Tax is complex! It is not always clear which particular tax, or what rate of tax applies to a transaction. The Taxman realises that businesses often have tax questions that need urgent answers, so he has set up a range of telephone helplines that each deal with specific areas of tax, such as VAT or the construction industry scheme.

Unfortunately these telephone helplines do not always give the correct answer. You may rely on a verbal assurance from a telephone helpline, but later get inspected by a Tax Officer who takes a different view of the situation and raises a penalty for the incorrect tax treatment. This does happen, and two recent cases have shown it is the taxpayer that suffers where there is a disagreement between the helpline advice and the Tax Inspector.

Case 1: In the first case Corkteck Ltd exported soft drinks to Poland through a third person: Sintra SA. The VAT helpline told Corkteck that the exported drinks would be zero-rated for VAT. However, the VAT Inspector decided the drinks should have been standard rated as Sintra SA was not registered for VAT within the EU.

Case2: In the second case Acrylux Ltd hired out a private residential property for various functions, some of which lasted several days. The VAT helpline told Acrylux that the hire of the property would be exempt from VAT as it was not a commercial property. However, the VAT inspector said the hire of the property was similar to short-term holiday lettings and VAT should be charged at the standard rate.

In both cases the taxpayer could not prove exactly what facts had been presented to the helpline, or exactly what the helpline had given as its advice. If the advice had been requested in writing the outcome for the taxpayer may have been different. If you have a tax question, please ask us before reaching for the HMRC helplines. If you act on advice that later proves to be incorrect, you could pay a high penalty!

From 1 October 2009 tips, gratuities, and services charges cannot form part of the national minimum wage of your staff who receive those payments. This applies even if the service charge is a compulsory part of the customer's bill. The Tax Office has reissued leaflet E24: Tips, Gratuities, Service Charges and Troncs to explain this point clearly.

If tips are paid directly to your staff by the customers, those employees should declare the amounts they receive in tips to the Taxman on their personal tax returns, but you don't have to worry about the tax situation. Where the tip is paid to you as the employer, perhaps as an additional amount on the credit card bill, and you decide how to distribute the total tips pool (known as the tronc), among your staff, you must deduct both PAYE and NICs at the relevant rate for each employee.

Where someone else manages the tronc, perhaps the manager who is not the employer, that manager must deduct PAYE but not NICs from the payments of tips to staff. Please talk to us if you uncertain about how to handle tips paid to your staff.

In these troubled times the failure of one business can have a knock-on effect on its suppliers. If one of your customers goes down you need to quantify the bad debts created by that failure as soon as possible.

Say your accounting year end is 30 June 2009, and one of your customers fails in October 2009 leaving the sales invoices it received in April, May and June all unpaid. Where it is clear that you will not receive payment from the liquidators or administrative receivers of that business for those sales invoices, you can include the bad debt built up between April and June 2009 in your accounts to 30 June 2009. This applies as long as your June 2009 accounts have not been finalised by the time you receive confirmation of the bad debt. Any sales made to this customer between July and October 2009 will need to be written off in your accounts to 30 June 2010.

This is a clear example of business failure, but bad debts can also arise where your customer is still trading. Before we finalise your accounts to submit them to the Tax Office or to Companies House, we need you to undertake a thorough check of all your sales debts. Where you can identify specific debts that are unlikely to be paid, and you have made every effort to recover the money due, those amounts need to be written off in your accounts. This will reduce your taxable profits, and avoid you paying tax on money you are very unlikely to receive.

VAT on bad debts can only be reclaimed six months after the due date for payment for the invoice. You must also pay over the VAT due to the VATman before it can be reclaimed. If you use the cash accounting scheme for VAT you automatically get relief for unpaid sales debts, as you do not account for the VAT due until the sales invoice is paid. Any business with a turnover of under £1.35 million can join the cash accounting scheme.

If your income has dropped in the current tax year, perhaps because your business has made a loss, or your company can't afford to pay you a salary, you could be eligible to claim tax credits or other state benefits. The Tax Office is actively encouraging people to check whether they would be eligible to claim working or child tax credits, and has included an interactive questionnaire on its website to help you decide, see: www.hmrc.gov.uk/taxcredits/start/who-qualifies/overview/quick-questionnaire.htm

The questionnaire does not cover complex claims such as where a member of the family has a severe disability, but it will cover most situations. Remember a claim for tax credits is based on your family's total income, so you need details of your partner's or spouse's income as well as your own.

If you are aged 60 or over, you may be eligible to claim pension credit from the Department of Work and Pensions (not the Tax Office). You don't have to be retired to claim pension credit, just aged 60 or more. Like tax credits your claim is based on your income as a couple, not just your income alone. If you have savings of over £10,000 these are also taken into account. This savings threshold was £6,000 until 2 November 2009, which excluded a lot of people from qualifying for this benefit.

If you find you are eligible for pension credit or tax credits, you should check whether you could receive help to pay council tax or housing benefit. Claims for both of these benefits now ignore any income received by the family as child benefit.

Q. I run a mixed arable and dairy farm in my own name, and my wife operates a holiday lettings business from two of the farm cottages. The VATman has said that we should treat both businesses as one and charge VAT on the holiday lettings. He has also sent us a bill for past VAT due of £10,000. What should we do?

A. Holiday lettings should be subject to VAT at the standard rate if the total turnover of the business is higher than the compulsory VAT threshold (currently £68,000). The VATman wants to combine the turnover of the farm, with your wife's holiday lettings business to reach this threshold. This can only be done if he can show that the two businesses are bound together on an economic, financial and organisational basis. Also the two businesses can only be treated as one business for VAT purposes from a current date, not some date in the past. You should appeal against the VAT bill of £10,000 and discuss with us how the businesses can be shown to be independent in the future. For instance the farm could charge the holiday business a small rent for the cottages used for letting.

Q. I am currently employed but I plan to start an internet-based business in my spare time, which will take about 18 months to break even. I will continue with my current position until the new internet business is making good profits. What is the best way to structure the new business so I can take full advantage of any losses it makes it the first two years?

A. If you run the new business in your own name as a sole trader, any losses made in its first four years will be available to set against your employment income. This applies as long as the Taxman does not see you as an 'inactive' trader, in which case the use of the losses against your other income will be restricted. To show the Taxman you are not an 'inactive' trader, you must work an average of at least 10 hours per week on the new business, and make a note of the hours you work. You should also draw up a business plan to prove the business is run on a commercial basis with a view to making a profit in the future.

