Welcome to January’s Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.

If you need further assistance just let us know or you can send us a question for our Question and Answer Corner.

We are committed to ensuring all our clients don’t pay a penny more in tax than is necessary.

Please contact us for advice in your own specific circumstances. We’re here to help!

Overdrawn Directors Loan Account Issues

If you borrow funds from your own company or get it to pay personal bills on your behalf, there could be additional tax bills for both you and the company unless you repay that money to the company quickly.

Personal Tax

Where the amount you owe to the company exceeds £5,000 at any time in the tax year, and you have paid interest at less than the official rate on this loan there will be an income tax charge on you personally. The official rate has been set at 6.25% since 6 April 2007 in spite of the massive cuts in the Bank of England interest rates since then.

Corporate Tax

Where the loan is still outstanding nine months after the company’s year end the company has to pay a tax charge equivalent to 25% of the loan, known as a ‘section 419’ charge. When the loan is eventually cleared this section 419 charge can be reclaimed by the company, but only when its next corporation tax bill is due.

What to do

If you do owe your company a significant amount you could either:

1. Use other personal funds to reimburse the amount you owe; or
2. Get the company to pay you a dividend or a bonus that is set again the loan to bring the amount you owe back to zero; or
3. Ask the company to write-off the loan.

Implications

Option 1 creates no further tax charges for you or the company, so it’s the best in that respect.

Option 2 generates more tax for you, particularly if you already pay higher rate tax. In that case you will have to pay 25% of the net dividend in tax but you won’t have received a cash dividend to give you the funds to pay that tax. The company may have to pay you a higher dividend to give you enough cash to pay the higher rate tax due. The company must deduct PAYE and NICs from any bonus it pays, so can often be more expensive and it must have the cash to pay that tax and NI to the Taxman.

Option 3 the loan write-off, is treated as a distribution by the company at the date of the write-off. This is taxed as a dividend in your hands, complete with the 10% tax credit, but it is not actually a dividend. The company cannot claim a deduction against corporation tax for the amount of the loan written-off. The Taxman may also argue that NI contributions are due on the amount of the released loan, as if it was a payment of salary.

If you owe your company money please discuss the situation with us as soon as possible as the most tax efficient solution will vary depending on your circumstances.

Being Taxed on your Keyman Policy?

Many small businesses take out keyman policies designed to pay out on the death or incapacity of a key person, such as a lead director. The premiums paid for such policies are only tax allowable as a business expense if all of the following conditions apply:

– the purpose of taking out the policy is to cover the drop in profits that would arise from the loss of the key person;
– the policy only applies for the time that the employee is useful to the company; and
– the policy does not have an investment element such as a surrender value.

If the purpose of the policy is to pay off a business loan, like an endowment policy, then that would be a capital related purpose, and the premiums would not be tax allowable. Endowment policies also tend to have an investment element.

Generally where the premiums paid for a keyman policy have been correctly deducted as a business expense, if that policy pays out the proceeds are treated as part of the trading income of the business. The converse also generally applies that if the premiums paid were not tax allowable, the receipts from that policy are not treated as trading income of the business.

Unfortunately there is no law that lays down this clear principle, and there have been several cases that have been decided either way. Even where the premiums have not been deducted from profits, the Taxman may argue that the receipt of the policy allows the business to continue, and the proceeds should be taxed as business profits.

Whether there is tax on the receipt may affect the amount you need to be insured for, so please contact us if you need advice on whether the receipt would be taxable.

Tax Help for Losses and Falling Sales

If your sales have dropped and costs have risen, you may be making a loss. This is not a disaster, but you should take action soon to get the best out of the tax system at this difficult time.

VAT

Where your turnover for the last 12 months has dropped below £65,000 you could deregister for VAT. This will not suit all businesses, but if you sell to the public you may gain a competitive advantage by being outside the VAT net.

Loss Claims

Once you have a definite loss figure from your accounts you can set this against your profits for the previous year to generate a tax repayment or tax reduction. If the current loss exceeds the previous year’s profits you may be able to carry the excess back a further two years, but this depends on when your loss making period ended. You may need to change your accounting period slightly to accelerate the loss relief available. Ask us to help you get your accounts finalised as soon as possible.

