Car Scrappage Scheme
Q: During the year I traded in my old car and purchased a new car for my business under the scrappage scheme. How do I deal with this in my accounts and tax return?
A: When a vehicle is purchased for business use, the cost of the vehicle is treated as capital expenditure and although the cost is not deducted from your trade income, capital allowances can be claimed which reduce the amount of profits charged to tax.
When a business has taken advantage of the scrappage scheme, when purchasing a new vehicle, capital allowances are available on the amount actually paid for the car, i.e. the net amount paid after the £2,000 deduction.
The car that has been traded in under the scheme is treated as having been scrapped, so the £2,000 discount is not treated as consideration for the old vehicle. The £2,000 does not need to be declared as taxable disposal proceeds for capital allowances purposes.
Where a sole trader or partnership business has taken advantage of the scrappage scheme, adjustments must be made to the capital allowances claims for private use of the vehicle.
Q: I have just been made redundant and my employer has offered me a redundancy package of almost £80,000. The managing director has told me that I will get £30,000 of this tax free - is that true? He has also asked if I would like the settlement amount to be paid after my official leaving date. He has told me I will pay less tax if he delays my payment - is this true, or is he just trying to improve his cashflow situation?
A: Where an individual is made redundant a tax-free amount of up to £30,000 can be paid, but care must be taken as not all termination payments qualify. In order to qualify as a tax-free payment, the sum must relate specifically to the cessation of the employment, rather than to duties already performed or to be performed in the future.
There are special rules for payments which are made to an employee after the cessation date of their contract. The leaver's form P45 will show the gross pay and tax deducted up to the date of leaving and the final PAYE code that was operated. Any payments made after the P45 has been prepared must be subjected to a BR PAYE code, which means basic rate tax is deducted from the gross amount.
The above treatment of payments issued after the P45 means that higher rate tax payers receive an initial cashflow advantage. It is important to note, however, that this is simply deferring the higher rate tax due. The income will need to be declared on a self assessment return and the tax will need to be paid by 31 January following the tax year in which the sum is received. If you receive a lump sum payment this summer, it will be assessable on the tax return for the year ending 5 April 2011 and therefore any additional tax due must be paid to reach the Collector by 31 January 2012.
Where termination payments consist of a number of different sums relating to loss of office, payment in lieu of notice, holiday pay and possibly disability elements and free shares, the tax situation can be very complex. For guidance and advice, please contact TaxAssist Accountants.
Is Rental Income a Trade?
Q: My husband and I invested in two residential properties earlier this year which are now both being let out. I need to register this as a new partnership with the Revenue, but as my husband is already in full time employment, can I have all of the profits, as I have been told that this will reduce the tax and National Insurance Contribution liabilities?
A: The income from residential letting properties is not treated as trade income, as there is insufficient activity to constitute trade income. The ownership of residential letting properties is deemed to be a form of investment and therefore you do not need to register a partnership business with HM Revenue & Customs. Likewise, because it is a form of investment, National Insurance Contributions are not due on this source of income.
Where a husband and wife have joint investments, the income arising is assessed equally on a 50:50 basis, unless the property is actually owned in different proportions AND a joint declaration is made to that effect. Assuming that you hold the property equally, you would each need to declare 50% of the income received and expenses incurred to the Revenue.
If you do not currently have income that fully utilises your personal allowance, you could consider having the properties held in your sole name so that all rental profits are assessed as your income. Under the current capital gains tax legislation, there are no implications for transfers between a husband and wife, but there would be some legal fees incurred.
The long term capital gains tax and inheritance tax position should also be considered, especially if the properties are owned outright. You should seek professional guidance before making any decisions that may have a bearing on any of these taxes.
Lloyd Stubbs specialises in managing tax and accountancy affairs for small business owners and can be contacted by phone or email
Disclaimer – advice shared in this column is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.