Q. About ten years ago I acquired all the various versions of the domain names relevant to the trading name used by my business. These domain names have always been held in my own name, although the business is now run through a company. I have just had an offer for the company and one of the domain names, which values the domain name at £3 million. How will the Taxman tax the profit on the sale of the domain name: as income profits or a capital gain?

A. If we assume the full £3 million represents the profit on the sale of the domain name, as the original cost was probably very small, the difference in the tax payable under an income or capital treatment will be approximately £660,000 (£3 million x 22%). This is because gains are currently taxed at 18%, and an income profit would be taxed at your highest personal income tax rate of 40%.

Your intention when acquiring the domain names was to secure the trading name of your business, not to sell on those domain names at a profit. You were holding the domain names as an investment, not as stock to be traded. The profit on the sale of the domain name should be treated just like the sale of any other investment; as a capital gain. Report the sale on the capital gains tax pages of your tax return, and provide as much information as possible about the original cost and sale value in the blank space on those tax return pages. You may be able to claim entrepreneurs' relief on up to £1 million of the gain, if the sale of the domain name is associated with the sale of your company. The rules for this tax relief are complex, so please discuss the details of the deal with us first.

2 Last day for car change notifications in the quarter to 5 October - Use P46 Car

5 PAYE/NIC and CIS deductions due for month to 5/11/2009

Please contact us if we can help you with these or any other tax or accounts matters.

In addition, if there's anyone else who you think would benefit from the newsletter, please forward the email to them or ask them to contact us to be added to the newsletter list.

If you are not already a client and are interested in becoming one, we would love to come to meet with you to discuss how we can help and provide you with a competitive quote for our services.

All new client consultations are provided free of charge and without obligation.

Smith Emmerson Accountants are based in Nottingham, offering local business owners and individuals a wide range of services.

Smith Emmerson received the prestigious award of AVN 2007/08 Accountancy Firm of The Year as voted for by fellow firms of accountant. We are very proud of the award as it is recognition of the service and advice we provide to our client's. Visit our website http://www.smithemmerson.co.uk for more information.

On 1 August 1989 the VAT law was changed to permit property owners to elect for specified buildings to be subject to VAT at the standard rate. This election is known as the "option to tax".

Without activating the option to tax by election, the letting or sale of the building would be exempt from VAT (with some exceptions), so no VAT can be charged on rents, and VAT on maintenance costs cannot be reclaimed. Opting to tax is generally beneficial for commercial landlords, as they can reclaim VAT on their costs, including VAT on the acquisition of the building itself. However, some tenants such as charities and banks, cannot reclaim the VAT charged on the rent, which makes the lease on a building with a VAT option to tax far less attractive.

The option to tax election can now be revoked if 20 years have passed since the election was made in respect of the building. You could now be in a position to revoke an option to tax you made over 20 years ago. You may want to do this to encourage a wider range of tenants to take on a lease, or to effectively lower the price of the building in this difficult market. Remember Stamp Duty Land Tax (SDLT) is charged on the VAT inclusive cost of a building or lease, so a VAT exempt building means there is less SDLT to pay.

In most cases the revocation does not need HMRC permission if 20 years have passed since the option to tax took effect, and the same person still holds an interest in the building. You just need to complete the HMRC form VAT1614J to inform the Tax Office the option to tax election for a particular building is being revoked. However, you need to check whether the anti-avoidance conditions numbered 3 to 5, on that form are also met. If those conditions are not met you need the permission of the Tax Office to revoke the election. If you have any questions about the option to tax election or how to revoke it, please ask us, as it can be very expensive if you get it wrong.

Late Tax Returns: Your personal tax return for the year to 5 April 2008 should have been submitted to the Tax Office by 31 January 2009 at the very latest. Tax returns submitted on paper for that year were due in by 31 October 2008. These deadlines may be later if the 2007/08 tax year was the first year for which you needed to submit a tax return, and you didn't receive the tax return form until after 31 July 2008.

The Taxman does not have much patience when it comes to late delivery of tax returns and has instructed his computer to send out £100 penalties every six months. The first penalty would have been issued in February 2009 and the second one in August 2009. If the Taxman gets really cross he will ask the Tax Tribunal to issue daily penalties of up to £60 per day, until you do deliver a complete tax return!

If you have paid all the income and capital gains tax you owed for 2007/08 by 31 January 2009, or you are due a tax repayment for that year, the £100 penalties can be reduced to nil. However, you do have to appeal against the £100 penalty notices to claim the reduction.

Late Payments: If you have not paid all the tax you owe for 2007/08 you will have been issued with a 5% surcharge in February and another 5% surcharge in August, plus interest will be mounting up at 2.5% on the amount owing. This interest rate on late tax increased to 3% from 29 September 2009. Where you have agreed a time to pay plan with the Tax Office, and are paying the instalments due under than plan on time, the 5% surcharges should not have been raised. If this is the case the Tax Office should be contacted as soon as possible to get the 5% surcharge cancelled.

When something changes with the set-up of your company, such as a new director, change of company name or registered office address, you need to fill in a form and send it to Companies House. All the forms that are used to report these events are replaced with new versions for changes effective from 1 October 2009 or a later date. You must use the new form to report the change as the old form will be rejected and this could lead to your company being fined if the event is not reported within the statutory deadline.

Most of the new forms can be filed online through the Companies House website, which is quicker, cheaper, and more secure than sending a paper form through the post. If you sign-up to the Companies House PROOF scheme you can only file changes to your company's details online. This prevents anyone hijacking your company by submitting a fraudulent paper form.

The property markets in all sectors have been through terrible times lately. A number of businesses, which were set up in the good times to invest in let property for the long term, have been forced to sell some properties to generate enough funds to cover costs.

Where the property investment business starts to develop properties for sale, rather than keeping them for long term letting, the business has started a trade of property development. In this case where a property, previously held as an investment, is transferred to the "stock pile" as stock ready to be sold, the property must be treated as if it had been sold at its open market value at that point. This can create a capital gains tax charge, or a capital loss, before the property has actually been sold.

