Taxes
Throughout our lives few of us are immune from some form of taxation that is imposed upon us. Below we provide an outline of:
* Corporation Tax (related to companies)
* Income Tax (self-employed and employees)
* Capital Gains Tax (related to all gains or profit on the sale of an asset)
* Value Added Tax (tax on consumer expenditure)
* Inheritance Tax (related to individual estates)
CORPORATION TAX
Companies are liable for corporation tax (CT) on their profits and are responsible for:
* working out their own tax liability
* paying the tax without prior assessment by the Inland Revenue
* delivering a return by the statutory filing date ( Note that from 2011 all CT returns must be filed online.)
CT is due for 'Accounting Periods' which are usually 12 months long. Payment of the tax is normally required nine calendar months and one day after the end of the accounting period (the "Normal Due Date) If the accounting period ends on the last day of a month, the normal due date will be the first day of the tenth following month.
Although mainly involving limited companies the following groups must also pay the tax even if not limited:
* Societies and Associations (including trade associations)
* Individuals conducting business but not as a partnership, for example co-operatives.
There are two bands of corporation tax; one for small companies and then the main rate. Companies which fall between the two bands are eligible for a relief rate. The rates and allowances can be viewed at http://www.hmrc.gov.uk/rates/corp.htm
There is a considerable amount to know about corporation tax and most companies engage the services of accountants to help them through the maze. Remember, however, that even with accountants it is still the company directors' responsibility to make sure all necessary returns are completed on time.
For more information on corporation tax click on to www.hmrc.gov.uk/ct
INCOME TAX
Income tax is payable on the sum accruing to the taxpayer after all permitted reliefs and allowances have been deducted from his "taxable income"
We are concerned here with taxable income from self employment and taxable income from employment (PAYE). These and other sources of taxable income are listed at http://www.hmrc.gov.uk/incometax/index.htm
Self employed - self assessment
Self employed taxpayers (including members of a partnership) are required to complete and file a self assessment tax return every year providing details of profits from their business and other income (e.g. rental income) on which tax may be payable. This can be done online or in paper form. Any tax due is normally paid in two half yearly instalments plus a final "balancing payment".
Four key self assessment deadlines are:
* 31 October - deadline for sending in majority of paper tax returns.
* 31 January - deadline for sending in tax return online and some paper tax returns where return cannot be filed online.
* 31 January - payment deadline for tax owed for previous tax year and payments on account, if due.
* 31 July - deadline for second payment on account - if one is due.
By law the self employed must keep records of all relevant business information for at least 5 years and 10 months after the end of the tax year the records relate to. Some basic records that must be kept are:
* records of all sales with copies of any invoices issued.
* records of business purchases and expenses.
* invoices for all business purchases and expenses unless for very small amounts.
* details of any amounts personally paid into or taken from the business.
* copies of business bank statements.
All businesses are different and there are many specific types of detailed records that may need to be kept e.g.
* cash book
* petty cash book
* order notes and invoices
* copy sales invoices
* till rolls
* record of stock in hand at years end
For more detailed information and guidance go to http://www.hmrc.gov.uk/incometax/index.htm
Employees - PAYE
PAYE (Pay As You Earn) is the HM Revenue & Customs (HMRC) system for collecting income tax and National Insurance contributions (NICs) from employees as they earn it.
Responsibility of employer
If you employ people, including any directors of a limited company, you will need to deduct income tax and NICs from their pay before they receive it.
As an employer, you need to know how to calculate the correct income tax deductions, taking account of the various rates, allowances and limits that exist These deductions should be made each time the employee is paid..
Payment to HMRC.
By the 19th of each month - or, if electronic payments are made, by the 22nd of each month - employers should send the most recent amounts deducted from all employees' pay to HMRC. If the average monthly payments are likely to be less than £1,500 employers may be able to pay them quarterly. Employers can also manage PAYE online at http://www.hmrc.gov.uk/payeonline/index.htm
If payments are too little or made too late, interest may be incurred and/or a fine imposed.
