June Questions and Answers
Newsletter issue - June 2022
Q. I am a basic rate taxpayer and a registered subcontractor having tax deducted at 20% from any income. I understand that I can register for CIS gross status to receive my pay with no deductions. How do I go about this and are there any disadvantages?
A: CIS gross payment status means that the contractor does not make tax deductions from payments made to a subcontractor. It is possible to arrange for payments to be made gross rather than having tax deducted but there are conditions. Importantly, your tax and NIC tax returns and payments must be up to date and a business bank account must be used. Turnover must be at least £30,000 if you are sole trader or £30,000 for each partner if operating as a partnership (or £100,000 for the whole partnership). The limits are different for companies depending on how many directors the company has. Application for gross status can be made online and at least one month should be allowed for the application to be approved.
The 'downside' is that you will have to ensure that you put aside enough money to pay any tax and NIC when due rather than claiming any tax refund that may usually arise.
Q. I lost my job during the pandemic and intend to set up an arts and crafts shop. I will be incurring some expenses before I can open including the cost of setting up a website, buying business cards, equipment and stock, paying two months' rent in advance and insurance. I purchased a computer and printer five years ago and although it is now deemed to be 'ancient' in computer terms, it still works and I want to use it in my business as well as for home use. What expenses can I claim?
A: The tax rules state that expenses incurred before the start of the business (termed 'pre-trading expenditure') can be claimed:
- if incurred within seven years of the start of the trade;
- if they would have been allowed as a deduction had the expenditure been incurred after commencement;
- if they are not otherwise deductible in computing profits
For assets acquired specifically for the new trade, 'pre trading expenditure' is treated as if incurred on the first day of trading. Assets acquired initially for private use that are also going to be used in the business (such as the computer and printer) are also treated as if purchased on the first day of trading. Importantly, the amount that can be claimed is not the cost but the market value on the first day of trading (unless, exceptionally, the market value on the first day of trading is greater than the cost, in which case the cost figure is used). Where assets will be used for both private and business purposes, the claim is restricted to take account of the private use.
If you are also registering for VAT, then you can reclaim the VAT on goods, stock and assets for up to 4 years before registration; VAT on services can be claimed for up to 6 months prior to registration.
Q. I incorporated a company in April 2021 but the company has not started trading for various reasons and possibly will not do so for another few months. Do I have to submit accounts and a corporation tax return?
A: The important point to remember with a company is that Companies House (CH) and HMRC have different submission dates for accounts and different definitions of 'dormant' and 'active'.
For CH accounts are required whether the business has commenced trading or not. If not, then the accounts to submit are 'dormant' accounts. CH considers a company as being 'active' if it has incurred expenditure and nothing else and therefore accounts must be submitted. The first accounts will be for the period from incorporation to the end of the month 12 months after incorporation and annually to the same date thereafter.
HMRC require formal accounts where the company:
- has business activity such as a trade even if it has not made any sales;
- has a bank account generating interest, even if none has been received as yet
- manages investments; or
- receives any other income.
When a company is formed CH notify HMRC who will issue a notice to file a Corporation tax return for the twelve-month period starting at the date of incorporation. HMRC will also expect a return to cover the remaining days of the accounting period. Even if the company is not 'active' until later, the return must be submitted unless HMRC say otherwise. However, you can contact HMRC, explain that the company is dormant and they will make a note on their file not to expect a tax return until you notify them that the company has become 'active'.