Where assets are owned in joint names any income is deemed to be shared equally between the spouses. If the actual shares of ownership are unequal, income is still deemed to be split equally unless an election is made to split the income in the same proportion as the ownership of the asset.

One exception to this rule is shares in close companies (almost all small, private, family owned companies will be close companies) where income is always split in the same proportion as the shares are owned

Example
A buy to let property is owned three quarters by Helen and one quarter by her husband Mark. If nothing is done the net rental income on which tax is payable will be split 50:50. If an election is made the income will be split 75:25. A choice can be made according to which is most desirable when other income of the spouses is taken into account.

Capital gains tax
Independent taxation also applies to capital gains tax. Each spouse is entitled to take advantage of the annual exemption of £9,200 before any capital gains tax has to be paid. Therefore it is often most tax-efficient for sales of assets to be made by husband and wife jointly.

Transfers may be possible shortly before a sale with no adverse consequences because transfers between husband and wife do not give rise to capital gains tax.Capital gains tax is payable on the amount of capital gains over the annual exemption at 10%, 20% or 40% depending on the income of the taxpayer in the year of sale. In effect the taxable gains are treated as the top slice of income and this allows further potential saving if assets are owned jointly, as maximum use can be made of each spouse’s 10% and 20% bands.

Separation
The breakdown of a marriage will often involve the transfer of assets between spouses. The marriage continues until the decree absolute but, for transfers of assets to be entirely free of a charge to capital gains tax, the transfer must be made before the end of the tax year in which the separation takes place.

Separation is deemed to happen when the couple cease to live together as man and wife - quite different to the date of the decree absolute which is often much later.

Example
If a couple cease to live together on 30 April 2007, transfers of assets must be made between them by 5 April 2008 for capital gains tax to be avoided. Conversely, for inheritance tax, transfers taking place before the granting of a decree absolute will continue to be exempt. Even after this date, transfers will not usually be a problem.There is usually no tax relief on maintenance payments made by one former spouse to another nor on any payments required by the Child Support Agency.

Children
It is often assumed that children are not taxpayers until they achieve some particular age. In fact HMRC will tax a child just as readily as anyone else if the child has sufficient income to make them liable.

Transferring income to children
Children have their own personal allowances and tax bands. Where their only income is, at best, a few pounds from a paper round or a Saturday job, there may be scope for transferring income producing assets to the children to use up their personal allowance.

Tax Planning

The problem is that if the parents do this the income will still be treated as belonging to them (until the child is 18 or marries) unless the gross income arising from such sources is not more than £100 per annum. However grandparents and others are not subject to this rule

Children and capital gains
Children also have their own annual exemption for capital gains tax so that assets transferred to them which have a bias towards capital growth rather than income may prove to be more advantageous.

Repayment claims
Where children have significant sources of income from which tax has been deducted, such as bank interest or trust income, they will almost certainly be entitled to a repayment. In such cases a repayment claim should be made.

Tax Planning

Friendly Societies offer 10 year, tax exempt savings plans for children for up to £25 per month

Child Trust Fund
For children born on or after 1 September 2002 a Child Trust Fund has been introduced. The idea is to encourage tax efficient savings, with the government’s help, to build a savings fund which the child can access once he or she reaches 18.

The government’s initial contribution is £250 or £500 for low income families, with a further payment of £250 (and again £500 for lower income families) once the child reaches the age of seven.

Other contributions of up to £1,200 per annum can be added to the fund by family or friends and, although there is no tax relief on making the contributions, the fund is tax exempt. This is therefore a tax efficient medium to which regular transfers can be made.

Tax Planning
There are still quite a few ways income can be transferred to children tax efficiently: buy them premium bonds - winnings are tax free

buy National Savings Childrens’ Bonus Bonds or National Savings Certificates - these are tax free

Friendly Societies offer 10 year, tax exempt savings plans for children for up to £25 per month

a parent can contribute to a pension scheme for a child contributing up to £300 per month gross (net cost £234 per month) even though the child has no earnings.

Child Tax Credit
The Child Tax Credit is means tested and potentially available to families who have responsibility for one or more children. It is a tax free payment made direct to the main carer and it will be available where combined income is less than £58,175 or £66,350 if there is a child under one year old.

There are several elements to the credit and claims can be complicated. Please talk to us.          

Company cars remain a popular benefit and for some a real status symbol, despite recent increases in the tax charge they give rise to.

If the car has a diesel engine the charge is increased by 3% (except that it cannot exceed 35%). However diesel cars registered before 1 January 2006 and which met the Euro IV emission standards do not suffer this supplement.

