Employing Family Members In The Business

In an earlier post, in September 2013, we looked at just what sort of expenses we could claim, when working from home.

Some 60% of UK businesses are family owned, and many of those do, actually, work from home, so, what are the key rules, when it comes to employing family members in the business?

It used to be common practice to pay a spouse or partner a small wage, in order to utilise their tax free personal allowances, or lower rate tax banding (particularly if they have no other employment).

This loophole has been partially closed in recent years, as any such salary must now be ‘earned’ by the person concerned, which can be difficult to prove when they have a full time job elsewhere.

One way around this, if you run your business as a limited company (and it is likely that you should be) is to issue a number of shares to your partner, so that they are able to receive part of the dividend paid for the year.

Under current legislation, a dividend is classed as investment income, rather than earned income, and, as such, there is no requirement to prove any involvement on the part of the partner. (Also, as investment income, it won’t be subject to National Insurance).

Alternatively, if they do actually play a part in the business (such as bookkeeping, administration or company secretary) then a salary is permitted, as long as it is at a commercial rate. One of the best ways to prove this is to ensure that they sign the odd document, from time to time, such as letters, cheques, etc.

That’s all very well, but what about the kids? Can we pay them a salary too? Everyone, including our children, has a tax / NI free personal allowance of around £10,000 (although this is increasing year on year) so can we use this to our advantage?

The simple answer is; “Yes”, so here are a few of the basics:

The Children And Young Person’s Act states that no person under 13 years of age may be employed, other than in very specific areas, such as acting, modelling and sporting activities, so employing your 8 year old as head of marketing could just raise a few questions.

Under current legislation, the National Minimum Wage doesn’t need to be paid to workers in the family business, provided they are members of the employer’s family, and share the family home. That said, the more we can pay them, within reason the greater the expense, for tax purposes.

As with most things, common sense is the watch word here. We need to be able argue that our kids are performing tasks that are well within their capabilities. Many, these days, are highly computer literate, and may have done work for us on our web sites, spread sheets etc. Others may have helped us with despatching goods, filling mail shot envelopes etc.

So, as long as our kids are over 13, and they perform appropriate tasks, within our business, for a sensible salary, there is nothing to stop us paying them for work done, in order to reduce our business tax liability.

There is a wealth of legislation governing this, but, for most of us, it’s definitely worth some serious consideration.

Some of that legislation is summarised in the Gov.UK feature; Child Employment

 

To see a recent video presentation of this article, by our own Dave Flatley, click on the image of Dave, to the right here.

 

HMRC Increases Annual Investment Allowance Again To Encourage ‘Investing In The Future’

With effect from April this year, Annual Investment Allowance has been increased to £500,000, a figure that will remain in force until December 2015.

This has been done as a means of attempting to encourage businesses to invest in their future growth and development.

Traditionally, assets, bought by a business, with more than one year of expected useful life, would have their cost spread over a number of years, in line with the expected benefit of that asset to its owner.

Annual Investment Allowance was originally introduced (at a starting rate of £50,000 per annum) to allow us to offset the entire cost of a piece of capital equipment in the year of purchase, thereby significantly reducing our levels of tax in that year.

The current limit is now 10 times that of the introductory rate, which, whilst it will be of major benefit to a significant number of larger companies, it does move it farther into the ‘So what’? category for the vast majority of smaller businesses, who’s annual equipment spend is closer to £500 than it is £500,000.

More details of this can be found on the HMRC Web Site.

Praxis YouTube Channel Receives A Revamp

Way back in 2008, YouTube replaced Yahoo as the second most popular search engine.

Although, since then, the likes of Bing have gained massive popularity, YouTube remains one of most popular search engines available, and it is a media we ignore at our peril.

Alan Young has operated a YouTube channel since 2008, however, with the recruitment of Dave Flatley in September of this year, the company is now building on it’s existing video offerings.

The first four video productions from Dave are now on the channel,  along with some of our favourite videos which we hope you will find useful and / or entertaining, with offerings from sources as diverse as HMRC, Companies House and Monty Python!

Feel free to check out the channel, at any time, and we will endeavor to update it as and when we find what we feel are suitable videos for our clients / subscribers.

