You may have heard about HMRC targeting people carrying on a business on Ebay, or bootsales.  HMRC are always keen to collect additional tax and there is quite alot of case law on the subject.  These come under the heading of badges of trade, and like many decisions this is based on the balance of evidence so each of the points will have an impact on the end result.

Profit seeking motive

Is the ultimate objective to make a profit?  This largely relates to whether the transaction is primarily for personal use or to generate a profit to live on.

Number of transactions

An occasional foray into Ebay or Boot sales although making a little profit does not necessarily indicate a trade, however regular listings or attendances will be stronger evidence of trade, and this is probably the main area that HMRC will be targeting on.

Changes to the asset

If some goods are purchased and changed to make them more marketable for sale this once again is an indicator of a trade.  This could for example be cleaning, polishing or mending some goods as it is this process which generates the profit.

Time between purchase and sale

If the goods being sold have been in the back of the garage or loft for several years and the reason for the activity is to clear them out this is not deemed as a trade, but a speculative purchase at a boot sale which is sold the following week would be a strong indicator of trade.

These are a summary of the main criteria which may be of relevance to Boot Sale sellers and Ebayers but are not exclusive.  HMRC have stated they are going to target this area and they have the resources to do so in order to raise additional taxes.

For more detail including the relevant case law there is a good ACCA article on Badges of Trade.  The details above are only a summary of the main criteria, so seek professional advice before taking any steps based on the information shown. If you would like advice in this or other areas feel free to call.  Alastair Wood, AW Accounting, Gravesend – Accountants who “speak your language”

All taxpayers will benefit from an increased level of Personal Allowance (the amount you get tax free) which increases from £6475 to £7475 which immediately puts another £200pa (£1000 X 20%) in your pocket.  That is the good news, the bad news is that the amount you can earn as a basic rate taxpayer is reducing from £37,400 to £35,000 so you will pay an additional £480 tax as £2,400 goes from basic to higher rate tax bands.  The gainers are lower income taxpayers and many of the governments “middle Britain” supporters will be losers.

The impact on NI is more involved but the same principles hold: a greater allowance before NI is payable; but then paying a higher percentage.  The details depend on your employment status:

Employed

The starting point for paying NI increased from £110 to £139 per week (£5720, 7228pa) saving £165pa but the rate you then pay is increasing by 1% to 12%, so this will have been taken back if you earn more than £2k per month.  The point at which you stop paying 12% is reducing by £1400pa to £42.4k but instead of paying 1% on everything thereafter this is increasing to 2%.

Employers NI is similarly increasing by 1% from 12.8% to 13.8%, so not only do staff end up with less in their pockets but employers too.

Self employed

The weekly Class 2 “stamp” is increasing a small amount from £2.40 to £2.50 per week but of more interest is the Class 4 NI contribution on profits.  The level at which Class 4 NI starts being paid increases from £5715 to £7225 and thereafter the rate increases from 8% to 9%.  In a similar way to the employed the upper level is reduced to £42.4k but then excess profits are charged at 2% (an increase of 1%)

In summary there are small gains for low earners but almost everyone else will pay more.  For HMRC tables  click here: TAX NI.  Only the main rates and allowances affecting most taxpayers are shown here, but for specific advice relating to your circumstances seek professional advice before taking any steps based on the information shown. If you would like advice in this or other areas feel free to call.  Alastair Wood, AW Accounting, Gravesend – Accountants who “speak your language”

Small companies benefit from paying a lower rate of corporation tax on profits upto £300k so there is a danger that a wily director could set up a number of companies under his control to make the maximum benefit from this tax band.  For this reason the associated company rules were introduced to block this loopholeby dividing the tax band down by the number of companies controlled by the same person.  So if you had 3 companies they would each only get £100k at the lower corporation tax which would be fine if each had profits of £90k, but not if one had £300k profits and the other two only £10k.  It would be better to release control of the smaller companies to maximise the benefit of the low tax rate.

