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.

Do You Know #1 – Capital Allowances on Plant & Machinery

Normally expenditure on land and buildings is a capital cost and thus cannot be deducted from income in order to reduce the tax payable on it.  However, if the expenditure is on any machinery or equipment, then Capital Allowances can be claimed on such expenditure on a building.

In addition to this, if the installation of the machine or equipment requires any amendments, or works to be done to the building, then this expenditure can also be added to the costs that qualify for Capital Allowances.

Ensure that expenditure on all plant and equipment associated with your buildings, and any cost of installing or positioning them is clearly identified so that your accountant can make the necessary claim on your behalf.

Things to be careful about if your Company is in danger of becoming insolvent

As a director of a company you may feel that the limited liability status of the company will enable you to walk away from a failing company without any personal liability.  However, under current legislation a liquidator or an administrator of the company may be able to take action against the directors if they fall foul of various legal requirements. 

Illegal dividends
 Dividends have to be legal.  They should be properly documented at the time they are declared, not by your accountant backfilling with false documentation some time later, and there must be sufficient reserves to cover them.

 Loans taken from the Company
When you simply take money from the company this is charged to a loan account and you may owe this money back to the company.  If you do then you can expect action against you for it’s recovery.  You simply cannot just take money from the company without it being justified in some way.

 Fraudulent Preference
You cannot prefer one creditor over another to the disadvantage of other creditors.  As a director, you cannot simply pay the creditors, including your own Director’s Loan Account, which will you with some benefit, and leave others unpaid.

 Wrongful Trading
Where the directors know that the company is insolvent, yet continue to trade on despite knowing this, they can be called to account if the company is liquidated.

 Selling goods at Undervalue
You cannot  sell any of the assets of the company to a third party, such as a lifeboat company you have created, at less than market value.  If you transfer assets out of your company you must pay the market value for them.

 Excessive Remuneration
Whilst there should not be any problem with regard to normal wages and salaries, any abnormal pay compared to the trading activities of the company can be questioned.

 Other Excessive Benefits
Similarly, other benefits that you may take, such as pension contributions, if excessive and outside the normal activities of the company can also be questioned.

 None Payment of Taxes
The liquidator may take actions where it is shown that the company has failed to make any payments for VAT, Corporation Tax, PAYE etc and this has enabled the company to continue trading into an insolvent position.

 Trading under Similar Names
There are restrictions to prevent you trading through a new company with a similar name as the old company that has gone into liquidation.  If you do start a new company then you should consider using a different name.

 Breach of Fiduciary Duties
Directors have certain duties to the company and action can be taken against them if there is a breach of these responsibilities.  They may also be called to task if they misappropriate the assets of the company and also face being barred from being a company director by Companies House.

 The above list is not exhaustive and only includes the most obvious misdemeanours that a director may have to answer for.  Needless to say all directors in these troubled financial times must take extreme care. 

 It is essential that you do things correctly, particularly with regard to the extraction of money for yourself.  If you simply take what you like and expect an accountant to “make it right” at the year end, you are likely to get a very big shock should the company eventually go into liquidation.

 If you are not getting the correct advice on the correct way to extract funds from your company, please do not hesitate to contact us at DEB Chartered Accountants.  We will help you to protect yourself against potential threats from liquidators.

Fee Protection Insurance – An unnecessary additional cost or a crucial defence against HMRC?

If your accountant offers you fee protection insurance  – do you take it out?  Like most insurances, people generally look at fee protection insurance in one of two ways. To some it will represent invaluable peace of mind knowing that they have some extra financial protection regardless of what HMRC throws at them. To others it represents an additional expense that can be overlooked when times are difficult and there are other more pressing financial commitments. The latter often reassure themselves that they are unlikely to be selected for an enquiry and will be alright if they do because they do things above board and haven’t got anything to hide. However, with the numbers of HMRC enquiries increasing year on year is fee protection insurance something that you can really afford to be without?

