What to do if the business is making a loss? This is a guidance on how to use business losses to offset other taxable income to save tax. There are slightly different rules between incurring losses as a sole trader and as a company. And there are rule changes for corporation tax loss which was brought forward from April 2017.
Business Losses as a Sole Trader
If you are in transition from being employed to a business owner, you might have a salary job to make sure you have the sufficient financial support as well as building your business on the side at the same time. If your side business is making a loss but you have a full-time/part-time job and tax is being deducted before you get paid, you can use your business loss to offset your salaried income. This enables you to get some tax back.
You can even decide how much loss you want to offset for the current year and carry back some to the previous year so that your personal allowance (currently £11,000) will not be wasted. For example, if you currently earn £10,000 which is under the tax-free threshold for personal tax, then you have a business that is making £2,000 loss, if you are offsetting the current year there is no benefit to you, as your first £11,000 income is tax-free anyway. However, if your previous year’s income is £30,000 and you paid tax on it then you can use that £2,000 to offset previous years which allows you to get some tax back. If you do not have anything to offset to the previous or current year then you can carry forward and if it becomes profitable in the second year you are able to offset the second year’s profit. Either way, you can always get some tax relief from your losses.
The income related to a sole trader includes capital gain. If you do have capital gain, there is an allowance of roughly £11,000 per year. When you use the allowance to offset capital gain, you need to make sure you do not waste the annual allowance. For you as a person, you have a tax-free allowance for both income tax as well as your capital gain.
Business Losses as a Ltd Company
A limited company is a separate person than you. If the company is making a loss, the loss cannot be used to offset your personal income. This is one of the reasons why people find it beneficial to first set up their business as a sole trader.
A limited company does not have any allowance. If you do incur loss but at the same time the company is running two different kinds of business activities where one is profitable and one is making a loss. You are able to use the current year loss to offset other income; this includes the interest from your business savings.
If there is nothing else left for you to offset, you need to consider carrying it back to the previous year. If you do have a trading history and you were making some profits before then you can carry it back to the previous year to offset that. Once you make a declaration on the corporation tax, you will get a tax refund from the government. The remaining unused losses will be brought forward for the future years.
If you are in your final year of trading and have some losses, you can use that loss to offset your previous 3 years profits then you will get some tax back that you have paid.
Corporation Tax Losses Rule Change Post April 2017
- If the losses are incurred before April 2017, you can only use it to offset the future profit of the same trade.
- If the losses are incurred after April 2017, you can use it to offset any profits. But the trade-off is that for carry forward losses, companies will be able only to use the losses to offset against up to 50% of the profit. Each company will be entitled to £5 million annual allowance. That means most small businesses will not be affected.
The Best Order to Consider Loss Relief to Get the Tax Relief Quicker
- Offset current year first – so that you get immediate tax relief from current year
- Carry back to previous years – so that you get tax refund from previous year’s taxed that you’ve already paid
- Bring forward to the future years – so you get tax relief if your business is profitable the next year
For sole traders, always remember to consider your tax-free allowances when utilising the losses, so that you can make sure your tax-free allowance won’t be wasted and you can maximise the tax relief you are entitled.
If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please direct message the author of this article so we can arrange a chat.
‘Health is the Ultimate Wealth!’
It costs the NHS more than £11 billion a year to treat the diseases that are related to poor lifestyle choices! (Public Health England)
When we are thriving to build wealth, it is easy to forget that ‘Health is the Ultimate Wealth!’
However, the good news is, most of the chronic diseases can be prevented by healthy lifestyle choices. When you are healthier, as a medical professional, you are more productive at work, have more positive energy that can impact other people’s lives, and help more people be healthier and happier.
You are good enough to look after your health no matter what profession you are in as long as you prioritise it.
Tips to Prioritise Your Health and Plan Effectively
- Prepare Your Meals in Advance – Instead of cooking every day you could try to cook your food in bulk. This can be handy if you are a busy professional. It will enable you to fit in a quick and easy meal within your busy lifestyle and save you money. You will also be able to control what is going into that meal. There are a lot of healthy alternative food options out there that you can use to help.