Medical Insurance

The employee is taxed on the amount of the premium paid by the employer.

Home and mobile phones and the provision of broadband

There is no benefit on the provision of a company mobile phone even where it is used privately. However this is limited to one phone per employee. Where home telephone bills are paid by the employer, the amount paid will be taxable. The employee may make an expense claim for the cost of business calls only but none of the line rental.

There is generally no benefit on the provision of home broadband access where the employer subscribes for the service for the employees home and the employee needs this access in order to carry out their job.

Cheap or interest free loans

If loans made by the employer to an employee exceed £5,000 in a tax year, tax is chargeable on the difference between the interest paid and the interest due at an official rate - currently 6.25%.

Childcare costs

Childcare costs paid for by an employer are exempt from both income tax and NIC. This applies to a place in an employer operated nursery or where the employer pays for registered or approved childcare. In this latter case the exemption is limited to £55 per week and any excess over this is subject to tax and NIC.

The costs will normally be paid in the form of vouchers or alternatively paid direct to the childcare provider. Any scheme must be open to all employees or all employees at a particular location.

Registered or approved childcare includes childminders, nurseries and play schemes registered by Ofsted, out of hours clubs run by a school on the school premises or by a local authority and childcare schemes run by approved providers.

Expense payments

Reimbursed expenses

Reimbursed expenses are taxable as a benefit but the employee can claim a deduction for those expenses incurred wholly for business purposes. The two will usually cancel out each other.

At the end of each tax year, the employer has to send a summary of all benefits to HMRC on form P11D. As well as the perks listed above, this form will include the reimbursed expenses.

The employee can then make an expense claim either on a self assessment return or by letter.

Because, often, nothing is taxable, employers can ask to be excluded from this process if they write to HMRC. This is known as a dispensation.

Mileage claims

Many employers pay a standard rate of mileage to all employees who use their own cars for business journeys. HMRC set authorised rates for business mileage which are currently 40p for the first 10,000 miles in a tax year and 25p thereafter.

If the employee is paid for business miles at less than the authorised rate, tax relief is available on the difference. If, however, the employee is paid at more than these rates then the excess is taxable.

Example

In 2007/08 Dave travels 14,100 business miles in his own car and is paid 32p per mile by his employer.

Dave can claim tax relief of £513 ((10,000 x 40p) + (4,100 x 25p)) - (14,100 x 32p).

Mileage payments do not have to be shown on the form P11D unless more than the authorised rates are paid.

Other transport issues

Vans

Where employees are provided with a van, and the only private use of this is to go to and from work (including any incidental private use on the way), then no taxable benefit may arise. If there is private use beyond this, there is a benefit of £3,000 per annum and an additional £500 if fuel is provided for private as well as business journeys. Prior to the current tax year the benefit on the provision of a van with unrestricted private use was only £500 or £350 for an old van.

Back to contents



WORKING FOR YOURSELF

Starting up a business of your own is a big step and not one to take lightly. The taxation of your business is only one of many commercial and legal aspects of starting a business that you will need to consider.

Preparation is the key and a proper business plan should be one of the first things you should do. However tax matters are our main concern here.

Choosing a business structure

The alternative business structures are:

Sole Trader
This is the simplest form of business since it can be established without legal formality. However, the business of a sole trader is not distinguished from the proprietor’s personal affairs. If the business incurs debts which are unpaid, the creditor can seek repayment from the sole trader personally.

Partnership
A partnership is similar in nature to a sole trader but involves two or more people working together. A written agreement is essential so that all partners are aware of the terms of the partnership. Again the business and personal affairs of the partners are not legally separate.
Sole trades and partnerships are often referred to as unincorporated businesses.

Limited Company
A company is a legal entity in its own right, separate from the personal affairs of the owners and the directors. A company provides specific liability which means that the creditors of the company cannot make a claim against the owners or the directors except in very limited circumstances. Often this advantage is somewhat eroded because a bank, for example, may seek personal guarantees from the directors.
These potential advantages carry the downside of greater legal requirements and regulations that must be complied with.

Limited Liability Partnerships (LLPs)
LLPs are a halfway house between partnerships and companies. They are taxed in the same way as a partnership but are legally a corporate body. This again gives some protection to the owners from the partnership’s creditors.
In this section we consider the differing tax treatments of the alternatives but you should choose which structure is right for you based on more than just the tax issues alone.
Many will start off as a sole trader, taking advantage of the lack of any formal procedures to establish the business. Some, however, will need the protection of limited liability because they are in a high risk business or they may need the additional stature that is seen as attaching to a limited company. Alternatively, they may need to establish and protect a particular name which only the formation of a limited company will allow them to do.