To avoid this difficulty the business owners can make an election to treat the value of the property when it enters the stock pile, as the value when it was acquired by the business. Any gain or loss will then only arise when the property is sold by the business. This election must be sent to the Tax Office within two years of the end of the accounts year for a company, or by the first anniversary of 31 January following the tax year end for an unincorporated business.

The advantage of making this election is that the loss, if one arises, becomes a trading loss made on the sale of stock by the business rather than a capital loss. Generally a trading loss can be set-off against a wider range of income than a capital loss. However, to use this trading loss the Taxman will have to be convinced that the property business has actually started a trade of property development, and is not simply selling off its surplus investments.

This can be a very difficult area and full advice is essential so please contact us for advice in your own circumstances.

Q. My payroll clerk accidentally overpaid the PAYE payable by my company for 2008/09. I have rung the PAYE office, but they refuse to repay the amount or reallocate it to another period. What can I do to get the money back?

A. Ask the PAYE office for the overpayment review form P35D. Complete this with as much information about how the mistake in overpaying arose, and send it back. If the repayment doesn't arrive, chase by phone, and make a note of exactly who you speak to, and what they say. If no repayment is forthcoming, consider making a formal complaint to HMRC.

Q. I've received a new PAYE code notice that shows tax is due on a negative figure. What does this mean?

A. A negative PAYE code, or 'K' code (due to the letter K used), means your personal allowances for the tax year are less than untaxed income and benefits which have been included in the code. Your employer or pension provider will add the negative figure from this code to your annual income rather than deducting it, as they would with a normal PAYE code. However, please check that all your allowances are included in the code. If you are married and were born before 6 April 1935 you may be due a married couples' allowance. In some cases the married couples' allowance has been missed from PAYE codes issued since 1 July 2009. If this applies to you, ring the Tax Office number shown on your code notice, or ask us to check your code for you.

Q. My elderly aunt wants to give me a seaside chalet, which she inherited when her mother died in 1985. If I accept this gift will I have to pay tax on it?

A. You won't have to pay any tax when you take ownership of the property. However, your aunt should declare the gift on her tax return. If the increase in value in the property between the 1985 value when she inherited it and its value when the property passes to you, is greater than her annual capital gains exemption (currently £10,100), she will have to pay capital gains tax at 18% on any excess above the unused exemption amount. The value of the chalet at the date of the gift could also be subject to inheritance tax at 40%, if your aunt dies within seven years of making the gift. However, inheritance tax will only apply if the value of your aunt's total estate on death, plus all the capital gifts she has made in the previous seven years, exceeds the IHT exempt threshold. This is currently £325,000, and will rise to £350,000 on 6 April 2010. This exempt amount could be doubled if your aunt is a widow when she dies.

1 Due date for payment of Corporation Tax for the year ended 31 December 2008

5 If a Tax Return has not been received, individuals and trustees must notify HMRC of new sources of income and chargeability in 2008/09

14 Return and payment of CT61 tax due for quarter to 30 September 2009

19 Tax and Class 1B NI due on PAYE settlements for 2008/09

19/22 PAYE/NIC and CIS deductions due for month to 5/10/2009 or quarter 2 of 2009/10 for small employers

31 Deadline for 2008/09 self assessment paper returns to be filed for HMRC to do the tax calculation and/or if tax underpaid is to be collected by adjustment to your 2010/11 PAYE code (for underpayments of up to £2,000 only)

Please contact us if we can help you with these or any other tax or accounts matters.

In addition, if there's anyone else who you think would benefit from the newsletter, please forward the email to them or ask them to contact us to be added to the newsletter list.

If you are not already a client and are interested in becoming one, we would love to come to meet with you to discuss how we can help and provide you with a competitive quote for our services.

All new client consultations are provided free of charge and without obligation.

Smith Emmerson Accountants are based in Nottingham, offering local business owners and individuals a wide range of services.

Smith Emmerson received the prestigious award of AVN 2007/08 Accountancy Firm of The Year as voted for by fellow firms of accountant. We are very proud of the award as it is recognition of the service and advice we provide to our client's. Visit our website http://www.smithemmerson.co.uk for more information.

If you live in the UK you should declare on your UK tax return all of the interest you receive from investments and deposit accounts situated anywhere in the world. This applies even if you don't transfer that income into the UK. Individuals who have non-domicile status (normally not born in the UK), can apply to use what is called the 'remittance basis', and in those few cases the off-shore interest does not have to be included on their UK tax returns if it remains outside of the UK.

The Taxman has a campaign to track down everyone who has held an offshore bank account or investment, and who has not reported the income as they were required to do so. A larger number of foreign banks, including the most secretive banks in Liechtenstein, have been forced to provide lists of account holders to the UK Tax Office. The accounts on this list include trustee accounts, bond accounts and all types of current and investment accounts.

The bank is required to provide the dates for which the account was open, the name and date of birth of the account holder, the balance at 31 March each year, and detailed transactional information for certain periods.

If you had an offshore bank account at some point in the past, which you forgot to include on your tax return, you can now come clean. From 1 September 2009 you can tell the Taxman you want to declare your offshore interest.

You can do this through the HMRC website, or by phone. Once you have made this initial approach you will be given a reference number, which you need to include on a detailed declaration. HMRC will also be looking for tax on the underlying capital where that came from an undeclared taxable source.

We can help you with this, but the full declaration must be submitted by 12 March 2010.

If you use this time to come clean to the Taxman, you still have to pay all of the tax and interest due, but the penalty for failure to disclose in earlier years will be limited to 10%. Although where the bank was a branch of one of the main UK banks the penalty may be 20%, as you could have disclosed this interest two years ago, under a similar scheme that ran in 2007. In normal circumstances the penalty can be up to 100%!

A dividend may be 'illegal', in that it is contrary to Company Law, when the proper procedures are not followed. If the Taxman examines the paperwork and decides the payment from your company was not a legal dividend he may treat the amount paid as a loan, or even as a bonus payment.

In both cases additional tax may be due from the company and sometimes from you.

To pay a legal dividend it is not sufficient just to write 'dividend' on the cheque stub or against the entry in director's loan account.

We recommend following these steps when paying dividends...

1. The directors should first review the profits available for interim dividends. This is not the same thing as funds in the bank account, as you have to take account of other assets and liabilities. Those deliberations should be recorded as a formal board minute, so if the Taxman ever asks, you can prove the profits were there when the decision to pay an interim dividend was made.

