Tax on sale of assets for individuals

Posted by admin on January 01, 2018 in Tax

This article looks at the basics of capital gains tax on gains in the sale of assets by individuals. Capital gains tax is paid by individuals whereas companies pay corporation tax on capital gains.

HMRC refers to sale of personal possessions. It is useful to note that, they are concerned with the sale of items for more than £6,000, and would include, a second property ,  jewelllery, paintings, antiques, coins and stamps, matched dining tableware and other items.

Items excluded from Capital gains tax include cars, clocks and other items with a limited lifespan. However, these items become included if they are used for business puirposes.

When a person or couple sell their home, they are usually eligible for Private Residence Relief.  They would need to check to verify their eligibility with HMRC. Where an individual sells a property which is not a sole residence, they can expect to pay

Indexation allowance may be available and is based on inflation records known as a consumer price index . Indexation allowance models the effect of recorded inflation on the cost price of the asset. Generally, inflation and therefore, prices, go up, except where a deflationary trend exists. The application of indexation allowance will usually result in a reduction of the capital gain

Once the amount of the gain is calculated, the tax is worked out using the applicable  annual exempt amount and the Capital Gains Tax rates.

The annual exempt amount is the amount of capital gain an individual may earn from Capital gain on disposal of personal possessions without taxation.

In the tax year 2016-17, the annual expempt amount was set at £11,100. The tax ratesrange from 10% to 28% depending on the type of asset and other factors.

Capital Gains are assessed via the standard self assessment system, and so, for those who currently do a return,  the relevant pages should be filled in. If you have not previously done a self assessment return, and feel that you may require on, please contact us.

 

what is a tax rebate

Posted by admin on November 11, 2017 in Tax

You might have asked your self this question before. What is a tax rebate.
The phrase tax rebate refers to a tax refund. That is, hmrc returns cash its already collect as tax from a tax payer.This article takes a look at tax rebates for employees, sole traders and companies.

Tax rebates for employees

Each employee on PAYE should receive an annual P800 tax calculation letter. This letter will often confirm where Hmrc has calculated an over payment of tax due to reasons like taxcode changes, periods of un employment, and other unexpected errors. The letter should indicate how the tax rebate should be collected or claimed. Much of the time, for an employed person, the rebate will be given via the taxcode resulting in an adjustment to their PAYE taxes.Employees can claim a tax refund on costs incurred on things like uniforms for their work. To process the tax rebate, the employee can fill in a P87 form in paper and post it to HMRC or file a claim online via government gateway.

However, if the employee is already filling a tax return, they’re required to claim for expenses on the tax return.Typically, these would be people with extra non PAYE income, or higher rate tax payers.
If the claim exceeds £2,500, the employee is required to make the claim via a self assessment tax return. If the employee in not registered for self assessment, the employee has to register in order to claim the tax rebate.

Tax rebates for Self employeds and Sole traders

For self employeds, sole traders, partners in partnerships or other persons who fill tax returns, tax rebates have to be claimed via a self assessment tax return. Generally
only expenses incurred in the period being taxed for the purpose of self assessment, can be claimed via the tax return. Expenses which were not claimed in previous years have to be the subject of a separate letter to HMRC. However , losses can be relieved

Tax rebates for Self employeed individuals under CIS

Construction industry sole traders and self employeds are required to fill in a self assessment tax return. Due to the fact that their income generally suffers a flat 20 percent deduction, they will often get a tax rebate after they file their tax return. The main reasons are usually expenses and the tax free personal allowance. However, the higher their income , the more complex the computation is, an the less likely a rebate is.

Tax rebates for companies

For incorporated businesses ,a tax refund can arise when losses disclosed in the most recent accounts are offset against the prior year’s taxable profit. A claim for tax relief is made in the corporation tax return . Where a company,is itself a contractor in the construction industry, it is likely to suffer CIS deductions. Reclaiming the deductions may be possible where the taxable profit of the company indicates a tax amount due thats less than payments taken from the companies income.

