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It’s a Pool Car isn’t it?

October 20, 2015 5:00 am / Leave a comment

Car racer

Yet again, we have another case on Pool Cars which could have been prevented had the right procedures been put in place.

The Case was decided in May 2015 and involved Mark and Trudie Holmes and their company KMS Logistics (UK) Ltd. The company owned 7 prestige cars which were used assist in maintaining and attracting clients.

There was no prohibition (not even a verbal one) on the private use of the vehicles, mileage logs showed that the cars were mainly used by Mr & Mrs Holmes. Until 2003/4 they had been declared as a benefit in kind but then the stopped being declared! There even seemed to be confusion over who owned the cars.

So not surprising Mr & Mrs Holmes lost the case.

Read the full details by clicking here

So what should you do to prove there is no private use:

  1. Keep the car on the company’s business premises
  2. Keep the keys at the company’s business premises
  3. Prepare a Board Minute
  4. Make sure your contract of employment bans private use
  5. Keep a mileage log
  6. Insure the car principally for business use

HMRC have specific rules on keeping vehicles at home in EIM23465

Even if you do meet the 60% rule you still have to prove ‘no private use’

steve@bicknells.net

When is a tax deduction allowed on property acquisition?

May 19, 2015 5:00 am / Leave a comment

A donut store, bakery, fish and chips store and a pet shop

Acquisition costs need to split into capital and revenue expenses.

“Several tests have been developed through case law to ascertain whether expenditure is revenue or capital in nature. The ‘enduring benefit’ test, which originated from Atherton v British Insulated & Helsby Cables Ltd [1925] 10 TC 155, is one such test.

“In this case, that expenditure incurred with a view to providing the business with an ‘enduring benefit’ was not allowable as a trading expense. ‘Enduring benefit’ means that the expense will benefit the business not just in the year in which it is incurred, but also in the years that follow. [Taxation]

Capital Expenses

  • Legal costs for the property purchase
  • Property Acquisition Cost

Capital expenses are only recovered as part of the capital gains calculation when they are added to the purchase cost to reduce the overall gain.

Revenue Expenses

  • Mortgage arrangement fees
  • Legal fees on arranging loans
  • Lenders normally include valuation fees in their charges

Revenue expenses are charged to the P&L and are deductible against income tax/corporation tax.

When loan costs are material they would normally be amortised over the period of the loan in order to apply the matching principle of accounting.

You cannot deduct:

  • Expenses incurred in connection with the first letting or subletting of a property for more than a year. These include legal expenses such as the cost of drawing up a lease, agents’ and surveyors’ fees and commission.
  • Any costs of agreeing and paying a premium on renewal of a lease.
  • Fees for planning permission or registration of title on property purchase.

HMRC Guidance

steve@bicknells.net

Annual Investment Allowance Tips

June 26, 2014 5:00 am / Leave a comment

Business people group.

What is the Annual Investment Allowance (AIA)?

The AIA was introduced in 2008. It is an allowance for tools and equipment meaning a business can write off 100% of qualifying capital expenditure (up to a set limit – currently £500,000) against taxable profits for the same period. (Expenditure over the limit is subject to the normal writing down allowances of 18 or 8 %.)

AIA is an incentive for businesses to invest because it accelerates the tax relief available, so it can all be claimed in the year of investment, rather than over a number of years, helping a business’s cash flow.

It also simplifies tax. The majority of UK businesses have qualifying expenditure less than £500,000, so they can just write this off and don’t have to make writing down allowance calculations every year.

What is the limit for AIA?

From April 2014 to 31 December 2015 AIA has been set at £500,000 per year.

From 1 January 2016 it will return to £25,000 per year.

E.g. If for the period 1 April 2014 to 31 March 2015 your taxable profits are £1,000,000 and you have spent £450,000 on qualifying capital expenditure, you can write that full amount off against your taxable profits and taxable profits will be £550,000.

Who can claim AIA?

AIA is available for companies, individuals and partnerships, where all the members are individuals.

What kind of expenditure does it cover?

It’s available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. It does not apply to cars.

