can be paid for it. If you make your spouse a director, all the responsibilities of this imposed by Company Law must be worth something.

• You can also do this where you have property that you rent out and the spouse manages the properties.

• If this is the case, it’s reasonable to pay them a salary commensurate with what they actually do. How much would it cost to get someone in to do that job? The minimum wage level is at least a good place to start but more if you can justify it.

• The amount must actually be paid. It’s no good the accountant just putting it through the accounts at the end of the year.

  Pay it, ideally through the bank rather than cash so that it’s easy to prove it’s been paid and record it in your accounting records.

• Comply with any PAYE procedures such as getting a P46 signed, completing an end of year PAYE forms as you would do for normal staff. Remember, it may also help keep up their National Insurance contribution record even if they don’t pay any National Insurance on the salary.

HM Revenue & Customs It is necessary to notify HM Revenue & Customs of your existence by completing forms CT41G (companies) or CWF1 (sole traders/ partnerships). The form notifies HM Revenue & Customs of your accounting date, your accountant, and also enables a PAYE (Pay As You Earn Scheme) to be set up, which is a requirement if you are to be an employer. If you fail to register within the first three full months of commencing business a penalty of £100 may be levied.

H M Revenue & Customs – NI Contributions Office

Depending on the level of profit, sole traders and partners have a liability to Class 2 NIC, and these are payable either quarterly or monthly by direct debit. Class 2 contributions are at a weekly level of £2.40 (where annual earnings are £5,075 or more for 2010/11) and the necessary form to collect Class 2 contributions should be completed at the same time as the form CWF1. Leaflet CA02 ‘National Insurance contributions for self-employed people with small earnings’ gives full details and an application form for exemption from liability.

H M Revenue & Customs – VAT

You need to consider if it is beneficial to be VAT registered from the outset. If you are registering for VAT, form VAT 1 needs completing, and if you are a partnership, form VAT 2 needs to be completed, in addition to the VAT 1, giving details of all the partners. Alternatively, an online registration process is available on HMRC’s website. If turnover exceeds the compulsory registration limit, £70,000 at 1 April 2010, in any period of 12 months or less Customs must be notified within 30 days of the end of the month in which the threshold was exceeded.

Dealing With The Penalties

At the end of an enquiry or investigation, there may well be penalties to deal with.

Firstly, there is interest to pay but HMRC see this as just financial compensation for them not having use of the money from when it should have been payable and so is largely fair and at a reasonable interest rate.

However, penalties are also due. There is a new penalty regime for return periods starting on or after 1 April 2009 or where the due filing date is on or after 1 April 2009. In fact the new penalty system replaces all penalties for incorrect returns which lead to an underpayment of tax for income tax, corporation tax, PAYE, National Insurance and VAT.

Penalties under the new legislation are based on the potential lost revenue. The starting point for the maximum penalty depends on the behaviour that gave rise to the inaccuracy.

For unintentional errors…

• Mistakes made despite taking reasonable care – no penalty.
• Mistakes made where there is a lack of reasonable care (i.e. carelessness) – maximum penalty is 30% of the potential lost revenue.

For deliberate inaccuracies….

• For deliberate mis-statements – maximum penalty is 70% of the potential lost revenue.
• For deliberate mis-statements which are then concealed – maximum penalty of 100% of the potential lost revenue.

So the starting point involves an assessment of the behaviour that gave rise to the penalty. And what is reasonable care will vary from taxpayer to taxpayer and is judged on the circumstances and abilities of the individual.

The maximum penalties can be reduced based on the disclosure made by the taxpayer to the taxman. Where a disclosure is unprompted in that it is made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the inaccuracy, the minimum penalties can be as follows…

• For careless errors – 0% (as opposed to 30%)
• For deliberate mis-statements – 20% (as opposed to 70%)
• For deliberate mis-statements which are then concealed – 30% (as opposed to 100%)

However where a disclosure is prompted as opposed to unprompted the minimum penalties are as follows…

• For careless errors – 15% (as opposed to 30%)
• For deliberate mis-statements – 35% (as opposed to 70%)
• For deliberate mis-statements which are then concealed – 50% (as opposed to 100%)

Please note that once an enquiry starts, it would be very rare for a disclosure to be unprompted if it is about something related to the enquiry.

