Most rental accounts are usually prepared on a cash basis, i.e. when rent is received and when expenses are paid, unless the annual rental exceeds £150,000 or you elect for it not to apply. You should keep a record of the gross rental income paid each month and a breakdown of the rental expenses, categorising each type of expenses separately. A simple spreadsheet should suffice.
You can claim most expenses relating to the rental business, such typical costs are;
Agent and management fees
New tenancy costs, like inventory or Tenancy Deposit Scheme costs
Repairs and maintenance costs (provided they are not to improve the original fixture)
Cost of replacement of furnishing and domestic appliances
Mortgage interest paid up to the value the property was let, subject to new finance restrictions
Legal and professional fees associated with the tenancy
Advertising costs
Service charges and ground rent
Utilities and rates paid while available for letting
Landlord, contents and building insurance
Under new rules that came into effect from April 2017 there is a restriction to tax relief on finance costs for residential landlords. Relief is gradually being restricted to the basic rate of tax over four years and will be given as a reduction in tax liability instead of a reduction to taxable rental income. For the 2018/19 tax year 50% of finance costs are deductible from rental income with 50% available as a basic rate income tax deduction restricted to the lower of:
Finance costs- costs not deducted from rental income in the tax year plus any finance costs brought forward.
Property business profits- the profits of the property business in the tax year (after utilising any brought forward losses).
Adjusted total income- the income (after losses and reliefs, and excluding savings and dividends income that exceeds your personal allowance.
For 2019/20, the restriction will increase to 75%.
According to HMRC, you should register as self-employed within three months of becoming self-employed. This can be done very simply using the online CWF1 form. You can use the link below.
This will register you for Self-Assessment if you are not already registered and also register you for National Insurance purposes. Once you are registered you should then receive notification by post from HMRC.
If you are self-employed, you will pay Class 2 NIC if your self-employed earnings are above the Small Profits Threshold. In addition, you will pay Class 4 NIC on your profits above the Lower Profits Limit, currently at a rate of 9% up to the Upper Profits Limit and then 2% above.
If you are employed, you will pay Class 1 NIC on your salary when your income is above the Primary Threshold. However, if your salary is lower and below the Primary Threshold, yet above the Lower Earnings Limit, you will still get the benefits of paying.
You can register to voluntarily make Class 3 NI contributions.
The NI rates are shown in more detail within this HMRC page, link here;
The tax year ends on the 5th April and the filing deadline of the Income Tax Return for that year will be 31 January after the year-end for paper tax returns. If you are filing a paper tax return this must be filed by 31 October after the year-end unless you have a reasonable excuse for not being able to file this online.
We use a software that mirrors the HMRC tax calculations. The tax rates and calculation methods are standard and not an individual process categorised by us. Our tax team are appropriately trained and qualified and receive regular professional updates to keep them on top of the constantly changing tax legislation.
If your tax and Class 4 NIC bill is in excess of £1,000, if this is your main source of income, you will automatically be due to make payments on account in advance of the following tax year. In addition, there are times when you may have additional income exceeding the de-minimus for payments on account and not enough taxed at source, so payments on account become due. Payments on account are based on 50% of the tax and Class 4 NIC due and are payable on 31 January following the year-end and then the following 31 July. If you believe your income for the next year will be much less, you can make an election to reduce your payments on account but if they are reduced incorrectly or too much, interest will become due, and possibly penalties if there is intent to reduce incorrectly
The Confirmation Statement is filed annually and you get a two week window to file this. If you are a client, we will notify you of this if we are engaged to do this for you. Failure to file the Confirmation Statement will result in Companies House sending reminders and some may seem threatening, as they can dissolve the company or threaten legal action if they do not receive the form, although this is not immediate. However, there is no penalty for filing the Confirmation Statement late. All companies must file a Confirmation Statement, regardless of the company type, size or whether dormant. If you do miss the deadline, just file the Confirmation Statement as quickly as you can and if there is a necessary delay or any specific reason to delay this, do let us know and we can advise you what to do, and we may be able to liaise with Companies House on your behalf to deter legal proceedings or strike off action.
Company abbreviated accounts must be filed with Companies House within 9 months of the accounting year-end. The full statutory company accounts must be filed with HMRC together with the company’s corporation tax return(s) within 365 days of the accounting year-end.
You are required to ensure the company is fully compliant and meets its filing obligations. You must act in the best interest of the company and keep the company in good financial health. We have a detailed summary of your obligations here.
There are no limitations of what car you can buy in a company. However, the tax charges and cost may well outweigh any advantage. The first thing to consider is the CO2 measure of the output of the car as this will determine the rate of capital allowances and benefit in kind tax is imposed. If you are interested in buying a car for the business, this should be your first question to the dealer. If you are buying a pool car for a business and do not intend to have any personal use there are different rules, but this is unusual and not often the case in our experience. Many clients will ask whether they should lease or buy but this depends on the circumstances and the costs involved, as well as the CO2 position so check this first and then seek advice.
As an owner managed company, as a director shareholder you can pay yourself a salary and dividends.