The emergence of fee protection insurance has significantly changed the negotiating positions of those taxpayers who take it out with regards to HMRC.  Before the arrival of this insurance the considerable extra costs of representing clients in an enquiry was undoubtedly a weapon that HMRC used as part of its armoury of tactics.  If it dragged out an enquiry long enough, then any client would start to weigh up the comparative cost of accepting a settlement with HMRC against the accountancy costs associated with fighting on.  Any accountant that cared for its clients, as indeed DEB does, would, at some point, have to mention the possibility of haggling a deal with HMRC to minimise costs when it was clear that the enquiry was going to drag on for a substantial length of time.

Fee protection insurance has changed this situation.  When cover is taken out the taxpayer no longer has to negotiate a settlement figure to try and minimise costs. The situation is effectively reversed, as accountants can fight on in the knowledge that they will get paid by the insurance company no matter how long an enquiry takes.  It is now HMRC that is faced with the need to close enquiries quickly due to a lack of resources.  If it is getting nowhere on an enquiry then it makes sense to close it down and move on to an easier target that will produce a better return for its time. So, if you are offered fee protection cover by your accountant there is a strong tactical argument for accepting it.

A cautionary note: Some organisations offer what sounds like similar cover for their members but the cover does not always offer the level of protection you need.  Often this cover is an arrangement between the insurer and the member organisation and the insurance provider generally stipulates that the negotiations with HMRC are conducted by an accountant of their choosing.  The reason for this is that the main priority of the insurer is to minimise the cost of the claim by settling the enquiry as quickly as possible.  This may result in an agreement that is not necessarily at the lowest cost to the taxpayer.  If you have cover provided as a membership benefit we would advise that you check the details to ensure that you have the appropriate cover in place.

If you wish to discuss fee protection cover further please do not hesitate to contact us at DEB Chartered Accountants.

Where there’s a Will there’s a way

It is staggering that a large majority of people do not have a Will.  Yet if they own such possessions as a home, car, investments, a business, jewellery, works of art, or any items of value then they really do need a will.

A will enables you to decide to whom you wish these assets to go. If you do not have one then the laws of intestacy will apply.  This can have disastrous consequences.

  • It could be that the people that you want to benefit from your estate do not.
  • Someone may benefit from your estate that you would not wish to.
  • You could have a Inheritance Tax Liability that could be avoided.
  • You would not have any say with regard to who were your Executors
  • Someone who is near and dear to you may not get the care that they need.
  • You would have no say regarding who looked after your children – a court would decide.
  • You could leave your spouse short of funds at a time that they need them most.
  • You would cause your family a tremendous amount of inconvenience just at the time they could do with out it.

Changes in IHT legislation with regard to the transferability of the nil rate band between spouses / civil partnerships have caused many wills aimed at utilising the nil rate band on the first death to now cause detrimental results.  Consequently, even if you have a will, it is possible that this needs to be reconsidered to gain the best tax advantage.

At DEB Chartered Accountants we are concerned that many people in business are in a position whereby the threat of IHT is gradually creeping upon them and, as a consequence, action needs to be taken to prevent it.  The preparation of a will is a key starting point to doing this.  At DEB we can prepare your will for you and help you avoid all the problems listed above.  Our purpose made company, ‘Where there’s a Will there’s a way’, can help you ensure that you have a suitable Will in place.

If you have any concerns in this regard, please do not hesitate to contact us.

Can You Afford To Die ?

Now that the Conservative Party are in power they have conveniently forgot their manifesto promise to increase the nil rate band exemption for Inheritance Tax (IHT) to £1,000,000.  Instead they have fallen in line with the Labour freeze on the current amount of £325,000 until 2015.  After 2015 this exemption will only be increased in line with the Consumer Price Index, which unlike the Retail Price Index, does not react to increases in property prices.

Inflation has already started to widen the gap between the nil rate band and the value of estates at death.  As the currently depressed property market recovers, this gap will get ever wider, bringing more and more people into the IHT net to be subject to a tax of 40% on all the assets that they own  in excess of their nil rate bands.