How much the penalty is reduced from the maximum penalty to the minimum penalty is then based on the quality of the disclosure. The quality factors to consider are…

• Telling HMRC about it – up to 30% reduction
• Helping HMRC to quantify the inaccuracy – up to 40% reduction
• Giving HMRC access to the records to ensure inaccuracy is fully corrected – up to 30% reduction

So for example, someone with a prompted disclosure of a deliberate mis-statement with concealment can have the penalty reduced from 100% to 50%. If you score 25%, 15% and 30% on the above 3 items, this will give a 70% reduction of the 50% reduction which is 35%. i.e. the penalty will be 100% less 35% = 65%!

If the penalty arose because you failed to take reasonable care, HMRC can suspend the penalty for a period of time, a bit like a suspended sentence. As long as you behave during that time, the penalty will not then be payable.

The Old Penalties

Although the new regime is coming in based on return dates, there will still be penalties around under the old rules for some time. So these are summarised here.

The starting point is 100% of the tax underpaid. That’s an awful lot and another good reason to get your Tax Return right in the first place.

However, the penalties will be mitigated downwards according to certain factors as follows:

• Up to 40% discount relating to the amount of tax at stake.
• Up to 40% discount for the degree of co-operation of the taxpayer.
• Up to 20% discount for voluntary disclosure at an early stage.

In theory the penalty can go down to zero but this is rare. Something like a 10% to 30% penalty is more normal. If you disagree on the penalty, you can again make an appeal.

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Technically HMRC  now start with enquiries rather than investigations into your Tax Return. Let’s start with the basic facts…

• The enquiry may be an aspect enquiry into one aspect of your tax return or a general enquiry into the whole return.

• Over 250,000 enquires are carried out every year and most are innocent enough affairs but if it leads to a full-blown investigation, it’s not nice.

• The change to the self-assessment system has allowed HMRC to spend more time on enquiries and they have also put more and more resources into it.

• Interestingly, most enquiries are into the affairs of men, rather than women.

• HMRC are also becoming more business like, targeting the businesses where they are most likely to get a result.

• Whether they admit it or not, HMRC do have internal targets for the number of investigations to be carried out that are there to be met.

• HMRC may select you for enquiry for a reason or you may be chosen at random for a full enquiry.

• The problem is, they don’t tell you whether you have been picked randomly or not, and they don’t tell you what they already know. They often indicate they know something to make you confess to perhaps more than they know about.

• It all starts with a standard letter saying they are going to make an enquiry into your return and assuming you have an accountant, they will send a separate letter to them with the details of what their enquiries are. From this you can normally tell whether it is an aspect or general enquiry into the whole return.

• Aspect enquiries do have the potential to turn into full enquiries. A full enquiry will turn into an investigation when it spreads over into looking into your affairs for more than one year.

• With effect from 2007/08 onwards HMRC have one year after the date you file your tax return to enquire into it.
• After that you are safe unless they make a discovery of fraudulent or negligent behaviour. In these cases they can go back up to 20 years, although 6 years is the norm. It therefore helps to give them all relevant information when submitting your return to help ensure finality.

• Even your death isn’t the end of the matter as the enquiry can still continue through your representatives. In war, your death is the end, but not so with tax.

As an example, let us say the Taxman finds just £1000 of income that hasn’t been declared on a return, the tax on this could be £400.

If they can show this was likely (not proven) to have occurred for 6 years, that tax bill becomes £2400. Interest will now be due on this, which could perhaps be another £1000.

In addition, there can be a penalty that can be as much as the tax. And in some situations from 1 April 2011 this can be up to 200% of the tax for those with financial interests outside the UK who have failed to declare the full extent of their offshore liabilities.