2. If the final accounts for the year are complete and show the accumulated profit and loss account is positive, the directors can recommend the profits, which are not required for investment, can be paid out as a final dividend to the shareholders. The shareholders can either accept the directors' recommendation or suggest a lower figure of dividend. Both these decisions also need to be properly recorded at the time they are made.

3. Dividend vouchers need to be prepared when either a final or interim dividend is paid, for each shareholder showing the total due, the tax credit attached to the dividend and the date of payment.

4. The dividend should be paid. The payment can be transferred from the company's account by cheque or bank transfer into the shareholder's own bank account. If the shareholder is a director his account in the company books may be credited with the dividend due to him or her, but this needs to be done as soon as possible after the decision to pay a dividend is taken.

We can help you with all this paperwork, but it is important that the decision to pay a dividend is made in advance of any payment being paid out of the company.

Where you find an error in your VAT records, which has already been included in the figures reported on a VAT return, don't panic. You can correct that error on your next VAT return, as long as the net error amounts to VAT due of less than £10,000, or less than 1% of your quarterly turnover (subject to a £50,000 cap). If the net error is larger than this you need to write to the Tax Office setting out what went wrong and how you have corrected the problem. We can help you with this.

Correction on the VAT return is the best and quickest option for most small errors. If the Tax Inspector looks in detail at your VAT return you may have to pay interest on the delayed VAT payment and a small penalty.

However, the interest rate currently used by HMRC is only 2.5%, due to rise to 3% in September. The penalty for an error that has been correctly voluntarily is a maximum of 30% of a nominal interest figure set at 5% of the delayed VAT payment.

For example: If you correct an error of VAT underpaid of £9,000 after six months, the maximum penalty will be £67.50: £9,000 x 5% x 30% x 6/12 = £67.50.

Dividends do not carry a NI charge for the paying company or for the recipient. Paying a dividend can thus be more tax efficient than paying a salary, but this can only happen if the employee is also a shareholder in the company. However, it is not that easy to transfer shares into an employee's name without incurring a tax charge.

Where an employee or director receives shares in the company they work for, the value of those shares and any dividends paid on those shares will normally be taxed as part of their salary, unless a number of very strict conditions are met. One exception is where the employee receives shares as part of a family or domestic arrangement, such as a gift between father and son, or between spouses.

This is a very complex piece of law and it has not been fully tested in court. However, the bottom line is HMRC do have the power to tax dividends as salary where tax avoidance has been involved.

If you would like your employees to own a slice of your company, even a very small slice, the best way to award shares in the company is through an approved share scheme, or an approved share option scheme. There are a number of types of approved share schemes, but some are quite complex to set up and administer.

The Enterprise Management Incentive share option scheme is designed for small companies with a balance sheet value of less than £30 million. This scheme allows the company to grant employees options to acquire shares at a particular value, within a set time period. It does not need prior approval from the Tax Office, but you do need to agree a value for the share options. Once the options are granted to the employees the company must tell the Tax Office within 92 days.

If you want to give shares to your employees please discuss this with us first.

Q. I operate my own company from a room in my own home, and charge the company a small amount of rent for the space it uses. Can I claim rent-a-room relief for that income on my personal tax return?

A. The law says this tax relief can only apply where rent is received from letting 'furnished accommodation in a residence', where that residence is the taxpayer's own home. Although the law doesn't say that the let room itself must be used purely for residential purposes, that is how the Taxman interprets the law. The Taxman says that letting a room as an office does not qualify for the rent-a-room relief, and he will not budge from that view until a taxpayer wins a case on those grounds. So although the law is silent on the matter of what the let room must be used for, the Taxman is clear that he will not agree to rent-a-room relief for office space.

Q. I am a self-employed fitness instructor and I teach classes at a number of locations. What records do I need to keep regarding my motoring expenses?

A. If your turnover does not exceed the VAT registration threshold (currently £68,000), you have a choice as to how to record your motoring expenses. When you use your own car for business journeys you need to note down exactly the number of miles driven. The choice is then whether to charge those journeys to your business at the standard rate set by the Taxman: 40p per mile for the first 10,000 miles per year, and 25p per mile for additional miles, or at the actual cost of using your car. For the actual cost method you need to record the total cost of all costs related to your car from fuel to servicing and any loan interest costs. This total cost is then split between business and non-business parts based on the total business miles driven in the entire year. You should also record any additional costs such as parking or tolls.

Q. My company is likely to fold soon leaving a number of debts including PAYE and VAT owing. Can HMRC demand that I pay those taxes personally after the company closes?

A. Anyone who was a director, manager or company secretary of the company, can be landed with a personal liability notice (PLN) for unpaid NI that was due from the company. The Taxman does not issue a PLN very often, but he will do so if he believes the company intentionally avoided paying NI. A similar power can be used to collect PAYE tax payable by the company, from the directors. If the Taxman believes the company has fraudulently avoided paying VAT he can transfer any VAT penalties to the directors or managing officers of the company.

19/22 PAYE/NIC and CIS deductions due for month to 5/9/2009

Please contact us if we can help you with these or any other tax or accounts matters.

In addition, if there's anyone else who you think would benefit from the newsletter, please forward the email to them or ask them to contact us to be added to the newsletter list.

If you are not already a client and are interested in becoming one, we would love to come to meet with you to discuss how we can help and provide you with a competitive quote for our services.

All new client consultations are provided free of charge and without obligation.

Smith Emmerson Accountants are based in Nottingham, offering local business owners and individuals a wide range of services.

Smith Emmerson received the prestigious award of AVN 2007/08 Accountancy Firm of The Year as voted for by fellow firms of accountants. We are very proud of the award as it is recognition of the service and advice we provide to our client's. Visit our website http://www.smithemmerson.co.uk for more information.

If you own and occupy more than one property as your home you can elect, within a set time period, for one of those properties to be your main home for tax purposes. You can change this election at any time so another property qualifies as your main home, hence the term 'flipping'. When you sell your main home the increase in value that has built up while it was your main home, and for the last three years of ownership, is free of capital gains tax.