Our YouTube Channel can be viewed by clicking on the link below;

Praxis Youtube Channel

HMRC Introduces New Webinar For The Newly Self Employed

Last month, HMRC produced a new 20 minute video webinar designed to give an all encompassing guide for those considering starting out on the road to self employment.

The guide covers the basics of business structures, registering with HMRC, types of National Insurance, record keeping, business outgoings, Self Assessment online and budgeting for tax payments.

Whilst the guide lacks some of the finer presentation skills of our own Mr Flatley, it is definitely worth a read, for anyone currently in this situation.

There is a link to the guide on the video pages of the Praxis web site, which you can get to on the link below:

HMRC New Business Webinar

Dave Flatley Joins The Praxis Team

As of this week, Praxis Accountancy are pleased to welcome Dave Flatley, as head of media and online promotion.

Praxis are very much about ‘getting the word out’ to small business owners, and those looking to grow their business beyond existing parameters.

To this end, the internet and social media is a vital part of our communication network, and, so, it made sense to recruit someone who lives very much within that world.

From hereon in, Dave will be taking on most of the media based activities, from Alan Young, so look out for a series of upcoming videos to complement this blog and our other social media offerings.

Dave’s contact details are as follows;

Business email; dflatley@praxisaccountancy.co.uk

Personal email; daveflatley@hotmail.com

facebook; https://www.facebook.com/dave.flatley.58

Deadline For Manual Self Assessment Tax Returns Just Weeks Away

HM Revenue and Customs (HMRC) has issued a reminder to anyone filing a Self Assessment tax return this year – from 2008, the is a 31 October deadline for paper returns, and it’s only weeks away.

Previously, both paper and online Self Assessment tax returns had to be filed by 31 January. But, from 2008, paper returns must be with HMRC by 31 October, or you could face a £100 penalty. The deadline for filing online returns remains 31 January.

If you file a paper tax return, you, therefore, need to get organised now. For example, start thinking about what information you need to complete your return, such as your P60, self employment accounts, records of your savings and investments, and details of any untaxed income.

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Alternatively, you could switch to online filing. It’s easy to register. Filing your tax return online has a number of advantages – your tax is calculated automatically, you get an immediate online acknowledgement once you’ve filed, and it’s processed faster, so any money you are owed by HMRC is repaid more quickly.

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Once you’ve filed your return, any tax due has to be paid by 31 January, whether you file on paper or online.

Home Business Mortgages. The Basics

Often, when we work from home, our house will have a dual purpose, as both a business premises, and a personal residence, so how does this affect our mortgage?

The simple answer is that, in most cases, it won’t.

Although we may need to notify our insurers, simply working from home is not something that mortgage companies generally need to be aware of.

The implications for buying a house will depend on its current usage at the time of purchase, as well as the level of business undertaken there.

If, for example, we buy a house with extensive outbuildings, as long as they are not currently used for business, then we will simply need a standard domestic mortgage. What we do to the buildings after that, is not relevant, until we come to sell or re finance the property. If, however, they have already been converted, say to offices, or a small retail unit, we would normally need a specialist mortgage, with dual residential / commercial usage.

This does not apply if the vendor simply ran a business from home. It is only relevant if there have been structural modifications, making the premises partly commercial.

Whilst looking at mortgages, I should just mention that it is common practice for small business owners to extend their mortgage, in order to finance a business venture. This could be for converting / fitting out our new office premises, or it could be for anything from web site design / production to recruiting new staff etc. As long as we can prove that some of the mortgage relates to our business, we can claim 100% of the mortgage interest relating to that proportion of the loan. This is something that often gets missed when completing our tax returns.

Tax Credits. Are They For Me?

Everyone has heard of Tax Credits. We’ve all seen the Inland Revenue publicity, but the usual reaction is; “That won’t apply to me. I earn too much” or “It’s not worth applying. The Government never give anything to people like me.”

Many people, though, particularly those with young families, are surprised to learn that they are, in fact entitled to some form of Tax Credits.

There are two main types available; Working Tax Credits and Child Tax Credits. The former is only available to families with a household income below £18,000 (or £13,000 for single parent families) but the latter can be available up to a household income of £26,000, for single child famlies, and £32,200 for those with two children.

