This month we have added articles covering: a situation where you might be advised to pay tax early; why you should prepare your business accounts as soon as you can; fuel for electric cars and the need for record keeping if you own property.
Why should you elect to pay tax?
There is a situation where you might be advised to make an election to pay tax. It arises if you sell your company and accept payment in the form of shares (or certain types of loan notes) from the buying company.
Let?s say that you own all of the shares in your company X Ltd and the original cost of the shares five years ago was £1,000.
You are approached by Z Ltd who offers to purchase your shares for £1m and offers you shares in Z Ltd as consideration for the transaction.
What are the tax consequences?
Basically, the share swap is not a chargeable event for Capital Gains Tax purposes. Your holding in Z Ltd will be deemed to have a base cost of £1,000 (the original cost of the X Ltd shares). This tax treatment is automatic. No election needs to be made. No tax is payable.
Why might you want to elect to pay tax now?
The issue that might encourage you to elect to pay Capital Gains Tax when the share swap is completed is Entrepreneurs? relief (ER). To qualify for ER certain criteria need to be met. For example:
The possible benefit arises if you are uncertain that your new holding in Z ltd will qualify for ER when you dispose of the shares at some future date. Any gains that qualify for ER, either now or in the future, would be taxable at 10%; gains that do not qualify would be subject to tax at 28% (based on present rules).
Best to be informed
If you are self-employed, as a sole trader or in partnership, and if we assume that your business year end is 31 March, then the profits you earn in the year to 31 March 2014 will form the basis of your tax payments on account for the tax year 2014-15 (unless the year to 31 March 2014 was your final year of trading).
Problems may arise if profits, year on year, fluctuate significantly; either up or down.
Your tax payments as a self-employed person consist of two payments on account and a final settlement on the 31 January following the end of the relevant tax year. For example you will make equal payments on account for the tax year 2013-14 in January and in July 2014. If this is insufficient to cover the total tax and Class 4 NIC due then you will have a top up payment to make in 31 January 2015.
Payments on account are initially based on your Self Assessment liability for the previous tax year ? in the above example, the January and July 2014 payments will be based on your actual taxes due for 2012-13.
If your trading profits have not increased or reduced significantly, the payments on account will usually cover tax due and there will be perhaps a small difference, under or overpaid, that will need to be sorted out in the following January.
However, if your profits have significantly increased or reduced, then cash flow considerations need to be taken into account.
If your profits for the year to 31 March 2014 are likely to be higher than the previous year:
In this case any payments on account you make January and July 2014 are unlikely to cover taxes due for 2013-14 and a balancing payment will arise on 31 January 2015.
If your profits for the year to 31 March 2014 are likely to be lower than the previous year:
In this case any payments on account you make in January and in July 2014 are likely to be more than you need to make to cover taxes due for 2013-14 and a balancing overpayment will arise on 31 January 2015. This can be addressed by making an election to reduce the payments on account to a more appropriate amount.
If either of these scenarios is likely to apply to your self-employed business profits, we advise you to have your accounts drawn up as soon as possible after your year end. The tax advantages can be summarised as:
Electric bill that won?t cause tax problems
Employers that provide a company car and pay for the employees? private fuel create tax, NIC and administrative issues for both parties.
But what happens if the fuel provided by the employer for private use is electricity?
Electricity does not count as fuel for this purpose. So, for example, where an employer enables an employee to recharge his car at work, or at home, and the employer pays the bill, there is no taxable benefit even if the car is available for private use.
Make sure your record keeping is up to scratch
In a recent tax tribunal case a tax payer was denied Capital Gains Tax relief for the cost of improvements to a property as he could provide no evidence of his expenditure to the court.
The court came to the conclusion that the taxpayer had made improvements and were somewhat dismayed by his inability to provide evidence.
This is a timely reminder that it is not only trading businesses that need to keep documentary evidence. Property owners should also ensure that they keep records of property purchases and sales together with copy invoices or other evidence of expenditure to improve their property.
Tax Diary February/March 2014
1 February 2014 – Due date for Corporation Tax payable for the year ended 30 April 2013.
19 February 2014 – PAYE and NIC deductions due for month ended 5 February 2014. (If you pay your tax electronically the due date is 22 February 2014.)
19 February 2014 – Filing deadline for the CIS300 monthly return for the month ended 5 February 2014.
19 February 2014 – CIS tax deducted for the month ended 5 February 2014 is payable by today.
1 March 2014 ? Self Assessment tax for 2012/13 paid after this date will incur a 5% surcharge.
1 March 2014 – Due date for Corporation Tax due for the year ended 31 May 2013.
19 March 2014 – PAYE and NIC deductions due for month ended 5 March 2014. (If you pay your tax electronically the due date is 22 March 2014.)
19 March 2014 – Filing deadline for the CIS300 monthly return for the month ended 5 March 2014.
19 March 2014 – CIS tax deducted for the month ended 5 March 2014 is payable by today.