- Scheduling and Planning – You can try to do something health-related as soon as you get out of bed. This will allow you to create a morning routine that you will eventually get used to and once you are, it will become a part of your lifestyle naturally.
- Preparing for Your Morning Routine – The first thing that you need to take into account is that your health starts with your mind. If your mind is not in a healthy place in the morning then it is really difficult to pick that up later on in the day. For example, if the first thing you do when you wake up is go through social media, whatever you may see whether it be positive or negative, it will stay in your mind the whole day.
Having a routine that takes you away from that is very important. Once your alarm goes off in the morning you could try to not check your notifications but instead, take some time to yourself. You could spend some time writing down things that you are really grateful for. This will instantly put you in a positive frame of mind as soon as you wake up because it is making you think about things that are making you happy.
You can then write down some things about affirmations. Affirmations are statements that you say to yourself that help you believe them. For example, if you are working towards your weight goal and you want to be healthier, you will write down, ‘I’m so grateful and happy that I can now fit into that dress.’
Lastly, you can then write down your intentions for the day. It is better to keep them basic so that you do not disappoint yourself. It could be anything small such as calling a family member on the day or messaging a friend. Fitting in a workout or exercise routine within this will also help. It is important to remember to always reward yourself consistently.
Creating a Lasting Habit and Sticking to It
This is something that a lot of people struggle with. It will always feel really unnatural when you first start off because it is not a habit just yet as you are not used to doing it. However, if you keep pushing yourself then you will overcome the hardest bit and afterwards everything will start to become more natural for you.
Once you have an everyday routine you will find it will be very difficult to go back to how you were. An important tip to take into account is to be prepared for the growing pains. If you can handle the difficult stages then things will pick up for you and everything will become easier. It is fine to challenge yourself because if you do not do this you will not grow as a person.
Healthy Snacks Ideas
- Protein Ice Cream – The ingredients you need to use to make this is yoghurt, ice cubes, soy protein and then all you have to do is blend it then put it in the freezer for about 10 minutes.
- A healthy alternative to KFC – All you need to do is get some chicken breasts, marinate them, add seasoning, crush up some cornflakes and roll the chicken breasts in them to coat it. You will then need to bake it.
Finally, why am I talking about this? Imagine more people start looking after their health, the costs of treating those diseases can decrease, so free up more money to invest in disease prevention, doctors’ welfare so they can be healthier first then look after more people, or even other things to enhance people’s lifestyle.
This is written just out of passion, if you have any thoughts or feedback on this topic, we’d love to hear from you.
‘Shall I buy a car under a company or personal name?’
There have been a lot of questions around personal cars vs company cars, when you are a running a limited company. It is important to be aware of the different things to consider as in the end there are a number of tax consequences when you purchase a car under a company’s name. If you are a company director you have a choice on whether it is worth it to purchase a car under the company’s name or have it under personal name but only claim the mileage through the business use.
What You Need to Consider
- You need to be aware of the tax implications. When you buy a car under your name and for business purposes, you are only allowed to claim tax deductions it when you are traveling from your office to a client. This is due to it being a business journey that is necessary for you to do your job.
- If you buy a car under a company, then that car belongs to the company and the company does get some tax relief on the corporation tax. However, it is important to note that for the company, they cannot always deduct 100% of the cost of the car.
- If you buy a car under a company but also use it for personal reasons, then the use of company car becomes a benefit, so you do need to pay personal tax on it.
Tax Implications Explained
If you buy a car under a company then there are dual tax implications. The company does have tax relief, but as a director (who is treated as one employee) you do have to pay tax on the personal use of that car. You are able to pay some money for the personal use which will effectively reduce your personal tax, but it is still something that you need to pay out of your pocket when evaluating the cash flow.
You need to make sure you consider whether the benefit of corporation tax outweighs the personal tax liability. For instance (based on the Illustration 1 below), if you get £820.80 as company tax relief but you have to pay personal tax at £1,104, as you have a £283.20 loss, in this case it is not worth it to put the car under the company’s name.
It might be better to put the car in your personal name and just claim the mileage. When you do record the mileage, for the first 10,000 miles you can claim 45p per mile, which you can reimburse yourself from your company. Anything above 10,000 miles is 25p per mile. For most contractors/locum doctors, it probably is better for you to put the car under your personal name and claim the mileage.