When starting out on a new business venture, money can often be a major issue, and any extra help is always welcome. It is important to remember, also, that, for the self employed, Working Tax Credits are paid, based on NET income. Just because you have total income of, for the sake of argument, £18,000, does not mean you’re not eligible. By the time you have deducted allowable expenses, such as travelling, telephone, insurance, etc, it is quite likely your net income will fall into the qualifying bracket, and this is where a good accountant will be able to help.

Also, people who are aware that they can claim Tax Credits, often fail to do so, as they feel it’s ‘not worth it’. In this situation though, we need to look at the bigger picture. Whilst the amount of the Tax Credits received may be small, there are a number of further benefits that will make a claim worthwhile, such as free dental treatment, assistance with childcare arrangements etc.

Still not sure? Why not check it out for yourself? The Government have a Tax Credits calculator available online. Simply by entering a few basic details, it will not only calculate whether you are eligible, but also give an indication as to how much you can expect to receive. This calculator is available at http://www.taxcredits.inlandrevenue.gov.uk/Qualify/DIQHousehold.aspx

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If you want to know a little more, the Revenue has a fairly comprehensive guide to Tax Credits, generally, which can be found at; http://www.hmrc.gov.uk/taxcredits/start/who-qualifies/what-are-taxcredits.htm

Working From Home. What Can We Claim?

 

In these times of the dreaded credit crunch, the more money we can save on our tax, the better. One thing that any small business owner will need to know is; “What expenses can I claim for running my business from home?”

Surprisingly, there are no ‘standard’ or recognised methods of calculating these allowable expenses.

In the ‘good old days’, accountants would simply claim a global ‘round sum’ amount (often about £20 – £30 per month) to cover these costs, which was never challenged by HMRC, as it was not significant or worth amending.

However, in 2004, the limit of these round sum amounts was capped at £2 per week (or £104 per year). Anything above this rate was increasingly likely to trigger an investigation. In 2009 though, this was increased to £3 a week, and, from April 2012, it was increased, again, to (wait for it) a massive £4 per week.

If we feel that the £4 is insufficient (and who wouldn’t) we can claim specific costs, based on actual expenditure, provided we can support our claim.

Main Criteria

·         We must actually work from home, and have a dedicated area for this work (doing the books on the kitchen table once a week simply won’t cut it)

·         Expenses must be ‘wholly and exclusively’ for the business. If mixed usage (part business, part personal) the business part must be separately identifiable.

·         Where an area of the house is used partly for business, and partly for personal, the expenses will be apportioned by time used, as well as floor area utilised.

What Can We Claim

The following property expenses can be claimed:

·         Light and Heat

·         Rent / Mortgage Interest

·         Council Tax

·         Water Rates

·         Property Insurance

·         Cleaning

·         Re decoration and repairs (internal and external)

Calculating ‘Business’ Element

As a general rule, we tend to apportion all of the above costs on the basis of floor area utilised. In reality, this may be difficult to calculate, so it is perfectly acceptable to work on the basis of numbers of rooms in the house. If, for example, we use one room for business purposes, and there are four further rooms, the business element will be 1/5, or 20% of the total running costs of the home. If we further estimate that this room is used 50% for business, and 50% personal, the percentage claimed will be halved to 10%.

Other Claimable Costs

In addition to our home, we can claim any expenses utilised ‘wholly and exclusively’ for the purposes of the business, including:

·         Telephone (including line rental) apportioned by call time (incoming and outgoing). A dedicated business line can be claimed in full.

·         Broadband (as telephone costs)

·         Business insurance

·         Repairs to business equipment

·         Capital allowances (wear and tear) on business equipment. (including computers and peripherals, office furniture and fixtures such as shelving etc). Annual Investment Allowance currently means that we can claim 100% of the cost in the first year, up to a capital cost of £25,000, increasing (subject to legislation) temporarily to £250,000.

·         Printing, stationery, postage and advertising

·         Computer software used for business

·         Travelling and subsistence costs (a whole topic in its own right). Subsistence relates to the ourselves only. Any entertaining of suppliers, business associates and, even, customers is totally disallowable.

·         Motor expenses of running business vehicles (less any personal element)

Pitfalls

When claiming expenses relating to our home business, we need to be aware of some potential issues:

·         Most mortgage companies ask us to stipulate whether or not there is a business element to our occupation. We may need to be able to prove to them that we have separate business insurance to cover us for this.