What about handing control to close family members?  This has also been blocked and is actually of more concern as often family members run completely independent companies, but they will still be caught by these rules.  There is a concession where there is no substantial commercial interdependence the rules can be released. Family members include husbands and wives, brothers, sisters, parents and children so beware of this danger.  Business partners are also included within this definition.

There is pressure for change in these rules as more and more people set up in business, but it is unlikely that there will be a great change.  The cost of the transition to the main corporation tax rate will diminish over the next few years as the rate reduces down from 28% to 24% as forecast in the last budget.

This area is involved and every situation is different.  While the basic principles have been covered there are other aspects such as loan creditors and terms on winding up which may also affect the control of the company. This article may not apply to your specific circumstance so please seek professional advice before taking any steps based on the information shown. If you would like advice in this or other areas feel free to call.  Alastair Wood, AW Accounting – Accountants who “speak your language”

VAT registration is not obligatory until a company turns over more than £70,000 in a year (the 2010 threshold).

A VAT number is definitely a sign of credibility, but many top craftsmen work alone, and don’t need to register.

Be suspicious if a VAT registered company offers to do a job cheaper by not charging VAT. Not being alarmist, but the VAT man is omniscient and has great powers to act against both parties acting fraudulently!

AW Accounting http://awaccs.co.uk/tax-advice/vat-tips-for-building-projects have provided some tips relating to VAT on building work:

There are a few VAT specific savings available for building work depending on the project you are working on and the property:

Listed Property

Work on “adding” to the property is zero rated, but it is up to the contractor to decide on whether to charge or not.  In many cases it is easier to just charge the customer.  Examples of additions include: an extension; installing central heating for the first time; a conservatory; even adding an Aga where there was not a kitchen formerly.  This however does not include general repairs and maintenance work.  More information is available from your accountant, HMRC or the Listed Property Owners Club (www.lpoc.co.uk).

Changing number of dwellings in a property

Vat on changes in dwellings is charged at a reduced 5% rate, and this will include: subdividing a house into flats; opening up an existing house which was previously split into flats; making a building not previously a dwelling into one eg a barn or warehouse conversion.

Claiming VAT on a home office

Under a little known concession “where a domestic room or rooms is put to business use, you may agree to an apportionment using an objective test to the extent to which the room is out to business use”.  So if 20% of an extension is to provide an office for you to work from home then you can claim 20% of the VAT, and also any specific items in that room which are for business purposes eg floor coverings, lighting.

This tips only provide a brief summary of what is available and may not apply to specific circumstance so please seek professional advice before taking any steps based on the information shown. If you would like advice in this or other areas feel free to call.  Alastair Wood, AW Accounting – Accountants who “speak your language”

• Any pre budget gains are still taxed @ 18%
• Post budget gains are taxed under new regime
• You can choose whether to offset the £10100 allowance against pre/post budget gains to minimise your tax bill (normally the post budget gains as avoids 28%)
• For post budget gains, once the allowance has been offset (if applicable), the gain is added to the persons taxable income (ie a “top slicing” arrangement):
  • Gains up to the top of the basic rate band are taxed at 18%
  • Gains into HR tax band are taxed at 28%

Example 1 from Budget Note 20 produced by HMRC (see link above)

Example 1
In 2010-11 X’s taxable income, after all allowable deductions and the personal allowance, is £27,400. The upper limit of the income tax basic rate band is £37,400. X sells an asset in May 2010 and realises a chargeable gain of £17,000. In November 2010 X sells another asset, realising a chargeable gain £25,100. X has no allowable losses to set against these gains, and the AEA (Annual Exempt Allowance) for 2010-11 is £10,100. Neither of the gains qualifies for entrepreneurs’ relief.
X’s taxable income is £10,000 less than the upper limit of the basic rate band (£37,400 – £27,400). X sets the AEA against the later gain (because part of that gain is liable to tax at the higher CGT rate), leaving £15,000 taxable (£25,100 – £10,100). The first £10,000 of the £15,000 is taxed at 18 per cent and the remaining £5,000 is taxed at 28 per cent. The £17,000 chargeable gain X realised in May 2010 before the change of rates on 23 June 2010 is taxable at the old 18 per cent rate.

