Debt Management

First examine the facts as they exist in the current financial year 2007-08. The current approved mileage allowances were set five years ago in the financial year 2002-03 and while the current rates in no way reflect the increases in fuel costs in recent years that all businesses including small business. The Inland Revenue is actually considering a revised scale of tax allowances that may even lower the overall amount that can be claimed which will be detrimental to small business.

The approved mileage allowance for cars and vans is 40p per mile for the first 10,000 business miles and 25p per mile for each business mile over 10,000 miles in each tax year. The approved mileage allowance for motor cycles is 24p per mile for the first 10,000 business miles and 24p per mile for each business mile over 10,000 miles in each tax year. The approved mileage allowance for bicycles is 20p per mile for the first 10,000 business miles and 20p per mile for each business mile over 10,000 miles in each tax year.

These approved mileage allowances demonstrate complete irrelevance to the actual costs incurred in performing the business journey. The purchase price of a new motor vehicle would not be unusually 100 times the price of a bicycle, plus vehicle maintenance costs, vehicle insurance, licence fees and substantial fuel charges in operating the motor vehicle compared with zero costs for a bicycle. Few small businesses claim tax allowances for bicycle business journeys in their small business accounts.

The startling anomaly is that vehicle allowances are only twice the bicycle rate on the first 10,000 miles and only 25% more over 10,000 miles. Not that many people are likely to use a bicycle and cover in excess of 10,000 business miles in a single tax year.

In addition to the approved mileage allowances an additional 5p per business mile may also be claimed as a tax free expense if a fellow passenger is also carried on the business journey in the small business accounting records. That fellow passenger must also be on a work journey to enable the mileage allowance to be claimed in the small business accounts

Generally there are specific rules on justifying a business journey and the information that must be supplied to support the claim for a tax free mileage allowance. In practise the Inland Revenue often take a reasonable view of any claims provided the information provided in the small business accounts indicates that the claim is valid and has been incurred for real business journeys as opposed to an invention by the claimant.

When claiming a mileage allowance the essential information to provide is the date of the journey, the reason for that journey, the place visited and the actual mileage covered. Small businesses who claim this tax free allowance should maintain detailed records as part of the small business accounting to substantiate their expense claim should it later be challenged by the tax authority. Devising an expense sheet and submitting this sheet to the business is one way of ensuring sufficient documentation exists within the small business accounts.

Another way a small business can substantiate a mileage allowance expense claim is to enter each journey directly into the accounts for small businesses, perhaps recording the mileage against either sales invoices to customers or against purchase invoices from suppliers. With these transactions having already been recorded in the small business accounting records with a date, the location also stated on the invoice and the purpose of the journey being obvious the rules on supporting information are covered.

That is the easy part of making a valid claim but for many small businesses making such claims would seriously understate the true level of business journeys. Therefore also include in the small business accounts all other business journeys undertaken which may or may not have resulted in a specific purchase or a specific sale.

So what other journeys can the small business accounting system claim as a deductible expense against the taxable profit. The answer is basically any business journey and that should include all incidental journeys, perhaps visiting a supplier or a customer, visiting customers to quote for work, attending a business meeting, taking money to the bank.

Mileage allowances cannot be claimed for a business vehicle where the running costs of that vehicle are being claimed as a deduction from net taxable profits. Vehicle running costs include the capital tax allowances, licence fees, insurance, repairs and maintenance, membership of breakdown services and fuel costs.

Many small businesses may find that more than one vehicle is used for business journeys. The business vehicle running costs may be claimed for a specific business vehicle on which mileage allowances are not claimed this tax allowances may be claimed for the use of a private vehicle in the small business accounts.

Perhaps the small business runs a van for its main business and the running costs exceed the potential mileage allowance in which case the business should claim the vehicle running costs. If a different private vehicle is also used for some business journeys, perhaps even a spouse taking cheques to the bank, then mileage allowances could be claimed for that journey.

Each business should examine their tax allowance practises to ensure the maximum tax free allowance is claimed and supported with the required documentation to lower the tax burden when preparing the small business accounts.

