The tax clock is loudly ticking

The end of January tax deadline is looming again and self-assessment taxpayers now only have a couple of weeks to return tax forms to HMRC – or face a £100 fine.

As well as filing a return by the end of this month, any tax due for tax year ended 5^th April 2011 needs to be paid along with the first half of this year’s potential tax bill. Failure to make payment of tax that is due by this date will result in interest being charged on the amount due.

Around nine million taxpayers submit a tax return every year and two thirds of these returns are now filed on-line. Many of us leave the filing of our return to the last minute and this caused around one million people to have to pay a fine last year.

If you are new to on-line returns then you need to register first of all and you can do this at www.hmrc.gov.uk. When you have registered you will receive an activation code through the post and this allows you to go on-line and file your return. Given the state of the postal service at the moment due to the weather time is now at a premium and if you have still to register you need to do it now!

If you still prefer the old fashioned method then HMRC need to have received your return by 31^st January.  You can take your return to a tax office up to that date if you don’t trust the postal service but in a neat little twist HMRC won’t issue you with a receipt to prove you delivered it on time if you hand deliver, leaving yourself open to the possibility of a fine.

Rachel’s tax questions answered – and how!

Elaine Guthrie, of Chartered Accountants Abercrombie Gemmell(www.agca.co.uk), has been looking at Rachel’s tax queries. Here are her suggestions:

In order for expenses to be offset against your income for tax deductibility, you have to look at the expenditure being incurred and whether it is incurred “wholly and exclusively” for the purposes of the business. So, the cost of a train ticket to get to and from a gig would be incurred by Rachel “wholly and exclusively” for the purposes of her business. Without the train ticket, Rachel would not be able to get to and from the gig and would therefore not receive any income.

Where it gets slightly more complicated is when there is a mixed element of usage. So, for example, telephone bills often have a business and private element to them. In these circumstances, we look at the element of business use and private use and apportion the costs based on these. So, for example, Rachel could apportion her telephone call based on the number of calls made/received by her or the number of minutes she spends on the phone for business/private use.

For a deduction for use of home as office, this is slightly more complicated. There are a number of ways to calculate the use of home as office deduction. HMRC have advised that they believe a deduction of £2 per week to be sufficient to cover additional costs associated with working from home. However, it is possible for Rachel to claim more than £2 per month provided she can justify this. Generally speaking, the most popular method of calculating the use of home as office is to consider the number of rooms Rachel’s house has. If Rachel had 5 rooms in her house and used 1 of these rooms for business purposes, then 20% of the costs would be available for her use of home as office calculation. Thereafter, Rachel should assess her business use of the room in question. If she used the room 25% of the time for business purposes, then she would be able to claim 5% of her total household bills against her business income (this represents 20% x 25%).

Care needs to be taken when claiming a deduction for use of home as office. For those individuals who own their houses, making a claim for 100% business use of one room of their property would render that room a business asset. As such, if they were to sell their house, the room would not qualify for Principal Private Residence Relief and as such may be subject to capital gains tax.

Turning to Rachel’s car, she is able to claim a deduction for the business use of her car in one of two ways:

Method 1: Rachel could claim 45p (40p pre-6 April 2011) per mile for each business mile travelled for the first 10,000 miles followed by 25p per mile thereafter.

Method 2: Rachel could bring her car into her business as a capital asset. This would allow capital allowances to be claimed on the value of the car together with the yearly running costs of the car for example road tax, MOT, repairs. However, care needs to be taken if Rachel has private use of the vehicle as only the business use element of the car would be an allowable deduction for tax purposes. Therefore, if Rachel used the car for business purposes 75% of the time, then she would only be able to claim 75% of the running costs of the car as a tax deduction.

Both of the above methods are worthwhile and Rachel should take care to ensure that she opts for the method that suits her best. It should be noted that Rachel cannot opt for different methods each year – she needs to choose one method to use consistently.

Rachel notes that she may purchase assets from time to time if they are required for her business. If these assets provide an enduring benefit to the firm, Rachel would need to claim capital allowances on them. Care needs to be taken when purchasing musical equipment. If the asset is likely to appreciate in value, it may be detrimental to claim capital allowances which would be clawed back on the disposal of the asset at a later date.

Rachel should include the total amount she receives from promoters in her income and include a deduction for her expenses at the same time.

If Rachel were to purchase a ball gown for an event, she may be able to claim a deduction for this. However it is necessary for Rachel to show that this purchase was for business purposes only. Therefore, Rachel should not wear the ball gown for any private purposes, but only for business purposes.

Rachel will be able to claim a tax deduction for any consumables used in her trade such as strings, reeds and so forth.

One little tip I would give to Rachel is this: keep twelve envelopes – one for each month of the year and pop your receipts into these throughout the year. It helps save a lot of time sorting them out at the end of the year!”

Don’t let the taxman spoil your Christmas

If you’re a student and about to start work for the Christmas holidays – not that you won’t already have been working hard all year at whatever course you’re doing – then remember that if you organise yourself properly you may not have to pay tax on your valuable earnings over the festive period.

Each of us has a personal allowance of £7,475 this tax year (from April 6th 2011 to April 5th 2012) and this is the amount of money that we are able to earn before starting to pay tax. So if you are only working for a few weeks over the holidays then it may be possible to have your employer pay you without deducting any tax from your pay.

To enable your employer to pay you without deducting tax then you will need to complete HMRC Form P38(S). It can be found at www.hmrc.gov.uk/forms/ps8s.pdf

If you’ve already started work and you have already had some tax deducted then you can still claim it back afterwards by completing a Form P50, and again you can download this form at www.hmrc.gov.uk/pdfs/p50.pdf

If you worked over the summer and paid tax but earned less than £6475 then you can still use this form to reclaim the tax you have already paid, and perhaps use the money to help fund your Christmas spending!

Rachel’s Diary update

Great to hear so much positive feedback from Rachel Hair’s first diary entry last week. It’s clear already that Rachel is raising issues that have taxed the minds of a lot of you for some time, but that you’ve never really known where to go for answers. Hopefully Moneysucks? for Musicians will provide some of these answers for you. Rachel and Fergus were interviewed by Bruce MacGregor on BBC’s Music Café this week and if you missed the piece then you might still be able to catch it here

Rachel told listeners about some of the problems she faced as a travelling musician and why she felt that writing down these problems would help not just her but lots of other working musicians as well. It seems that this is going to be the case since already lots of you have been telling us that it’s a great idea and you’re looking forward to reading Rachel’s Diary.

The next edition will be out early next week and will continue down the tax road, as well as looking at the thorny subject of double taxation agreements.

If you have any specific queries that Rachel hasn’t covered yet but that you would like answers to then please drop us a line.