This article aims to be informative and your should take professional advice before taking any steps based on the information shown. If you would like advice in this or other areas feel free to call.  Alastair Wood, AW Accounting – Accountants who “speak your language”

The Chancellor George Osborne started by painting the picture of the poor state of the economy and among various political comments stated that due a cautious approach fiscal goals would be met one year earlier than expected in 2014.  The inflation target will remain at 2% which has already been exceeded, this will peak at 2.7% later in the year and then reduce.  In terms of the approach to the deficit a lower spending rather than higher tax route is being taken, supporting the stand taken by the IMF and OECD, which will be done in the ratio 80/20, clearly showing the public sector will suffer.  The relationship with Europe will continue with a commitment not to join the Euro, and the government group looking at this area will be disbanded and used for more “useful tasks.”

Turning to the actual decisions, cuts are to be made to existing budgets but there was a commitment to capital spending, particularly if there is economic benefit.  This will be greeted with some optimism by the schools and infrastructure in North Kent which was rumoured to be cut to reduce the deficit.  The Royal Family have accepted that the Civil List will be frozen , and will be subject to annual National Audit Office reviews.  There will be an overall reduction of 20% in departmental budgets but due to commitments to maintain or increase NHS funding and overseas support the actual effect on departments hit by the cuts will be that of a 25% cut.  We will not know the full impact of the cuts until the Spending Review for which the date has been released for the first time as Wednesday 20^th October.

The public sector will face the biggest cuts and the most noticeable to the man in the street is the 2 year pay freeze for staff paid over £21k.  The government wants to encourage the back to work culture and the tax credits system is being used to facilitate this.  Tax credits will be more targeted particularly at the lower paid and will reduce for families with a combined income over £40k.  Child benefit is also to be frozen, the government acknowledging a number of approaches including means testing and taxing the benefit but finally settling on a freeze.  In other areas medical tests are to be introduced for those claiming disability benefit.

For business the main corporation tax rate will reduce by 1% per annum for the next 4 years reducing from 28% to 24% over that time, which will be the lowest rate in the G20.  For small businesses the rate will reduce by 1% only to 20% from next year.  There is also to be a small reduction in the rates of capital allowances, of main interest to small businesses the Annual Investment Allowance will reduce from £50k to £25k, which will still meet the needs of many SME businesses.

Among the miscellaneous changes, the Chancellor is introducing a levy on banks as recommended by the IMF, and this will take the form of a tax based of the size of the bank, small banks will be excluded from this arrangement.  The landline duty to fund broadband expansion is being withdrawn before even being introduced, this will be funded by links with the private sector and local initiatives.  In order to encourage business growth outside London and the South East there will be an NI exemption for new businesses being set up.

The biggest news of the budget and not entirely unexpected was the increase in VAT from 17.5% to 20% from 4 January 2011, but exempt and zero rated items such as childrens clothing and food will be unaffected.

There will be no increases in the previously announced duties for alcohol/fuel etc, but the additional cider increase has been withdrawn from the end of the month (apparently in time for the final 8 in the World Cup!)

In personal tax capital gains tax will remain at 18% for basic rate taxpayers but increase to 28% for higher rate taxpayers, the £10,100 limit will remain.  This may appear good at first sight but gains on property for example may well push basic rate taxpayers over the threshold so will pay 28% anyway.  To continue to encourage entrepreneurship the limit for lifetime gains will be increased to £5m at which an effective 10% rate applies.