Is It Better to Lease the Car or Purchase the Car?
- When you are leasing a car, you are entering a long term monthly rental agreement. You are able to claim the tax relief on the lease payment you made. If you are VAT registered, you are able to claim the VAT paid on the lease payment but that is restricted to 50% of the VAT. It can be a better option for you if it is better for your cash flow, and you are not interested to own the car at the end of the lease.
- If you buy a car and it is under your company’s name (that included a hire purchase agreement, i.e. the kind of lease that you will own the car at the end of the lease), then the company does get tax relief but you need to consider the tax implications stated above.
Carbon Dioxide (CO2) Emissions
At the moment, the government has been encouraging low emission and electric cars. The lower the carbon dioxide emission is the more tax beneficial it is. If you have a very low emission car or electric car, it is likely that from the corporation tax point of view you will get 100% capital allowance on the year it was purchased (with CO2 emission lower than 75g/km). If the carbon dioxide emission from your car is around 100g-120g per Km (which has been shown on average cases), then you can only claim 18% of the cost of the car towards corporation tax.
For personal use, if you have a very low emission car or electric car, you only get personal tax charge based on 9% (7% in 2016-17) of the ‘cost’ (list price) of the car. This may be more beneficial for you if this is the case as it does not incur much personal tax liability and you get corporation tax relief based on 100% of the cost of the car.
It is important to note that if you have a very low emission car or electric car, it may be to your advantage to put it through the company. As you do not have much personal tax charge, but from the company tax point of view you get tax relief of 100% of the cost of the car.
Steps You Need to Remember to Consider
- The dual tax implications.
- Would it benefit the cash flow or is it cost effective? Would it be cheaper for you to lease the car or buy the car?
- Carbon dioxide emission levels in comparison to the personal tax charge or corporation tax relief.
If you find this content useful, we do provide tailored professional advice on your personal or business tax matters. If you are interested, please direct message the author of this article so we can arrange a chat.
Travel and subsistence is a very simple expense but there is a lot to say about it. We will look at this in further detail and explain when you cannot claim this expense and when you can. There are also some tricks if you are running your own business to make the travel tax deductible.
When You Can and Cannot Claim Travel and Subsistence
- If you are an employee or business owner and you have an office, the regular commute from home to office every day is not allowed to be claimed. This is due to it being your normal commute so it is seen as a personal travel expense.
- If you travel from your office to a client’s site temporarily or if you have to travel to another city to stay overnight then these types of travel are seen as business journeys. This means you are allowed to claim the expenses.
Temporary Workplace Vs. Permanent Workplace
There are many different scenarios that need to be taken into consideration when deciding on whether you can claim the expenses or not. They are mainly linked to whether they are a temporary workplace or permanent workplace. If you are an employee/self-employed and travel from home to one place or your primary office base is from home but you do have client’s you travel to regularly, the journey will only be allowable if it is from your primary workplace to your temporary workplace.
- A very simple rule to remember is that when you do travel to the temporary workplace if it has been ongoing for longer than 24 months it might be considered as a permanent workplace. If it is less than 24 months, it will be seen as a temporary workplace.
For example, if you are a self-employed contractor and have been working for a client for 6 months, it will be classed as a temporary workplace. However, if you have been working for them for 3 years and even if they are paying you to your limited company, it is still considered as a permanent workplace so you cannot claim that.
- Another rule to remember is that it has to be less than 40% of your working time. (Less than 24 months)
If you run a self-employed consulting business for 3 years but you have had a contract for 6 months which is less than 40%, this means it is still a temporary workplace. Even if it is less than 40% and you have been travelling back and forth for a client for more than 24 months, it cannot be temporary so cannot be claimed.
If you are a trainee doctor what might happen is that you will be on rotation and work at a hospital for a couple of months but perhaps you are on an essential single contract. If this is the case, your payslip will show that you are being paid differently but in reality, they are all linked to each other. As you have only been working there for a couple of months and it is less than 24 months, it is considered as a temporary workplace. If you are a qualified locum doctor and are self-employed/running a limited company, this rule will also apply to you.