Tax Planning
If you operate as a limited company, there is a legal separation between you as the owner and the company itself. This means you cannot use the company cheque book as if it were your own! This requires a certain discipline without which all kinds of difficulties can occur. Many will start off as a sole trader, taking advantage of the lack of any formal procedures to establish the business. Some however will need the protection of limited liability because they are in a high risk business or they may need the additional stature that is seen as attaching to a limited company. Alternatively, they may need to establish and protect a particular name which only the formation of a limited company will allow them to do.

The tax regime
Unincorporated businesses
A new business must register with HMRC within three months of commencing to trade. Income tax is paid on the profits of the business. The amount that the proprietor, or a partner in a partnership, draws out of the business (referred to as ‘drawings’) is irrelevant. Profits are taxed on a current year basis as shown by the example.

Example

If the accounting period (or ‘year’) end is 31 March then, in the tax year 2007/08, the profits for the year ended 31 March 2008 will be taxed. If the year end was 31 August then, in the tax year 2007/08, the profits for the year ended 31 August 2007 will be taxed.

Many businesses choose 31 March (or even 5 April) as their accounting period end but this is not compulsory.

Where losses arise at the beginning of a new business or if the profits grow appreciably month on month, then the choice of the accounting date can be important. Accounting dates early in the tax year give a cash flow advantage as there is a longer period of time between earning the profits and paying the tax. However the earlier the accounting date is in the tax year the more profits are assessed twice in the early years of a business. The taxpayer is eventually allowed to claim relief for the double assessed profits know as overlap relief. This may be 20 years from now when the business stops trading. Over the lifetime of the business the actual business profits are assessed.

Payment of tax

A person who is self employed, either as a sole trader or a partner in a partnership, will usually pay tax twice a year, on 31 January and 31 July. At first this may seem confusing and is best explained by an example.

Example

A business starts on 6 April 2007. Profit for the period to 31 March 2008 is £10,000. Tax and Class 4 NI due in 2007/08 is £1,165.

On 31 January 2009 tax and Class 4 NI payable is £1,747 being £1,165 balancing payment for 2007/08 and £582 (50% of £1,165) payment on account for 2008/09.

On 31 July 2009 £583 will be payable being the second payment on account for 2008/09.

Profit in the year to 31 March 2009 is £30,000 and the tax and Class 4 NI on this is £6,937.

On 31 January 2010 the payment is £9,240. This is made up of £5,772 balancing payment for 2008/09 (£6,937 - (£582 + £583)) plus £3,468 payment on account for 2009/10.

On 31 July 2010 a second payment on account for 2009/10 of £3,469 is due. And so on …

Tax Planning
The payments on account system can make tax payments very volatile if profits fluctuate widely from year to year. You must plan ahead carefully to avoid nasty shocks.

Companies
Unlike sole traders and partnerships who pay tax on profits only (and drawings are ignored), companies have two layers of tax. The first is tax payable by directors and shareholders on money they take out of the company and the second is corporation tax which is due on the company’s profits.

Tax on ‘drawings’

The directors of the company will normally be paid a salary and this is taxed under PAYE as for all employees. The cost of this, including the employer’s NIC, is generally an allowable expense of the company. The shareholders of the company may be rewarded by the payment of dividends on their shares. In most small companies the directors and shareholders are one and the same and so they can choose the most tax efficient way to pay themselves. Using dividends can result in savings in NIC. This requires planning. Please talk to us to decide the best options for you.

The small companies rate normally applies where profits do not exceed £300,000. Profits between £300,000 and £1,500,000 are taxed at 32.5% for the year to 31 March 2008.The small companies rate is increased from 19% to 20% for the year to 31 March 2008.

The government plans to increase the small companies rate to 21% and then to 22% in the years to 31 March 2009 and 2010. The full rate applies to all profits where those profits are greater than £1,500,000.

This rate is set to decease to 28% for the year to 31 March 2009.Tax on profits The profits of a limited company are calculated in a similar way as for unincorporated businesses and the same rules about expenses and capital allowances apply. Remember though that the salaries paid to directors, but not the dividends paid to shareholders, are deductible from the profits before they are taxed.

Payment of tax

PAYE and NIC on salaries is payable monthly (or quarterly where the amount due is less than £1,500 per month).Corporation tax is usually payable nine months and one day after the year end, so the choice of year end has no tax consequence.

Example

This example makes some assumptions based on the proposals announced in Budget 2007 regarding income tax rates and bands, NI band changes and the corporation tax rate changes.

