VAT on new houses

Q: I am a small builder and have just completed a new house.  It is proving difficult to sell in the current economic climate and I am thinking of renting it out in order to cover the bank interest.  When I eventually sell will the sale still be at zero rate?

A: The first sale of a new residential property will always be zero rated whether or not it has been let out previously.  However your proposed course of action does raise another possible problem. As residential letting is exempt from VAT, then there may be cause for concern that some of the VAT reclaimed relating to the new build falls under the partial exemption rules. I would strongly advise you to take professionasl advice on this.

Extension of Loss Reliefs for Traders

Q: I noticed in the recent Pre Budget Report a section about loss reliefs being extended. I run my own small construction business and like most people in the property industry I have struggled to find any new work in the last few months after making substantial profits in the previous years. Is this loss relief measure going to help me?

A: Yes, this measure will help all small businesses who make a loss in the 2008/09 tax year. The Pre Budget Report last month extended the current one year period for which current trading losses from businesses can be carried back against previous years profits for a period of three years, with losses being carried back against the later year first.

The proposal applies to losses arising in the 2008/09 tax year, and extends the loss relief available against general income so that any excess may be carried back against trading profits in the 2006/07 and 2005/06 tax years. There are other options available to you should you make a loss, so ensure you consider all of them carefully.

This measure is particularly welcome for small businesses such as yours that have been affected by the credit crunch in the current tax year. It will be especially beneficial if in the previous you were a higher rate taxpayer in the any of these years you can receive up to a 40% tax refund for the losses you have made in 2008/09.

It is best to seek professional advice from your local TaxAssist Accountant on the revisions introduced, as they can establish which loss relief claim is most tax efficient, and which option provides you with the greatest tax refund.

Small Companies & Corporation Tax Losses

Q: I run my own small limited company, with profits in previous years below £100,000. I’m uncertain as to whether we will actually breakeven this year, so can you advise whether the Pre Budget Report 2008 will help with our corporation tax bill?

A: Yes there are two substantial corporation tax measures taken by the Government in last month Pre Budget Report.

In the last Budget, they had planned to increase the small companies corporation tax rate from 21% to 22% with effect from 1 April 2009. This has now been deferred until 1 April 2010. One percent may sound small, but on a company like yours with profits of £100,000 it will amount to a £1,000 corporation tax saving.

The second measure was to extend loss relief’s available on any trade losses, (arising for a corporation tax period falling between 24 November 2008 and 23 November 2009), from 1 year to 3 years. One minor details is that after losses have been set against the previous 12 month period under current legislation, the extended relief only allows the amount of the loss that be carried to the preceding 2 years to be capped at £50,000.

For most small business this £50,000 cap will not have an impact, and it will provide a massive cashflow benefit in the current economic climate, as previously if losses exceeded profits in the previous 12 month period, the loss would just be offset against future trade profits.

Clothing Cost for Self Employed

Q: I am a self-employed freelance journalist, and while I do work at home, there are frequent occasions when it is necessary for me to visit clients in their workplaces in appropriate business dress. I need to buy a couple of new suits for such meetings – is this considered an allowable expense for tax purposes?

A: This is one of a variety of expenses which the courts have held to have an "intrinsic duality of purpose" – which means they are not deductible for tax purposes.

The suits are actually classed as “ordinary clothing worn by a trader during the course of their trade”, and are not deductible expenditure for tax purposes. This is the case regardless of whether particular standards of dress are required, for example to comply with the rules of a professional body, or simply for the trader to keep up appearances on meeting clients – because these items are regarded as ‘everyday' wardrobe.

Conversely, the cost of clothing that is not part of an ‘everyday' wardrobe, such as protective clothing and uniforms, is deductible for tax purposes, together with the cost of putting a company logo on the items.

Charging Interest on Outstanding Debts

Q: I've recently looked contacted all my customers to recover any outstanding debts to reduce my business borrowing but one particular client has not been very forthcoming with payment. Can I charge interest on the outstanding monies I am owed?