Three years of the ownership period will be free of tax, even if the property has only been designated as your main home for a very short period, perhaps only a week. This is the tax rule many MPs used to avoid paying tax on the home that had been largely funded by their expense claims.

You can flip your properties just like an MP, if you make the first election within two years of acquiring another residence, or within two years of marrying (or civil partnership). If you have missed this deadline on your current properties it may be worth acquiring a very small third property to give you the option to make the election again.

However, beware that the law in this area could be changed with little advance notice following the MP's scandal. If you want to take advantage of this flipping rule, talk to us without delay.

If you are self-employed it can be a struggle to have enough money to pay the two instalments of your tax bill for the year due on 31 July and 31 January. HMRC has realised these two large six-monthly bills can be difficult to manage, so they have set up a budget payment plan to help individuals pay their tax bill in smaller chunks.

It works like this:

- You register on the HMRC website to use the HMRC online service for self-assessment. You don't have to use this service to send in your tax returns, we can still do this for you, but you can review your tax statements online, which is useful.
- Next, set up a direct debit online to pay your self-assessed tax to HMRC. You chose exactly what to pay and whether to pay weekly or monthly.
- About 5 days later the direct debit will be 'live' and it will start to take the amount you have authorised from your bank account at the intervals you specified. These amounts will be set against your next tax bill. You can change the amounts or the intervals at any time, and even cancel the payment plan if you wish.
- Your bank statements will show the payments to HMRC as: 'HMRC NDDS'.

There are some disadvantages to using this budget payment plan:

- HMRC will not pay you any interest on the amounts you have paid in advance towards your tax bill. A deposit account with a bank would pay a very small amount of interest.
- You can only make payments under the budget payment plan by direct debit.
- You cannot get the money back from HMRC to use for another purpose, unless you are due a tax repayment.
- You must be up to date with your self-assessment tax payments before you can join the budget payment plan.

Currently this budget payment plan can only be used by individuals. There is no similar payment plan in place for companies.

Many people are currently waiting for a tax rebate from the Tax Office, as they have claimed for losses to be set against an earlier year's income. If you are expecting such a tax refund, or even if you are not, take care not to be drawn in by emails that claim to have a tax rebate ready for you. These emails tend to ask for details of your bank account to pay the refund into, but they are scams.

The UK tax office HMRC does not send emails to taxpayers informing them of tax rebates. All such emails are fraudulent, and potentially very dangerous. You should not respond to the email. Do not click on any link embedded in the email as this may allow the scammers to get to your computer through a virus included in the link.

Fraudulent emails normally stand out as they are not correctly addressed to you personally. The email may have missing address details or say 'Dear Subscriber' or 'Dear Taxpayer'. Some scam emails include what looks like a tax refund form including a fax back number. You should never complete such a form sent to you by email supposedly from HMRC. To complete genuine HMRC forms yourself you need to log into the HMRC secure website using the login details which will have been sent to you in the post.

If you have doubts about an email supposedly from HMRC, forward it on to the HMRC at: phishing@hmrc.gsi.gov.uk then delete it.

Certain pick-up trucks and other commercial-type vehicles are built to very high comfort standards these days, so a pick-up or 'van' can easily be used as the main family vehicle. In which case does the company owned van become a company car?

The distinction is important because the benefit in kind tax charges are far higher for a car than a van (see example). Also vans, but not cars, qualify for the annual investment allowance (AIA), which allows the full cost of the vehicle to be set against profits in the year of acquisition, subject to the AIA cap of £50,000.

Example

The Mazda BT-50 2.5 TD double cab pick-up has a list price of £15,063 and a CO2 emissions rating of 244g/km. Below shows the difference in the taxable benefit for 2009/10 should this vehicle be classed as a car or van.

Taxable benefit of personal use: Car:£5,272 Van:£3,000
Fuel provided for personal journeys: Car:£5,915 Van:£500
Total taxable benefit: Car:£11,187 Van:£3,500

In tax law a van is a goods vehicle that has a design weight not exceeding 3,500kg. In addition the HMRC guidance specifies that a pick-up truck is a goods vehicle if it has a payload of least 1 tonne. Payload is the difference between the kerb weight and the gross weight as stated in the vehicle's specifications. So if the pick-up is primarily designed to carry goods rather than people and can safely carry 1 tonne in weight, it falls squarely into the van category.

However, this statement about the 1 tonne payload is not law, it is only HMRC guidance. If you have a pick-up that carries less than 1 tonne it will be a van for tax purpose if you can show that it is either:

- a goods vehicle; or
- a vehicle of a type not commonly used as a personal vehicle and unsuitable to be so used.

It doesn't matter what the vehicle is actually used for, its what it was designed to be used for that counts. The Taxman says in his own internal manuals: "Actual use of a particular vehicle is irrelevant: the statutory test is a test of construction, not use."

For advice on choosing the right vehicle to qualify as a van please contact us.

Q. The interest rates available on personal deposit accounts are much higher than those for business deposit accounts. Can I withdraw money from my company's account and deposit it in an account in my name, on the understanding that I hold the funds as an agent for the company? All the interest would be declared as the company's income rather than my own.

A. The Taxman accepts this plan works if there is a trust deed in place which gives the company a legal right to the funds. However, will you be completely open with the bank when opening the deposit account in your name? If you declare you hold the funds as agent for the company you may not get the higher interest rate you seek, as the bank will view the account as a commercial rather than a personal account.

Q. My company requires certain employees to attend trade shows in other countries. The company pays for all the costs including any visa where necessary, and the employee's passport, if one is not already held. Can the company claim the cost of the passport as well as the cost any visa as a business expense?

A. Where the visa can specifically be linked to the requirement to attend the trade show it is a valid business expense for your company. If the employee makes no other personal trip in the country where the trade show is held there is no significant personal element for the employee, so there is no benefit in kind tax charge for the employee. The employee's passport will last for 10 years, so the business element of the trip to the trade show will be tiny. Where the company pays for the passport it will be a benefit in kind for the employee that needs to be reported on the form P11D. However, if the terms of the employment require the employee to hold a passport the company can claim the cost of obtaining the passport as a business expense.

Q. I recently formed a new company which will take over the business I run in my sole name. The formation agent charged VAT on their invoice. Can my new company reclaim that VAT?

A. Yes, the company can reclaim the VAT in its first VAT return as long as it becomes VAT registered within six months of the formation of the company.