What is Business Turnover?

Sales turnover is the amount the business earns before deducting business expenses including receipts of any kind for goods sold or work done such as commission, tips, payments in kind, fees and insurance proceeds. The turnover to be included in your financial accounts is the date it was invoiced or earned and not the date it was received.

What is excluded from Business Turnover?

Sales turnover excludes sales of fixed assets such as premises, vehicles and plant and equipment. Also exclude business start up allowances which are entered separately on the self assessment tax return. Money introduced to the business is excluded being capital introduced and not sales turnover.

What business expenses are allowable?

All running costs incurred solely for the purpose of the business may be deducted as allowable business expenses including goods bought for resale, employee wages, premises rent and overheads, administration costs, vehicle running costs. Interest on loans and overdrafts can be claimed as business expenses excluding the capital element of repayments. Higher business expense levels accurately recorded can keep taxable profit below the higher tax rate.

Can the cost of buying and repairing plant and machinery be claimed?

Repairs and maintenance costs are allowable business expenses. The purchase cost including improvements and replacement costs are not allowable business expenses, these costs being subject instead to capital allowances. Depreciation is not allowed and replaced by Capital Allowances for the purposes of calculating the tax payable.

What are Capital Allowances?

Capital allowances are designed to write off the cost of purchasing a fixed asset over the life of the asset rather than in the financial year in which it was purchased. Capital allowances on the majority of assets are based upon a higher rate of allowance in the year of purchase, First Year Allowance with the balance of the cost being written off at a lower rate, Writing Down Allowance. The full cost of any asset may be claimed as an expense in the year it is sold or scrapped less the total of accumulated capital allowances that have been claimed against taxable profits. Any sales proceeds over and above the written down value after Capital Allowances is added back to net profits and becomes taxable. Cars are subject to writing down allowances but not First Year Allowances unless they are classed as commercial vehicles. DIY Accounting has accounting software templates that automate the calculation of capital tax allowances.

Can expenses incurred for both business and personal purposes be claimed?

No. HMRC only allow such expenses if the business expenses element of the cost can be separated from the personal element. If you claim the travelling expenses to buy business goods they can be claimed for tax purposes but would be disallowed if you also showed evidence of personal items being purchased on the same journey. Using your home phone is an allowable business expense if you claim specific identified business calls in which case you would also be able to claim a similar proportion of the rental cost.

Can vehicle costs be claimed when that vehicle is also used for personal use?

Vehicle running costs and expenses such as fuel, excise duty, insurance, repairs and breakdown membership may be claimed as business expenses if the vehicle is used solely for business purposes. Travel from home to work is not business use and disallowed. Vehicle running costs, and capital allowances on vehicles, are split between claimable costs and a disallowed cost depending on the proportion the vehicle is used for business and personal use. Parking fees for business purposes may be claimed, parking fines and penalties for motoring expenses are not claimable as business expenses for tax purposes.

An alternative to claiming vehicle running costs and vehicle capital allowances would be to claim mileage allowances which at the time of writing are 40p for the first 10,000 miles and 25p per mile thereafter.

Can Business trips be claimed?

Travelling expenses and modest lunch expenses may be claimed. Hotel and reasonable costs of subsistence may also be claimed. A subsistence allowance can be claimed if staying with friends or family as an alternative to an hotel. The cost of lunch may not be allowed when staying away overnight. Lunch with clients is regarded as entertainment and is not allowed. If you are accompanied on a business trip by family only your cost is allowable and specifically only if the trip was purely for business purposes. Expenses on combined business and personal trips are not allowed to be deducted as business expenses on tax returns.

Can home costs be claimed?

If part of your home is identifiable as solely for business purposes then running costs can be claimed. The cost allowed is the proportion of the total area of the home the business area occupies. For example, excluding shared facilities of kitchen and toilet if the home has three bedrooms, living and dining room and one bedroom is used solely as an office then 1/5 of home costs could be claimed. The costs to claim would be heat and light, insurance, general and water rates and mortgage interest excluding repayment amounts. Where mortgage interest is claimed the revenue might also claim as a capital gain the increase in value of that proportion of the home, such Capital Gains Tax being subject to tapering relief over time.