·         Running a business from home may attract the attention of the Valuation Office Agency who will determine whether or not a property will attract business rates. Guidelines for this can be found at:http://www.voa.gov.uk/corporate/Publications/workingFromHome.html.

One major concern in the past has been that, if we claimed an area of our home as primarily for business use, then, on sale, this element of the property would not be eligible for Principle Private Residence Relief, which could, potentially give rise to a Capital Gains Tax liability. In June 2008, however, HMRC announced that this would no longer apply, so, for now, we are no longer subject to any CGT on the sale of our house, One thing to be aware of here, though, is that, if you are running a substantial business from home, and the VOA determine that all, or part, of your house should be subject to business rates, then you may still be subject to CGT on that proportion of the home.

Legislation is constantly being updated, and the only piece of advice that never changes is; Always check with your accountant, when looking to claim or calculate these expenses. (Advice the odd MP would have done well to heed recently).

Links:

HMRC Document BIM47825 (Specific deductions: use of home: examples).  http://www.hmrc.gov.uk/manuals/bimmanual/BIM47825.htm

HMRC Document BIM47820 (Specific deductions: use of home: specific deductions.  http://www.hmrc.gov.uk/manuals/bimmanual/bim47820.htm

When Do We Need To Register For VAT?

There are many misconceptions, amongst new business owners, as to when they should register for VAT. There is, however, no legal requirement to do so, until the business turnover exceeds the registration threshold (currently £79,000).

It is possible to register for VAT voluntarily, even if you are below the Registration Threshold.

Reasons we might want to would include:

* In order to reclaim the VAT incurred on large initial capital outlays at business start up (equipment, vans etc).

* To reclaim VAT on ongoing purchases and expenses, thereby making them 20% cheaper. (although we should be wary if we are mainly selling to the public).

* To improve company image. If a company is not registered for VAT, then any potential large customers will realise that its turnover is below £79,000, and may refuse to deal with such a small company, on the grounds that its continuity cannot be assured. This will be a potential issue for any of you working from home.

*To take advantage of the potential cash flow benefits of operating the flat rate scheme. (Yes, that’s right. The flat rate scheme can actually benefit your cash flow, as we can see in the example below).

When considering voluntary registration, you need to be aware of who your customers are. If we are dealing mostly with business customers, then they will, in the main, be able to reclaim any VAT that we charge on our products and services.

If, on the other hand, we mainly deal with the public, they are unable to make such a reclaim and our goods and services immediately become 20% more expensive. Alternatively, we can make our current prices VAT inclusive, and lose out on the extra profit. Either way, this will be a major factor in choosing whether or not to register for VAT before we actually need to.

Example of Flat Rate Scheme

(Note: This is not at current rates. This arose when the Flat Rate Scheme was first introduced)

 A was a locum vet, dealing exclusively with veterinary practices, all of whom were VAT registered.

Her expected turnover, at £50,000 in year 1, was somewhat below the current VAT registration threshold, so registration was not compulsory. What are the implications of registering under the flat rate scheme?

Firstly, as all of her customers were VAT registered, there was no problem with them claiming back the VAT, so this will not be a barrier to registration.

Secondly, because she is one person, working from home, and, basically, just selling time, there will be little or no input VAT for her to claim on payments out and expenses.

Under prevailing rates, at 17.5%, she would charge a total estimated VAT amount of £8,750.

The relevant VAT flat rate for vets was 10% (though this was calculated on the GROSS amount invoiced, in this case; £58,750 (£50,000 plus VAT)). In the first year of the scheme, there is a 1% discount available for new users.

In this case, the VAT payable to HMRC, in year 1, will be £5,287.50 (£58,750 @ 9%).

As we can see, A has charged £8,750 to her clients, but only had to pay £5,287.50 to HMRC, resulting in a £3,462.50 positive impact on her cash flow. On this occasion, it was considered to be worthwhile registering for the flat rate scheme, but rates will vary from one business to the next, and each case should be considered individually. It’s definitely worth a look though, and the calculation is straightforward, as you only need to identify total sales.

More details on how and when to register for VAT can be found at;  http://www.hmrc.gov.uk/vat/start/register/when-to-register.htm