Tax Tips

Use The Cash Basis To Calculate Taxable Income

Taxable profits are normally calculated in accordance with Generally Accepted Accounting Practice. This means that profits are determined on the accruals basis by reference to the amount earned in the year, rather than by reference to cash received and paid out. However, from the 2013/14 tax year small eligible businesses can elect to use the simpler cash basis to work out taxable profits. An election applies or the tax year for which it is made and for subsequent tax years. The cash basis option is only available to the self-employed and to indiduals in partnership whose receipts are not more than the VAT threshold (£79,000 from 1 April 2013).

Claim Fixed Rate Deductions

To save the work incurred in keeping details of expenses, individuals carrying on a trade as a self-employed sole trader or in partnership with other individuals can instead claim fixed rate deductions. Fixed rate deductions are available in respect of vehicle deductions, business use of home and in relation to business premises which are also used as a home. Businesses can choose to claim the fixed rate deductions to save work or can keep records of actual expenditure and make the necessary apportionments between home and business use and claim a deduction for either the actual expense or, where this gives a more favourable result, claim the fixed rate deduction.

Small Earnings Exception For Class 2 NIC

If you earn less than £5,725 (2013/14 figures) a year from your self-employment you are entitled to claim the small earnings exception and not pay any Class 2 NIC for the year. At £2.70 a week this is a yearly saving of £140.40 in National Insurance. Remember that you can also claim this for any year in which you have a loss. However, if you have no other earnings and are not entitled to NIC credits, you may wish to pay Class 2 contributions voluntarily to preserve entitlement to the state pension.

Claiming Expenses If You Don’t Fill In A Tax Return

If you do not fill in a Tax Return you need to claim relief for expenses incurred in relation to your employment on form P87. If you do not claim the relief, you will miss out. A claim for 2013/14 must be made by 5 April 2018. Form P87 is available to download from the HMRC website at www.hmrc.gov.uk/forms/P87.pdf.

Losses And Capital Allowances

Capital allowances are treated as part of a trading loss for loss relief purposes, and so care should be taken to determine whether disclaiming these and shrinking the loss may actually leave you better off. This is because personal allowances are ignored in loss claims, so a loss carried back could be wasted if it is set against income that is already covered by personal allowances.

Registering Your Capital Losses

If you bought an asset and sold it at a loss then it is possible that you made a capital loss (e.g. if you invested in a start-up that failed or bought an investment property that went down in value, then this may well apply to you). Capital losses can only be relieved against capital gains and if there are no gains in the year of the loss, the loss can be carried forward. However, if gains are incurred during the year that the loss was made, the loss is first set against the other gains for the year, with any balance remaining unused being carried forward. Losses must be set against gains of the same year before being carried forward, regardless of whether the gains exceed the annual exempt amount for capital gains tax (£10,900 for 2013/14). In order to preserve a loss for use against gains in future years, it is necessary to establish that loss. You must return the loss within your Tax Return within four years, or amend an already filed Return to claim the loss. Alternatively, a claim can be made by writing to the tax inspector. Remember, any size loss if realised in isolation can be used in this way, and could save you 28% tax on the amount of the loss in future years. Therefore, always claim losses in the year in which they arise and keep a note of the amount of losses you have accumulated.

Registering Your Rental Losses

If you rent out property then you have an obligation to report the property income and expenses to HMRC (see www.hmrc.gov.uk/report-changes/individual/income.htm#2). You will need to tell HMRC that you are receiving income from property by 5 October after the end of the Tax Year in which the income is received. You may need to complete a tax return, in which case HMRC will notify you of the need to file a Return. However, if you have PAYE earnings, you may be able to have any tax due collected via an adjustment to your PAYE code. Even if you make a loss it is to your advantage to report this to HMRC. Many people do not realise this and only start reporting the income when they break into profit. Without reporting the rental losses, you are losing out on being able to set these losses against future income from property, meaning that you will pay more tax than you should. So if you register these losses now, you will be able to take them forward and offset them in future years.

Time Your Capital Expenditure

If your cash flow allows it, consider carefully the date on which you invest in new items of plant and machinery or other items qualifying for capital allowances. A purchase date of a few days either side of your accounting year end date can make all the difference in getting the first capital allowance in this accounting period or having to wait 12 months to get any relief for the expenditure.

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