October, 2010

UK has fourth highest rate of income tax in Europe

As well as significant Government spending cuts planned for the next few years, one of the ways that successive administrations have tried to narrow the UK’s deficit is by raising more tax.

A new survey has found that since the introduction of the new highest rate of tax in the UK – the 50 per cent band – we now have the fourth highest rate of income tax in all of the European Union.

‘Biggest income tax hike in the world in 2010’

The research from major accountancy firm KPMG found that only Sweden, the Netherlands and Denmark now have a higher top rate of income tax than the UK.  Sweden tops the poll with a rate of 56.6 per cent, followed by 55.4 per cent in Denmark and 52 per cent in the Netherlands.

The survey also found that higher rate taxpayers in the UK also suffered from the biggest income tax hike in the world this year, when the top rate paid by people earning £150,000 was raised from 40 per cent to 50 per cent.

Austria and Belgium came in equal fourth place with the UK, with both also charging a highest rate of 50 per cent.

Significant rise over recent years

Just a year ago, the UK was only 13th on the list of top income tax rates in the European Union.  The increase to 50 per cent has therefore catapulted the country up the table.

KPMG said that although income tax had remained static in many locations across the world in the past year, the general upward trend suggested governments were beginning to opt for tax hikes in order to combat deficits.

The accountancy firm reported that ‘Iceland has replaced its flat tax regime with a progressive one, raising the top rate by 9 per cent, while Greece has hiked its highest rate by 5 per cent, Portugal has imposed a 3 per cent hike and France has raised its top rate by 1 per cent’.

Income tax cuts and low rates

Whilst the UK may have increased the top rate of tax by a huge 10 per cent, other countries have tackled the global financial crisis by cutting income tax.  Denmark reduced its top rate of income tax by nearly 7 per cent in an attempt to stimulate consumer spending, whilst Croatia reduces its top rate of tax by 5 per cent.

The lowest tax rates in the EU remain in Bulgaria, where the top rate is just 10 per cent.  Lithuania and the Czech Republic are next, at 15 per cent.

KPMG report that the average top rate of income tax across the whole of the EU is 37.2 per cent, up from 36.7 per cent in 2009.

Tax Return for Taxi Drivers: What You Should Know

Are you a self-employed taxi driver?

If so, you will have to complete a self assessment tax return every year to ensure you pay the appropriate tax.  As well as keeping good records of your earnings, it is also vital you keep track of your business expenses.  Our guide will help you work out what you need to declare to HMRC.

Taxi income

If you are a self-employed taxi driver it is vitally important that you keep good records of all your earnings.  Make sure that you keep an extensive, organised record of all your fares and tips, as HMRC may need to check the amount that you declare on your self-assessment tax return.

It is worth having a filing system at your home in order that you can keep your income records in good order.

Taxi expenses

All self-employed people are allowed to claim allowable tax expenses.  A self-employed butcher can claim the cost of renting a shop or buying in his meat, whilst a self-employed baker can claim the costs of their raw materials and premises.

A self-employed taxi driver is no exception.  Many of the expenses you incur in running your business can be deducted from your income to determine the ‘net’ profit of your taxi business.

Common examples of tax expenses that taxi drivers are permitted to claim include:

  • Petrol or diesel costs
  • The costs of servicing and repairing your taxi
  • Interest on any bank or personal loans taken out to buy your taxi cab
  • The costs of your annual road tax and your MOT test
  • The costs of washing and cleaning your taxi cab
  • Your license (and any other applicable registration fees)
  • The costs of running your office (if you have one) including the payroll costs of any administrative or support staff that you employ

Don’t forget that, as with any self-employed business, you can only claim the expenses that are ‘wholly to do with your business’.  So, if you use your taxi 25% of the time as your private vehicle, you cannot claim for the petrol or cleaning for this portion.

Claiming a mileage allowance

If you are a self-employed person and you use your own vehicle for business usage, you can claim a mileage allowance in accordance with a standard HMRC scale.  However, this is not possible as a taxi-driver.

This is because you are already factoring these mileage costs – repairs, tax, petrol etc – into your tax allowances.

Self Employed Tax Expenses – What You Can Claim

If you are one of Britain’s four million self-employed people, you will have to submit a self assessment tax return every year.