2 - Last day for car change notifications in the quarter to 5 July - Use P46 Car.

19/22 - PAYE/NIC and CIS deductions due for month to 5/8/2009.

Please contact us if we can help you with these or any other tax or accounts matters.

In addition, if there's anyone else who you think would benefit from the newsletter, please forward the email to them or ask them to contact us to be added to the newsletter list.

If you are not already a client and are interested in becoming one, we would love to come to meet with you to discuss how we can help and provide you with a competitive quote for our services.

All new client consultations are provided free of charge and without obligation.

Smith Emmerson Accountants are based in Nottingham, offering local business owners and individuals a wide range of services.

Smith Emmerson received the prestigious award of AVN 2007/08 Accountancy Firm of The Year as voted for by fellow firms of accountants. We are very proud of the award as it is recognition of the service and advice we provide to our client's. Visit our website http://www.smithemmerson.co.uk for more information.

You can still save tax by operating your business through a company rather than as a sole trader or partnership, but the level of tax savings will depend on the range of salary, dividends and benefits that you want to take out of the company.

If you take a salary equal to the personal allowance of £6,475, and extract the rest of the profits as dividends, you could make the following tax savings in the current tax year. This salary level involves paying some NICs as the NIC threshold is £5,715, but a lower salary would waste part of the dividend tax credit. Salary is also tax allowable for the company whereas dividends are not.

For 2009/10 the following shows for different profit levels the tax payable as a sole trader, by incorporating as a company and the total saving...

Profits £15,000: Sole trader: £2,573 - Company £1,951 - Total saving: £622
Profits £30,000: Sole trader: £6,773 - Company £5,101 - Total saving: £1,672
Profits £50,000: Sole trader: £13,169 - Company £9,463 - Total saving: £3,706
Profits £100,000: Sole trader: £33,669 - Company £29,838 - Total saving: £3,831
Profits £150,000: Sole trader: £54,169 - Company £50,213 - Total saving: £3,956

There are other tax factors to consider. For example...

- If the company owns a car that is used privately by the business owner, this can seriously reduce the tax savings. However, the answer is not straight forward as it depends on the cost, age, and CO2 emissions of the car (see below).
- The amount of profits left within the company for future use. If dividends are only taken to take your income up to the level of basic rate tax, substantial further savings of many thousands are possible!
- The availability of tax-free benefits such as childcare vouchers.

Tax rates are due to increase from 2010/11. Individuals will pay a top rate of 50% on income over £150,000 and the personal allowance will be withdrawn for those with income over £100,000. The tax rate paid by a small company will also rise to 22%. These changes will reduce the tax savings to be made by operating through a company. The calculations summarised as follows for 2010/11 assume a salary equal to a personal allowance of £6,635, which is reduced to nil when profits exceed £113,000.

Profits £15,000: Sole trader: £2,530 - Company £2,004 - Total saving: £526
Profits £30,000: Sole trader: £6,730 - Company £5,304 - Total saving: £1,426
Profits £50,000: Sole trader: £12,998 - Company £9,704 - Total saving: £3,294
Profits £100,000: Sole trader: £33,448 - Company £30,273 - Total saving: £3,175
Profits £150,000: Sole trader: £56,642 - Company £53,633 - Total saving: £3,009

Please talk to us about the savings possible for you. We can provide a calculation specific to your circumstances and outline the many other factors you will need to consider when incorporating.

Low property prices are tempting some people to acquire residential properties to develop and sell when the market improves. If you intend to do this, the Tax Inspector may argue that you are actively trading in properties, rather than just investing and letting.

If you are considered to be trading in properties it will have the following tax consequences:

- All the gains you make on selling the properties will be subject to income tax at 20%, 40% or 50% rather than capital gains tax at 18%.
- NI will also be due on top of these income tax rates.
- You will not be able to set your annual capital gains exemption (£10,100 for 2009/10) against the gains made from selling properties.
- If you run the property business through a limited company the difference in tax rates will be far less.
- You may need to register for VAT.
- Any rents received may be taxed as incidental trading income.
- The value of your business should attract a 100% exemption from inheritance tax as business property.
- You can get tax relief for indirect or abortive expenses connected with buying and selling properties.
- Any losses you make by trading in your own name can be set against your other income.
- You may qualify for entrepreneurs' relief if you sell your whole property business.

Please talk to us about your plans so we can advise you on the tax strategies which will fit your business.

There are a number of reasons why you would want to, or need to, register for VAT quite quickly. Once your turnover for the last 12 months exceeds £68,000 you must register for VAT within 30 days. If you start a new business, incorporate your current business (see above) or buy an existing business you may also need to register for VAT immediately.

The VAT office aims to issue a VAT number to 70% of businesses within 13 working days of receiving the application for VAT registration. However, the remaining 30% of businesses may suffer delays, which can endanger the viability of the business. If you need to register for VAT follow these tips to speed up the process:

- Use the correct form: VAT 1 - this form was revised about a year ago so make sure you use a new version.
- Include the bank account number for the business that is registering for VAT. Do not include a bank account number for a different business. No bank account will delay the registration.
- Show a contact telephone number for the business. Although it is not a legal requirement to have a telephone number, the VAT registration will be delayed if you don't include one.
- If the business is a company you must include the date of incorporation and the company number.
- The business address must be a UK address where the business will be carried on. A 'care of' or PO box address is not acceptable.
- The business activity description must be clear and not generalised. Consultancy businesses need to state their area of expertise, such as 'business management' or 'information systems'.
- You must include an estimate of the annual turnover. This gives the VAT office an idea of the risk profile of the business.
- If any of the business owners have been involved in any other businesses in the last two years the full names of those businesses, including VAT numbers, must be given.
- If you are registering for VAT on a voluntary basis complete box 13 and specify the date you require to be VAT registered from.
- The VAT 1 form must be signed by an appropriate person, such as partner or director. Remember to state in what capacity that person is signing.

If you drive a company car you need to keep an eye on the tax you pay for using the vehicle, as this is likely to increase year on year.

The tax charge is related to the car's CO2 emissions and its price. An average car has CO2 emissions of around 160g/km, which means for a petrol car the driver is taxed on 20% of the vehicle's list price every year. This percentage will increase to 21% from 6 April 2010, and will be 22% from 6 April 2011.