Travelling to Another City and Staying Overnight
For example, if you are based in London but need to travel to Manchester and stay overnight just for work, then you are allowed to claim this. It is important to record your business journey because you will be claiming mileage and if you travel by public transport, you need to make sure you have the receipts with you.
If you do stay overnight, you are allowed to claim your food and accommodation because they are both necessary for work. When it comes to claiming food, there is another rule that needs to be taken into consideration:
- If you are working somewhere that is more than 5 miles from your normal workplace and you have to work there for more than 5 hours then you are able to claim subsistence.
There may be another scenario where entertainment and food can be claimed. This may happen if you have to go networking as part of your business. The food expenses are incurred as part of your networking to find prospects as part of your marketing. As long as you clearly state it is necessary for your business to go networking in order to meet a lot of people in order to get more business. If the food and entertainment are for your staff it will be part of your payroll costs so for your business tax purpose it is allowed as well.
How to Make Your Travel Overseas Tax Deductible
Going on holiday can be tax deductible but not if it is for personal enjoyment. However, if you are going to a location to expand your business and do some market research, or are going to find some networking events to find some potential prospects then it can be considered as a business expense.
Are you tired of working long hours to fund your tax bill?
There are a lot of people who may feel as though they would need to work more shifts in order to fund their next tax bill, this is a short-term solution but it is tiring as well. When you are working seven days a week for a month you will have an income surge and cash flow wise you will have a lot of cash coming in. On the other hand, your incurred tax liability from that particular month will be high which means that it will be added to your future tax bill. It is best to not be in this position because you will be going around in circles and you will end up working forever for the taxman.
But the upcoming new changes may help you stay on top of your money and predict your tax bills in time, so that ‘working for the taxman’ may become unnecessary!
The new movement is called ‘Making Tax Digital’.
What is ‘Making Tax Digital’?
It is the new quarterly reporting requirement that will be coming into play from April 2018, and most of the self-employed individuals and landlords will start the duty from that time. Previously, if you were self-employed and running a business you would file a tax return once a year. However, with the new changes taking place you are required to report the tax on a quarterly basis. This does not mean you have to pay tax every quarter, it is only a process to enable you to update your records on a quarterly basis. From the government’s point of view, they are looking to close the tax gap and by doing this they will have an idea of how much you are going to pay to them.
The Benefit of Making Tax Digital
Making Tax Digital should not be seen as a negative change that only benefits the government. There are a few positive outcomes from this change such as:
- Prediction of Tax Liability – It will allow you to have a prediction of your tax liability so that you can pay the liability by the deadline set and make sure you meet your payment deadline.
- No Errors or Omissions – It makes sure you do not end up having errors or having any omissions on your tax calculation.
- Enable You to Update Your Records – If you are keeping your records up-to-date on a quarterly basis instead of 9 months after your year end, you will have the prediction on your tax bill. This will allow you to put money aside which will enable you to meet the payment deadline. You will pay the tax easily and you do not have to end up working so many hours to make up this tax bill.
The government has set a timeline for all the changes to take place:
- April 2018 – If you are self-employed or a landlord and are earning over the VAT threshold, which is £85,000 for the year, it is likely that you have to prepare for the changes. You will start to do the quarterly reporting from April 2018 so it is worth paying attention to it.
- April 2019 – If you are earning under the VAT threshold, the changes do not apply to you until April 2019. If you are VAT registered the same will apply but the changes should not make much difference to you as you file a VAT return quarterly already.
- April 2020 – By April 2020, everyone including limited companies, will be taking part in the quarterly tax reporting.
Exemption: Businesses, self-employed individuals and landlords with turnover under £10,000 are exempt from this duty.
What You Need to Do
- Check your Timeline – The first step you need to take is to check your timeline so that you can prepare for the quarterly tax reporting.
- Keep your Records Up to Date – The second step is to look at your current record-keeping and if you are keeping your records up-to-date regularly. Most people that are self-employed are currently doing their 16/17 tax return, it is best to get that out of the way as soon as possible and once it is done you would need to update your records.