If you are self-employed, there are a number of tax expenses that you can claim to offset the business profits that you make.  The rules can be long and complicated, but our guide explains the main tax allowances that you can claim if you are self-employed.

Allowable tax expenses

In order for expenditure to be allowable, it must be ‘wholly and exclusively’ for carrying on and earning the profits of your business.  This means that the sole purpose for the expenditure must have something to do with your business.

HMRC do allow you to get some private benefit from the expenditure and still get tax relief for the amount spent for your business, as long as either:

  • the private benefit was incidental and not the reason for the expenditure, or
  • you can clearly identify and separate the expenditure between business and private purposes

You can deduct the full amount of your allowable business expenditure from your business income to work out your taxable profits.

Cost of Stock

The money you spend on stock for your business is an allowable tax expense.  So, if you run a bookshop, the cost of buying books as stock is an allowable tax expense.

Payroll Costs

If you employ staff, the cost of their salaries can also be deducted from your business profits.  Remember, however, that you cannot typically claim your own wages or drawings as a deduction.

Premises Costs

You are allowed to deduct the costs of maintaining your business premises as a tax expense.  These may include rent, rates, heating, lighting, repairs and insurance.  You can also deduct the business part of these costs if you run your business from home.

Motor and Travel Expenses

If you are self-employed, you can deduct the cost of using your car, motorcycle or bicycle for business purposes. The most common method of claiming motor and travel expenses is to claim a fixed rate for each mile travelled on business, using HMRC’s standard, fixed mileage rates.

Finance Costs

If you have taken out a commercial loan specifically for investment in your business, you can claim the costs of this finance as tax expenses (for example, the interest you pay on a bank loan.)

Administration/Office Costs

You can deduct the administrative costs of running your business, including advertising postage, stationery, telephone and fax.

Professional Fees

If your business involves you joining a professional or trade body – for example if you are an surgeon or a chartered surveyor – you may be able to deduct the cost of joining the appropriate professional association.  You may also be able to claim tax expenses for the purchase of trade or professional journals or subscriptions.

HMRC challenged to find £15 billion in missing tax

In these tough economic times, the government is trying to find every last penny of savings that it can.  Now, as part of the comprehensive spending review, Revenue and Customs (HMRC) has been challenged to find £15 billion worth of avoided and evaded tax.

Many experts have criticised the report as they feel that it is an unrealistic challenge based on complicated tax laws and a lack of personnel at HMRC.

Target of £15 billion in savings

The BBC reports that the government have challenged the tax authorities ‘to make £15bn by 2014-15 by tackling tax evasion and avoidance, and by cleaning up the tax credit system.’

£8 billion of the savings is expected to come from tackling fraud and error in the notoriously complicated tax credits system.

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Crackdown on tax credit fraud

The tax credit system is notoriously complicated which makes it a straightforward target for fraudsters.  A Government blueprint on tackling fraud admits this, saying: “Customers can also be frustrated by confusing advice from staff who themselves do not always fully understand the specific requirements for different benefits.”

Common ways to defraud the tax credit system include:

  • Only declaring the income of one working adult in a household (when there are two)
  • Suggesting adults work more hours than they actually do
  • Claiming excessive costs of childcare
  • Exaggerating disabilities
  • Claiming for more children than actually exist in the household

The BBC reports that there has been some success in recent years in tackling fraud.  ‘Over the last four years, intervention by HMRC has delivered £1.5bn and the target has now been set for £8bn over the next four years.’

Tax avoidance and evasion

HMRC has also been challenged to close loopholes and gaps which allow many people to avoid paying tax.  The Spending Review included the promise of £900m of investment to tackle the problem of tax avoidance and evasion.

However, one of the problems is that tax avoidance, unlike tax evasion, is perfectly legal.

Former tax inspector Ronnie Ludwig, of accountants Saffery Champness, says that many people legitimately ‘avoid’ tax by making simple changes to their tax affairs – such as a self-employed person setting up a business and paying corporation tax, rather than income tax.  Mr Ludwig told the BBC: “I do not know where the line is drawn on avoidance.”

HMRC figures show that the amount of tax that went uncollected in the last financial year was £42bn.