Taxable benefits
Employees are also taxed on benefits in kind, such as a company car or medical insurance, and employers will have to deduct Class 1A NICs on such benefits and make appropriate payment to HMRC. These payments are not made under the PAYE system but at the year end.
Applying PAYE
PAYE is applied to all payments an employee receives as a result of working for the employer, including:
" salary and wages
" overtime, shift pay and tips
" expense allowances and claims (this only applies where these are paid in cash and, for expense payments, only if they fall within specific criteria - for more details, see HMRC guide on business expenses and dispensations)
" bonuses and commission
" statutory Sick Pay
" statutory Maternity/Paternity/Adoption Pay
" lump sum and compensation payments - such as redundancy payments - unless they are exempt from tax
Tax relief on other deductions
If employees are given payments other than in cash, such as shares or vouchers, PAYE must be applied to the cash value of such items. Childcare arranged and paid for by an employer and childcare vouchers provided by an employer, up to a certain weekly value, are exempt from tax and National Insurance, subject to the following conditions:
" The care used must be registered childcare or approved home childcare;
" Where a childcare benefit-in-kind scheme operates it must be available to all employees.
"
Employee tax codes
Each taxpayer has a personal tax code issued to them by HMRC and this together with HMRC taxable pay tables enables employers to work out how much tax to deduct from each employee.Taxable pay tables are available on the HMRC website.
Getting Started
Call the HMRC New Employers Helpline on 0845 60 70 143. They will advise you on what you have to do first and will help you find your way around the PAYE and National Insurance contribution systems.
" Get free confidential advice from your local Business Support Team on a one-to-one basis at any location which suits you. Find contact details of your local Business Support Team at the HMRC website.
" Get a starter pack from HMRC, which contains taxable pay tables and pay calculators, and all the essential forms and information.
For information on PAYE, and how to file online you can visit HMRC's website.
CAPITAL GAINS TAX
Capital Gains Tax (CGT) is payable on the gain, or profit, made from the disposal of an asset. The tax is paid on the difference made, rather than the sale value. So for example if you buy £10000 of shares and sell them on at £15000, then CGT will be chargeable on the £5000 difference. CGT does not only affect assets which are sold, but which are inherited or gifted, once the asset is sold on.
For example;
If you own a business valued at £50,000, which you then gift to your son, no initial CGT is payable. However if your son then sells the business on at £75,000 then he will have to pay CGT on the £25,000 difference, despite not having paid for the company in the first place.
Similarly, if you gift an asset to your spouse whilst you are still legally married and living together, then no CGT is payable until the asset is sold on.
When calculating your CGT you may deduct buying, selling and improvement costs from the chargeable gain. For example; if you sell on your business at a gain of £50,000 but you spent £15,000 on improvements, CGT would be chargeable on £35,000 (£50,000 less £15,000).
There is also an Annual Exempt Amount (AEA) which is an allowance for capital gains.
No CGT is payable when an asset is donated to a registered charity.
No CGT is payable on certain assets including;
o Your private car
o Personal goods worth less than £6000
o Premium Bonds, British Saving Bonds and Saving Certificates
For more information on CGT go to the HMRC website; http://www.hmrc.gov.uk/cgt/index.htm
VALUE ADDED TAX
VAT is a tax on consumer expenditure and is collected on business transactions, imports and acquisitions.
Most business transactions involve supplies of goods or services and VAT is payable if they are:
" supplies made in the United Kingdom (UK) or the Isle of Man
" by a taxable person
" in the course of a business
" not specifically exempted or zero-rated.
VAT rates
There are 3 rates of VAT:
* a standard rate, currently 20%
* a reduced rate, currently 5% (e.g. domestic fuel and power)
* a zero rate (e.g. basic foodtsuffs, children's clothes and books)
Registering for VAT
If the value of your taxable supplies is over a specific limit (currently £68,000), you need to register for VAT, unless your supplies are wholly or mainly zero rated in which case you may apply for exemption from registration. You can register online using the HMRC's VAT online registering service.