Summary

Tax rebates are a refund of tax paid by HMRC where the tax payer has paid more tax than is due at that time. Tax refunds are also available when loss relief is suffered by a business corporate or sole trader in the normal course of business. Business Loss relief is not available to employees, however employees can make a claim in writing for employment expenses not claimed in previous years. Note that while every effort is made to keep this article accurate, as at May 2016, it should not be taken to be profssional advice at any time. Furthermore, income tax law changes constantly.

vat flat rate scheme

Posted by admin on June 22, 2017 in Tax

The VAT flat rate scheme is offered to small businesses by HMRC. To use the vat flat rate scheme, the business must be VAT registered. Essentially, the business can work out VAT due solely on their gross sales turnover.

The business charges its clients the applicable  rate of VAT on its  sales, as per the VAT rating of the product being sold. Hence , sales invoices have VAT on on them for the buyer to reclaim output VAT and the rate indicated by the invoice

The business itself works out the VAT due to HMRC as a multiple of the gross sales value of vatable invoices for the VAT period and the vat flat rate scheme percentage. The Flat rate VAT percentage varies by business sector. The applicable rate will be confirmed by Hmrc on registration for the Flat rate scheme.

Ted items only

For illustrative reasons, a typical rate would be 15% on Gross sales. When issuing an invoice, a business on the vat flat rate scheme must show the net , vat and gross amounts separately on the invoice.

Example: company Great shops ltd registered on the vat flat rate scheme, sells standard rated items only, Vat rate 20%. However, the company’s flat rate percentage is 15%.

When great shops ltd sells a product for £120 cash received in full, the VAT invoice will show : net £100, vat £20, total £120.

The VAT due to HMRC on this individual transaction would be 15% x £120 = £18. It should be noted that there is no input tax deduction on expenses.

The £18 and the 15% do not appear anywhere on the invoice, the customer can reclaim the full £20 from HMRC if they are Vat registered or from outside the EU. Other factors not considered might apply.

Not all small businesses benefit from the vat flat rate scheme, and tax law changes from 2017 mean that businesses with  limited costs might not benefit at all.

To explore further the issues raised in this article, please drop us a line we will be happy to go through the applicable facts with you. This article is not intended to represent financial advice.

Taking money out of a limited company

Posted by admin on June 03, 2017 in Limited Companies

When you are a majority shareholder and Sole director of a limited company in the United Kingdom, there are a number of legitimate routes to extracting the profits from the company. You may also wish to retrieve monies you have put into the company.

Usually, what happens is that directors draw out money from the comapany bank account continously. Then at the end of the financial year there is often a large directors loan account to  deal with. The otion chosen will depend on the circumstances at the time.

Always take professional advice before taking money out of a limited company. A company is a legal entity and has a separate legal identity from its managers and shareholders. All the monies or assets taken out of a company have to be accounted for.

Repayment of directors loans: Where the director has put money into the company over and above the share capital. The director is entitled to a repayment of these monies without tax being deducted. However, if the director charges the company interest, the interest would be a chargeable expense to the company, and taxable income in the hands of the director.

Taking a Salary: The director can take a salary and this salary would be an expense to the company. The salary would be taxable income in the hands of the director and might require setting up a PAYE scheme.

Take dividends: The company can declare a dividend if it has distributable reserves. So a company making losses, which has no historical profits brought forward should not be declaring profits per Companys Act. Dividends may be taxable inthe hands of the director.

Distributable reserves: Generally, this means the cumulative profits of the company. If a comapny has no cumulative profits, then it should not declare a profit. Directors should bear in mind that distributable profits are after all taxes and cumulative losses have been accounted for. A cummulative loss means there is no distributable profit.

All the options considered in this articles do require some work and the right choice will depend on the circumstances. Companies house lays out formalities that should be followed in running a company including the resolutions you should have on file related to these matters. In a multi director multi share holder environment, you  may need the documented consent of the other directors and shareholders.  It is good practice to document your actions and retain these documents. You must also retain records identifying the monies taken by directors and shareholders.

Please note that this article is not intended to be taken as business advice and you should consult your retained advicers.