Rather than being a tax on the super rich, who have the means of avoiding this tax, IHT is a tax that impacts mainly on the moderately wealthy members of society such as the current Baby Boomers who typically are industrious, frugal, and have accumulated on paper a reasonable estate.  A decent house, a nice car, and some investments, and you could be facing a considerable tax liability on your death.  Leaving a legacy to you loved ones could be a daunting prospect for them – with the present state of the banks how are they going to find the money to pay the IHT bill so that they can get probate and deal with your estate?

IHT is a stealth tax at its worst.  It will affect more and more people if they do not take action NOW.  At DEB we are rising to the challenge that this liability poses to many of our clients. We are looking to increase awareness so that remedial action can be taken to reduce their exposure to a tax that is imposed upon the wealth that has been  created out of income that has been heavily taxed already.

If you feel that that IHT could be a concern and you need some help, please do not hesitate to contact us at DEB Chartered Accountants.

Is operating as an unincorporated business really a ‘cheap’ option?

When many entrepreneurs start out in business the default position is to operate as a sole trader or a partnership. This is more straightforward than operating as a limited company and is considered a cheaper alternative as it avoids the costs of incorporation and the higher accountancy costs associated with running a limited company. However, it is becoming increasingly evident that the ‘cheaper option’ of running an unincorporated business can be something of a false economy and could be an option that the unwary business owner simply cannot afford to take.

Over recent years, HM Revenue & Customs have been shifting the burden of much of the work that they historically did onto the shoulders of business owners and their accountants. In particular, the extra compliance work associated with the Construction Industry Scheme (CIS), being VAT registered and the newly introduced Real Time Information impacts upon both incorporated and unincorporated businesses alike, and from a workload perspective does not therefore provide a compelling argument in favour of incorporation. However, when considering the associated punitive penalty regimes there is a strong argument in favour of operating as a limited company that could be too costly for many business owners to ignore.

The harsh penalties associated with non-compliance can soon mount up, even for small businesses, and leave business owners faced with fines amounting to tens of thousands of pounds. Whilst this is always an undesirable position, those business owners who operate under the protection of a limited company at least have the option of liquidating the company and walking away without facing a personal liability. The outlook for unincorporated businesses however could be considerably bleaker, with the business owner facing the prospect of re-mortgaging or possibly even bankruptcy.

Incorporated business are unquestionably more difficult and costly to run but business owners need to seriously consider whether they can run the risk of operating without the safety net of limited liability. The days of operating an unincorporated business as a ‘cheap’ option look to be numbered.If you are uncertain about whether you would benefit from being incorporated then please do not hesitate to contact us at DEB Chartered Accountants.

The danger of underestimating the book-keeping requirements for Pay Pal

Paypal is an extremely useful facility that is becoming far more widely used by many businesses – see our earlier blog about Chip and Pin from Paypal.  For some small users, the existence of the Paypal account can be overlooked when they do their bookkeeping. This is particularly the case when the number of transactions is small.  At some point of time the payments and/or receipts get transferred to the main bank account.  It is at that point that some business then acknowledges them as sales and expenses etc.

Paypal is a bank account and, due to its greater acceptance amongst businesses, it is gaining far more significance.  In order to get the tax points on your transactions correct for VAT purposes, and also to ensure that you book-keeping is complete, it is essential that you record all the transactions on your Paypal account as a separate bank account.  The passing of sums between your Paypal Account and your main bank account should be treated as transfers that are outside the scope of VAT.

For many businesses this may seem like an un-necessary complication, particularly as it can be tricky obtaining the right printouts from Paypal to enable you to do the necessary book-keeping.  Failure to do this however, can result in significant errors and short comings in your book-keeping.  This is particularly the case if balances are left on your Paypal account and you only transfer funds to your main account periodically.

The emergence of Paypal, and its increasing use by many businesses, has the potential of creating a greater opportunity for HMRC to discredit the record keeping of unwary businesses where the need to properly record Paypal transactions is ignored.

If you use Paypal and are not separately recording the transactions you need to change as soon as possible.  If you need any advice on this subject, please do not hesitate to contact DEB Chartered Accountants on 01226 245824.