- Consider the Best Record Keeping System for You – If you are using spreadsheets at the moment you can continue to use it as a record keeping system as long as you continuously update it quarterly. There are some online cloud-based software that you can also use that are very inexpensive and easy to use. It is automated as well so it can include your bank transactions which can simplify the process for you. An example of suppliers are Xero or QuickBooks, they are both good and are worth looking out for.
There are more medical professional clients who are looking to start property investment. It is important to be aware of the tax implications when you rent out a property and how different it is tax-wise when you rent it out. This is a guidance focusing on when you do not have to declare rental income in your tax return, buy-to-let tax changes and options to mitigate the tax impact.
Note – Please be aware that this article focuses only on tax legislations around properties. However, if you are looking for full property investment strategy, further specialist advice may be required.
Non-declarable Rental Income
If you are starting out or if you are a home owner and are renting out a spare room to earn extra cash, there are three types of scenarios where you do not have to declare your income such as:
- Rental Income Less Than £1,000 For the Year – If you are just starting out and only have £1,000 from the rental income for the year then you do not have to declare the income.
- Rent Out A spare-room for less than £7,500 for the year – If your earning collected for the year is less than £7,500, you do not have to declare it in your tax return.
- Property fund investment held in ISA – ISA is a tax-free environment, they are investments that you can choose from such as property funds. If you are earning income from an investment ISA then it is tax-free so you do not need to pay tax. It is important to speak to a financial adviser about ISA and investment.
In the past, there have been a few scenarios where there are people who rent out a property but do not fill in a self-assessment or declare the tax and eventually the tax man finds them. It is essential that you do fill in a tax return if you do rent out a property or for any other reason other than the three conditions mentioned in order to avoid being in the same situation.
Buy-to-Let Tax Change
From 17/18, if you have a buy-to-let property and are paying mortgage on it, the government starts to restrict the tax relief on the mortgage interest. Such mortgage interest relief will be cancelled completely by 2020-21. Mortgage interest can be the biggest expense currently for buy-to-let landlords. If the government do decide to cancel this tax relief it can be a significant impact.
An example of this is if you are a basic rate taxpayer, you earn around £25,000 and have a lease rental property which collects around £50,000 for the year. The mortgage interest would be £30,000 and other expenses are £10,000. This means that you will have £10,000 profit, in 17/18 you are able to claim 75% of it but until 2020/2021 the interest relief will be completely removed. The impact is that you will have up to 50% of what you have now. In this case, after tax and before the tax change, you will have £8,000 in your pocket. But in 2020/2021, you will only have £4,000. (Graph 1)
If you are a high rate taxpayer and earn £50,000, it will have an immediate impact on you. From this year you will have around £1,500 less but eventually in 2020/2021, the impact will be significant. (Graph 2)
Options to Mitigate the Impact
- Rental Loss Relief – If you have recently had a property loss, you can carry forward the loss to offset your profits. This approach is the cheapest and most straightforward strategy for you to mitigate your tax.
- Spouse Transfer – If you are married and the buy-to-let is under your name only, you might be able to consider having a shared ownership. This can apply to situations where if your spouse is not working or they are earning at a basic rate tax band. When you share the ownership, his/her share of that property profit will be reported by the lower tax bracket. This will help you to save tax.
- Re-invest in Commercial Properties or Furnished Holiday Lettings (Airbnb) – You can still claim the full mortgage interest relief if you invest in commercial properties or furnished holiday lettings. However, only take this approach if you are fully committed to do it and it is your own strategy. There are different mind-sets between having a property and collecting the rent compared to holiday lettings. This is due to constantly having to advertise your property and it is like a business, it involves a lot of work.
- Forming a Limited Company – Forming a limited company will protect you from the impact of the mortgage interest relief restriction. Corporation tax at the moment is only 19%, this is a huge tax advantage. You can also take further advantage if you have your spouse or family member become a shareholder of your company which will allow you to share the company income as well.
However, if you are running a very profitable property management business, the dividend tax is not as good as before which needs to be considered. When it comes to forming a company, when people consider transferring the assets into the company, if they do not do it considerably there is a capital gain tax implication. Another downside is if the properties are held in the company, the mortgage options are very limited. There are also more administration burdens such as; filing company accounts and company tax return. You may also need to run the payroll when you need to hire someone to manage the property business for you.