Do You Know #9 – Stock Valuation

You have to adjust for the amount of stock that you have on hand at the end of your accounting period to arrive at the correct amount of profit.  In calculating the stock value it is usually taken at the value at which you bought it at, that is cost.

However, if you have held the stock for some time, then it is possible that this may not now be worth as much as it originally cost.  It is in accordance with conventional accounting practice that the value of this stock should be reduced to this lower figure.  The lower the stock figure, then the lower is the your profit, and hence the lower the amount of tax that you pay.  Be aware though, HMRC may require you to substantiate why a value below cost has been used.

Once you have counted all your stock, you should identify the slow moving items, or the items for which the value has fallen for other reasons, and ensure that they are valued at the correct amount if this is below cost.

If you would like further advice on this or any matter, please do not hesitate to contact us.

Do You Know #8 – Bad Debt Relief

Suffering from a bad debt is not good for any business.  However you can obtain tax relief for this.  If a debtor is not going to pay, and either the cost of pursuing it is un-economic, or the chance of recovery is remote, then the debt can be written off in your accounts and this can be treated as a deductible cost in determining your level of profits for tax purposes.  If the debt is subsequently paid in a later accounting period, then the amount recovered is treated as income.

 Any costs of pursuing a bad or slow paying debtor can also be treated as a tax-deductible cost.  This includes legal fees and other debt collection costs.

If you have any problems with debtors please feel free to discuss the situation with us.

The Personal Allowance Trap

In an attempt to increase tax revenues without affecting middle income earners, the treasury introduced legislation back in 2010 that removes the personal allowance of those earning over £100,000. This legislation is still with us, and is affecting more people each year due to the increase in the personal allowance.  The personal allowance (PA) represents the amount of income that an individual can earn free of income tax. For the current 2013/14 tax year the personal allowance is £9,440.  People with taxable income of over £100,000 will have their personal allowance reduced or even removed. The reduction is a rate of £1 for every £2 of income over £100,000. This means that anyone with income over £118,880 will lose their personal allowance completely. This means that the tax rate on earnings between £100,000 and £118,880 is a massive 60%. As the personal allowance increases, the range of income increases, resulting in more people being caught by this ‘Personal Allowance Trap’.

For those people (both employed and self employed) with earnings exceeding £100,000 there are planning opportunities worth consideration, which will obtain 60% tax relief. These include:-

  • Increasing or making lump sum contributions into a personal pension scheme
  • Gift Aid donations to charities
  • Shifting income to a spouse of civil partner
  • Deferring income

If you are affected by the personal allowance trap then please feel free to contact us at DEB Chartered Accountants to discuss your options further.

Do You Know #7 – Capital Allowances on Cars

When you purchase a car the expenditure will qualify for Capital Allowances.  Unlike expenditure on machinery and equipment however, expenditure on cars may not qualify for the 100% Annual Investment Allowance. The amount and type of Capital Allowance you will get is dependent upon the CO2 rating of the car.  Those below a very low level, which changes periodically, may rank for 100% First Year Allowance.

Where they do not qualify for First Year Allowance then they are eligible for an annual Writing Down Allowance, and again the rate of this allowance is determined by the car’s CO2 rating.  Those with high CO2 levels only get a rate of 8% per annum.  Those below a specified level (currently 130g/km) qualify for the higher rate of 18%.

The tax rules thus encourage you to go for the more environmentally friendly cars.  Thus the choice of your vehicle matters.

The decision of which vehicle to get, how to finance it, and whether to have it inside or outside your business, is a complex issue.  If you would like to discuss it with us, please do not hesitate to contact us.

Wills: Who, What, When, Why & How

If you have not yet made a Will then it is very important that you seriously consider rectifying this.  A Will is essential if you are to minimise your Inheritance Tax (IHT) liability, ensure that your assets are distributed as you desire, and make sure that all your loved ones are taken care of.

 The important questions that you need to consider are:-

Who do you wish to leave your assets to when you die?  Your spouse and children are obvious choices.  Some provision has to be made for their welfare, but how do you wish to divide your assets between them?  Is there anyone dependent upon you that has special needs?  Do you wish to give to anyone else, including charities?

What is it that you wish to pass on to those you have decided to benefit?  Your home is probably your major asset that requires careful consideration.  What about your pension benefits and proceeds of insurance policies? Have you made provision to avoid these aggravating your IHT position?  Are there any specific gifts you want to make to someone?  Have you thought about what will happen to your business when you die?

When would you like the beneficiaries of your Will to obtain the assets that you are leaving?  Leaving substantial sums to teenage children may not be what you wish to do as you may consider them too young at that age.  Would you consider giving some of the gifts now?

Why bother?  Well if you do not take positive action and make a Will, the consequences of dying without one could cause serious problems for those who have to resolve your estate. This could result in significant amounts of tax being paid needlessly, and potentially result in people ending up with your assets who you would not like to get them, including the State.