In 2009/10 Terry and June own equally the shares in Scott Ltd. They have profits of £100,000 before allowing for their salaries.

They can arrange their salaries and dividends in the most tax efficient way and, assuming they draw all of the profits, the company will pay corporation tax of £19,701 and they will have income tax to pay of £766 each. This makes a total of £21,233.

In 2009/10 Tom and Barbara are equal partners in Goodlife Associates and they have profits of £100,000. Irrespective of how much they draw and in what proportions, they will each pay income tax and NICs on £50,000. The amount due will be £13,870 each, making a total of £27,740.

Terry and June have saved £6,507 by operating as a limited company.

Value added tax (VAT) and your business

VAT is a tax ultimately paid by the final consumer and businesses act as the collectors of the tax. There are heavy fines for failing to operate the system properly.

What does VAT apply to?

VAT is chargeable on the supply of goods and services in the UK when made by a business that is required to register for VAT.

A registered business must charge VAT on its sales which is known as output VAT. There are currently three rates of VAT which can be payable on what are known as taxable supplies. These are the standard rate of 17.5%, the reduced rate of 5% and zero rate (where the supply is deemed to be subject to VAT but the output VAT is charged at 0% meaning that no VAT would be payable).

However that business will also pay VAT on the goods and services it buys. This is known as input tax.

If the output tax exceeds the input tax, then a payment of the difference has to be made to HMRC. This calculation is normally done quarterly. If input tax exceeds output tax a repayment of VAT will be made. This calculation is also done quarterly except that if repayments occur regularly this can be done monthly. Regular repayments would perhaps apply where a business generally makes zero rated supplies.

Supplies

Certain supplies of goods and services are not subject to VAT at all and are known as exempt supplies. A business that makes only exempt supplies cannot register for VAT and will be unable to reclaim any input tax.

As there are three rates which can be applicable to taxable supplies, standard, reduced or zero rated it is important to identify the type of supplies correctly and apply the correct percentage of VAT.

Some input VAT is not reclaimable by a VAT registered business. Two common examples are VAT incurred on entertaining business customers and VAT on the purchase of a car.

Do I need to register?

A business must register if its taxable supplies exceed an annual figure, currently £64,000. If taxable supplies are less than this a business may still register voluntarily. So, for example, if the business makes only zero rated sales, it can still register and reclaim the input tax suffered.

VAT can affect competition. A plumber, for example, who sells only to the general public will be at a disadvantage if he has to register for VAT. He may have to charge up to 17.5% more than a plumber who is not registered to earn the same profit. On the other hand, if the same plumber only works for other VAT registered businesses, such as building companies for example, then it will not matter if they are registered because the customer will be able to recover the VAT that is charged.

Indeed, in general, a business that always sells to other VAT registered businesses will normally register, even if below the annual limit, because then it can reclaim VAT on purchases and expenses. This will improve profit. This can be especially relevant for new businesses because there are often high start-up costs that carry VAT.

On the other hand registration comes at the cost of having to meet onerous record-keeping requirements, a need to submit VAT returns on time and a fundamental need to get it right! Failure on any of these points exposes the business to penalties which, in some cases, can be substantial.

Schemes for small businesses

The Flat Rate Scheme

This scheme, designed to make the VAT system simpler, is open to businesses whose annual taxable supplies are less than £150,000. It allows businesses to pay VAT at a fixed percentage of their total turnover and no specific claims to recover input tax need to be made. The fixed percentage depends on the type of business.

The Cash Accounting Scheme

If annual taxable supplies are less than £1,350,000 a business may calculate its VAT payable by considering only the output tax and input tax on invoices which have been paid, rather than by reference to the invoice date alone. This is advantageous where a business has to wait a long time before it is paid by its customers.

The Annual Accounting Scheme

If taxable supplies are below £1,350,000 a business may choose to make only one annual return instead of quarterly returns. Interim payments of VAT must be made monthly or quarterly by direct debit based on an estimate of the amount due.By reputation VAT is a tax full of pitfalls for the unwary but most problems arise from poor record keeping or a lack of understanding of the rules. We can help with both of these issues and make your life a lot simpler.

Back to contents



TAX AND YOUR INVESTMENTS

Setting aside income in the form of savings is important for us all, to provide for the unexpected or to build up a nest egg that we can enjoy in retirement. Given that the earnings from which our savings come have already been taxed, people often object to the fact that any return they enjoy on their investments will usually be taxed again.

In this section we consider what are the most tax efficient investments to make.

Pensions

Pensions are one of the most tax efficient forms of saving. A higher rate taxpayer can contribute £100 to an approved pension fund at a cost of only £60 and investment income and capital gains will accrue within the scheme largely tax free.

