HANLEY & CO CHARTERED ACCOUNTANTS IN ASHTON UNDER LYNE, TAMESIDE AND BLACKPOOL Blog

Rent A Room

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Although Budget 2017 announced that the Government intends to review the rent-a-room scheme, it currently remains a tax-efficient way of letting out a spare room. Broadly, HMRC’s rent-a-room scheme is an optional exemption scheme, which allows individuals to receive up to £7,500 of tax-free gross income (income before expenses) from renting out spare rooms in their only or main home. The exemption is halved where the income is shared with a partner or someone else. Broadly, as long as income is below the annual threshold, it does not need to be reported to HMRC. If income exceeds the threshold, it needs to be reported to HMRC via the self-assessment system.

In order to qualify under the rent-a-room scheme, the accommodation must be furnished and a lodger can occupy a single room or an entire floor of the house. However, the scheme doesn’t apply if the house is converted into separate flats that are rented out. The scheme cannot be used if the accommodation is in a UK home which is let whilst the landlord lives abroad.

The rent-a-room tax break does not apply where part of a home is let as an office or other business premises. The relief only covers the circumstance where payments are made for the use of living accommodation.

Sometimes additional services are provided, for example, cleaning and laundry. The payments for such services must be added to the rent to work out the total receipts. If income exceeds £7,500 a year in total, a liability to tax will arise, even if the rent itself is less than that.

Accounting for tax

Where the annual threshold is exceeded, there are two options available:

– the first £7,500 is counted as the tax-free allowance and income tax is paid on the remaining income; or
– the landlord opts to treat the renting of the room as a normal rental business, working out a profit and loss account using the normal income and expenditure rules.

In most cases, the first option will be more advantageous. The principal point to bear in mind is that those using the rent-a-room scheme cannot claim any expenses relating to the letting (e.g. insurance, repairs, heating).

To work out whether it is preferable to join the scheme, the following methods of calculation should be compared:

– Method A: paying tax on the profit from letting worked out in the normal way for a rental business (i.e. rents received less expenses).
– Method B: paying tax on the gross amount of receipts (including receipts for any related services they provide) less the £7,500 exemption limit.

Method A applies automatically unless the taxpayer tells their tax office within the time limit that they want method B.

Once a taxpayer has elected for method B, it continues to apply in the future until they tell HMRC they want method A. The taxpayer may want to switch methods where the taxable profit is less under method A, or where expenses are more than the rents (so there is a loss).

Example

During 2016/17, Flo lets out a room in her home. She receives total income of £11,000 (£10,800 rent plus £200 towards bills). She incurs expenses of £3,000. If she uses method A to calculate her tax liability she will pay tax on £8,000 (£11,000 less £3,000). If she uses method B, she will pay tax on £3,500 (£11,000 less £7,500). Flo is better off using method B.

Even though the tax rules for the rent-a-room scheme are different to the general property income tax rules, a resident landlord will still have certain responsibilities towards tenants, particularly in relation to safety. For further information, see the GOV.UK website at https://www.gov.uk/rent-room-in-your-home.

Working From Home

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Over recent years, it has become increasingly popular for employers to allow their employees to work from home, and in doing so, pay an amount to cover any additional household costs incurred. What are the tax implications of such expenses for the employee?

Broadly, no tax liability will arise where an employer makes a payment to an employee for reasonable additional household expenses, which the employee incurs in carrying out duties of the employment at home under ‘homeworking arrangements’.

‘Homeworking arrangements’ are arrangements between the employee and the employer under which the employee regularly performs some or all of the duties of the employment at home. There is no requirement for any part of the employee’s home to be used exclusively for the purposes of the employment – in fact, if any part of the home is used exclusively for work, problems could arise on the future sale of the house as part of the capital gains tax exemption on private residences may be lost.

HMRC have stated that they will accept that homeworking arrangements exist where:

– there are arrangements between the employer and the employee; and
– the employee works at home regularly under those arrangements.

The HMRC guidance also advises that:

‘the arrangements need not be in writing but usually will be. They do not need to apply to all employees. The exemption does not apply where an employee works at home informally and not by arrangement with the employer. For example, it will not apply where an employee simply takes work home in the evenings. It applies where an employee works at home by arrangement with the employer instead of working on the employer’s premises.’

HMRC accept that the ‘regularly’ condition is met if working at home is frequent or follows a pattern. The fact that the days spent at home vary from week to week is not a bar to claiming the exemption.

