Trading stock

If some goods that your business makes or sells are donated to a charity, the cost of these goods can be claimed in your business accounts, thereby reducing your profits and tax liability.

Equipment

You can benefit from capital allowances on the cost of equipment given to a charity. One condition is that you must have used the equipment in your normal business activities for it to qualify and it must be considered plant and machinery for capital allowance purposes: tools, office furniture, computers, vans, etc.

When working out the chargeable gain, some of the costs of buying, improving the property and selling can be deducted.

Rates for Capital Gains Tax:

2010-11 and 2011-12: Up to 22 June 2010, capital gains tax was charged at a flat rate of 18%. After that date, the rates for individuals are 18 and 28%, depending on the total amount of the individual’s taxable income.

There are 2 distinct benefits you could be entitled to claim depending on your business structure and level of earnings: Statutory Maternity Pay or Maternity Allowance.

Sole trader

If you are self-employed, you are not entitled to Statutory Maternity Pay (SMP) but you may be entitled to Maternity Allowance (MA).

Maternity Allowance is a benefit paid weekly by Jobcentre Plus. MA can be paid for up to 39 weeks and no income tax or NI contributions are payable on Maternity Allowance.

The standard rate of MA is currently £124.88 a week.

If you are self-employed and do not have a small earnings exception certificate, for any week covered by a Class 2 NI contribution you will be treated as having enough earnings to result in the standard rate of MA, payable at the end of the week covered by a Class 2 NI contribution.

If you are self-employed and hold a small earnings exception certificate, you will be treated as having earnings equal to £30 at the end of any week covered by your certificate, and receive a weekly rate of MA of £27.00 (90% of £30).

Director of your own limited company

To qualify for Statutory Maternity Pay, you must satisfy the continuous employment rule (continuous employment for at least 26 weeks into the qualifying week (which is the 15th week before the week in which the baby is due) and the earnings rule.

Earnings rule: your average gross weekly earnings must be at least equal to the lower earnings limit for National Insurance (NI) purposes:  £97 a week for tax year 2010/11, £102 a week for tax year 2011/12.

The amount you get depends on your earnings. The first 6 weeks of SMP are earnings related and you will get a weekly rate equal to 90 per cent of your average weekly earnings. The remaining 33 weeks are paid at the weekly standard rate SMP of £124.88 or the earnings related rate if this is less than standard rate SMP.

SMP is paid by the limited company and reclaimed from HMRC.

If you do not qualify for SMP, you may be entitled to MA.

For further information, please feel free to contact us: info@fraccountants.co.uk

A round sum claim of £3 per week can be claimed. However, if you are self-employed and use part of your house for more than a few hours a week, you can very probably claim more than this amount and reduce your tax bill.

Expense claims are based on the area of the room and time the room is used for business.

HMRC will accept claims which include part of the following costs:

• Mortgage interest
• Council tax
• Home insurance
• Electricity
• Gas
• Telephone

It is generally recommended not to claim that the room used for business purposes takes up more than 20% of the total of the house. Also, never claim that a room is used 100% for business, to avoid any Capital Gains Tax liability if you were to sell your house in the future.

For example, if a house has 5 rooms: 1 kitchen, 1 living-room, 3 bedrooms, and one of the bedrooms is used as a home office for 90% of the time, the percentage of expenses that can be claimed is 18% (20% x 90%).

The business element on some general household costs can also be claimed: window cleaning, house exterior being painted, re roofing, etc.

Goodwill is the value of a business that is not directly attributable to assets and liabilities and may include names, logos, etc. It is classified as an intangible asset. It generally arises in the case of an acquisition and equals the purchase price less the fair value of the tangible net assets.

Tax relief can be claimed on the full value of goodwill, but this has to be spread over a number of years using one of the following two methods:

- over the “useful life of the goodwill”. This should be calculated in accordance with Financial Reporting Standard 10 (FRS10)

- at 4% of the value of the goodwill.

The opportunity to write off goodwill over a shorter period of time provides tax benefits but HM Revenue & Customs will consider what is “reasonable”.

If you are a sole trader or a partnership it may be possible to incorporate and obtain tax relief.

Some companies are overlooking the value of goodwill they have created themselves for which a deduction can also be claimed. The time limit to make claims for earlier periods was reduced to 4 previous years in April 2010.

Are you planning to leave the UK (whether on a temporary or permanent basis) and rent the property you have there?

In this case, you need to be aware of the NRL (Non Resident Landlord) scheme. Unless you have successfully applied to HM Revenue & Customs to receive the rental income gross, the lettings agent (or the tenant of the property if the rent is more than £100 per week) is required to deduct tax from the rental income, at the basic tax rate, which is currently 20%, and pay it to HMRC.

To have the rent paid gross and avoid overpaying tax, it is necessary to apply for exemption under the Non Resident Landlord Scheme.

You will generally be required to file a UK self assessment every year as you will remain liable to UK tax.

Relevant expenses can be deducted on the tax return and include lettings agent fees, mortgage interest, maintenance costs.

Word of caution: you will have to apply to HMRC to be entitled to your UK personal allowance (if you have one), it is not allocated automatically.

Please note that self assessment online services are currently not available to non UK residents.

For any further details or advice, please contact us: info@fraccountants.co.uk.

- Company Tax returns will have to be filed online (for any accounting period ending 31 March 2010). To register for HMRC online services, you need to set an online account. This is straightforward but do not leave it to the last minute as the activation code for the account will be sent by post and may take up to 7 days to arrive.

- Company will have to file their annual accounts and tax computations in iXBRL format (Inline eXtensible Business Reporting Language). The same requirement will be adopted by Companies House.