An individual is entitled to tax relief on personal contributions in any given tax year up to the higher of 100% of earned income or £3,600. The contributions are paid net of basic rate tax and the pension provider will then recover the tax from HMRC. Higher rate relief, if appropriate, can be claimed from HMRC. Contributions of more than this can be made into a scheme but the excess will not attract tax relief.

An employer may make contributions to a scheme and a deduction from profits may be available to the employer.

Despite these generous reliefs there are controls which serve to limit very high levels of contribution. These are complex but, put simply, they will give rise to a tax charge if annual contributions result in an increase in pension rights for a year of more than £225,000 (for 2007/08) or if the value of the fund when benefits are taken is greater than a lifetime allowance which, for 2007/08, is £1.6 million.

When the pension is taken, the fund must be used to buy a life annuity. Part of the fund, normally 25%, may be used to take a cash free lump sum.

Tax free savings

Individual Savings Accounts (ISAs)

ISAs are free of income tax and capital gains tax. There are maximum investment limits which apply for each tax year but, over several years, large investments can be built up. The ISA can be in stocks and shares, cash or life insurance but most ISA providers invest solely in stocks and shares (maxi or mini). Banks and building societies provide mini cash ISAs.

Note that if, say, a cash mini-account is opened, no maxi-account can be opened in the same tax year so that only a mini stocks and shares ISA can be opened. 16 and 17 year olds are only able to open mini cash ISAs.

• A number of reforms will be introduced from 6 April 2008:

•   The mini/maxi distinction within ISAs will be removed. The government will continue to allow individuals to hold these components with either the same or different providers

•   The maximum amount which can be invested into a cash ISA will be increased to £3,600.

•   The maximum amount which can be invested into a stocks and shares ISA will be £7,200, subject to an overall limit of £7,200 subscribed into both ISAs in a tax year.

Other tax efficient investments

The following investments work in varying ways. You should consider your needs in detail before entering into any commitments.

National Savings products

There are a number of products, taxed in different ways, but some, such as savings certificates, are tax free.

Premium bonds

Another national savings product, premium bonds are tax free and you could win £1m! By their nature, returns are volatile. Prizes currently total over 3% of the premium bonds in issue so that, statistically, a large investment (maximum £30,000) should yield something similar to this. 3% is equivalent to a gross return of 5% to a higher rate taxpayer.

Single premium insurance bonds

These provide a means of deferring income into a subsequent period when it may be taxed at a lower rate.

The Enterprise Investment Scheme (EIS)

Income tax relief at 20% is available on new equity investment (in qualifying unquoted trading companies) of up to £400,000 in 2007/08. Capital gains tax exemption may be given on sales of EIS shares held for at least three years. If the proceeds realised on the sale of any chargeable asset (eg quoted shares, second homes, etc) are reinvested in EIS shares, the gain on the disposal can be deferred.

Venture Capital Trusts (VCT)

These bodies invest in the shares of unquoted trading companies. An investor in the shares of a VCT will be exempt from tax on dividends and on any capital gain arising from disposal of the shares in the VCT. Income tax relief currently at 30% is available on subscriptions for VCT shares, up to £200,000 per tax year, so long as the shares are held for at least five years (three years for shares issued before 6 April 2006).

Buy to let properties

In recent years, the stock market has had its ups and downs. Add to this the serious loss of public confidence in pension funds as a means of saving for the future and it is not surprising that investors have looked elsewhere.

The UK property market, whilst cyclical, has proved over the long-term to be a very successful investment. This has resulted in a massive expansion in the buy to let sector.

Buy to let involves investing in property with the expectation of capital growth with the rental income from tenants covering the mortgage costs and any outgoings.

However the gross return from buy to let properties - ie the rent received less costs such as letting fees, maintenance, service charges and insurance - is no longer as attractive as it once was, investors also need to take a view on the likelihood of capital appreciation exceeding inflation. Investors should take a long-term view and choose properties with care.

Which property?

Investing in a buy to let property is not the same as buying your own home. You may wish to get an agent to advise you of the local market for rented property. An agent will also be able to advise you of the standard of decoration and furnishings which are expected to get a quick let.

Letting property can be very time consuming and inconvenient. Tenants will expect a quick solution if the central heating breaks down over the bank holiday weekend! Don’t cut corners - a correctly drawn up tenancy agreement will ensure the legal position is clear.

Tax on rental income

Income tax will be payable on the rents received after deducting allowable expenses. Allowable expenses include mortgage interest, repairs, agent’s letting fees and an allowance for any furnishings provided.