The list price is the show-room price for the car, not what your employer actually paid including discounts. Currently the list price used for the tax calculation is capped at £80,000, but from 6 April 2011 this cap is removed. This will hit drivers who get their own companies to pay for top range cars.

Say you drive an Aston Martin DB6 costing around £160,000, which has CO2 emissions off the scale. In 2009/10 you are taxed on £28,000 (35% x £80,000). At the 40% tax rate this amounts to a tax bill of £11,200. From April 2011 you will be taxed on £56,000 (35% x £160,000). At the top tax rate of 50% that will apply in 2011/12, this will produce a tax bill of £28,000.

If you are drive an alternative fuel car, such as a hybrid, bio-fuel, or E85 fuel, you currently get a reduction in the tax charge compared to normal cars. This discount will be removed from 6 April 2011 for all alternative fuel cars, except for pure electric cars, which will still be taxed on 9% of their list price.

So the message is: get that expensive car out of your company ASAP, and if you must drive a company car, may be it's time to start thinking electric, or at least very low CO2 emissions.

Q. My company submitted a claim for a tax refund for £15,000 in January, but it still hasn't materialised. We really need those funds now. I've chased the Tax Office but get some excuse about security checks. How long will I have to wait for this money?

A. HMRC have imposed extra security checks on many tax refunds in an attempt to block fraudulent claims that have been flooding the system. These extra checks are slowing up refunds to genuine businesses. A six month delay is quite exceptional. Try writing to your Tax Office suggesting you will take the matter to your local MP if you do not receive the tax refund within 10 days.

Q. In the last two years I have lent my company in excess of £40,000, but now the company is insolvent and I will not receive any of that money back. Can I claim any tax relief for that loss?

A. Assuming your company was a trading company, as opposed to a company that just holds investments, you can claim a capital loss for your loan. The Tax Inspector may ask you to show the funds were used for the company's trade, rather than simply use to pay dividends, so be prepared to supply the company's accounts if requested.

Q. I was made redundant on 27 February 2009 from where I was paid £16,000 a year. Almost immediately I found a part time position that pays about £9,400 a year. I made a claim for Tax Credits as I am working 30 hours a week now, but I've received a Nil award. What should I do?

A. Your initial Tax Credits award is based on your income for 2008/09, which was too high for you to qualify for Tax Credits, assuming you are a single person with no children. However, on your current wage you should qualify for about £1,200 a year in Tax Credits. Just ring the Tax Credits Office and tell them your current wage rate. They should revise your tax credits award within weeks.

5 - Deadline for PAYE settlement agreement for 2008/09.

6 - Deadline for 2008/09 forms P11Db, P11D and P9D to be submitted and copies of P11D and P9D to be issued to relevant employees.
Deadline for employers to report share incentives for 2008/09 - form 42.

14 - Return and Payment of CT61 tax due for quarter to 30 June 2009.

19/22 - PAYE/NIC and CIS deductions due for month to 5/7/2009 or quarter 1 of 2009/10 for small employers.

19 - Class 1A NIC due in respect of the tax year 2008/09.

31 - Second self assessment payment on account due for 2008/09.
Second 5% penalty surcharge on any 2007/08 outstanding tax due on 31 January 2009 still unpaid.
Second £100 penalty if 2007/08 tax return due for filing on 31 January 2009 is still outstanding.
Deadline for Tax Credits to finalise claims for 2008/09 and renew claims for 2009/10.

Please contact us if we can help you with these or any other tax or accounts matters.

In addition, if there's anyone else who you think would benefit from the newsletter, please forward the email to them or ask them to contact us to be added to the newsletter list.

If you are not already a client and are interested in becoming one, we would love to come to meet with you to discuss how we can help and provide you with a competitive quote for our services.

All new client consultations are provided free of charge and without obligation.

Smith Emmerson Accountants are based in Nottingham, offering local business owners and individuals a wide range of services.

Smith Emmerson received the prestigious award of AVN 2007/08 Accountancy Firm of The Year as voted for by fellow firms of accountants. We are very proud of the award as it is recognition of the service and advice we provide to our client's. Visit our website http://www.smithemmerson.co.uk for more information.

The car scrappage scheme, which was launched on 18 May 2009, also applies to small vans that weigh up to 3,500kg. So if you are thinking of trading in your 10 year old van for a new one, this could be a good time.

Capital Allowances
The scrappage scheme gives you a £2,000 discount off the list price (of which 50% is funded by the government), and it is this net cost which will go into your capital allowances pool. A van will qualify for the Annual Investment Allowance (AIA), which allows 100% of the cost to be set against your business profits in the year of purchase. The AIA is limited to a maximum spend on capital expenditure of £50,000 per year, so you should plan to spread out any large purchases. Any excess cost above the AIA cap will qualify for capital allowances of 40% if the purchase is made before 1 April 2010, otherwise the excess will qualify for 20% capital allowances per year.

VAT
If you are VAT registered you will be able to reclaim the VAT charged on the purchase of a new van, although not all of it where it is for an unincorporated business with private use. Instead you must reduce your VAT claim by £130.43, which is 15% of the manufacturer's gross discount of £1,000. The Government contribution to the scrappage scheme of £1,000 per vehicle does not affect the VAT.

Car Benefits
If your company is purchasing a car through the scrappage scheme, which will have some private use, the driver will be taxed on a percentage of the vehicle's list price. The percentage depends on the car's CO2 emissions, but the list price is fixed. It is not reduced by the £2,000 discount given under the scrappage scheme.

In our Budget newsletter we mentioned that UK residents could now make claims for tax reliefs associated with furnished holiday let property situated in other EEA countries. The EEA countries are the 27 EU countries plus Iceland, Liechtenstein and Norway. The tax reliefs that could be claimed include:

- Setting losses on the let property against other UK income;
- Capital allowances on equipment used in the property;
- Capital gains relief on selling the property;
- Entrepreneurs' relief for disposals made after 5 April 2008;
- Business asset taper relief for disposals made before 6 April 2008; and
- Business property relief for inheritance tax.

These tax reliefs could apply for a number of PAST tax years, but to qualify you need to prove all of the following applied for the relevant year:

- The letting business was carried on commercially with a view to a profit;
- The property was available to let as furnished short-term holiday accommodation for at least 140 days per year;
- It was actually let for these short-term periods for at least 70 days per year; and
- Longer-term lettings, which exceed 31 consecutive days let to the same person, did not take up more than 155 days per year.