Construction Industry Scheme CIS

Posted by admin on March 22, 2016 in Tax

Construction industry scheme outline

The construction industry scheme operated by HMRC in the united kingdom, requires that construction businesses, contractors, in the UK withhold an amount for taxes when making payments to independent contractors.

  • The Contractors in the construction industry who employ subcontractors, have to with hold money from what they pay their sub contractors. They have to be registered with HMRC as contractors.
  • Sub contractors do not have to register HMRC as sub contractors .
  • 20% deducted from HMRC registered sub contractors.
  • 30% deducted from HMRC unregistered sub contractors.
  • Contractors have to keep and retain detailed records of payment and deductions
  • Money deducted has to be paid to HMRC by the company with holding the money.
  • The money deducted  under CIS is a forward payment against the sub contractors tax liability for the relevant financial year.
  • contractors are required to issue a Payments and deductions statement to their sub contractors.

Reclaiming Construction industry scheme deductions

The way CIS is operated often results in the sub contractor been due a tax refund. This tax refund is often referred to as a tax rebate.
There are a number of things to consider at the financial year end regarding tax liability and CIS deductions.

  • The deductions suffered by the sub contractor will be offset against the sub contractors personal tax liability at year end if the sub contractor is self employed this is usually handled via a self assessment tax return.
  • A company can suffer cis deductions on its income if the company is itself a sub contractor. The same company can also have sub contractors and be required to make deductions of the income paid to its sub contractors. The deductions collected from sub contractors can be off set against the deductions suffered by a sub contracting company who also uses subcontractors.
  • CIS deductions can be offset against a businesses PAYE liabilities.
  • CIS deductions cannot be offset against corporation tax liabilities or reclaimed against corporation tax payments.
  • Where there is insufficient PAYE related liability and payments to offset the CIS deductions, the are other CIS reclaim procedures available at HMRC.

 

limited liability partnerships

Posted by admin on February 15, 2016 in Business

In English and Scottish Law, a limited liability partnership (LLP) is essentially like a partnership but with liability for losses limited to the partners investment in the LLP. Limited liability partnerships were introduced to English and Scots law by the Limited liability partnerships act 2000. In essence, the act provides for the limited liability partnership to be a separate legal entity from the partners in the partnership, and limits the  partners liability on wind up to their contribution to the LLP.

LLPs must be incorporated at companies house. The law requires that two or more persons intending to go into partnership and partake in a legitimate business , subscribe their names to an incorporation document, which should then be delivered to the registrar of companies at companies house.

The incorporation document also sets out a number of things. This includes naming the persons whoo will be designated members, or stating that all the members will be designated members. Designated members function like the directors of Limited companies. They sign the accounts and appoint auditors where required. There must always be at least two designated members, and where two are not appointed, or there is only one, all members would be deemed to be designated members. Like all legislation, this may be subject to change.

Once all legal requirements have been fulfilled, the registrar retains the incorporation document or a copy of the original and issues a certificate of incorporation for the Limited liability partnership.

Limited liability partnerships have to submit accounts to companies house at least once a year. The accounts are not subject to companies act format, but accountants are guided by UK GAAP such as the Statement of Recommended Practice: Accounting by Limited Liability Partnerships, a SORP

LLPs have to submit a partnership tax return just liked standard partnerships and the individual members are subject to personal tax under self assessment. The members are taxed on their share of the LLPs profit or loss for the accounting period, plus any other income they have for the financial year.

The LLP structure offers the members a significant benefit over the traditional partnership. This is the limited liability element. And as the LLP has a legal personality, the members of an LLP are not held to be generally and severally liable for the actions of an individual member

This article is limited to the treatment of Limited Liability Partnerships in England and Scotland, and is not intended in anyway to represent Legal or professional advice. You should seek professional advice should you intend to go into a limited liability partnership.

Capital expenditure

Posted by admin on February 07, 2016 in Business

What is capital expenditure , and how do you record capital expenditure in the accounting records?
Capital expenditure for a business is the acquisition of an asset, or assets which will be used in the business for the conduct of that businesses operations for a considerable period, usually exceeding one accounting period. Thus the benefit of the capital asset, is expected to persist over multiple years.