‘Household expenses’ are defined as expenses connected with the day-to-day running of the employee’s home. The exemption applies to additional household expenses, and HMRC have given the following guidance:

‘Typically this will include the additional costs of heating and lighting the work area or the metered cost of increased water use. There might also be increased charges for Internet access, home contents insurance or business telephone calls. Where working at home leads to a liability for business rates the additional cost incurred can also be included.

The additional household costs must be reasonable and must be incurred in carrying out the duties. This excludes costs that would be the same whether or not the employee works at home, for example mortgage interest, rent, council tax or water rates. It also excludes expenses that put the employee into a position to work at home, for example building alterations or the cost of furniture or office equipment.’

Amount of exemption

To minimise the need for record-keeping, employers can pay up to £4 per week (£208 per year) without supporting evidence of the costs the employee has incurred. If an employer pays more than that amount, the exemption will still be available but the employer must provide supporting evidence that the payment is wholly in respect of additional household expenses incurred by the employee in carrying out his duties at home.

If an employer wishes to pay more than the guideline rate per week tax-free, then it is recommended that the employer should agree in advance with HMRC a scale rate. Failing that, records will need to be kept of the actual additional costs incurred by each employee.

IHT – NIL rate band

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From April 2017, each individual spouse or civil partner will be offered a residence nil rate band (RNRB), which is designed to help pass on a home to ‘direct descendants’, including children or grandchildren, tax-free after their death. The rules governing the inheritance tax (IHT) nil rate band are complex and it is always recommended that prior professional advice is considered.

Phasing in of RNRB

The RNRB is being phased in over a four-year period as follows:

– £100,000 in 2017-2018 – £125,000 in 2018-2019 – £150,000 in 2019-2020 – £175,000 in 2020-2021

Broadly, the new RNRB will be added to the existing £325,000 IHT threshold, meaning the total tax-free allowance for a surviving spouse or civil partner will be up to £850,000 in 2017-18, and up to £1 million in 2020-21.

For the purposes of the new nil-rate band, ‘direct descendants’ include the spouse or civil partner, children, step children, adopted children, foster children, and any lineal descendants.

The property in question must be a ‘qualifying residence’. This means it must be a property where a person held an interest and had occupied the property as their residence at some point. HMRC may require evidence of this, so it is essential to maintain proper records to help substantiate a claim. Where a person has more than one property, an election can be made so that the exemption is offset. For the purpose of the exemption, there is no requirement for the property to be the main residence at death.

Tapering

The new allowance will be tapered away from those leaving an estate of more than £2 million, so that those leaving more than £2.35m will not benefit from it.

For estates (broadly, assets less liabilities) exceeding £2 million, the RNRB (£100,000 for 2017-18) is reduced by £1 for every £2 over the £2 million threshold. The effect of tapering is an extremely important planning point, particularly where the whole of an estate is being left to a surviving spouse or civil partner – whilst no IHT will be charged on first death, the amount of RNRB that may subsequently be transferred to the surviving person may be affected by the taper.

If there is no qualifying residence or the residence is left to someone who is not a direct descendant, upon the first death of one spouse or civil partner, the RNRB will not be available. However, the surviving spouse or civil partner may be able to benefit from the unused RNRB when they subsequently die. On the death of the surviving spouse or civil partner, they will be entitled to two times the RNRB. Note that for this to happen, a claim would need to be made within two years of the death of the second spouse or civil partner.

There is an additional benefit to this exemption which will naturally affect a number of people whom in their old age may wish to, or require to, either downsize or dispose of their residence (move in with family or into a care home). Provided that the sale of the property occurred on or after 8 July 2015, the RNRB will not be lost. Instead, the exemption can be maintained and used against either the remaining value of their smaller residence or equivalent value of assets (provided it has been left to a direct descendant).

In the event that the property was given away, the RNRB can be available, provided the gift was made on or after 8 July 2015, and assets of a similar value have been left to a direct descendant.

The calculations for the RNRB where a residence has been downsized, sold, or gifted are extremely complex and careful planning is required to ensure the exemption is not lost. It is extremely important that proper records of sales and/or purchases of residential property are maintained.

Pension lump sums

I reached state retirement age in March 2016 but deferred receiving my state pension for 12 months. I have been informed that I can now take a lump sum in addition to my regular state pension. Is the lump sum taxable?