You can find guidance on claiming AIA in the Capital Allowances Toolkit. This is one of a suite of products designed to help agents avoid errors seen in real returns.

, 25 June 2014

Buy to Let is Back!

September 29, 2013 7:54 am / Leave a comment

Mosaïque de logements

House prices are rising as confirmed by the Land Registry in their report 29 April 2013, the annual change is 0.9%, rent is increasing again after a drop in 2009 according to the English Housing Survey, in 2011 it went up 3% to a mean rent after housing benefit of £132 per week. So let’s see who the tenants are (English Housing Survey 2011):

social and private renting households receiving Housing Benefit
all
social
renters		 all
private
renters		 all
renters
percentages
age of household reference person
16 to 24 6.3 11.9 7.8
25 to 34 12.6 26.9 16.5
35 to 44 18.1 24.0 19.7
45 to 54 16.3 15.8 16.2
55 to 64 14.1 9.0 12.7
65 to 74 15.8 7.8 13.6
75 and over 16.7 4.4 13.4
marital status of household reference person
married1 16.9 18.4 17.3
cohabiting2 5.5 9.7 6.7
single 33.2 37.6 34.4
widowed3 17.1 7.5 14.5
divorced4  20.9 17.0 19.8
separated5 6.4 9.9 7.3
household size
one 50.5 31.7 45.4
two 23.2 28.7 24.7
three 11.5 18.0 13.3
four 8.2 12.3 9.3
five 3.6 5.8 4.2
six or more 3.0 3.4 3.1
household type
couple, no dependent child(ren) 11.5 8.0 10.5
couple with dependent child(ren) 10.1 19.2 12.5
lone parent with dependent child(ren) 20.9 35.1 24.7
other multi-person household 7.1 6.0 6.8
one person 50.5 31.7 45.4
length of residence
less than 1 year 8.4 27.7 13.6
1 year, under 3 years 15.4 32.5 20.0
3 years, under 5 years 13.2 15.5 13.8
5 years, under 10 years 20.7 12.3 18.4
10 years, under 20 years 22.2 8.0 18.4
20 years or more 20.1 * 15.7
economic activity of
household reference person
full time work 2.7 13.1 5.5
part time work 9.5 18.1 11.9
retired 36.4 16.0 30.8
unemployed 13.8 17.4 14.8
full time education * * 1.5
other 36.4 32.9 35.5
total 2,395 890 3,285
£ per week
mean gross weekly income
of household reference person 206 237 215
(and partner)
sample 1,945 690 2,635

Yields are looking good, its possible to achieve 8% to 10%, take a look at the examples on http://investors.assetz.co.uk/property-listing.htm

Lending rates are low with Bank of England base rate stuck at 0.5%.

So we should see Buy to Let coming back into fashion with investors, with that in mind here are my top tips to minimise your tax:

1. Claim allowable expenses

  • Mortgage or Loan Interest (but not capital)
  • Repairs and maintenance (but not improvements)
  • Decorating
  • Gardening
  • Cleaning
  • Travel costs to and from your properties for lettings or meetings
  • Advertising costs
  • Agents fees
  • Buildings and contents insurance
  • Ground Rent
  • Accountants Fees
  • Rent insurance (if you claim the income will need to be declared)
  • Legal fees relating to eviction

2. If the property is furnished claim for Wear & Tear, you can claim 10% of the rent each year

3. Claim for repair and advertising expenses incurred in getting the property ready for renting

4. Consider how the property is owned for example your partner may pay less tax or if you own it 50/50 you could use their capital gains tax exemption on sale of the property

5. Consider whether owning the property within a limited company might be better, Corporation Tax is 20% for small companies in the UK which can make dividends more tax efficient than personal income.

6. Make sure any borrowings you have are on the Buy to Let so that you can claim tax relief on the interest

7. Claim the Energy Saving allowance  for energy saving work and save £1,500

steve@bicknells.net

5 things you need know about asset revaluations

August 25, 2013 6:50 pm / Leave a comment

Your Net Worth Credit Card Debt Rating Value

It’s a fundamental concept of accounting that the accounts must give a ‘True and Fair’ view of the state of affairs of the company at its year end.