Whether the ever shrinking HMRC workforce will be able to meet this tough challenge remains to be seen.  However, with continuing problems regarding millions of incorrect tax bills, HMRC looks like it may be stretched to breaking point over the next few years.

What Everyone Ought To Know About Paying Tax as a Student

Life as a student can be tough.  With increasing tuition fees and accommodation costs, it’s not surprising that some students finish their course with tens of thousands of pounds worth of debts.

Every penny is vital, and so it’s important that you don’t pay any unnecessary tax or National Insurance.  Our guide explains how to deal with your tax affairs as a student.

Do you have to pay tax and National Insurance as a student?

If you work for an employer during term-time, you will pay any Income Tax and National Insurance (NI) due on a Pay as You Earn (PAYE) basis.  This means that tax and NI will be deducted from your wages before you receive them.

However, everyone is entitled to earn a certain amount each year without paying any tax.  This is called the ‘personal allowance’ and is £6,475 in the tax year 2010-11.  You also only pay National Insurance contributions if you earn over a certain amount per week (£110 in tax year 2010-11).

If you earn under this amount, you should not have to pay any tax or National Insurance.

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Special rules if you are a student and you only work in the holidays

If you are a full-time student with a holiday job, you may not need to pay tax through PAYE.  However, you will still pay National Insurance contributions if you earn more than the weekly threshold.

There is a form called a P38(S) that you can download or request from your employer if all of the following criteria apply to you:

  • You are a full-time student in the UK
  • You are only working in the holidays
  • You are returning to full-time education at the end of the holiday
  • Your total income for the year is under the personal allowance limit

If you have a part-time job during term time, you can’t use form P38(S) just for your holiday job.

Working abroad in the holidays

If you normally live and study in the UK but you work abroad during the holidays, you will still count as a UK resident for tax purposes. You will have to pay UK tax on anything you earn abroad above the personal allowance.

However if you are taxed by your overseas employer, and you can’t claim the tax back directly from the foreign authority, you will probably be able to claim a tax credit in the UK.

If this applies to you, you should contact your tax office for more advice.

Tax rebate for students

If you believe you have paid too much tax, you should get in touch with your tax office.  You may have to provide documentation such as P45s or P60s confirming your earnings in order to obtain a tax refund.

You will typically either receive a new tax code to take into account any rebate that is due.

Warning: The Tax Rebate E-mail You May Have Just Received Is A Scam

Have you received an e-mail about a tax rebate?

If so, the chances are that it could be an internet scam.  HMRC regularly suffer from criminals posing as the official tax service to obtain personal information fraudulently.  Here is our guide to some of the recent and most common tax scams you may encounter.

E-mails promising a tax rebate

One of the most common ways that fraudsters try and obtain your personal details is by sending out a ‘phishing’ e-mail telling you that you can apply online for a tax rebate.  Such an e-mail will generally contain a link to a website where you will complete lots of your personal information with the promise of receiving a tax refund.

HMRC does not inform customers of tax refunds via e-mail, so you should always ignore such an e-mail.

Examples of e-mail addresses where these fake e-mails are sent from include:

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Notice of Underreported Income

Another common e-mail scam involves fraudsters sending out fake ‘notice of underreported income’ messages.  These come from a series of plausible looking e-mail addresses (such as relations@hmrc.gov.uk or communication@hmrc.gov.uk).

The email links to a fake HMRC website entitled ‘Fraud Application’ and asks that you download and review a tax statement document.  The website then opens an executable file on your machine which can compromise your computer’s security.

Update from HM Revenue & Customs’ email

A similar phishing e-mail scam involves criminals sending out emails sent asking recipients to ‘update your account to the new EV SSL certification’.  This is a scam email attempting to steal user IDs and passwords.

You should never disclose personal information such as User IDs or passwords – HMRC will never ask you for these, especially by e-mail.

Telephone tax rebate scams

As well as a number of e-mail scams, there are fraudsters that call people purporting to be from HMRC.  During the telephone call they may ask you to confirm personal data or password information.

Often, these calls will claim that you have a tax rebate.  The callers will ask you to give them your bank details or other information in order to pay this tax refund to you.

If you receive such a call, don’t provide any information.  Only give passwords and personal information if you instigated the telephone call and you are 100% sure that the person on the other end of the line is an HMRC employee.