The lump sum is taxed as income. In simple terms, the rate of tax that applies to the lump sum will be the highest rate that applies to your other income for that tax year. This means that:

– if you are not liable to tax for that tax year on your other income, ignoring any deductions from that income for the marriage allowance or married couple’s allowance, no tax should be deducted from any state pension lump sum you receive;
– if you are liable to income tax, you will pay tax at one of the following rates: – 20% – where taxable income does not exceed the basic rate limit (£33,500 for 2017/18);

– 40% – where taxable income exceeds the basic rate limit but does not exceed the additional rate limit of £150,000; or
– 45% – where taxable income is over £150,000.

When working out what rate of tax you should pay on any state pension lump sum, the special rates that are used to tax savings income and dividend income falling within the basic rate band – the 0% starting rate for savings, savings and dividend nil rates (personal savings and dividend allowances), are ignored. So if all your other income falls within the basic rate band of tax, you will pay tax at 20% on your state pension lump sum.

Similarly if you are a higher rate taxpayer, you will pay tax at the rate of 40% on your state pension lump sum. This will also be the case if you have dividend income that is chargeable to tax at the rate of 32.5%.

If you are an additional rate taxpayer, that is, you pay income tax at the rate of 45% (or 38.1% on dividends), you will pay tax at the rate of 45% on your state pension lump sum.

Great childcare schemes

The government has some great schemes to help parents balance the very significant cost of childcare with the benefits of being in work.

Below are details of the new ‘tax free childcare’ scheme and also of the free nursery hours available for 3-4 year old.  Parents will be able to apply for both these schemes in one go through the government’s new digital childcare service. Eligible parents can benefit from both tax-free childcare and 30 hours free childcare at the same time.

Please do contact us for advice on your own specific circumstances – we’re here to help!

Tax free childcare

The long-awaited tax-free childcare scheme launched on 28 April 2017 and will be rolled out during the course of the year. In conjunction with this, the government’s new Childcare Choices website is now operative, allowing parents to find out about available support. The website includes a childcare calculator for parents to compare all the government’s childcare offers and check what works best for their families, including the new 30-hour free childcare offer, tax-free childcare or universal credit. Through the website, parents can also pre-register for email alerts that will notify them when they can apply, as well as providing details of existing government childcare offers.

It is currently estimated that some two million working families will be eligible for tax-free childcare. It will be gradually rolled out, with parents of children under two invited to enter the scheme first. By the end of the year, all eligible parents will be able to receive government top-ups of £2 for every £8 that a parent pays into their tax-free childcare account, up to a maximum of £2,000 per child (or £4,000 for disabled children). This will be open to all working parents across the UK with children under 12, or under 17 if disabled.

30 hours free childcare

From September 2017, the new 30 hours free childcare offer for working parents of three and four year olds in England will double the current 15 hours of free childcare currently available, saving eligible working families up to £5,000 a year.

Eligible parents will be able to apply online through the childcare service. They will receive a code – this will allow parents to arrange their childcare place ahead of September 2017. Parents can take their code to their provider or council, along with their National Insurance Number and child’s date of birth. Their provider or council will check the code is authentic and allocate them a free childcare place.

We are now a certified Quickbooks Pro Advisor!

bronze - We are now a certified Quickbooks Pro Advisor!

We are delighted to announce we are now a certified Quickbooks Pro Advisor.  This means we can offer any client wanting to complete their own bookkeeping a choice of two award winning online bookkeeping solutions – Kashflow and Quickbooks.

We have invested in extensive training with both providers, so that we are in a position to:-

  • advise on which solution suits your business requirements best
  • set up the system (including your bespoke invoices and reports)
  • provide excellent initial training to empower you to use the system effectively
  • support you at any time during the year to answer queries
  • help you easily transition to the Making Tax Digital (MTD) regime, when it becomes relevant to you in a few years

Both solutions take the hassle out of your bookkeeping – you can access the system on any device (laptop, PC, phone, tablet), so you can update your transactions, prepare VAT Returns anywhere anytime.

One particular function which our clients really appreciate is the ability to import your bank transactions directly from your bank to the system – no more adding bank receipts and payments manually from your statements line by line!  And you can teach the system how to automatically classify your regular transactions.  For example, United Utilities payments can be automatically allocated to ‘water’.

Kashflow and Quickbooks can truly save you hours of time, enabling you to concentrate on running your business.

If you are looking to change accountant but you already use Kashflow or Quickbooks (or any other online solution) with your existing advisor, please do contact us for your FREE initial no obligation consultation and rest assured it is very easy to provide us with access to the system instead.

