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Tax and VAT

Posted: Wed Mar 29, 2006 12:22 pm
by Pete the Pong
OK, here are the "facts" about tax and VAT, as I understand them. If I've got anything wrong, then please pm me (or email and I'll edit in the correct information. As this is a "sticky" it’s probably best not to add to the thread unless you have some extra info, otherwise it will become too long. I've started a separate thread for discussing the issues involved.
And please remember, although this information is correct to the best of my knowledge, I am NOT an accountant!

1) By law we all have to submit a tax return once a year. You can get a professional accountant to do this for you, but personally I prefer to use a program such as Tax-Calc and do the whole thing myself.
2) If you are simply working as a hobby then any profit you make must be added to your regular income.
3) If you are self-employed, then you must declare that to the tax-man (phone them and ask how)
4) If you are unemployed then you MUST tell the DHSS what you are doing, and how much profit you have made (if any). If you are trying to start off as a small business, then you will probably find them very sympathetic -as they want to get you off their books ASAP!
5) If you are working as a partnership with someone, then you need to declare this, and that declaration will include an agreement on how you are going to split the profits. Gracia and I split them 50/50, but you can use any ration. You then have to submit a separate "Partnership Return” which shows the business profit (or loss). You then transfer your proportion of that profit to your personal return
6) Tax is only payable on PROFITS over your tax allowance, which in the last budget was set at £5035. Therefore if there are two of you, you need to make a profit of over £10,000 before you are eligible for tax.

Any expenses incurred in the running of your business are tax deductible. If in doubt phone the Inland Revenue help line (0845 9000 444) and ASK. Again I've always found them very helpful.

VAT is a different matter. That becomes payable on all sales once your business TURNOVER exceeds the set limit, which at the moment is £60,000 in any 12 month period. Ie if today is June 21st, that 12 month period started on June 22nd last year. It's a "rolling" date".
Disadvantage of VAT registration. There's a lot of paperwork and you give the taxman 17.5% of everything you take. Which may mean you have to raise your prices.
Advantage? You can claim back all the VAT you pay on business expenses.

Council tax etc.
You are allowed to use your home as an office without it affecting your tax. Also sewing, small-scale bookbinding, etc is classed as a "craft" or a "cottage industry", and is acceptable. However once you start using large workshops etc. the situation may well change, and the real problem starts when you have clients etc visiting the house on a regular basis. That starts to classify as a “change of usage".
Oh and anything that can be eaten carries a whole raft of health and hygiene issues!

Re: Tax and VAT

Posted: Thu Mar 30, 2006 10:46 am
by Pete the Pong
David Smith wrote:Capital Expenditure, like most areas of accountancy and tax is rather a grey area, and open to as many interpretations as there are tax inspectors and accountants.

You have to keep track individually of Buildings and Property, Vehicles, and lump everything else into Equipment.

It's going to be fairly rare for a historic trader to want to have Property or Buildings as an asset of the business, if you work from home then claim a proportion of the costs of things like contents insurance, electric, phone on a basis relating to space used specifically for the business. I use one bedroom as an office, so as kitchens and bathrooms don't count for this calculation, the house has one reception, and 4 bedrooms, therefore my office is one fifth, and so I claim 20% of household bills. This does have longer term implications on making a profit of the sale of the House and 20% of that being liable to Capital Gains Tax, but that's a way off yet and may well get lost in the dust, fingers crossed. If you do have a property or land owned by your business, then all maintenance and repairs are deductible. However there is no Capital Allowances per se as the Revenue assume property will increase in value, as opposed to things like cars which depreciate (ie lose value).

Vehicles attract two sorts of tax implications - running costs and depreciation. Depreciation (ie loss of value) is not recgonised bythe Tax Man, instead he lets you claim Capital Allowances on a reducing balance basis - ie you never really get the full benefit, but that's the way the cookie crumbles. Vehicles CA's are 25% pa max, so you buy a van for £10,000, and in year one you claim CA's of 25% being £2,500. The Van thenhas a Tax Written Down Value (in your records, easy on Excel) of £7,500 and so in year 2 25% of that is £1,875 to put in the box on the Tax Return and a TWDV to carry forward of £5,625 and so on.

All other Equipment: lump it in together, and write it down as fast as you like or can argue a case for. Try and regard most things as "Tools" and claim the whole cost in year of purchase.
So you have an Equipment Record which runs
Purchase in Year One
Less 50% CA's as the damn stuff is obsolete so fast (PC's and Printers, Camera, Office Furniture in my case)
Balance at End of Year One
Plus Purchases in Year Two
Less Any Disposals (at WDV) - proceeds add to Income
Balance therefore is X
CA's in Year 2 at 500%
Tax WDV carrried forward into year 3

And so on. Not too tricky if you use Excel, or even a paper based system. just logical steps - and of course claim as high a % as you can, and try to justify most purchases as "tools" or similar.

