When Is A Debt Not A Debt

It would appear that the answer to this is when it is a debt used to obtain some form of Inheritance Tax (IHT) advantage.  Changes announced by the Budget 2013, when implemented, will have a significant effect on Inheritance Tax planning.  The proposal is to disregard certain debts in the calculation of the estates of individuals where they have been incurred under certain circumstances.  Simply put, they will not allow, as a deduction against the assets in an individual’s estate, any debt that has arisen as a consequence of taking assets out of the IHT tax net. Perhaps the most prevalent example of this will arise when people take out a mortgage on their own home and then use the funds to purchase an asset that is exempt for IHT purpose, such as those qualifying for Business Property Relief (i.e. Business Premises).  Under these circumstances, it will no longer be possible the outstanding mortgage against the value of the home on death.

These new tax changes will also impact upon debts to trusts, such as those to Employment Benefit Trusts (EBT’s) and Employer Financed Retirement Benefit Schemes (EFRBS).  Such debts often arise as a consequence of implementing tax strategies aimed at profit extraction from companies.

It appears certain, that this new tax legislation will represent a significant blow to planning used to defend against IHT liabilities.  Anyone who has been relying upon such loans as a means of reducing their estates will now have to revisit their planning in order to ensure that any steps taken to reduce their exposure to IHT are still appropriate.

At DEB Chartered Accountants we are well aware of the growing significance of Inheritance Tax to many of our clients.  In light of this we have developed software to review exposure to IHT and can give valuable advice to hep you minimise your IHT liabilities before it is too late.  If Inheritance Tax is a matter of concern to you please do not hesitate to contact us.

Do You Know #11 – Laundry Costs

Normally the cost of cleaning workwear is tax deductible for an employee or self-employed person.  This is particularly the case where the provision of the clothing or workwear is tax deductible also.  The cost of normal clothing however, including gents and ladies suits, is not deductible, whether or not they are used  solely for work purposes.

Dependent upon the type of industry that an employee works in, there are scale rates that HMRC publishes which they will accept as being a reasonable cost for maintaining protective clothing and uniforms.  No such round sum allowances exist for the self employed, who should claim the actual costs involved, unless they have negotiated something to the contrary with HMRC.

Do You Know #10 – Overnight Costs

If your business requires you to work away from home and there is a need to stay away overnight, there are expenses that you can claim as tax deductible.  These include accommodation costs such as hotel bills and meals.  If the cost of these is borne by the worker and they are not reimbursed then they can claim for these as a deduction against their income on their tax return.  If the employer pays for them, then they will be a tax-deductible expense in their accounts.

Personal incidental expenses of up to £5 per night if in the UK, or £10 if abroad can also be claimed.  This will cover such costs as newspapers, telephone charges, and mini-bar costs that may appear on a hotel bill.  The amount per night is taken as an average over the whole period away, and thus it is not a problem if some of the days exceed this amount.  If the average is not below the permitted amount, and the difference is not reimbursed, then the whole amount paid would be taxable pay for the employee.

A word of caution – you cannot simply pay the employee the above sum tax-free.  The payment is only tax-free if it is made wholly and exclusively for the purpose of defraying expenses that are incidental to the employee being away from home.  It is thus far safer to let the employee incur the expenses, and then claim them back, rather than simply paying a regular amount per night and hope to be able to substantiate the basis of the payments if challenged by HMRC probably several years later.  You would have significant difficulty in doing this.

If you would like to know more about deductible expenses, please do not hesitate to contact us.

 

 

 

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.

http://www.hmrc.gov.uk/helpsheets/490.pdf

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