KASHFLOW LOGO ON WHITE21 150x150 - We are now a certified Quickbooks Pro Advisor!bronze 150x150 - We are now a certified Quickbooks Pro Advisor!

Nice article clarifying the VAT treatment of disbursements

dreamstimesmall 84188685 - Nice article clarifying the VAT treatment of disbursements

http://www.accountingweb.co.uk/tax/business-tax/vat-dealing-with-disbursements?utm_content=bufferfc244&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

Nice article clarifying VAT on disbursements

http://www.accountingweb.co.uk/tax/business-tax/vat-dealing-with-disbursements?utm_content=bufferfc244&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

Capital Gains Tax Exemption – Use It or Lose It

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Capital gains tax (CGT) is normally paid when an item is either sold or given away. It is usually paid on profits made by selling various types of assets including properties (but generally not a main residence), stocks and shares, paintings, and other works of art, but it may also be payable in certain circumstances when a gift is made.

The most common method for minimising a liability to capital gains tax is to ensure that the annual exemption is fully utilised wherever possible. Whilst this is relatively straight-forward where only capital gains are in question, the computation can be slightly more complex where capital losses are also involved.

Where a loss arises on the sale of assets it can be offset against any other gains made in the same year or in the future. However, a strict order applies for setting-off losses.

Firstly, losses arising in the tax year are deducted from any other chargeable gains for the same year. All losses for the year must be deducted, even if this results in chargeable gains after losses below the level of the annual exempt amount. If the allowable losses arising in the tax year are greater than the total chargeable gains for the year, the excess losses can be carried forward to be deducted from chargeable gains in future years. In this situation, the annual exemption for the year in question may be lost.

If chargeable gains remain after deducting the allowable losses arising from the same year, unused allowable losses brought forward from an earlier year may then be deducted. It is only necessary to deduct sufficient allowable losses brought forward to reduce the chargeable gains after losses to the level of the annual exempt amount. Any remaining losses brought forward are carried forward again without limit, to be deducted from chargeable gains in future years.

Plan ahead

For 2017/18, most individuals will be entitled to an annual exemption of £11,300, which means that no CGT will be payable on gains up to that amount for that tax year. Since spouses and civil partners are each entitled to the exemption, for jointly held assets, there is scope for exempting £22,600 worth of gains in 2017/18.

The annual exemption is good only for the current tax year – it cannot be carried forward or taken back to an earlier year – so anyone planning to make a series of disposals, may want to consider the timing of sales between two or more tax years to use up as much and as many annual exemptions as possible.

Flat Rate Scheme – Changes and Tax Tips

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The VAT flat rate scheme (FRS) is used by many small businesses to help simplify their VAT reporting obligations. Businesses could often gain a cash advantage from using the scheme, but this advantage has been significantly curtailed from 1 April 2017, particularly in relation to service-related businesses. Whilst the FRS continues to operate, many businesses will no longer find it economical to use.

Broadly, the FRS is a simplified VAT accounting scheme for small businesses, which allows users to calculate VAT using a flat rate percentage by reference to their particular trade sector. When using the FRS, the business ignores VAT incurred on purchases when reporting VAT payable, with the exception of capital items which cost £2,000 or more. If the business incurs few expenses, and it operates in a sector with a relatively low FRS percentage, it will pay out less VAT to HMRC under the FRS than it would outside the scheme. Historically, many businesses have registered for VAT voluntarily before their turnover reached the VAT registration threshold, so they could make use of the cash advantage offered under the FRS.

Common percentages used by service-related businesses in recent years include:

– Accountancy and legal services 14.5%
– Computer or IT consultancy 14.5%
– Estate agents and property management 12%
– Management consultancy 14%
– Business services not listed elsewhere 12%

However, from 1 April 2017 a new 16.5% FRS rate applies for businesses with limited costs (see below). Since the rate of 16.5% of gross turnover equates to 19.8% of the net, the result is that there will be almost no credit for VAT incurred on purchases. Many businesses, particularly in the trade sectors listed above, are likely to see a significant rise is VAT payments.

A ‘limited cost’ business is defined as one whose VAT inclusive expenditure on goods is either:

– less than 2% of their VAT inclusive turnover in a prescribed accounting period;
– greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

– capital expenditure goods;
– food or drink for consumption by the flat rate business or its employees;
– vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services).

(These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.)

Practical Tip

Businesses who are trading under the VAT threshold (£85,000 from 1 April 2017) may consider deregistering from VAT. Businesses who are trading over that threshold may wish to withdraw from the FRS.