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Newsletter October
2006 During late November early
December we are due the Chancellors Pre-Budget Report. We can expect
announcements that will no doubt change elements of the UK tax system and
whilst we do not intend to speculate on what might happen, we will of course
keep you informed. This month we have
included information on VAT for owners of Holiday Let Property, the tax
consequences of loans to directors, the green agenda for cars and vans, and
finally a couple of tax pointers for owners of commercial property who let to
a trading business. Our next monthly tax
update will be sent out on Tuesday 6th November - be sure to check your
inbox. VAT and Holiday Let
Property There are
a number of well known tax advantages for the owners of UK furnished and let
property that has been classified as a "Holiday Lets Property" by the
Revenue. A major tax advantage is the treatment of rents received as trading
income. For
example this would ensure that losses sustained in letting the property can
be set off against other income, and that surplus rents count towards
earnings for pension purposes. There
are, however, VAT considerations which should not be overlooked. The
letting of holiday accommodation is generally a standard rated supply. If the
property owner is already registered for VAT as a sole trader, then such
letting income will be subject to VAT. If the
property is owned jointly by a married couple or other partnership that is
already VAT registered, then again relevant letting income will be subject to
VAT. If the
property owners are not already registered for VAT, these gross rents
received from all properties owned by the same person or partnership count
toward the VAT registration limit - currently an annual turnover of £61,000. If such
rents, together with any taxable turnover from other business interests,
exceed the threshold, the owner(s) will need to register for VAT and charge
VAT at 17.5%. It would
be difficult to argue that the takings were not business income for VAT
purposes, as this would involve claiming that this was not a business
activity. Such a claim would certainly undermine the favourable tax
treatment. Back to Article Listing Loans to Directors of
small companies Small company accounts
often show an overdrawn position on directors loan accounts. Technically a
company cannot loan funds to a director, this is a breach of the Companies
Act. Fortunately, for private companies, this apparent breach of the law is
not subject to criminal sanctions. Where the amount of the
loan exceeds £5,000 it is good practice to get the written permission of the
shareholders to the granting of the loan - unless the director is also the
sole shareholder. The loan will have a
number of tax consequences. Two are highlighted below. S419 Corporation
Tax If a small company had
loaned say £10,000 to a director and this amount was unpaid at the year end,
31 December 2006, then an additional corporation tax charge could be created.
Whether the tax would fall due depends on when the loan is repaid. If the loan is unpaid 9
months after the year end, 30 September 2007 in the above example, the
Revenue would issue an assessment based on 25% of the loan, £2,500, which
would be payable on the 1 October 2007. This is not a permanent loss of
revenue for the company as a claim can be made to have this £2,500 refunded
when the loan is paid back to the company. Unfortunately the refund of tax
will be delayed until the due date for corporation tax in the trading period
in which the directors loan was repaid. In our example above if
the loan is paid back in full on the 30 November 2007, and as this is after
the 9 month cut off (30 September 2007), the additional tax would have to be
paid on the 1 October 2007. As the directors loan was cleared in the trading
year to 31 December 2007 the refund of £2,500 would not be forthcoming until
the 1 October 2008. This provision applies to
all loans outstanding at the accounting year end, even those under £5000. As you can see from this
example the timing of repayments of the loan is critical. Directors'
personal tax The grant of a loan by the
company to a director is deemed to benefit the director and not surprisingly
the Revenue will want their pound of flesh. There are two possible
outcomes. 1.
If
the company charges the director interest for the term of the loan the
Revenue will not seek to assess the director for any additional benefit. The
rate of interest charged must be at least the official rate of 5%. This will
increase the company's taxable profits by the amount of the interest and will
of course increase the amount that the director has to pay back overall. 2.
If
the company does not charge interest or charges at less than the 5% official
rate, the Revenue will assess the deemed shortfall in interest, which they
consider should have been charged, as a benefit in kind. This will need to be
returned on the form P11D at the tax year end. The current rate of interest
applied is 5%. Please note loans to
individual directors that do not exceed £5000 at any time during the relevant
year will not attract a benefit in kind charge. Back to Article Listing Cars and Vans - the
green agenda As you will see from the
comments made below, there are currently a number of incentives to buy and
use low emission cars. There are also a number of disincentives to discourage
private use of company vehicles. 100% Capital
allowances for very low emission cars This 100% first year
allowance was introduced in the 2002 Budget, and lasts until 31 March 2008.