Corporation Tax

The present 28% corporation tax rate for larger companies will be reduced by 1% per annum from 1 April 2011:

1 April 2011 – 27%
1 April 2012 – 26%
1 April 2013 – 25%
1 April 2014 – 24%

For smaller companies (taxable profits below £300,000), the corporation tax rate will be reduced from 21% to 20% on 1 April 2011.

National Insurance Contributions

Employers’ NICs threshold: The threshold at which employers start to pay National Insurance will be raised by £21 per week above indexation in April 2011

Employers’ NICs exemption – In targeted regions, new businesses will be exempted from up to £5,000 of employer contributions for each of their first 10 employees hired

Capital Allowances

Partly to offset the reductions in corporation tax rates, most rates of capital allowances are to be reduced, from 1 April 2012 (for limited companies) and from 6 April 2012 (for unincorporated businesses):

-       Writing down allowances will be reduced from 20% to 18% on the cost of qualifying plant and machinery. This will also affect any unrelieved expenditure in the main rate pool;

-       Writing down allowances on long life assets, integral features and specified cars will be reduced from 10% to 8%. This will also affect any unrelieved expenditure in the special rate pool;

-       The annual 100% investment allowance available for qualifying capital expenditure (up to £100,000) will be reduced to £25,000.

VAT – Increase in standard rate

From 4 January 2011 the standard rate of VAT will increase from 17.5% to 20%. There is no change in the scope of the rules for zero-rating, VAT exemption and the 5% reduced rate.

VAT – Users of Flat Rate Scheme

Due to the increase in the standard rate to 20% from 4 January 2011 the Flat Rate Scheme rates will change from the same date.

Enterprise Management Incentives (EMIs)

From the date the June Budget receives Royal Assent the following change to the present EMI rules will be made:

The requirement that a company granting qualifying EMI options to its employees must operate “wholly or mainly” in the UK is to be replaced by a requirement that it be required to have a “permanent establishment” in the UK.

VAT – Increase in standard rate

From 4 January 2011 the standard rate of VAT will increase from 17.5% to 20%. There is no change in the scope of the rules for zero-rating, VAT exemption and the 5% reduced rate.

VAT – Users of Flat Rate Scheme

Due to the increase in the standard rate to 20% from 4 January 2011 the Flat Rate Scheme rates will change from the same date.

Insurance Premium Tax

From 4 January 2011 the standard rate of IPT will increase from 5% to 6%. The higher rate will also increase from 17.5% to 20%.

Anti-Avoidance

Schemes using trusts to reward employees and to assist in the avoidance, deferral or reduction in income tax or NIC including avoiding the new pensions tax relief restrictions, will be legislated against with effect from April 2011. The government is also consulting on the introduction of a General Anti-Avoidance Rule. Other specific anti-avoidance measures have also been introduced to counter specific schemes.

Other Measures

Various other specific business tax announcements were made including clarifications on the treatment of UK companies receiving capital distributions, changes to the “worldwide debt cap” rules for large groups of companies, amendments to the rules for companies claiming consortium relief and harmonising of the interest rules for late payments and repayments of corporation tax.

The personal allowance for 2009-10 and 2010-11 is £6,475. This is the tax-free income which can be earned in a year.

 The business plan

Your business plan should provide a thorough examination of the way in which the business will commence and develop. It should describe the business, product or service, market, mode of operation, capital requirements and projected financial results.

Business structure

There are three common types of business structure:

• Sole trader: this is the simplest form of business since it can be established without legal formality. However, the business of the sole trader is not distinguished from the proprietor’s personal affairs.
• Partnership: a partnership is similar in nature to a sole trader but because more people are involved it is advisable to draw up a written agreement. Again the business and personal affairs of the partners are not legally separate. A further possibility is to use a Limited Liability Partnership (LLP).
• Company: the business affairs are separate from the personal affairs of the owners, but there are legal regulations to comply with.

The appropriate structure will depend on a number of factors, including considerations of taxation implications, ownership and liability.

Books and records

All businesses need to keep records. They can be maintained by hand or may be computerised but should contain details of payments, receipts, credit purchases and sales, assets and liabilities.

 Accounts

The books and records are used to produce the accounts. If the records are well kept, it will be easier to put together the accounts. Accounts must be prepared for HMRC and if a company is formed there are strict requirements as to their format.

A company and a LLP may need to have an audit and will need to make the accounts public by filing them at Companies House within a strict time limit.

 Taxation

When starting in business, taxation aspects must be considered

• Taxation on profits: the type and rate of taxation will depend on the form of business structure.
• National insurance (NI): the rates of NI contributions are generally lower for a sole trader or partnership than for a director of a company, but the entitlements can also differ. In a company, it may be possible to avoid NI by paying dividends rather than salary.
• Value added tax (VAT): correctly accounting for VAT is an essential part of any business and neglect may result in a significant loss. When starting a business, you should consider the need to register for VAT. If the value of your taxable sales and services exceeds the registration limit, you will be obliged to register. Expect a visit from HMRC within eighteen months of registration. This inspection of your records ensures VAT is being properly accounted for.

 Employing others

For the business to get off the ground or to enable expansion, it may be necessary to employ staff. It is the employer’s responsibility to deduct income tax and national insurance. The balance must then be paid over to HMRC. Payroll records should be carefully maintained.

Insurance

Comprehensive insurance for business motor vehicles and employer’s liability insurance are a legal requirement. Other types of insurance such as public liability, consequential loss, business assets, bad debts should be considered.

 Pensions

Putting money into a pension scheme can be a very attractive way of saving for retirement because of the favourable tax rules.