We recommend you use an online cloud accounting software to manage your bookkeeping and day to day recordkeeping. Making Tax Digital will be coming into force and is starting from 6 April 2019, whereby VAT registered businesses will need to file their VAT Returns using an online bookkeeping software. In the meantime, for those not affected, you could otherwise keep a spreadsheet or ledger book. HMRC require that you record your transactions individually and keep sufficient accounting records. You must also keep all your receipts, whether in paper or digitally for at least 6 years after the year-end in case of HMRC enquiry. We can help you set up a bookkeeping process and assist you with providing the appropriate software. Please see our MTD page.
Please feel free to download our business expenses guide, which you may find useful to keep to hand.
You should review your turnover on a monthly basis and you are required to look back 12 months at the end of each calendar month to determine if you have gone over the VAT threshold (currently £85k). If you have done so, you will need to register for VAT, if not, you simply review the same the following month. You can voluntarily register for VAT as a trading business if you are making or about to make taxable supplies and the benefit of doing so will depend on your circumstances. You will also need to consider if you will go over the VAT threshold within the next 30 days.
You can only claim VAT on your costs if you are VAT registered and have a VAT invoice or receipt. Some receipts may not show a breakdown of VAT but will give you an indication on the receipt, such as the VAT number and a symbol against the vatable costs. Some costs do not give rise to VAT, such as postage and books but a stationery or Post Office receipt might show a VAT number so it is important to review in detail.
There is no single answer as to whether a sole trader should incorporate, it is entirely dependent on your business circumstances. For some, there may be commercial reasons to incorporate and trade through a company but for others it may just lead to unnecessary extra admin burden and costs. We recommend you talk this through with your adviser to understand the specific implications and priorities or you and your business. Previously the tax advantages were greater as a small owner managed business but the effective cost difference has been closed since the introduction of the effective dividend tax.
Nothing, both terms mean the same and you can see these referred to separately when in fact they mean the same thing.
According to HMRC, you should register for Self Assessment within three months of the need arising, ie from the date your circumstances required you to file a Tax Return. This could be the date you started to receive rental income, or became a director in receipt of remuneration, or had any other income or capital gains subject to Self Assessment. You should use a different form to register for self-employment and National Insurance contributions (NIC) and this is called the CWF1 form shown on our Self-Employed FAQ section. This can be done very simply using the online SA form. You can use the link below.
Once you are registered you should then receive notification by post from HMRC of your UTR number, which is your 10 digit Unique Taxpayers Reference number..
Being registered for Self Assessment to do Tax Returns does not mean you are registered for NIC purposes and you will only pay Class 2 NIC if you are self-employed earning are above the Small Profits Threshold. Rental profits, pension income and other general investment income types are not subject to NIC as these are not deemed as earnings, but instead unearned income.
If you are employed, you will pay Class 1 NIC on your salary when your income is above the Primary Threshold. However, if your salary is lower and below the Primary Threshold, yet above the Lower Earnings Limit, you will still get the benefits of paying. Although you will include your salary on your Tax Return, you will not include any Class 1 NIC paid.
The NI rates are shown in more detail within this HMRC page, link here;
Your Tax Return must include all your sources of income received in that tax year, including any income already taxed at source. This is because your income is added together to work out your effective income tax rate for each type of income. There may be times when you have not paid enough tax at source, which could be through a PAYE adjustment or a PAYE code amendment. If you are unsure of whether your PAYE code being used is correct, you should get this checked (your employer will not have a breakdown of your PAYE code and will not be able to advise). If you receive benefits in kind, it is likely that they are not fully included in your PAYE code and you will receive an annual P11D form showing the value of your taxable benefits in kind to be included on your Tax Return any you may therefore end up paying more income tax thereon. You should also include all your investment income on your Tax Return, including small amounts of bank interest (if over £1 together). Bank interest is no longer taxed at source and although you may be entitled to a tax-free allowance, it will still need to be included in your Tax Return. If you receive rental income, this must also be included, except in very certain situations, ie you only receive rent from a room in your house which is less than the Rent-a-Room relief allowance or your property income is under the £1,000 allowance. If your are a higher rate taxpayer, you can include relief for charitable donations made under Gift Aid and personal pension contributions. This list is not exhaustive and you should seek advice if you are not sure.
The tax year ends on the 5th April and the filing deadline of the Income Tax Return for that year will be 31 January after the year-end for paper tax returns. If you are filing a paper tax return this must be filed by 31 October after the year-end unless you have a reasonable excuse for not being able to file this online.
We use a software that mirrors the HMRC tax calculations. The tax rates and calculation methods are standard and not an individual process categorised by us. Our tax team are appropriately trained and qualified and receive regular professional updates to keep them on top of the constantly changing tax legislation.
If your income tax liability is in excess of £1,000, you will usually automatically be due to make payments on account in advance of the following tax year, unless you have sufficient income already taxed at source, such as PAYE income, that is proportionately higher. Payments on account may well be due if your main income is from rental property for example. Payments on account are based on 50% of the liability due and are payable on 31 January following the year-end and then the following 31 July. If you believe your income for the next year will be much less, you can make an election to reduce your payments on account but if they are reduced incorrectly or too much, interest will become due, and possibly penalties if there is intent to reduce the payments incorrectly. You will not pay payments on account on capital gains tax.
Contact our team to find out more about how we can help you today!