When a small business buys a server computer for say £4,000 this is a fairly substantial out lay for a small company. Typically, a server will have an operational life of four to five years. The matching concept in accountancy requires that we match the expense to the period over which it is relevant.
In the case of our £4,000 server, that is four to five years depending on the companies replacement policy. Hence the full capital expenditure of £4,000 should be taken to fixed assets.

The capital expenditure of £4,000 is now released to the Profit and loss account via a depreciation charge. Typically, this will be the cost of £4,000 divided over the expected useful life of the asset. Assuming the choice is four years, a charge of £1,000 would be taken to profit and loss each year.
Some companies will elect to fine tune their depreciation charge in the year of initial capital expenditure to a monthly charge.

A server computer is an obvious example of capital expense, others include, printers, cars, factory machinery like lathes, tractors, robots, and many others. However, some items that might be thought of as maintenance , could actually fall under capital . There is a lot of legal precedent illuminating what may be considered capital expenditure. Its beyond the scope of this article to go into detail on these precedents.

However, one clear principle is that, where the work done , or additions to an existing asset, extend the utility of that asset, the expenditure should be considered as capital expenditure.

Thus if a building has been acquired in a derelict condition, unfit for use as a business premises, the cost of making it usable will be capital in nature. Thus, the cost of repairing windows, floors, painting , new bathroom fittings, labour costs, and all the associated costs, will have to be capitalised.

Similarly, when you buy accessories for a factory lathe machine which make it possible to make new items, the nature of your purchase will be capital.

In recognising capital expenditure, one generally capitalises only material expenditure. Thus, even if your £10 screw drivers are expected to last a couple of years, generally, you would charge small tools to maintenance or other suitable profit and loss accounts.

Tax relief for capital expenses is via the capital allowances regime, under which we also find the Annual investment allowance which became available on qualifying expenditure incurred after
6th April 2008 per the Finance act 2008. Plus there are many other allowances. Capital allowances will be looked at in another article.

Limited company tax

Posted by admin on October 22, 2014 in Limited Companies

A limited company pays tax on its taxable profits for the year and the tax paid by limited companies is known as corporation  tax.

Taxable profit: This is obtained by taking the company’s accounting profit and adding back expenses that are not permitted by tax law and then deducting allowances given to companies in the tax law.

Most income received by a company will be subject to corporation tax.  So a company can receive income from a trade, for example, the company could be a retail shop supplying plumbing supplies. A company could receive income from supplying professional services to clients , such as a legal , accountancy or IT services.

If a company sell assets which it uses to pursue its business such as an office block, it can make a capital gain or loss however, its assessed for tax for the gain on the corporation tax regime.  A company whose business is selling property would probably treat its profits on selling the property as trade income.

Other income received by companies include rental income and interest income received on loans made by the company or deposits held in bank accounts. All income from the sources described thus far are generally subject to corporation tax and are a limited company tax,  directors must be familiar with.

Where a company receives investment income, some of the investment income may not be subject to corporation tax. Some income from overseas sources may also be outside corporation tax. Each situation must be assessed against the extant Income tax law at the time.

Other taxes remitted to HMRC by companies include PAYE which is paid by employees on their income  and collected by their employer to be paid over to HMRC.

Another Limited company tax is VAT for VAT registered companies. VAT is an indirect tax which is levied on the price of goods and services sold by VAT businesses. For businesses with turnovers above the prevailing VAT threshold, VAT must be collected on the some of the goods or services they supply depending on the VAT rate applicable to their output. However, many items are exempt from VAT

One more common limited company tax are CIS deductions. The construction Industry Scheme requires that some firms withhold a given percentage from the amounts paid to independent sub contractors. The amount withheld must then be remitted to HMRC.

Its imperative that directors of small businesses familiarise themselves with limited company tax in order to make sure that their businesses comply with the law and they are able to prosper without undue problems with the state.

