Offsetting Losses from a Sole-trader Business

Q: I started my own business last year, and due to some significant initial start up costs I made a substantial loss in my first period of trading? Can I claim relief for these losses, and receive a tax refund?

A: You have a number of options with regard to claiming relief for your losses, and the amount of tax refunded will depend on the rate of tax you paid in previous years.

You can offset the loss against the income you earned in the current or previous tax years. The options available are carrying the loss back against other income you received in the tax year arising 3 years earlier, setting it against other income in the tax year of the loss or setting it against other income in the previous tax year.

Your total taxable income is reduced by the amount of the loss, and as a higher rate tax payer in all of these years, you will receive up to a 40% tax refund for the losses you have made. If circumstances were different, and neither of these options are beneficial, you can choose to carry the loss forward and set it against future profits from your business.

One other useful point to note is that you are also entitled, under any of the options above, to obtain national insurance class 4 relief for the losses. This can provide you with up to a further 8% relief through a reduction in your national insurance liability on future profits from your business.

In all cases it is best to seek advice from your accountant on this subject, and establish which option is most tax efficient, and provides you with the greatest tax refund with a calculation.

Non Resident Landlord Scheme

Q: I emigrated to Australia last year, and began to rent my home in the UK. I decided to rent this property to a friend, and as such will not be engaging a letting agent. My friend will be paying the rent directly to me. Can you explain whether I will need to pay UK tax on this income?

A: Even though you do not live in the UK, as the income arises here you will need to declare this to the UK tax authorities.

There are special rules for landlords who are classed as “Non Resident” for UK tax purposes. You must also seek advice from an accountant in Australia, as you may also be required to declare this income in the country where you are currently resident.

Under UK legislation, if a tenant pays net rent of more than £100 a week (£5,200 per annum) to a non-resident landlord they must deduct basic rate tax (currently 20%) from the landlord’s rental income and pay this over to HM Revenue & Customs on behalf of the landlord. Tenants who pay net rent of £100 a week or less do not have to operate the scheme unless they are told to do so. When working out the amount to tax, the tenant can take off tax deductible expenses that are incurred by the landlord for the purposes of letting the property such as council tax, ground rent, repairs etc.

If your tax affairs are up to date and you do not expect to be liable to UK income tax for the tax year due to your personal allowance exceeding the income you receive, you can apply on form NRL1 to the Centre for Non Residents for approval to receive your rental income gross. You must still include this information on a UK self assessment tax return at the end of the tax year.

For further information on the landlords and tenants responsibility under HMRC’s Non Resident Landlord Scheme, contact us.

Supplying Equipment to a Disabled Person

Q: My VAT registered company is about to supply some equipment to a number of disabled persons for use in their home. I understand there are various supplies to people with disabilities which do not have VAT charged on their supply. Is this true?

A: Unfortunately there is no blanket exemption from VAT for disabled persons. When VAT was introduced into the UK it was agreed that disabled persons should not have to incur the tax when buying items designed solely for their use or when having equipment adapted.

Therefore, if you supply certain goods or services to disabled people then the supply can be zero rated, and no VAT needs to be charged. Specific conditions must be adhered to in order for these supplies to qualify for zero-rating. These conditions include the design or adaptation of the item, the supply being made to a disabled person for their domestic or personal use and the receipt of an eligibility declaration form.

Goods supplied such as medical and surgical appliances, adjustable beds, chair lifts, Emergency alarm call systems may qualify for relief.

Examples of services qualifying for relief include installing zero-rated equipment which has been designed solely for use by a disabled person, adaptation goods to suit a disabled person condition and the repair and maintenance of equipment designed solely for their use.

Advising of Rental Property Income

Q: I started renting out a property a number of years ago, and due to the fall in interest rates have recently made a profit. In previous years I have always incurred losses. I haven’t ever completed a tax return as I am in PAYE employment. How should I notify the HMRC of this additional income?

A: If a taxpayer receives any taxable income in a tax year of which HM Revenue & Customs is unaware, then they have a legal duty to “notify of chargeability” to tax by 5 October following the end of the tax year in which the income was received.

The HMRC recently published guidance explaining that a lot of straightforward work can be dealt with over the phone to avoid the administrative burden of completing a tax return.

They explained that clients with net property income (that is income after expenses incurred) of £2,500 can use this facility, as they will make an adjustment through your PAYE code to recover the tax due. For more complicated matters they insist on receiving notification in writing.

You mentioned that you made a loss on the property in previous years. Even though you have not been asked to fill out a tax return, you should still notify HMRC of any losses, as you can offset these losses now that you have made a profit from the rental business.