You are now looking at a tax bill of up to £5800, just because they found £1000 of income missing in one year.

Imagine how much you’re looking at if £20,000 was missing from your accounts in a year.

Aspect enquiries often tend not to lead to fines and penalties but general enquiries are more likely to. Jail is always an option but very rare amongst small businesses and is reserved for cases of serious fraud.

Accountants are more likely to go to jail for tax evasion and no doubt lists of dodgy agents exist at local tax offices whose clients are therefore more prone to enquiry.

The problem with investigations is that the Inspector seems to have all the time in the world to go through your affairs with a fine tooth comb, to the extent of identifying what restaurants you eat in, where you go on holiday, etc. They do this to try to prove the income declared in your accounts cannot support your lifestyle. They may want detailed information going back years.

Can you…

• Remember why you didn’t have any cash takings on the 3^rd November 2001?

• Identify where a banking in your private bank account 6 years ago for £123.18 came from?

• Remember how much a week you spent on milk in 2002?

It’s not out of the question that some tax inspectors will want to know the answers and be suspicious if you can’t answer.

The taxpayer on the other hand has to pay an accountant and so time is often limited by cost constraints and even when you’ve done nothing wrong. It can end up being easier for some taxpayers to just give up the fight, particularly when the investigation has been going on for a couple of years.

Please note a full investigation can take years, not months to conclude.

Both the financial pressure and the pressure of just dealing with the investigation enquiries can be an enormous strain to taxpayers if they let it get on top of them. It’s important not to panic or be pressurised into surrendering.

Also, did you know accountancy expenses in dealing with a tax investigation are not usually deductible as an expense against tax.

Sometimes it doesn’t pay to own your own home, have savings, etc. There are some clients that just don’t worry about a Tax Investigation and are happy to concede whatever the Taxman wants. Often, these are clients with few assets who know that whatever the Inspectors finds, they can’t pay. If you haven’t got the assets to pay, HMRC aren’t going to be able to take anything from you. If this is the case with you, it helps to point this out at an early stage.

Remember also, ignorance of the law is no excuse. As Lord Denning once said, “ignorance is a misfortune, not a privilege.”

Expenses to Claim

• The cost of any goods or services you use fully for your business can be deducted from your sales revenue for tax purposes. Where an item is used partially for your business and partly for private purposes, such as your private car or home, you can claim the business proportion of the costs against your business profits. However, you must be able to justify the business proportion with evidence such as the miles driven, or space used by the business.

• Capital allowances – if you purchase an item that is expected to last several years, such as a van, you can claim a special deduction known as a capital allowance. The first £100,000 you spend on equipment each year qualifies for 100% capital allowances in the year of purchase. This does not include cars.

• Loan interest – if you take out a business loan the interest paid on that loan can be deducted from your sales revenue. The loan must be taken out to fund your business, rather than a personal loan or credit card borrowings.

Government Support

• Government funding – if you live in an area in the UK that has been designated as a regeneration area you may qualify for a government funded programme to help people start their own businesses.

• Charitable support is also available from the Prince’s Trust throughout Britain for those aged 18 to 30 who wish to start their own business.

• Self-employed credit – if you have been registered as unemployed for at least six months you may qualify for a self-employed credit of £50 per week if you start your own business. Ask at your local Jobcentre Plus office for more details.

• Working and child tax credits – You may qualify for these while you run your own self-employed business. Your tax credit award is based on your family’s joint income including your self-employed profits, but it will also be determined by the number of hours worked by the adults in the family, and the number of children aged under 16.

Please contact us to see how we can help you

It should take you no more than 20 minutes to complete this check list.

Please feel free to contact us to arrange a one hour consultation with us to discuss any areas of tax savings.

Link to Tax Busting Check List: Tax Busting Check List

If your employer  allowed you unlimited use of the van, this will be assessed under PAYE as benefit in kind of £3000. If your employer also pays for the private fuel, there will be additional £500 benefit in kind on you. If you are basic rate tax payer (20%)  for the tax year 2009/10, your tax bill for private use of the van will be £700.