 

tax on rental income

Posted by admin on August 12, 2014 in Tax

Tax on rental income is a matter of great importance to many people and the state as well. In this article, we will take a look at some basic items relating to taxation on rental income .Rental income and expenditure is treated separately from trade and other self employed income.

When a person human or corporate rents out a property, they generally get an income from the tenant which is the rent. Very often , the tenant will pay a lot of the bills associated with the property.This could include utility bills, cleaning bills, domestic or commercial rates,Naturally, expenses paid directly  by your tenant are not rental expenses for you the landlord.

Expenses you the landlord might pay, are off set against your rental income to get your taxable profit on which you would be liable to pay tax on rental income. These expense could include Gardening, decorating, maintenance, Electricity for communal areas, you might be paying the rates, might be paying all the fixed costs when property is empty, Mortgage interest costs, loan interest on loans to improve the property.

Major works on the property, which result in an improvement to the property, or are necessary to make the property habitable, might be considered to be capital expenditure and therefore not allowable.

In addition to the standard expenses, you get 10% wear and tear allowance on furnished property lettings, the 10% being a percentage of the related rental income for the furnished property only. Ergo, don’t go taking 10% from the incomes of multiple properties where only one is Furnished.

Rental income and expenditure are netted off  in an income and expenditure account to get your rental profit or loss figure. this figure is what is taken to your tax computation.. Rental property losses brought forward from previous years can be set off your current rental profits.

If your rental property has made a loss, this loss can be carried forward or , depending on the current tax law at the time,and depending on the type of rental , it might be set against your other income for the year. Currently, tax legislation allows Rental losses to  be carried forward to off set against rental profits in the future, thereby reducing the tax on rental income payable.

A common question is whether rental properties attract Annual investment relief or capital allowances, and generally the answer is no, unless the legislation changes. However wear and tear allowance does give relief for some of the fittings in a furnished letting

Furnished holiday letting  are treated differently, any property profits or losses under furnished holiday lettings can be treated in a similar way to  trade income. Strict rules govern the type of property which would be accepted as furnished holiday letting.

Once your taxable rental income has been determined , it is taxed along with the rest of the  income .according to the existing tax rates and allowances.

Directors loan account

Posted by admin on August 06, 2014 in Limited Companies

In the accounts of a limited Company in the UK, a directors loan account is an account recording the transactions between the company and its director or directors. The transactions recorded are those that can be assigned a monetary value. So money put in the bank by the director will be posted to the directors loan account.  On the other hand, the hours of intellectual work that directors pour into the company, conceptualising, incorporating, getting loans, designing that product, cannot be posted to the directors loan account unless income is recognised for the Director.

Its important to maintain individual loan accounts for each director, when there are multiple directors, at all times.In the event of disputes, or a request for interest charges, this becomes particularly important.

Most small limited companies start of with only the directors funds. These directors pour a lot of their financial , material , intellectual, emotional and time resources into getting their business of the ground. it is a good thing to record all these contributions as accurately as possible. A lot of this is handled in the directors loan account

It is common for directors not to draw their salary and leave it as a loan to the company, particularly where the directors are also the main share holders. Conversely, some directors take out more money than their salary, which can lead to a debit balance on the directors loan account.

Once dividends are declared, the directors can either draw  the cash from the company’s accounts or leave part or all of their dividend in the company by way of a credit posting to the directors loan account.

Directors often draw out money from the company as they need it. Where the director has initially put the money in, by way of financing the company and a sufficient credit balance exists on the directors loan account, this is not a problem.

However, companies act prohibits directors from taking loans from the company they run, and they must pay back any overdrawn balance. There are tax implications, to begin with, if the overdrawn balance is outstanding 9 months after the year end, the company may have to pay tax on the loan. Further more, the loan may have to be reported as income in a tax return for the director

in the event that a company is to be wound up, the creditors of the company are entitled to claw back any overdrawn  directors loan account.Where the company is dissolved , a credit balance directors loan account ranks behind secured creditors, creditors,  and others, but ahead of the shareholders.

 

 

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