Registering a New Business

Q: I am thinking of starting my own business this month. A friend who is currently self employed said I had to register as self employed to avoid a fine. Can you please tell me how to do this and how soon do I have to register?

A: You have to be registered as self employed for national insurance purposes within three months after the end of the month in which you became self-employed. In your case, as you started in March 2010, you must be registered by 31 June 2010, and failure to do so will result in a £100 penalty. Unless you are proposing to earn below the small earnings exception level (currently £5,075 for the 2009-10 tax year), you are required to commence payment of class 2 national insurance contributions at £2.40 per week.

There are various ways to register. The most popular being either by telephoning the Self Employed Registration Helpline on 0845 915 4515, by completing form CWF1, or registering online via the government gateway portal on www.hmrc.gov.uk .

In each case you will need to give your full name, address, post code, date of birth, national insurance number and, if you wish to pay the class 2 national insurance by standing order, the details of the bank account from which it will be paid.

Registering will act as a joint notification for both tax and national insurance purposes, and you will receive a 10 digit Unique Taxpayer Reference (UTR) for tax purposes, together with a tax return to complete for the 2009/10 tax year in April 2010.

Pension Contributions Before the Year End

Q: I run a small grocery business and in previous years have paid higher rate tax. The recession did not seem to affect our business. My accountant has suggested I make a pension contribution before the tax year end to reduce any higher rate tax liability. Is this useful advice?

A: Yes it is. Assuming you make your contribution before the 5th April, your contributions will almost certainly attract tax relief in the tax year they are paid.

Unfortunately you cannot carry back contributions to an earlier tax year, so it is important that you have at least an estimate of your business profits before the tax year finishes on 5th April 2010 to assess whether it is beneficial to make a pension contribution.

The legislation currently allows you to make contributions to a registered pension scheme and obtain tax relief on the lower of 100% of net relevant earnings or the annual allowance (2009/10: £245,000 rising to £255,000 in 2010/11). If you have no earnings in a year, or earnings are less than £3,600, you can pay contributions with relief up to that level.

The relief is given in two stages to a 40% higher rate tax payer. The pension provider claims basic rate relief back from HM Revenue & Customs (HMRC) at 20%. This means that for every £100 you contribute, £125 is actually added to your pension fund.

You must include details of the contribution on your self assessment tax return for the tax year the contribution is paid. This results in a further claim of the additional 20% tax relief due on pension contributions via a reduction in your tax liability for the year.

Setting Trading Losses Against Capital Gains

Q: I made a loss in my soletrader business this year, and sold a number of shares I own to supplement my living expenses. I estimate that selling these shares will realise a capital gain after reliefs of £30,000. Can I claim relief for any of my trading loss against the gains I have made?

A: Yes, a loss relief is available that allows individuals to offset self-employment losses against any capital gains you have made in the same tax year.

You must first offset the trading losses against your total other income for the tax year, even if this means losing the benefit of your tax free personal allowance. Any excess can then be extended under section 71 of Income Taxes Act 2007 (ITA 2007) and set against your chargeable capital gains (after capital gain losses have been accounted for) for the tax year.

Alternatively, you can choose to carry the loss back to the previous year, first against other income (s64 ITA2007), and then against capital gains (s72 ITA2007).

If you do not have any other income in the tax year, tax relief on your trading loss is claimed against your capital gains of £30,000. This will result in a significant fall in your capital gains tax liability.

However, be aware that the capital gains tax rates are currently only applied at 18% of any gain, and it may therefore be beneficial for you to consider carrying the losses forward to obtain income tax relief in a later year at a higher rate.
We can advise on the most tax efficient option available to you with a quick calculation.

Filing VAT Returns Online

Q: I recently received a letter from HM Revenue & Customs informing me that I am now required to submit my VAT returns online. Can you explain further?

A: From the 1st April 2010 all business with an annual turnover of £100,000 (excluding VAT) and any newly VAT registered business will be required to submit their VAT returns online, and pay any VAT electronically.
The online VAT Return is very similar to the paper version and there has been no change to the rules on how you complete your return or how you calculate VAT. Also, you won’t have to change your existing record keeping system – you can still keep your records on paper if you prefer.

Any business which is required to file online must sign up to the VAT online service through the HMRC website. Signing up to do your VAT online is straightforward and you don’t have to be a computer expert. The service is designed to make the process easier, more secure and more efficient for small businesses.

Further advantages of using the VAT online service system include setting up an email reminder service to advise when your next online VAT Return is due. Another benefit as you are required to make payments electronically either through Direct Debit, internet banking, telephone banking, is that you receive a further seven extra calendar (in addition to the usual one month deadline) to file your return and for the payment to reach the HMRC bank account.

Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.