Top Ten Forgotten or Missed Tax Deductions
Dont miss out: business tax deductions
SUMMER IS on the wane, the leaves will soon be falling and business owners’ minds begin to turn towards that most hated of annual chores: their personal tax return.
The deadline for filing paper tax returns for the year ended 5th April 2009 is 31st October 2009. If you file online you have until 31st January 2010. Early preparation is the key to getting through this process with as little stress, and as little tax to pay, as possible.
Early preparation can reduce your tax bill
Most business owners use an accountant to prepare their tax return. The sooner you can get your tax information to your accountant, the more time they have to consider your position.
Give your books to your accountant now and they will have time to consider additional expense claims that may not appear in your records. They might notice if your car insurance is missing or take the time to ask if it makes sense that your profits have doubled. Leave it until January and they’ll most likely have to push your accounts out as possible without checking these things: and that will cost you extra tax!
A good accountant will check that all of your tax deductions are included. Sadly, however, some are less pro-active and will simply process the details you give them, without looking for extra tax savings.
To maximise your tax deductions, you need to make sure you let your accountant know about them and that nothing is forgotten.
Here is my list of ‘Top Ten Forgotten Deductions’:
1. Home Expenses: If you do any work from home, you can claim part of your household running costs, including heat and light, mortgage interest and council tax.
2. Motor Expenses: If you ever use your car for business, you can claim part of your running costs. Even quite occasional use is worth a claim: does your accountant know about it? Directors and other employees can claim any shortfall between HMRC’s approved mileage rates and amounts reimbursed by their employers if they use their car for business. And don’t forget you can claim an extra 5p per mile if you take another director or employee in your own private car on a business journey.
3. Capital Allowances: You can claim capital allowances on any asset you use in your business, including computers, furniture, equipment and your car. If you use something partly for business and partly personal, then a partial claim is possible. This includes used items that you bring into business use – you get allowances on their value when first used for business.
4. Family Payments: Did you pay your spouse, partner or children for some work in your business? Tell your accountant about it. If you didn’t pay them last year, ask if it’s something you should consider this year.
5. Missing Receipts: Lost the paperwork or never had it? Don’t give up – tell your accountant about it. Just because you’re missing a receipt doesn’t mean the expense can’t be claimed. There are other ways to prove the expenditure took place and HMRC will not usually refuse reasonable claims.
6. Interest and Finance Charges: Any interest incurred exclusively for business purposes can be claimed. This can include mortgage interest, credit card interest, personal loans, etc: as long as the funds were used for business purposes. Don’t forget to include charges like loan arrangement fees too. Company owners and business partners who borrow money to lend it to their business can also claim a deduction for interest through their tax return.
7. Subscriptions: Professional subscriptions related to your business are deductible. This applies not only to sole traders and business partners, but also to directors and other employees who pay their own subscriptions personally.
8. Books and Publications: Don’t forget to include your Business Tax Saver subscription and any other money you’ve spent on books and publications related to your business – it all adds up!
9. Pension Contributions: Most pension contributions are made net of basic rate tax but you need to include them in your tax return to get any higher rate tax relief that’s due.
10. Gift Aid: If you’re a higher rate taxpayer, gift aid payments will save you tax, but your accountant won’t know about them unless you tell them. Don’t forget to include entry fees for museums, zoos, etc – these are often paid under gift aid. You could also include gift aid payments made since 6th April – these can be carried back to last year.
This list isn’t exhaustive but is worth using as an ‘aide memoire’: I have seen every item overlooked by business owners or their previous accountants. Forgetting a valid tax deduction is a tragedy: don’t let it happen to you!
Company Directors and Business Partners
Most of the items on my ‘forgotten deductions’ list apply to everyone. Pension contributions, gift aid payments and interest on money borrowed to invest in a company or partnership can be claimed against any form of income. These are ‘deductions’ rather than expenses and are claimed directly through the tax return.
For business partners, any other expenses will need to be included in the partnership accounts in order to be claimed, so it is vital to let your accountant know about them!