A: All businesses have a legal right to claim interest from late-paying customers. The statutory right to interest applies to all contracts agreed after 7 August 2002 and gives you the right to charge interest at the Bank of England base rate plus eight per cent. For example, the base rate is for the current period to 4 December 2008 is 3%, so you could charge interest at 11% per cent.

The statutory right to charge late-paying business customers interest applies to contracts which do not already include their own arrangements for 'substantial' interest. If there is no agreed credit period, the law sets a default period of 30 days. You can charge interest 30 days after you delivered the goods or provided the service, or 30 days after you notified the purchaser of the amount of the debt - whichever is the later. Ideally, to notify the purchaser of the amount of the debt, you should send an invoice, but any other form of notification would do, including a phone call - though that might be difficult to prove if there is a dispute.

All organisations also have a right to claim reasonable debt-recovery costs. Creditors can claim an extra £40 for debts of up to £1,000, £70 for debts from £1,000 up to £10,000 and £100 for debts of £10,000 or more.

State Pension Credit For Low Paid Employment

Q: I have recently left full time employment and taken a part time job as I am nearing state pension age. I have worked out that I will actually earn slightly less than the National Insurance threshold £105 per week and consequently I will not pay any National Insurance contributions through may wages. Will this affect my entitlement to a state pension?

A: If you earn more than the Lower Earnings Limit (For 2007/08 tax year this is £5,435), then you will get a notional credit towards your secondary state pension even though you have not made any National Insurance contributions.

For this to be effective your employer must report your earnings at the end of the tax year on the employers end of year return form P35 and form P14.

You should ensure that you get a P60 from your employer showing your earnings at the end of the year, as this will prove that your earnings have been declared to the HMRC, and mean that you receive a notional credit for state pension purposes.

Tax Credits Available to the Self Employed

Q: I started my own business recently after relocating my family to London. Will my Child Tax Credit & Working Tax Credit rates increase, as my cost of living has increased dramatically, and I am paying childcare for two small children so I need all the financial help that is available?

A: The rate of tax credits paid are fully dependent on your level of earnings, which means you wouldn’t receive an increase (or decrease) on the statutory rate depending on where in the country you live.

However, you did mention you are also incurring childcare expenses, which presumbably has increased in costs from your recent relocation. This increase may result in a greater payment of Working Tax Credit to meet the childcare costs for your two children, so ensure you let the Tax Credits helpline know that your circumstances have changed as soon as possible, as they will only backdate amounts for 3 months.

Council Tax Benefit may also be available, and we would recommend you check with your new local council, whether you meet certain criteria.

The Department of Work and Pensions produces information on a website www.direct.gov.uk which explains the claim process in more detail.

Pre Budget 2008 changes

Q: I use cash accounting in a small business turning over about £130,000 net of VAT per annum.  Apart from the reduction in the standard rate of VAT from 17.5% to 15% are there any other changes that may affect me? 

A: There was a change to the Flat Rate scheme whereby the limit to join is set at no more than £150,000 of taxable turnover (which is all of your VAT rated sales except for exempt supplies).  This is a change from the old method of including an additional test to ensure that your total business income (which includes exempt supplies) also does not exceed £187,500. 

The vast majority of the  percentages used have decreased slightly to take into account the standard rate deduction.  With the decreased rates and the opportunity to take advantage the additional one point reduction in the first year, this may well be a good opportunity to apply for flate rate treatment. 

Disclaimer – advice shared in this column is intended to inform rather than advise and is based on legislation and practice at the time. 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.

Richard Brookes  specialises in managing tax and accountancy affairs for small business owners – and can be contacted on 01223 414033, or by email richardbrookes@taxassist.co.uk.

TaxAssist Accountants is located at 173 Mill Road, Cambridge, CB1 3AN.