If this applies to you we can help you make a claim for tax relief which may be due.

You know the tax system is crazy when the Taxman encourages you to claim a benefit, which you don't currently qualify for, just in case you do start to qualify for the payment later in the tax year. That's exactly the position the Taxman is taking for Working and Child Tax Credits.

Working Tax Credit is paid to single people who work at least 30 hours a week, and to parents and disabled workers who work at least 16 hours per week, but in both cases the total family income must be below a qualifying threshold. For a single childless person aged at least 25, the qualifying income threshold is currently £13,250 per year. For a family with children the qualifying threshold is considerably higher, up to around £80,000 in certain extreme cases, although the exact amount would depend on the family's circumstances. Child Tax Credit is paid alongside Working Tax Credit and is assessed on the same claim form.

The income that counts towards the qualifying threshold is the family's income spread out over the full tax year. If the family income suddenly drops part way through the tax year, due to redundancy or business failure, which is far more likely in the credit crunch, the family's average income for the tax year may well be below the qualifying threshold.

This is where the system gets really crazy. The family or individual must make a Tax Credit claim before 6 July 2009 to allow the claim to be back-dated to the beginning of the current tax year (2009/10). Although the claim may initially give rise to a nil payment based on income received in 2008/09, the claim for 2009/10 can be amended later to take account of the reduced income for 2009/10. At that point payments will be made based on the total family income averaged out over the tax year.

If you feel your family income may be at risk in the current unstable economic climate, it may make sense to submit a protective Tax Credit claim before 6 July 2009. Do be careful if you are making a claim as a single person, when you later become part of a couple, as you must tell the Taxman when this happens. The Taxman requires couples (mixed or single sex) to make Tax Credit claims as a couple, and will demand repayment of Tax Credits paid to individuals who make an invalid single-person claim.

Even if your business is not registered for VAT, you need to be aware of the point where your total sales require you to become VAT registered. The turnover limit at which you must become VAT registered is currently set at £68,000 for any 12 month period ending on or after 1 May 2009.

If your annual sales are near this limit you need to calculate your total turnover for the last 12 months, every month, adding the latest month and subtracting the earliest month each time, to check you haven't breached the threshold. Alternatively, if you believe your sales for the next 30 days will exceed £68,000 you must register for VAT immediately.
There are several advantages of keeping your sales below the VAT threshold:

- You don't have to register for VAT, but you can if you wish to.
- If you are not registered for VAT, your customers do not pay VAT on top of your basic prices. This makes your goods and services appear to be better value for money for non-business customers or other small non vat registered businesses.
- On your 2009/10 self-assessment tax return, which will be issued in April 2010, you will only have to complete three lines to report your business profits.
- You do not have to submit your VAT returns online.

Currently a small percentage of VAT-registered businesses submit their VAT returns online each quarter. But for periods starting after 31 March 2010 all VAT-registered businesses with a turnover of £100,000 or more will be compelled to submit their VAT returns online. Also any business that becomes VAT registered after 31 March 2010 will also have to submit all their VAT returns online, whatever its turnover.

If you become VAT registered before 1 April 2010 you will not be forced into online filing straight away, as you will be able to continue with paper VAT returns until your turnover exceeds £100,000, or the law is changed.

There are of course penalties for failing to register on time so please contact us if you need any help with the decision to register for VAT.

Q. My business requires me to have up to 100 days a year away from home speaking at conferences. I always travel first class rail, to allow me to prepare notes on the way, and stay in four-star accommodation. The Tax Inspector has said my expenses are excessive and I should only get a tax deduction for the cost of second class travel and two-star accommodation. Is he correct?

A. The Tax Inspector is not correct. His own Employment Income Manual at paragraph EIM 31835 says: "The tests that apply to travel expense relate to the nature of the expense and not to the amount." It goes on to say: "You should not refuse a deduction for first class rail travel, if that has been incurred, on the basis that the same journey could have been made more cheaply in standard class". As long as the travel and accommodation costs were incurred wholly and exclusive for your business of lecturing the full cost can be claimed.

Q. I pay income tax at 40%, but my wife and child have no income at all. If I purchase fixed income bonds in their names will the interest be effectively tax free, as it will be covered by their personal allowances?

A. When you purchase the bonds in the names of your relatives you will be giving them the capital you invest, as they will have complete control of the bonds. There is no limit on the amount you can give to your spouse, although there could be inheritance tax implications. Your wife will be taxed on the interest from her bond, but if this does not exceed her personal allowance of £6,475, there will be no tax to pay. If your child is aged under 18, the interest from his bond will be taxed as part of your income if it exceeds £100 per year.

Q. If I start earning money from a website I have setup in my spare time, will I have to pay tax and NI on that income? I am also employed full time on a salary of £25,000 a year.

A. You should register your new web business with the tax office as a self-employed business. We can help you do this if you wish. Your self-employment will not affect your employment, and your employer need not know about your website business. However, you will have to complete a tax return each year to declare all of your income; from your business, employment and any investments. By registering as self-employed you will also be automatically registered to pay class 2 NI in respect of your self-employed profits. If these profits are expected to be less than £5,075 for the current year, you should complete form CF10 which is a request for exemption from paying class 2 NI.

19/22 - PAYE/NIC and CIS deductions due for month to 5/6/2009.

30 - Deadline for UK businesses to reclaim EC VAT chargeable in 2008.

Please contact us if we can help you with these or any other tax or accounts matters.

In addition, if there's anyone else who you think would benefit from the newsletter, please forward the email to them or ask them to contact us to be added to the newsletter list.

If you are not already a client and are interested in becoming one, we would love to come to meet with you to discuss how we can help and provide you with a competitive quote for our services.

All new client consultations are provided free of charge and without obligation.

Smith Emmerson Accountants are based in Nottingham, offering local business owners and individuals a wide range of services.

Smith Emmerson received the prestigious award of AVN 2007/08 Accountancy Firm of The Year as voted for by fellow firms of accountant. We are very proud of the award as it is recognition of the service and advice we provide to our client's. Visit our website http://www.smithemmerson.co.uk for more information.