Personal tax allowances will increase by £1000 to £7475 from next year, one step towards the £10k limit proposed by the Lib Dems.  The NI thresholds are to be increased and the cost to employers of employing staff paid less than £20k will not increase.  For pensioners the basic state pension will be relinked with earnings after a gap of several years, and in a further attempt to support low income families the Child element of Child tax credits will increase by £150pa.

This is by its nature a summary of the main points we consider of interest to readers, there was alot more content in the whole speech but we hope this will be more easily understood.  The main announcements are on HMRC website http://www.hmrc.gov.uk/budget2010/index.htm .  We hope this will be informative but if you would like advice in this or other areas feel free to call.  Alastair Wood, AW Accounting – Accountants who “speak your language”

He was looking at the Honda Insight with a P11D list price of £16,270 and CO2 of 101g/km.  The other well known hybrid the Toyota Prius has lower emissions of 89g, but higher list of £19505.

Benefits in kind

The car benefit to the employee is based on 10% of the list price (£1627 for the Honda) and is £325.40 for a basic rate taxpayers and £650.80 for a 40% rate taxpayer.  The additional benefit if fuel is provided is £1800, costing an additional £360 or £720 in tax for 20%/40% taxpayers respectively.

The equivalent for a 2.0 TDCi Mondeo Zetec list price £16770 and 139g CO2, benefit is £3186 and cost £637.20 and £1274.40 for 20%/40% taxpayers, and with fuel an additional £3420 benefit costing £684 and £1368 respectively.

In conclusion the Mondeo works out at about twice as much due to higher emissions for a similar priced car.

Capital allowances

There are also savings for a company, if a car has emissions of less than 110g then the full cost of the vehicle can be claimed against profits in the year of purchase so at 21% a saving of £3416 in corporation tax.  The Mondeo with emissions of <160g attracts a 20% allowance, and only £670.80 tax saving

There is a price to pay in terms of performance and size but clearly significant savings in tax in the year of purchase, but well worth considering for the green driver.

I hope this will help you decidwhat would be the best option for you but if you are unsure about this or would like advice in other areas feel free to call.  Alastair Wood, AW Accounting – Accountants who “speak your language”

1. Personal allowance – everyone has a personal allowance which is a tax free band, these are normally £6475 for the younger working population, rising to £9.5k for the over 65s who also get an additional amount for married couples of at least £2.6k.  This sets the level from which other adjustments are made.
2. If you have more than 1 employment or pension and one is under the personal allowance limit, HMRC will issue two coding notices, one which “should” cover the smaller amount and the balance of the tax free amount is allocated to the other employment.  This means that you will not be overtaxed.  This is often used for pensioners where part of the allowance is allocated to the state pension and the rest to other income.  In order to check this make sure the deduction for “state pension/state benefits” is about the same or a little more than the annual state pension you receive.
3. Benefits in kind – employees sometimes get benefits from their employers such as health insurance or company cars.  These are part of taxable income so in order to tax these amounts correctly part of the personal allowance is taken away which by default means that this part of income becomes taxable.  In order to check this make sure that the figure deducted from your code is the amount of the benefit paid for the year, which should be shown on the P11D form you receive from your employer every year.  If you no longer receive a benefit you should call or write to HMRC to advise them so they can amend the code.
4. Additional allowances for Gift Aid and pension contributions – both of these are taxable at the basic rate (although pension contributions are now restricted for the very highest earners (over £150k), so if you are a higher rate taxpayer HMRC will give you an allowance to make sure that these are not taxed at the higher rate on these.
5. If you have underpaid tax as a result of your tax code being wrong you must advise HMRC by preparing a Self Assessment Tax Return.

If you have identified an error you can call HMRC using the 0845 number but this is often accompanied by a very long wait, so alternatively write to them, but the processing time will be several weeks, so there is no fast and simple solution.

We hope you find the contents of this blog useful; the principles of allocating the tax code are fairly simple but if you are unsure you should of course always seek professional advice for your specific needs.  Alastair Wood, AW Accounting – Accountants who “speak your language”