Tax and Pension Credits

If your business is your main source of income, a loss means you may be eligible to receive Tax Credits. Tax credits are particularly valuable for families with children under the age of 16 or who are in full-time education, but single individuals can also claim. Your claim can only be backdated up to three months, so don’t delay making your claim. If you are aged 60 or over you may be able to claim Pension Credit. You don’t have to be retired to claim this support and it is a much simpler system than Tax Credits.

However your trading loss arose, the best policy is to act quickly to reduce the business tax payments and generate tax refunds. The worst thing you can do is put your head in the sand!

Planning January 31 Tax Payments

Remember remember 31 January, because that’s when your biggest tax payment is due, particularly if you are self-employed. You will need to pay any balance of tax due for 2007/08 by that date, and at the same time make the first payment on account for the tax due for 2008/09.

If your business is not run through a company, your profits are taxed in the tax year in which your accounting period ends. Say your accounting period ends on 30 June 2008, the profits for that period are taxed in 2008/09, and the first instalment of that tax is due on 31 January 2009. Where this accounting period has produced much lower profits than the previous year, or even a loss, you can elect to reduce your 2008/09 tax payment on account. But please ask us to check your figures first as you will be charged interest on any tax that is later found to be underpaid.

It is very important to plan for this big tax payment, and if you think you won’t have the funds to pay the full amount due, you should contact the Tax Office as soon as possible. There is now a new helpline number devoted to these sorts of problems: the Business Payment Support Service on 0845 302 1435, which is open every day from 8am. This service is staffed by tax officers who can arrange to spread your tax payments over a reasonable period. They can also deal with payments of VAT, PAYE, NI and corporation tax.

Question and Answer Corner

Q. Last year my friend’s company; MC Ltd was having cash flow difficulties, so my company; IQ Ltd paid some the outstanding debts with MC’s suppliers. The amount paid was recorded as a debt between our companies. When looking at the books of IQ Ltd the VAT inspector told me I should reclaim the VAT on the invoices IQ paid on behalf of MC Ltd. Is that correct?

A. The VAT inspector is wrong. Only MC Ltd can reclaim the VAT shown on invoices from its suppliers, as MC Ltd is the company that received the goods or services, not IQ Ltd. You have treated the transaction correctly. This shows how important it is for your suppliers to make out invoices correctly. If the invoice is addressed to a business that did not receive the goods or use the services, the VAT cannot be reclaimed.

Q. In 2001 I sold my city centre property and relocated my business to a converted farmhouse with workshops. At the time my accountant said I didn’t have to pay capital gains tax on the sale of the city property, as the gain was rolled over into the workshops. If I now let my surplus workshops will I have to pay tax on the capital gain I made in 2001?

A. The gain you rolled into the cost of the workshops will not become payable until your sell those buildings. As long as you used the workshops for your own business at the time you bought them, the claim to roll-over the gain was valid and is not disturbed by changing the use of the buildings at a later date. However, as you no longer use the workshops for your own business you won’t be able to roll-over the 2001 gain once more when you sell those buildings and buy another business asset.

Q. I am employed to teach a few courses at a college and I buy a few books each year to help prepare for those courses. Can I claim the cost of those books against tax?

A. The scope for employees claiming expenses, which are not reimbursed by their employer, is very limited. The expenses must be incurred while the employee is performing the work, not to prepare for that work. So the cost of books purchased to improve your underlying knowledge cannot be claimed against tax. Many taxpayers have fought this point in the courts, and lost. It would be better to get your employer to reimburse you for the cost.

Key Tax Dates for January 2009

1 – Due date for payment of Corporation Tax for the year ended 31 March 2008

14 – Return and payment of CT61 tax due for quarter to 31 December 2008

19/22 – PAYE/NIC due for month to 5/1/2009 or quarter 3 of 2008/09 for small employers

31 – Deadline for filing 2008 Self Assessment personal, partnership and trust Tax Returns – £100 first penalty for late filing.
Balancing self assessment payment due for 2007/08.
Capital gain tax payment due for 2007/08.
First self assessment payment on account due for 2008/09.
Interest accrues on all late payments.
Last time for HMRC to inform you if it intends to start an enquiry into your 2006/07 Tax Return.