UK Tax Questions Answered by Shrewsbury Accountant No.21

Here is my latest tranche of UK Tax Questions Answered. Each question is from a Tax blog reader which will hopefully be relevant and of interest to you

1. Subcontractor up in arms
2. Wife’s wages disallowed
3. When a garden shed can be a cunning plan
4. Mileage claim
5. Dividend Tax

Subcontractor up in arms!

Question:

I run a small building business and have to use subcontractors, so I use the Constructions Industry Scheme and deduct 20% from their invoices. Last month I received an invoice with a breakdown (labour + materials) from a new subcontractor and I paid him 80% of the invoice total. He went ballistic and told me in words of very few syllables that I shouldn’t deduct 20% from the materials amount. I don’t think he’s correct, but am I right?

Answer:

No you’re wrong I’m afraid, as the CIS scheme is operated to essentially collect Income Tax. Providing the subcontractor provides an accurate breakdown of labour and materials, you only withhold 20% of the labour element.

Wife’s wages disallowed

Question:

I run a driving school and my wife runs the administration, keeping the books, making the appointments for lessons and doing pretty well everything except teaching the customers to drive. Every week, I transfer £450 into our joint account (£300 for me and £150 for her). I don’t operate a PAYE scheme as my wife’s wages are under the NI threshold of £155 a week; however I recently had a HMRC routine Compliance Check on my tax return. The Inspector disallowed my wife’s wages on the basis that she hadn’t actually been paid and treated the £7,800 paid in the year as a non-deductible allowance. This will potentially cost me a fortune and seems grossly unfair; so my question is has he gone over the top and do I have grounds to appeal his decision?

Answer:

Whilst I believe that the Inspector could and should have exercised commonsense discretion, on a technical point of tax law he is correct. The unfair aspect of his decision is that as your wife clearly contributes a significant amount of time to the business and if you’d paid her into an account in her sole name it would have been allowable. I would suggest that you appeal to his immediate superior and catalogue exactly what she does and the hours spent and request a review of the decision. If this fails you can always appeal to a Tax tribunal, but this will involve costs and as by the strict letter of the law the inspector is correct, it’s a long shot I’m afraid.

When a garden shed can be a cunning plan

Question:

I’m a musician and teach drumming, mostly from home. Despite double glazing, lessons can get quite loud and I’ve had complaints from my neighbour as I live in a semi-detached house and the local Council noise-abatement official has threatened me with an ASBO unless I reduce the noise significantly. I’ve come up with what I think is a cunning plan which involves buying a large heavily insulated and double glazed garden shed to teach drumming in. As most of the sound is transmitted by vibrations through the walls and floor, in theory moving into a shed will reduce the noise by around 80% and the Council official will be happy. The downside is that this special shed will cost around £8,500, so can I claim it against my tax?

Answer:

As you can clearly prove by correspondence from the Council that you need alternative sound-proofed premises, I am of the opinion that the cost of the shed is tax deductible. The only caveat is that you cannot use it for any other purpose

Mileage claim

Question:

I began my small business (selling personalised greetings cards) in October 2015 and have decided to close it in December 2016 as the modest profits I’m making are not worth the 80 plus hours I’m putting in. My single biggest expense is motoring; I’m averaging 3,000 miles per month, around 42,000 over the 14 months of the business and intend to claim the 45p mileage rate. I am aware that I will have to have Annual Accounts prepared and I want to put the mileage claim which I’ve calculated at around £19,000 on one set of Accounts for an extended year of 14 months. Am I correct that I can extend my year?

Answer:

You are correct that you can have an extended year of 14 months, but unfortunately you’ve misunderstood the rules on mileage claims. The rules state that on the first 10,000 miles in the tax year you can claim 45p per mile, however for each additional mile above this the rate drops to 25p per mile. This will reduce your mileage claim by £6,500 to £12,500; however, if you don’t have an extended year and have a set of Accounts done for each tax year you would have a second 10,000 higher rate mileage claim, which would increase your claim by £2,000, giving a tax and NI saving of £580, assuming you’re a 20% taxpayer or £820 if you’re a 40% taxpayer.

Dividend Tax

Question:

My wife and I run a small limited company with an equal shareholding. We both have a modest salary just above the tax threshold and take the rest of our income by way of dividends. Now that the new dividend tax is upon us, I’m thinking of issuing shares to other family members to try and avoid it. The question is, how do you go about doing this so as to avoid accusations of income shifting from the HMRC?

Answer:

There is nothing in HMRC’s rulebook against issuing more shares at their nominal value to other family members, as long as they’re able to keep any dividends the company pays on their shares. However if these new shareholders are expected to give the money back to you and your wife, then HMRC could well consider this to be deliberate income shifting.

(NOTE: The first £5,000 of dividends a person receives is tax free, with dividends above this level taxed at 7.5% (for basic rate taxpayers) or 32.5% (for higher rate taxpayers),