The allowance is 100% on the cost of new cars which emit at no more than 120
g/km of CO2, or are electrically propelled. Benefits in kind on
very low emissions cars In the 2006 Budget, the
Chancellor announced that from 2008/09 very low emission cars, those with
emissions of no more than 120g/km would attract only a 10% of list price
benefit in kind charge, rather than the rate currently applying, which would
be 15% for petrol models, and 18% for diesels. Capital allowances
on expensive cars The Government is likely
to announce a change in the way capital allowances are given to businesses
that buy expensive cars. The changes will probably include: For both these reasons it
is likely that the new system will act as a disincentive for businesses to
buy and run expensive cars. Please note that "expensive" for these
purposes means costing over £12,000! Company Vans -
from 6 April 2007 Don't forget that from the
6 April 2007 company van drivers who are allowed private use will see a
swingeing increase in the benefit in kind tax charge. Presently van drivers
(vehicles under 4 years old) will only suffer a benefit charge of £500 per
year to cover private use. From next year this will increase to a benefit
charge of £3,000, plus £500 for free private fuel. We may be coming to a
watershed in the way in which relief is given and tax is charged for the use
of company vehicles. Now would be an opportune time to review this area and
create a new strategy - please call if you would like to discuss this. Back to Article Listing Personally owned
properties used in someone else's trade The notes that follow
point to some of the tax consequences if you personally own a commercial
property that is used by a trading business. 1. Capital Gains
Tax on sale. As long as the property is
let to an unlisted trading company, (could also be a sole trader or
partnership if let after the 5 April 2004) it will be classified as a
business asset for taper relief purposes. Potentially higher rate tax payers
may only pay 10% tax on sale if the property is owned for more than 2 years.
Don't forget that if you let the property to a sole trader or partnership
before the 6 April 2004 this earlier period up to the 5 April 2004 will
complicate the calculation of the final capital gains tax bill - owners in
these circumstances can expect to pay more than 10% tax on a subsequent sale
of the property. There are no restrictions
on this favourable tax treatment if the owner charges rent for the use of the
property. 2. Owner's income
tax status. Any rents charged by the
owners, less allowable costs, interest charges and in some cases Industrial
Buildings Allowances, will be subject to tax. If the property is
provided rent free this may result in the loss of tax relief for costs met by
the owner. Back to Article Listing Tax Diary
October/November 2006 1 October 2006 - Due date for corporation tax due
for the year ending 31 December 2005. 19 October 2006 - PAYE and NIC deductions due for
month ending 5 October 2006. (If you pay your tax electronically the due date
is 22 October 2006) 1 November 2006 - Due date for corporation tax due
for the year ending 31 January 2006. 19 November 2006 - PAYE and NIC deductions due for
month ending 5 November 2006. (If you pay your tax electronically the due
date is 22 November 2006) Back to Article Listing If you would like your
email address removed from our subscriber list please reply to this email
with the word "unsubscribe" in the subject bar. DISCLAIMER -
PLEASE NOTE:
The ideas shared with you in this email are intended to inform rather than
advise. Taxpayers circumstances do vary and if you feel that tax strategies
we have outlined may be beneficial it is important that you contact us before
implementation. If you do or do not take action as a result of reading this
newsletter, before receiving our written endorsement, we will accept no
responsibility for any financial loss incurred. Jay & Jay Partnership
Limited. 2 Chesterfield Buildings,
Westbourne Place, Clifton, Bristol, BS8 1RU. Telephone: 0117 973
5120 Fax: 0117 923 9807 Web: www.jayandjay.co.uk Jay & Jay is a
limited company, registered for VAT under reference 793 4730 00. Directors in the firm are
members of the Association of Chartered Certified Accountants (ACCA). This
body has their headquarters in the UK and their rules of Professional Conduct
can be obtained from their web site. Jay & Jay are
authorised to act as statutory auditors by the ACCA.