What Everybody Ought To Know About Declaring Rental Income To The Inland Revenue

Completing your tax return for property that you rent out can be a tricky business.

Not only do you have to consider all the rental income that you receive, but you also have to determine what tax expenses that you are able to claim.  And then, you have to take into account that there are different rules for furnished holiday lettings and the ‘Rent a Room’ scheme.

So, if you have to complete the property pages of your tax return, here are some handy hints.

You might not have to complete a tax return at all

You do not automatically have to complete a tax return just because you receive rental income.  If either of these two scenarios applies, you won’t necessarily have to complete a tax return:

  • You earn income from property (before deducting allowable expenses) of less than £10,000
  • You earn income from property (after deducting allowable expenses) of less than £2,500

If you are employed, or getting a pension through PAYE, and your taxable income from property is less than £2,500, your tax code can be adjusted to collect the tax that you owe on your property income.  All you have to do is to ask your Tax Office to send you form P810 to report your income each year.

Tax expenses that you can claim on letting property

To reduce your tax liability on the rental income you receive, HMRC allow you to claim a number of tax expenses.  So, when declaring rental income to the Inland Revenue, you are able to claim various tax allowances including:

  • Letting agent’s fees
  • Buildings and contents insurance
  • Council Tax and any utility bills that you pay
  • Repairs and maintenance to the property
  • Professional fees including legal fees for lets of a year or less and accountant’s fees
  • Interest on property loans
  • Other expenses you pay for, including cleaning and gardening

Remember that whilst you can claim for property repairs and maintenance, you are not allowed to claim for property improvements (such as an extension or conservatory).

Declaring rental income to Inland Revenue

As we saw above, if your income from property is under £2,500 (after deducting your tax expenses) you won’t have to complete a self assessment tax return.  If it is over this amount, you will have to file a tax return every year.

You can file your tax return in one of two ways:

  • Complete a paper based tax return which must arrive at HMRC by midnight on 31st October following the end of the tax year
  • An online tax return which must arrive at HMRC by midnight on 31st January following the end of the tax year

You will have to complete the mandatory pages on the tax return in addition to the relevant ‘property’ pages.

How To Reclaim Overpaid PAYE Tax

Have you paid too much tax?

The Inland Revenue PAYE system for paying tax was established in the 1940’s.  Whilst the world of employment has changed beyond recognition, the way that tax is collected has remained broadly the same for almost seventy years.

With many people now having two jobs, working on a contract basis or changing jobs for more regularly, it is quite easy to end up paying too much tax.  Our guide explains when you may pay too much tax and how you go about claiming a tax rebate.

Why might you have paid too much tax?

There are a number of reasons that you may have paid too much tax.  Some of the most common reasons are:

  • You were only employed for part of the tax year
  • You were on an emergency tax code for a period
  • You went from working full time to part time
  • You changed from being employed to self-employed part way through the tax year
  • You were a student who only worked at holiday times
  • You had more than one job at the same time
  • Other income included within your tax code (savings or property income) has reduced, meaning your tax code is wrong

Often, your total tax will be wrong because your tax code is incorrect.  As your tax code is issued at the start of each tax year, it may be incorrect if any of your circumstances change.

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How to claim a tax rebate for PAYE overpayments for this tax year

How you reclaim this year’s overpaid tax will depend on your circumstances.

  • If you are an employee, you should get in touch with your tax office and explain why you think you have paid too much tax.  If they do not have all the information needed to check your claim, they may ask you to send some documents to them.  Any refund will be included with your wages.
  • If you have become unemployed or if you have retired, your claim depends on your circumstances.  This will include whether you are claiming any benefits, whether you are planning to take on a new job etc.

How to claim a tax rebate for PAYE overpayments for previous tax years

If you believe you paid too much tax in a previous tax year, you should write to your Tax Office requesting a rebate.  Make sure that you include any relevant documentation about your earnings during the tax year for which you’re claiming, such as your P60 or P45.

The tax office will look into your query and work out how much they owe you.  You will receive a refund in the post.

There are time limits for making claims for rebates in previous tax years.  The time limit is generally four years from the end of the tax year, although it may be slightly longer from tax years between 2004/5 and 2006/7.