How do I treat business goods taken for my own use?

Any business goods taken for personal use should be added to sales at normal selling prices including items supplied to family and friends at less than normal prices. He cost of providing services for family and friends is not allowable as a business expense.

Can I deduct my salary or drawings as a business expense?

You cannot deduct your own wages, personal national insurance or drawings from the business as a business expense as these are distributions of the business income after net taxable profit has been calculated and not allowable expenses before tax..

Can I deduct my partner’s wages?

Yes partner’s wages can be deducted as a business expense although there are rules which would be applied in such circumstances to ensure the amount paid is both real and reasonable. The business would need to operate a PAYE scheme for that employee, deducting income tax and national insurance, the work carried out must be real not invented and the rate paid reasonable for the nature of the work and the time spent. Evidence may also be required that the amounts were actually physically paid to that partner, for example in the form of a cheque.

Should Tax Credits be included?

No these are excluded from business profits although the level of credit received may subsequently be changed in the light of the actual business profit earned compared with the amount declared when the Tax Credit was applied for. HMRC do check that the net taxable profit shown on the tax return is the same as that declared when the Tax Credit was claimed.

Can I claim expenditure incurred prior to trading commencing?

Yes business expenses incurred up to seven years prior to trading commencing can be claimed. The actual date of the expenditure should be recorded although all pre-trading expenditure is treated as having been incurred on the first day of trading.

Are pool cars taxable?

Company cars are taxable as a taxable benefit while pool cars are not taxable. To qualify as a pool car, private use should be incidental to business use, the vehicle should not normally be kept at the employee’s home and the vehicle must be available and used by more than one employee.

Getting a tax refund is something that we can look forward to. It’s nice knowing the government owes you money after you’ve paid your taxes, because we may need those extra dollars for perhaps several different reasons. However, there are some cases in which you can lose that tax refund to your creditors.

How is that possible? After all, it’s your money. However, you can lose your tax refund to a bankruptcy trustee if you have filed for bankruptcy.

Because you didn’t have enough money to pay your bills is really the only reason you would file for bankruptcy. If you do file for bankruptcy and are relieved of your obligation to pay your creditors back, there are certain rights you are no longer entitled to when it comes to your tax refund. The bankruptcy trustees may be able to take a fraction or sometimes all of your tax refund, but only under certain circumstances.

Filing Before January 1st if you file for bankruptcy before January first, the bankruptcy trustee can usually only take a portion of your tax return. Still, this sometimes only applies depending on certain circumstances, like which state you live in and other factors like that. Often though, say if you file for bankruptcy around September, that’s 3/4 of the previous year, so they can only take 3/4 of your tax refund. This is called a pro-rata portion of your income tax.

Filing After January 1st Filing for bankruptcy after January first will usually give the trustee the right to take all of your tax return. This usually only applies if you file bankruptcy between the beginning of the year and the time you receive your refund. If you get your refund and then file, the trustee may only be able to take part of your refund.

Filing Jointly If you are married, you may have filed a joint tax return with your spouse. If you filed for bankruptcy afterward, but only one of you filed, the other may still get their share of the tax return, because that spouse does not have to suffer the consequences of bankruptcy. Therefore if you filed for tax returns jointly and only one individual files for bankruptcy, you will still get half of your joint tax return.

Spending Your Tax Return Money If you spend the money you got from your tax return money before you file for bankruptcy, then the bankruptcy trustee will usually not demand it of you. However, what you spent that money on makes a difference in whether or not they will ask the money of you.

If you use your tax return money to pay soemone back, like any kind of creditor, including family and friends that you may have borrowed money from, then the bankruptcy trustee will ask that you pay the amount you received in your tax return. But if you do not spend it to repay someone and spend it on something like getting your roof fixed or repairing your car, they will usually not go after you to get that tax return money.