Once you have registered you need to charge VAT on all your taxable supplies from your date of registration and keep:
" a record of all standard-rated goods and services you supply or receive as part of your business
" a separate record of any exempt supplies you make
" a VAT account.
At pre-set intervals you need to fill in a VAT Return with details of your sales and purchases. You can do this online or use a paper return.
If the VAT on your sales is more than the VAT on your purchases you pay HMRC the difference. On the other hand, if the VAT on your purchases is more than the VAT on your sales you can claim the difference from HMRC.
Flat Rate Scheme
There is a flat rate scheme for small businesses to make it easier to pay VAT. If you use the scheme you apply a single percentage to your turnover in a VAT period. The result is the VAT you pay to HMRC.
Further information on VAT can be found at www.hmrc.gov.uk/vat
INHERITANCE TAX
Inheritance Tax (IHT) is chargeable on individual estates currently valued at £325,000 or more, at a rate of 40%. This tax is applicable to all beneficiaries including family and friends but it is not applicable to married couples or civil partners. There are further exemptions from the tax, see below for more details.
The individual estate valuation will remain at £325000 per individual beginning tax year 2010-2011. However couples (those married or in civil partnerships) can combine their allowances, in order to double their total tax allowance or 'nil-rate band'.
This means that if one spouse dies they are currently entitled to bequeath £325,000 to family and friends without paying tax. If the deceased does not use all of the allowance, then the remaining amount is transferred on to the surviving spouse's allowance.
There is no limit to the amount of wealth that can be transferred tax free from one spouse to the other, before or after death.
For Example
If a deceased spouse, Mr X leaves £100,000 in inheritance to his children, the amount is not taxable as it falls within his 'nil-rate band'.
The remaining £225,000 of the allowance is then transferred to the surviving spouse, Mrs X and becomes part of her IHT allowance, so her 'nil-rate band' will then be £550,000.
If you are a widow or widower and your deceased spouse did not use the full amount of their 'nil-rate band' then you are eligible to combine this outstanding amount with your own allowance to increase your tax-free slice. It is possible to combine these personal allowances, regardless of when your spouse died, as long as the surviving partner is still alive. There is no need to apply for this transfer; it comes immediately into effect once the surviving spouse dies.
For more information see; http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/InheritanceTaxEstatesAndTrusts/DG_4016736
Exemptions
Inheritance Tax is not payable on wealth which is inherited by;
o Spouses or civil partners
o Registered UK charities
o Some national institutions such as museums and universities
o UK political parties
It is important to bear in mind that when a person dies, gifts over the value of £250 which they have bequeathed in the seven years preceding their death will be factored in to their personal allowance. There are further exemptions to gifts received in the seven-year period including;
o Wedding gifts
o Maintenance allowances to ex- and current spouses, relatives and children under 18
o Gifts to children under 18 and in full-time education
For full details on exemptions from IHT visit: http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/InheritanceTaxEstatesAndTrusts/DG_10010612
If you chose to transfer wealth over the personal IHT threshold into a company or newly created trust, then there is an immediate inheritance tax of 20% payable on the excess. The threshold figure will also take into account any gifts made in the preceding seven years, under the same terms as the normal IHT.
If you die within seven years of making a company or trust transfer and you paid 20% IHT, then the amount will be subject to the full 40% IHT rate. If you did not pay IHT on the initial transfer then the figure will be added into your estate to work out any IHT which may be due.
For more information on transfers to trusts and companies, visit; http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/InheritanceTaxEstatesAndTrusts/DG_10038335
All PBS information sheets are designed to provide the detail you need to implement best business and employment practices. They are not a detailed commentary on the current law and where advice is needed in a specific case you should contact PBS for expert consultation