On another point, you can ( I think, unless they have changed the rules, which they do every blessed year which is why I hate giving tax advice, best to check the help pages in Tax Calc ) when you start a business bring in any relevant expenditure you have incurred previously in getting ready to start that business, I don't think there's a time limit but you'll need the relevant receipts to support the spending - and when you carefully) make a loss in the first few years of your business you can claim back that loss against tax you have paid in the previous 6(?) years on other sources of income - such as a job and PAYE.

Posted: Thu Mar 30, 2006 10:59 am
by david smith
Please note that should be 50% not 500% :oops:

Oh, the other part of vehicle costs, the running expenses. Road Tax, Insurance, Repairs, Servicing, Car Wash, and fuel - all deductible but work out a sensible compromise between business use and private use, it is rare for the Tax Man to believe that any vehicle is only ever used 100% for business if it is not something like a pantechnicon which would make "popping down the shops" a bit tricky. Unless you (or the other half) have another small economical vehicle which you can claim is used for all the "personal" stuff :lol:

I used to get away with that one when Madam had a Pigot 205, but once she grabbed the Audi A6 I kinda lost that argument, and so now only claim 85% of the running costs of the Volvo.

Best wishes

Posted: Thu Mar 30, 2006 11:06 am
by Pete the Pong
By the way, TaxCalc is no longer published by Intuit. However it's still available (and just as good)
The URL is

Don't forget NIC's

Posted: Sun Oct 15, 2006 1:16 pm
by restimson
Coming out of the cupboard slightly as I am also a qualified chartered accountant.

For those registering as self employed you must also pay class 2 and class 4 NIC's. Basically these are split into two types 1. £2 ish a week and 2. NIC's on profits. Now the good news is that firstly the rate you are paying is lower than for those in employment and secondly if you are not earning enough from self-employed income that you can become exempt. To become exempt there is a simple form that you can fill in from your local NIC office who can give you details for the current income. Interestingly if you still have employed income this is not taken account of when calculating whether you are eligable or not. However it is worth saying that if you aren't paying any NIC's then benefits you can receive eg state pension may be affected, in which case you can elect to pay the £2 a week.


Posted: Fri Oct 20, 2006 1:44 pm
by Dishonoured Knight
If you use a room in your house you can actually charge a % of the bills to the business. For example if you have a house with 8 rooms and you use 1 for your trade you charge the business 1/8th of your heating, lighting and mortgage. Providing the figures aren't too hefty this won't affect the residential status of your property.

Posted: Tue Oct 24, 2006 9:59 am
by Annie the Pedlar
I think the rule is you don't count the kitchen, bathroom, and toilets so a 3 bed semi counts as living room, dining room, and 3 bedrooms. If you colonise a bed room you can claim 1/5th of the heating and lighting.

If you own your own house its a minefield if you claim for a portion of the cost/morgage payments as when you sell you'll be clobbered for capital gains tax.

Can anyone enlighten me on renting?

Posted: Sun Dec 09, 2007 4:08 pm
by Annie the Pedlar
I've found out a bit more about VAT.
You can elect to register for VAT if your turnover is less than £60,000 or whatever the going rate is.
Then you keep a tally of the VAT you pay on stuff you buy,
and you keep a tally of the VAT you charge people for the stuff you sell.

Then I need Restimson to tell us what to do next.
You take one total from the other and the answer might be to your advantage or you may have to pay the taxman.

If the totals balance out you don't do anything.

And I can't for the life of me see where the advantage of going to all this bother lies but it made sense when it was explained to me.....Restimson - HELP!

Posted: Fri Feb 01, 2008 12:14 am
by histrenact
I also found out something about VAT earlier on today as I was talking to the VAT man about problems with the VAT website falling over.

Apparently if you file your VAT forms on-line, as I do, there is an additional seven days *after* the file date, in my case this time around 31/01/08, in which you can file them and not incur any penalty.

Ae ever I am not qualified to say that this is anything but it was repeated to me by three different people at HMC&E today so if in doubt check yourself.

Take care

David D.

Posted: Fri Jul 10, 2009 11:36 pm
by Mark Griffin
If you sign up for online VAT returns they also give you a £75 credit, nice people.

Also, beware of the billing yourself ofr the use of a room thingy as you may get hit for a bit of capital gains tax when you sell the house. My advised method is to claim back a wee bit of the utilities your business uses and forget hiring out a few sq ft to yourself.