Frequently Asked Questions
Q. My cafe was badly damaged in the recent riots, but my loyal customers have collected £3,000 to help me open the business as quickly as possible. How should I treat this sum for tax purposes? Is it a personal gift, or a contribution to be set against my repair costs?
A. This gift from your customers should be treated as income for your business for income tax or corporation tax purposes. You are likely to have a lot of repair expenditure to set against your income for the current period, so you may well not have a profit to declare even after including the gift as income.
Q. I've received a tax refund for 2010/11, but I'm worried that it's not correct as I usually have tax to pay each year. Also I haven't even submitted my 2010/11 tax return yet.
A. You are right to be worried about the tax refund, as the Taxman's computer has issued some incorrect refunds recently. If you normally complete a self-assessment tax return but also have some income taxed under PAYE, the computer should wait until your tax return has been submitted before calculating the tax to be refunded. In a few cases this has not happened, and the tax refund has been based only on the taxpayer's PAYE income. Please ask us to check the tax calculation that should have arrived with your refund cheque.
Q. The Tax Office has written to me saying £2,800 tax I owe will be collected by restricting my PAYE code for 2012/13. What does this mean?
A. The Taxman is now permitted to collect up to £3,000 of unpaid tax or overpaid tax credits through PAYE codes. Your PAYE code tells your employer how much of your income to treat as tax free, and thus how much tax to deduct from the rest. A common PAYE code for 2011/12 would be 747L, which gives you tax free income of £7,475 for the year. If you owe £2,800 in unpaid tax, and your highest marginal tax rate is 40%, your tax free income will be reduced by £7,000 (£2,800/ 40%), leaving you with tax free income of £475 and a PAYE code of 47L. The numbers will be slightly different in 2012/13, but essentially you will pay more tax each month from April 2012 until the tax debt is eliminated.
Q. I generally invoice about £5,000 per month, some £60,000 per year, so my business is not yet VAT registered. However, from 1 April a new customer will provide an additional £2,000 of sales per month. When exactly will I have to register for VAT?
A. You currently have a margin of £13,000 between your regular sales and the new VAT registration threshold of £73,000 (from 1 April 2011). Your new income will fill that margin in 7 months. If your regular sales remain constant your turnover for the past 12 months will exceed £73,000 in mid October 2011. You will need to register for VAT by 30 November 2011. As the VAT registration process can take at least a month, you should send in your application for VAT registration (online or in paper form) as soon as you realise your sales have exceeded £73,000. On that form be careful to state the date from which you become liable to register for VAT, even if that is some weeks in advance.
Q. My PAYE tax code is 647L, but the websites I've looked at say it should be 747L, which is correct?
A. The personal allowance for individuals aged under 65 for the tax year 2010/11 (which ends on 5 April 2011) is £6,475. If you have no deductions to set against your personal allowance your tax code for 2010/11 should be 647L. The standard personal allowance for the tax year 2011/12 (from 6 April 2011 to 5 April 2012) will be £7475, so your tax code for 2011/12 will be 747L.
Q. I work through my own UK company that has secured a 6 week contract to be performed in Amsterdam. I plan to stay with my cousin in Amsterdam while working on that contract. As I won't have receipts from a hotel, what can I claim as expenses?
A. HMRC set benchmark scale rates for business trips in most countries. These cover costs for accommodation, meals, and other sundry expenses known as the residual rate. Your company can reimburse your expenses at the benchmark scale rates without receipts. However, if you are staying with a friend or relative and do not pay for accommodation or meals you can only reclaim 10% of the residual rate for the area. Where you pay for some meals (e.g. lunch) you should claim the specific meal rate or the actual expense supported by receipts. On top of these expenses you can also claim personal incidental expenses of £10 for every night that you are working abroad.