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December 2003
Q:
I recently started a small, part-time business from home. Do you have any potentially suitable tax planning ideas that I could use?
A:
It is not possible to offer any specific guidance in the absence of any background information regarding your business. However, I have outlined below some planning ideas of a general nature. Hopefully, some of them may have some application in your business.
1. Pay your spouse
If you are a married business owner, you could consider employing the spouse and paying wages. The salary or bonus must be legitimate (i.e. it should be justifiable for the duties performed, recorded in the books and physically paid). This is generally attractive to business owners who are higher rate taxpayers, if the other spouse pays tax at a lower rate (or none at all). The National Minimum Wage may need to be considered, although many family businesses are exempt from the minimum wage rule.
2. £825 from the taxman - tax-free!
The Inland Revenue are offering 'small' employers (i.e. those with fewer than 50 employees) up to £825 tax-free if they send in their end of year PAYE tax returns online. The Government is seeking to encourage those employers to 'e-file' voluntarily, before online filing of end of year returns becomes compulsory for small employers for 2009/10 and later tax years. £825 is a maximum figure based on the total incentive payments for filing end of year returns online over five years from 2004/05 to 2008/09 inclusive:
2004-05 (return due by 19 May 2005) - £250
2005-06 (return due by 19 May 2006) - £250
2006-07 (return due by 19 May 2007) - £150
2007-08 (return due by 19 May 2008) - £100
2008-09 (return due by 19 May 2009) - £75
3. 100% tax allowances
Some expenditure by small businesses potentially qualifies for 100% tax relief, including 'information and communications technology', such as a computer purchased for the business. But hurry - the 100% allowance in this category only applies to expenditure incurred on or before 31 March 2004.
4. Use of home as office
Home-based businesses can generally claim tax relief for the business proportion of household running costs (e.g. gas and electricity). Further information on such claims (including possible implications for business rates and capital gains tax) was covered in Tax Doctor 1. More recently, the Inland Revenue are understood to have issued the following guidance to taxpayers:
"If you set aside an identifiable part of your home and use it only for the business (for example a room used solely as an office) then a proportion of running costs can be claimed. These might include insurance, heat and light and mortgage interest. But you should note that if you have used part of your home exclusively as an office, there could be some loss of private residence relief from Capital Gains Tax when you sell your home. If no part of the property is exclusively used for the business then these costs are not allowable - even if there is business use" (emphasis added).
Many practitioners believe that this guidance is incorrect, as a claim for 'use of home as office' does not necessarily require exclusive use of a specific part of the home. However, you should be aware that a tax relief claim may be challenged by the Revenue, particularly if it appears excessive.
For more information on using your home as office, make sure you also read Tax Doctor 13.
5. High or low profits?
Are you employed as well as self-employed (e.g. do you have a full-time job in addition to a part-time business)? If you pay National Insurance contributions as an employee, there is no need to pay Class 2 contributions as a self-employed person, if the profits from your spare time business are expected to be £1,300 or less. If you are not employed and your business profits are low (£4,095 or less for 2003/04), there is no need to pay Class 2 National Insurance contributions if you make a claim to the Inland Revenue for 'small earnings exception'. Further information can be found in Revenue Leaflet CA02 'Self-employed people with small earnings', which can be downloaded from the Revenue's website (http://www.inlandrevenue.gov.uk/pdfs/nico/ca02.pdf). However, Class 2 contributions count towards the retirement pension and certain state benefits, and are only £2 a week, so it may be better in the long term to continue paying.
More profitable businesses could consider whether it would be more beneficial to incorporate the business and trade as a limited company. Entire books have been written on this subject, although incorporation was briefly discussed in Tax Doctor 3.
Health warning
Always get specific tax advice for your business. There is no "one size fits all" in tax planning, because every business (and the tax affairs of every business owner) is different. There is obviously a cost involved in engaging a professional adviser, but good, specific tax advice should be money well spent.
To find a tax adviser in your area, visit TaxationWeb Directory of Tax Professionals.
Mark McLaughlin
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