Directors and other employees can claim professional subscriptions and any other expenses incurred ‘wholly, exclusively and necessarily in the performance of their duties’ against their employment income. Special rules apply to some items but the first step is to let your accountant know about the expense you’ve incurred.
Don’t rely on the PAYE system. Coding notices seldom deal correctly with items such as pension contributions, gift aid payments or professional subscriptions. Most people are better off claiming these through a tax return. (Getting them included in your PAYE code does provide faster relief for part of the claim though.)
Reducing Payments on Account
It’s also important to let your accountant know if you expect your income for the current tax year to be less than last year. They can then calculate your estimated tax liability for the current which can be used to reduce your payments on account due in January and July 2010.
Many people overlook this simple procedure and end up overpaying. Yes, you get the money back the following year, but HMRC gets to keep your valuable cash for six or twelve months.
Under a new penalty system introduced this year, all taxpayers are expected to exercise ‘reasonable care’ when completing their tax returns. The good news is that any innocent mistakes made when you have exercised ‘reasonable care’ will not lead to any penalty.
However, any mistakes made when you haven’t taken ‘reasonable care’ can lead to a penalty of up to 30% of the extra tax due.
Using a qualified accountant to complete your tax return is part of taking ‘reasonable care’ but it’s not the ‘be all and end all’. You need to make sure that you give your accountant details of all your income and capital gains and, most importantly, when you get your tax return back from them for your approval, you must check that all your income and any reportable capital gains are included and look reasonable.
What is Reasonable?
Many people ask why they should have to check their tax return when they are paying an accountant to do the work. This is a fair point but you are not expected to carry out a detailed review – merely to check that your tax return looks reasonable. Here are some examples by way of illustration.
Cheryl has eight different interest-bearing accounts. She receives a total of £8,745 in interest during 2008/9 but her accountant includes a figure of £7,845 in her tax return. Cheryl would not be expected to spot this error.
Sarah received interest of £1,500 during 2008/9 but her accountant does not include any interest in her tax return. Sarah should spot this omission if she is taking reasonable care.
Gary usually makes a profit of about £40,000 each year. His accountant forgets to include income of £800 and produces accounts showing a profit of £38,000. Gary would not be expected to spot this error.
Mark usually makes a profit of about £60,000 each year. There was nothing unusual about the year ended 31st March 2009 but Mark’s accountant includes a profit of just £20,000 in his 2009 tax return. Mark would certainly be expected to query this with his accountant if he is taking reasonable care.
Jason needs an accountant. His friend Howard recommends Robbie & Co. “They’re no good, they always make loads of mistakes, but they’re really cheap”, says Howard. If Jason uses Robbie & Co, he will not be taking reasonable care!
To get through ‘tax return season’ with as little pain as possible, get all your information to your accountant as soon as you can, remember to include all those ‘forgotten deductions’ and have a quick look through your tax return to check it’s reasonable before you sign it. You’ll probably still have a bill to pay in January but you can sleep soundly knowing you’ve paid as little as the law allows and you won’t get penalised for any innocent little mistakes.
Late Tax Returns
Filing your personal tax return late currently leads to a penalty equal to the lower of £100, or the amount of tax outstanding on the due date.
The easy way to escape the penalty is simply to pay your tax in full by 31st January. You only need to pay the tax due for the preceding tax year to escape the penalty (e.g. pay all the tax due for 2008/9 by 31st January 2010). If you haven’t finished working out your tax, it’s usually worth overpaying a little to be on the safe side – any excess will simply go towards your first payment on account for the current tax year.
Whilst this is a useful ‘escape clause’ at the moment, it’s best not to make a habit of it. Filing your tax return late is seen as a bad sign by HMRC who links this with a higher probability of errors, thus leading to greater risk of an enquiry. (It doesn’t seem to occur to them that some people are late because they’re taking reasonable care!)
Furthermore, under a new regime to be introduced in the near future, the late filing penalty of £100 will apply regardless of whether any tax is due. (Late partnership tax returns already incur a penalty of £100 per partner, when no tax is due.)