Where your only private use of the van is for home to work  travel (and vice versa) this is not treated as private use so you will not be taxed under these circumstances if all other private use is not allowed by your employer. Your employer should ask you to sign an agreement stating that you will only be allowed to use the van for private purpose to travel from your home to work and vice versa. Any other private use would not be allowed. You also need to keep mileage logs recording your mileage for each business journey and the reason for the journey.

To ensure you do not end up with an unwarranted tax bill, please make sure you that you sign the only business use agreement before the new tax year starts – 6th April.

http://www.southsideaccountants.co.uk/free-consultation.html

This is a plain English Guide to Income tax.

What is income tax?

This is tax paid on money you earn, It includes your salary, some state benefits, savings and pensions. If you are an employee benefits such as company cars are also taxed.

Please note the rates below are for the tax year 2009/10.

How much tax do you pay?

This depends on how much you earn.

All of us are entitled to earn up the the level of our personal allowance of £6,475 (for the tax year 2009/10) without being taxed. This is your tax free income that the taxman cannot touch.

Those of us who fall in the higher age bracket get a higher level of personal allowance:

• Aged between 65 to 74 the personal allowance is £9,490

• For people  aged 75 and over it is £9,640

There is also a blind person’s allowance, and married couple’s allowances based on age

After using your personal allowance, any income that you earn after £37,400 you will be taxed at 20% . Any income above £37,400 after using your personal allowance will be taxed at 40%.

Any interest paid on your savings, the first £2,440 above your personal allowance will be taxed at 10%.  However, if your other income (non savings) exceeds £2,440 after deducting your personal allowance, then any interest from savings will be taxed at the basic rate of 20%.

How is income tax paid?

If you are:

Employed: Tax will be collected through PAYE (Pay As Your Earn). If you receive a pension, your pension provider will collect the tax in the same way.

Self Employed: Tax will be paid through self assessment. You or your accountant will complete a self-assessment form to determine your tax bill.

Savings Income : Your bank will deduct tax from the interest you receive it.

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If you are selling some stuff  that is lying around in the attic then the answer is unlikely. To pay tax on what you sell you either need to be trading or make a capital gain.

HMRC are likely to consider you as trading  where you are buying or making goods to sell them on to make a profit. This also applies where you sell these goods for a third party and you are paid a commission on your sales.

If  you just sell  odd items on Internet auctions, classified adverts or car boot sales it is unlikely HMRC will regard you as self-employed. This is because in most situations the amount you receive for goods sold is less than the amount you originally paid for the second hand goods you have put up for sale.  Tax is only to be paid where you make a profit.  You have have not made a profit here.

The same applies to capital gains tax. You only need to pay this tax on gains you made on selling certain assets. You will only make a gain where you sell the asset for more than what you paid for it or where the value of the asset has increased over the period your ownership and price you sell it for is above this increased value. The items you sell are more than likely to personal effects or goods – these are known as chattels, they are separately worth than £6k when you sell them. They are exempt from capital gains tax so it is unlikely that you will make a gain that is chargeable to tax.

If you would like us to help just get in touch.

http://www.southsideaccountants.co.uk/taxation-services.html#perstax

With a repayment mortgage, the interest element decreases over the period of the loan as more of the mortgage is repaid. This means the amount of interest you can offset against your rental income decreases and your tax bill rises.

The solution  may be to take out an interest only mortgage…

• Repayments would be less each month and the mortgage would not reduce so the interest would  remain high.

• The saving on the lower mortgage payments can be  added to the repayments on say your normal home mortgage and so repay this off quicker instead.

By organising  your mortgage in this way, you ensure your tax on the rental income is minimised. What you are doing is paying less interest on your residential mortgage which is not tax deducible and more interest on your buy to let mortgage which is!

http://www.southsideaccountants.co.uk/promises.html