In order to achieve this a company may need to revalue its fixed assets, it could be Plant or Property, larger companies will refer to International Accounting Standards and Financial Reporting Standards but most SME’s use FRSSE.

Accounting Explained gives a good summary of the entries related to revaluations http://accountingexplained.com/financial/non-current-assets/revaluation-of-fixed-assets

Here are some things you need to know:

  1. Revaluing Assets does not create a tax liability
  2. Revaluing Assets does not create a profit (it creates a revaluation reserve)
  3. Depreciation Rates may need to be reviewed (as they could be too high if you need to revalue regularly)
  4. Revaluation will increased the Net Worth of your business
  5. The Directors can revalue the assets but the value needs to be carefully worked out as an arms length market value

steve@bicknells.net

How do you do capital investment appraisal?

August 20, 2013 8:33 pm / Leave a comment

Progress

How can you decide whether to buy a fixed asset or to rent it? How do you evaluate and compare capital expenditure requests?

There are 4 key techniques used:

1. Pay Back Period – how many years does it take to get back your initial investment in profits – for normal investments anything less than 3 years is considered good

2. Average Rate of Return (ARR) – this method of appraisal takes the average of the profits made over say a 3 year period (or the life of an asset) and shows the result as a % of the initial investment

3. Net Present Value/Discounted Cash Flow – this method of appraisal takes into account the time value of returns, its often considered the best and most precise way to assess returns, to calculate the Net Present Value you create a cash flow table year 0, shows the investment as a cost, then the net profits are shown in the subsequent years and a factor is applied to remove the effect of inflation, the higher the NPV the better the investment

4. Internal Rate of Return – this is also described as the effective interest rate, to calculate this we increase the Discount Rate in the DCF (3 above) until the NPV equals zero and that produces the return rate

Many businesses will seek to match the funding of the asset to its useful economic life through either a loan or lease, as the life of the asset will normally exceed the pay back period, this should lead to increased profits compared to renting the asset.

Assets are depreciated in the business accounts

Depreciation means the cost of the asset is spread, so it is written off against the profits of several years rather than just the year of purchase. Depreciation is not allowable for tax. Instead you may be able to claim the cost of some assets against taxable income as capital allowances.

The most common methods of Depreciation are Straight Line (depreciation is the same amount in each year) and Reducing Balance (the amount of depreciation decreases each year and is a percentage of the net book balance).

In the Finance Bill 2013 it was announced that for 2 years from 1st January 2013 the Annual Investment Allowance will be increased from £25,000 to £250,000 (an increase of 10 times!).

 

This is fantastic news if you are planning asset purchases because it will reduce your tax bill.

Some examples of AIA qualifying expenditure

 

‘Plant or machinery’ actually covers almost every sort of asset a person may buy for the purposes of his/her business. Really the only business assets not covered are land, buildings and cars (which are excluded by one of the ‘general exclusions’). Typical examples of plant or machinery include:

– computers and all kinds of office furniture and equipment
– vans, lorries, trucks, cranes and diggers
– ‘integral features’ of a building or structure, see CA22320
– other building fixtures, such as shop fittings, kitchen and bathroom fittings
– all kinds of business machines, such as printing presses, lathes and tooling machines
– tractors, combine harvesters and other agricultural machinery
– gaming machines, amusement park rides
– computerised /computer aided machinery, including robotic machines
– wind turbines and fibre optic cabling.

Capital Allowances

Capital allowances are available to sole traders, self-employed persons or partnerships, as well as companies and organisations liable for Corporation Tax.

If you buy an asset, for example, a car, tools, machinery or other equipment for use in your business, you cannot deduct your expenditure on that asset from your trading profits. Instead, you may be able to claim a capital allowance for that expenditure if you haven’t claimed the Annual Investment Allowance for the same asset.

There will be a timing difference between Depreciation and Capital Allowances/Annual Investment Allowance and the Tax on the difference in rates is calculated and shown in the accounts as a Provision for Deferred Tax.

steve@bicknells.net

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