Two property related articles this month - "Small Business Rate Relief" how to possibly cut your rates bill, and a tax planning tactic for owners of 2 properties. We have also set out the VAT rules for claiming input tax on the use of mobile phones and taken a further look at the tax advantages of buying "green" cars!

Our friends at the tax office have, like last year, been busy issuing letters to various businesses over the summer months, warning them their tax returns and accounts may be incorrect.  These are so called "enabling letters", and come in two sorts.

The first is addressed to all businesses - although not every business gets one - and lists some common mistakes and errors that HM Revenue & Customs find in small business accounts.  It really is Janet and John stuff, but it can cause some concerns to recipients eg, "Why have I received this?" or "Am I being investigated?" - the answers to these questions are, first, "Not sure, the HMRC computer appears to be pulling taxpayers out of the hat", and secondly, "No,  and just because you've received the letter it doesn't mean you are going to be".  If you read the next paragraph regarding the construction industry you'll see why the selection of recipients is quite bizarre.  These letters are a none to subtle form of scare tactics, attempting to suggest HMRC is cracking down on small business accounts.

The second type of enabling letter is going to businesses who are Contractors under the Construction Industry Tax Scheme (CIS), and suggests that the business may want to check that the employed/self employed status of its workers is correct.  It appears that the HMRC computer is selecting businesses to receive this letter because the same sub contractors crop up regularly on their CIS submissions.   The letter goes on to explain how (in the tax mans eyes) you tell whether a sub contractor is employed or self employed.

Again this is nothing more than scare tactics.  Firstly there is no sensible selection process for the letters - in one of our professional journals it was reported a business received one of these letters a few weeks after the conclusion, in the businesses favour, of a three year dispute about whether the blokes were employed or self employed - so no one at HMRC had even considered whether the taxpayer should receive the letter, it was just fired off.  Secondly on the scare tactic front, there appears to be no consideration in selecting businesses for this letter as to whether the sub contractor who offends by cropping up regularly on the returns also supplies plant, material or other labour - basic questions, ignored!  Finally the employed v self employed tests given in the letter are selective in the extreme and don't cover a lot of the basic status tests. 

So are the letters all bad?  No, not at all.  Compared to last years batch, this time HMRC have learnt the difference between "yours sincerely" and "yours faithfully" and, shock, have actually managed to date the letters rather than last years undated missives!

If you do receive one of these letters then there is no need to tell us about it. That said if you are unsure about expenses you can claim in your accounts or, in the construction industry, about status of sub contractors, then please give us a call for a discussion.

Next tax year, 2006/07, will see some major changes in two specific areas of the tax system.

Don't forget to keep an eye on garbetts.com, our www site, where you can find a selection of tools and briefings to help you with your accounts and taxes.

In England and Wales

If you occupy business premises you may be eligible for the new Small Business Rates Relief. The relief is effective from the 1st April 2005.

To qualify for the relief the combined rateable value of all business premises occupied must be under £15,000 (London £21,500). If you occupy a main property and additional properties, the individual rateable value of each additional property must be under £2,200.

Eligible businesses with rateable values below £5,000 will get 50% rate relief on their liability.

Rateable values in excess of £5,000 up to £15,000 (London £21,499) will get a progressively lower rate of relief.

If you would like our assistance with an application please call. Applications for the financial year ending 31 March 06 must be submitted by the 30 September 2006.

In Scotland

In Scotland this type of relief was introduced on the 1 April 2003.

Business property occupiers with a rateable value of £10,000 or less are eligible for a discount of between 5% and 50% on the rate poundage. These are the discounts for 2004-2005.

You need to make a formal application for relief if you are entitled to more than a 5% discount. You will get the 5% by default.

If you own two or more properties, which you occupy as your residence from time to time, only one can be nominated as your principal private residence. Usually your principal private residence is the property where you spend most of your time.

When you sell your principal residence any gain is potentially free of capital gains tax (unless you have let the property at any time during your ownership, or otherwise not occupied it.).

If you also own a second residence any gain on the sale of this property will be a fully taxed capital gain.

However there is a way that you can legitimately use the election to treat ANY residence that you own as your principal private residence, to good effect. To be effective the very first election must be made within 2 years of the purchase of that property.

The Inland Revenue have an interesting example of the advantages you can secure by employing this strategy. On their web site they describe the example of a couple sacrificing just 1 weeks ownership of their main property as their principal private residence, to secure 3 years relief from capital gains tax on their second residence.

To take advantage of this type of planning you will probably need to demonstrate a continuing occupation of the second residence - there is no minimum time set out in law, but at least three months would be advisable.

The key in the planning is to submit and revoke tax elections in a timely and proper format. If the circumstances fit please call if you would like us to consider a possible use of this strategy

When a business provides a mobile phone for an employee the tax and national insurance position is reasonably clear. As long as the contract with the mobile provider is between the business and the provider then no tax or national insurance will be payable by the employee and the business can deduct the full cost as a business expense. This is the case even if the employer allows the employee to use the phone for private calls.

Unfortunately the VAT position is slightly more complex!

The following notes may be helpful:

Phones provided for Business Use only.

If the phone is provided under a written agreement that the employee will not use it for private purposes, then

• All VAT added to the purchase of the phone and on all standing charges to maintain a network connection, is recoverable as input tax, subject to the usual rules.
• All VAT added to call charges is likewise recoverable. Small amounts of private calls are generally ignored and will not prevent VAT incurred being recovered in full.

Phones provided for Business and Private Use.

1. Subject to point (2) which follows, all input tax on the purchase of the phone and on all standing charges to maintain a network connection, is recoverable as input tax.
2. Where the phone contract allows the business to make a certain number of free calls for a fixed monthly fee, and there is no separate standing charge, you will need to disallow a realistic proportion of the total fixed fee to allow for private use of the phone.
3. A proportion of the input tax on call charges must be disallowed to reflect private use. For instance you could analyse three months bills and use the private use percentage as a reasonable guide to reduce your claim for VAT added to future call charges.
   

Under present legislation if you buy a company vehicle with a CO2 emissions rating below 121g/km, your business can write off the total cost of the vehicle for tax purposes in the year of purchase.

Additionally the user of the vehicle will suffer the lowest rate of benefit charge for the use of the car. The benefit in kind for the use of a company car varies between 15% and 35% of the list price when new. Under 121g/km the lower rate of 15% applies.

With oil prices climbing the financial and other tax benefits of buying a car with a lower CO2 rating are compelling.

For example according to government statistics the car with the lowest CO2 rating (petrol use) in the
UK is the Honda Insight. This hybrid petrol/electric car is rated for CO2 emissions at just 80g/km. Fuel consumption is 83mpg!

The top five petrol vehicles are:

1.Honda Insight 80g/km
2.Toyota Prius 104g/km
3.Peugeot 107 109g/km
4.Toyota Aygo 109g/km
5.Smart City Coupe Hatchback 113g/km

1 September 2005 - Due date for corporation tax for the year ending 30 November 2004.

19 September 2005 - PAYE and NIC deductions due for month ending 5 September 2005. (If you pay your tax electronically the due date is 22 September 2005)

30 September 2005 - Last day for submitting your 2004-2005 self assessment tax return if you want to have a relevant underpayment for that year coded out.

1 October 2005 - Due date for corporation tax for the year ending 31 December 2004.

19 October 2005 - PAYE and NIC deductions due for month ending 5 October 2005. (If you pay your tax electronically the due date is 22 October 2005)

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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.