What can I claim for?

Transcription

1 What can I claim for? So, armed with this basic outline, what can you claim for and how can you minimise your tax obligations? An overview of some of the common claimable and non claimable costs reads like this; Trader VAT Limited Company Sole Tax VAT Tax Your own salary Yes No No No Working spouse s / partner s salary Yes No Yes No Motor expenses Business Petrol Yes Yes Yes Yes Road Tax Yes No Part No Insurance Yes No Yes No Repairs Yes Yes Yes Yes Depreciation Part No Part No Finance charges Yes No Part No Travel Taxis Yes V Yes V Train Yes No Yes No Air fares Yes No Yes No Hotels Yes Yes Yes Yes Meals Yes Yes Yes Yes (but not entertaining) Telephone & fax Yes Yes Yes Yes Mobile phone Yes Yes Yes Yes IT costs Yes Yes Yes Yes Home costs Light & heat ] ] Repairs ]Part No ]Part No Insurance ] ] Stationery Yes Yes Yes Yes Postage Yes No Yes No Advertising Yes Yes Yes Yes Insurance Equipment Yes No Yes No Public / employers liability Yes No Yes No Personal BIK Yes No No No Entertaining No No No No Interest on bank loans Yes No Yes No

2 Bank charges Yes No Yes No

3 Pensions & life assurance Life assurance No No No No Income protection No No No No Medical insurance BIK Yes No No No Mortgage protection BIK Yes No No No Earnings protection BIK Yes No No No Pension contributions Yes No TD No No Key V BIK TD = depends on whether the supplier is VAT registered = creates a taxable benefit in kind for the employee = basic rate tax credit given at source by the Inland Revenue (for individuals) This is not an exhaustive guide and is included to provide illumination rather than support but should give you a feel for what you can and cannot do. Above all, you do need to keep records and receipts for all expenditure that you want to claim for, for VAT, income tax and corporation tax purposes. State retirement pension entitlement This, although you may not realise it, is a benefit that can be bought quite cheaply. Paying either 2.20 per week in Class 2 National Insurance as a sole trader or taking a modest level of salary from your limited company, of as low as 87 per week, will help you to maintain you entitlement to a full basic state pension which is currently worth around 87 per week on retirement. Calculating and minimising your tax So, let us assume that you are billing fees of 80,000 to your clients and after deducting various costs you are left with a profit of 50,000. Your tax position, using the 2007/2008 tax year would be: Sole Trader: Limited Company paying out full salary: Limited Company paying out a low salary but some dividends: 14,050 tax and NIC payable 16,284 tax and NIC payable 9,931 tax and NIC payable Your choice as to whether you are a sole trader or limited company can have profound tax implications. So, talk to your accountant and weigh up the pros and cons. But, do be aware that the tax picture will change from year to year and what is good this year may not be so good next year. Here are some current hot issues in tax: IR35 If you are operating as an independent through a limited company and any of your contracts with your clients could be construed as being of an employer and employee nature if your limited company was hypothetically stripped away, then

4 you would need to take out most of your remuneration from your limited company by means of salary rather than dividends which means that your tax position Deleted: you re

5 could be rather worse than operating as a sole trader. IR35" is the name and style given to the Inland Revenue press release which announced this anti avoidance tax legislation in March It is an on-going and contentious piece of legislation, about which books have been written in their own right. Useful information on this subject is also available from the Professional Contractors group website at A very brief guide to how this legislation works is set out further on in this site. Paying dividends rather than salary through your limited company. Paying dividends is currently better than paying salary as already suggested. But against a backdrop of a growing government budget deficit, tax rises may occur in spring 2008 and the advantage off trading through a limited company and following the low salary / high dividend route may be further eroded What about paying your partner or spouse salary or dividends? Well, for husband and wife family companies, following the win secured at The House of Lords in the Arctic Systems case by the taxpayers, (Mr & Mrs Jones), HMRC are introducing new rules which will come into place from 6 April 2008 to ensure that income sharing arrangements between family members, non married partners and other family members will be ineffective for tax purposes so that dividends and profit sharing payments for non-working spouses, non-working partners and non-working family members are assessed on the working spouse, partner or family member respectively. There is no clear detail as to how this will work in practice as yet and draft legislation will be published over the new few months. Working tax credits and child tax credits Your level of income, (combined with that of your spouse or partner), will also impact on the level of any child tax credit or working tax credit award that you receive from the Inland Revenue. So, apart from considering the headline rate of tax do not forget that your combined income will determine the level of any means tested awards you receive. Child tax credits and working tax credits generally depend on the combined joint incomes of both you and your spouse and/or partner in any tax year. They can be a valuable source of support in your early years as an independent. Remember that you cannot backdate a claim for these benefits so you must file and claim for your entitlement early in each tax year, (preferably before 5 July for a tax year beginning on the previous 6 April), for at least a provisional award, which is then finally adjusted after the end of the tax year, (the following 5 April), when final details of your joint incomes will be known. Remember that no claim can be backdated by more than 3 months.

6 Your legal obligations to the tax man Each year whether you are a sole trader or a limited company you will have to file various sorts of tax returns with HM Revenue & Customs (and Companies House also if you operate as a limited company). Most importantly, both sole traders and limited companies must submit their accounts annually to the Inland Revenue. You must also keep records of your revenues and costs, substantiated, as far as possible, by keeping receipts, copy invoices and bank statements. Also, these records should regularly be processed, (particularly for a limited company which has an additional legal duty under the Companies Act 1985 to maintain regular accounting records). Deleted: Deleted: = Deleted: c