How Missing The October 31st Tax Return Deadline Could Cost You Hundreds

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Do you want to submit a paper based tax return for the last tax year?

If so, you should remember that the deadline for tax returns is looming large.  Paper tax returns have to be with HMRC by midnight on 31st October.

If you haven’t submitted your tax return, it is time to get moving.  Our guide explains the deadline for tax returns and the penalties for non-compliance.

The 31st October deadline

If you send in a paper tax return, it must reach HMRC by midnight on 31 October.

The deadline for paper tax returns is only later than 31 October if:

  • You have been told by HMRC that you are not allowed to file online
  • You are completing a paper based tax return because there is no software available for you to file online (for example if you are a Non-Resident Company)

In these two situations, you have until 31 January to file your tax return.

  • You receive your HMRC ‘notice to file’ after 31 July

In this situation, HMRC must receive your paper tax return within three months of the date you receive your ‘notice to file’.

Online returns

Remember, the deadline of 31st October is only for paper based tax returns.  If you submit your tax return online, or you plan to submit your return online, you have until 31st January for HMRC to receive your self-assessment tax return.

Missing the 31st October deadline

If your paper based tax return arrives at HMRC after midnight on 31st October, you will receive an automatic £100 penalty.

However, if you have a ‘reasonable excuse’ for missing the deadline, you will not ordinarily have to pay the penalty.  There is no strict rule for what constitutes a ‘reasonable excuses’ but they generally include:

  • A serious illness that prevents you from filing your return
  • Long running Royal Mail industrial action over a period of time
  • Documents lost by fire or flood and unable to be replaced in time

If you’ve got a reasonable excuse you can ask for a penalty to be reconsidered.  However, don’t delay – write to HMRC immediately and explain to them why your return was late.  HMRC will look carefully at the information you provide and any other evidence that’s available and determine whether the penalty will be waived.

If you don’t send in your return on time, HMRC may decide to estimate the tax due and request payment. This is called ‘a determination’.  You may also be asked to pay interest on the estimated tax that you owe.

So, if you plan to submit a paper based tax return, you need to do this before the October 31st deadline. What are you waiting for?

Are You Completing A Tax Return For Letting Property?

Letting a property can be a complicated business.  You have to find and vet tenants every time a tenancy agreement ends.  You have to make repairs and improvements to the property and deal with letting agents and insurance companies.  And, you have to deal with all the financial headaches that come from letting a property including mortgage payments, collecting rent and paying tax.

Completing a tax return for letting property can also seem like a daunting task.  However, it is not as difficult as it seems.  Our guide explains why.

You may not have to complete a tax return

There are certain situations where you don’t have to complete a self assessment tax return, even if you do let out a property.  For example, you don’t have to complete a tax return if:

  • Your income from property (before deducting allowable expenses) is under £10,000
  • Your income from property after deducting allowable expenses is under £2,500

In this instance, your tax office may well be able to claim the tax owed through the Pay as you Earn (PAYE) system.

What are ‘allowable expenses’?

To work out whether your income from letting property falls below the threshold for completing a tax return, you will need to know what ‘allowable expenses’ you are allowed to deduct from your rental income.

Allowable tax expenses for letting a property include:

  • Interest on property loans
  • Buildings and contents insurance
  • Repairs and maintenance to the property
  • Any utility bills or council tax you pay
  • Letting agent’s fees
  • Professional fees including legal fees for preparing tenancy agreements and accountant’s fees

Whilst you are able to claim for repairs and maintenance to the property, you are not permitted to claim for home improvements.

Working out what your property income is

Once you have identified all your tax expenses, you need to work out what your income from letting property is.  You do this by totalling all the rental income that you receive and then deducting the allowable expenses.

If the result is under £2,500, you may not have to complete a tax return.  If you earn more than £2,500 after deducting your allowable expenses, you will need to submit a self-assessment tax return.

Tax return for letting property

The tax return for letting property is quite simple.  If your total property income is under £68,000, you simply include the total figures for income and expenses on your tax return.  You do not have to break these figures down into their constituent parts.

However, it is important that you keep good records of your rental income and tax expenses in case HMRC require clarification or proof of any figures.