DEB can help you consider all the options available to you and find answers to these difficulty questions. So don’t leave these issues to chance. Contact us as soon as possible and we would be happy to assist you in creating a suitable Will so that you can have the peace of mind that comes from knowing that when you die, your belongings will be distributed as you would wish.

Do You Know #6 – Repairs to Properties That You Let

If you incur expenditure on a property that you let, then this is tax deductible.  Generally, a repair is something that puts to right something that has been damaged or does not work correctly.  A repair simply restored the situation to what it was before without the need to replace the item entirely.

If you make a change or alteration to a property, then that is a capital expense and is not deductible against the rents received.  This expenditure is offset against the eventual sale proceeds and thus you must still keep a careful record of such expenditure.  This will include improvements that are not incidental to the repair.

Where the repair does involve some alteration then the cost will still rank as a repair providing the alteration is incidental to the nature of the repair.  HMRC now accept that an improvement using modern materials will rank as a repair, and the usual example used for this is the replacement of wooden windows by UPVC double glazing windows.

Where the change is clearly on of a capital nature you cannot claim for the notional amount of repairs that you might have incurred if you had not made the capital improvement.

In your records it is very important that you clearly identify what you consider to be a repair, and what is a capital improvement so that these can be dealt with correctly when your accountant prepares your accounts.  If he does not produce any accounts for you – Oh dear!

If you need further advice on this, or any other item, please do not hesitate to contact us at DEB.

Do You Know #5 – Business Journeys

You can only claim tax relief on business journeys and not on ordinary commuting.  Ordinary commuting is travel between your home and your permanent workplace.   This usually is  the place where you work.  However, you can claim for travel between two workplaces, say your permanent workplace and a temporary workplace.  You can also claim for travel from you home to a temporary workplace provided this is necessary for the performance of your duties.

A temporary workplace is one that you will not be working at, or expect to work at, in excess of 24 months, or, if it is over 24 months, then you will not be working there in excess of 40% of your working time.

There are lots of complications relating to commuting, and permanent and temporary workplaces.  HMRC have published a guide on this issue called – 490 Employee Travel.  It is well worth reading and contains lots of examples so that you can get a better idea on what journeys you can claim for.

If you need any advice on this, or any other matter, please get in touch with us.

Do You Know #4 – Private Residence Relief

The sale of property usually gives rise to a possible Capital Gains Tax liability.  However, perhaps one on the most important tax reliefs for most people is the Private Residence Relief.  There is no charge to CGT where the property that you have disposed of is you private principle residence.

Where the property is occupied during the whole of the ownership, then all the gain will be tax free.  Where there has been periods of absence then apportionment has to be made. Only the gain that is attributable to the period of residence will be tax free.  The rest is potentially taxable.   However, the last three years of the ownership are always treated as being a private residence provided that the property was occupied at some time during the ownership.

In addition various other periods of absence may also be included in the number of years of private residence, usually determined by the demands of your employment.

However, A word of caution. To claim for private residence relief there must be substantive occupation with intent for the property to be a private residence.  HMRC will oppose any claim for the relief when they believe the private residence is a sham.  If you intend to use this relief in any form of tax planning you need to take professional advice.

Do You Know #3 – Roll Over Relief

If you sell certain assets used in a trade this may give rise to a Capital Gains Tax liability.  However there is a relief that is available to reduce the amount payable so long as the sale proceeds are reinvested in replacement business assets.  Where the whole of the sale proceeds are not fully reinvested then a part of the gain would still remain and hence be taxable.

The reinvestment must be done within a specified time period.  This is one year before the date of the sale, or within three years after it.

The type of assets typically involved where Roll Over Relief may be applicable includes land and buildings, fixed plant and machinery and goodwill.

Where sales of assets that may give rise to Capital Gains Tax are concerned you are always best advised to take professional advice on the matter.

Do You Know #2 – Capital Allowances for Integral Features

Any expenditure on integral features within a building has to be included in a separate pool upon which only 8% Writing Down Allowance is obtained, rather than at the rate of 18% allowance on any fixtures that are not integral features.

Included in this category for integral features is any expenditure that is incurred on repairs, where either the repair cost exceeds 50% of the replacement cost of the integral feature, or if the total expenditure on the integral feature over the last twelve months exceeded 50% of the replacement cost.

So, what are included in Integral Features that warrant such treatment?

They include:-
Lifts, Escalators and Moving Walkways
Cold Water Systems
Water Heating Systems
Ventilation Systems, Air Cooling, Air Purification
Floors and Ceilings comprised in Water Heating Systems, Ventilation Systems etc
Electrical and Lighting Systems

Many of these costs will be hidden within the purchase price of a building.  If they can be identified then the allowances can be claimed.  You may need the assistance of a specialised surveyor to do this.