Tips on saving tax, the latest tax and business news, tax loopholes and useful links

This year’s Tax Freedom Day, the date in the year when we finish paying our tax burden and start earning for ourselves, was May 14 - the earliest since 1973. However, when Government borrowing is factored in this date does not fall until June 25 - the latest since 1984. This equates to working all morning for the Government and only working for your own pocket in the afternoons!

In 2008 Tax Freedom Day fell on 15 June but in 2009 it will take 10 days longer before you start to earn any money for yourself.

The new penalty regime for errors on tax returns commenced on 1 April 2009.  Mistakes on returns will be penalised depending on the behaviour of the taxpayer which led to the inaccuracy.

Innocent mistake

Where the taxpayer has taken reasonable care to ensure that his return does not understate the tax due, there will be no penalty. It would seem that HMRC does now understand that “people do make mistakes” but that provided everyone takes reasonable care, an innocent mistake will not be punished.

Lack of reasonable care

Where the error arises through carelessness, and the taxpayer did not take sufficient care over his return he will be liable to a penalty of 30% of the tax understated. Where the taxpayer comes forward and notifies HMRC of the error it is possible to significantly reduce the rate of penalty. Depending on the circumstances the penalty can be reduced to nil in the case of an unprompted disclosure, and 15% when the disclosure was prompted.

Dishonesty

Where the taxpayer deliberately understated his liability the penalties range from 70% for deliberate understatements to 100% for deliberate understatements that have been concealed. Again, larger reductions are available for unprompted full disclosure rather than after a request for information by HMRC.

What is reasonable when taking care?

All taxpayers are expected to keep sufficient records on which to base their return, and sufficient to ensure that any return prepared is correct. Beyond that, taxpayers should seek advice if they are unsure about something and if they remain unsure should disclose the uncertainty on their return.

Taxpayers with an accountant

When a taxpayer has an accountant there is in theory more scope for error in terms of a breakdown in communication between the taxpayer and the accountant. There will be no penalty for careless error when the return is dealt with by an accountant if HMRC is satisfied that the taxpayer took reasonable care but the accountant just made a silly mistake.

More than 50% of the PAYE codes we see are incorrect.  Often the Taxman will include adjustments for a taxpayer’s rental income, dividend income and bank interest meaning that your employer will deduct extra tax from your wages to pay the tax on this other income.

We think it is worthwhile exercising your right to have these adjustments removed from your code.  At the worst it will delay the payment of the tax by up to 21 months but if your other income is less than in previous years it will mean you don’t pay extra tax only to have to claim it back from the Taxman several months later.

We are regularly asked about what VAT to charge overseas customers.  Here is our summary for the EU.

Goods sold to customers based in another EU country can be zero-rated if the customer is a VAT registered business.  To ensure your paperwork is water-tight you should quote the customer’s VAT number on your invoice to them and keep a proof of shipping.

If the customer collects the goods from you in the UK, ask for a 15% deposit which can then be returned to them once proof of the export is supplied to you.

HMRC will change its bankers later in 2009 from the Bank of England to RBS and Citibank.  If you pay your tax bills electronically you should be aware of the new account numbers and sort codes which will be announced in due course.

If you pay by Direct Debit or BillPay the changes will be made automatically.  If you use a payslip to pay manually, you will need to ensure you have an up to date payslip whenever you payment is due.

Its not usually a good idea to pay tax voluntarily, but sometimes it can be beneficial.

If you’re retiring after 5 April 2010 and you won’t have achieved 30 years of NI contributions required for a full state pension you can buy extra years (up to a maximum of six).

Paying £626 of Class 3 NI contributions will buy you an extra £165 per year of state pension income.  So four years after retirement you’ll have got more money back than you originally paid.

It is advisable to regularly check your NI contributions record with HMRC to ensure you are on track to qualify for your state pension when you reach retirement age.  To fully qualify you need to have built up 30 years of contributions (or deemed contributions).

To check your last 6 years’ contributions record, call HMRC on 0845 915 5996.

To request a state pension forecast (which will confirm how many working years you have accrued in total) call the Pension Service on 0845 3000 168.

Here is our summary of the tax announcements from yesterday’s Budget that are relevant to small businesses and contractors.

Income tax

• If you earn more than £100k, the personal allowance (currently worth £6,475) will be tapered down at the rate of £1 for every £2 of income in excess of £100k.
• From 6 Apr 2010 income tax will be 50% on income above £150k (42.5% for dividends).

Therefore if you have surplus funds in your company it may be an idea to take an extra dividend this tax year (i.e. before 6 Apr 2010). However, think twice about paying pension contributions to avoid the 50% tax rate as pension relief is tapered down to 20% for those earning more than £180k.

Business tax

• Company losses of up to £50k arising in periods ending in the two years before 23 Nov 2010 can be offset against profits of the previous 3 years.
• Losses arising in tax years 2008/09 and 2009/10 can be offset in a similar fashion for the self-employed or partnerships.

Savings

• ISA limits are increased to £10,200 (max £5,100 for cash sums) from 6 Apr 2010.
• If you are at least 50 yrs old on 6 Oct 2009 the above limits apply from this date.

Capital gains

• The annual exempt amount is £10,100 for gains crystallised in 2009/10.

Company cars purchased or leased from 1 Apr 2009

• The purchase cost of cars with Co2 emissions exceeding 160 get tax relief of just 10% pa.
• Cars with emissions of 110 or less get 100% relief in year one.
• All other cars form part of the general pool with relief at 20%.
• If a car is leased with Co2’s of more than 160 only 85% of the cost is tax deductible.
• The taxable benefit % for a given Co2 level is increasing slightly (again)

VAT

• The rate will revert to 17.5% on 1 Jan 2010.
• The registration threshold is increased to £68k from 1 May 2009.

Property

• Stamp duty exemption on houses up to £175k is extended to 31 Dec 2009.
• Tax relief against other income for losses from UK furnished holiday lets is temporarily extended to European properties (to avoid European discrimination charges).  Don’t get too excited however as from 6 Apr 2010 tax relief will be withdrawn for both UK and European properies.

Details of tax rates for 2009/10 can be found on the HMRC website.

Although these tax returns were issued less than 2 weeks ago, a plethora of errors have already come to light!  Follow this link for details of the tax return corrections.

From 1 April 2009 a new system of penalties for incorrect tax returns is being introduced.  Generally, this means penalties will be higher but if you take ‘reasonable care’ the penalty can be reduced to nil.

Click here for HMRC’s guidance on the new penalty regime.