February Question and Answer Section

Newsletter issue - February 2012.

Q. What records do I need to keep to claim travelling expenses? Do I also need to keep receipts for petrol?

A. You should record the date, destination and distance of each business journey you drive in your own car. It is good practice to record the total on your car's milometer at the start and end of each journey. Your employer can pay you up to 45p per mile for each business related journey you drive. Business journeys do not include normal commuting between your home and your permanent workplace. If your employer is VAT registered it will be able to reclaim VAT on part of the mileage allowance you receive, if you provide VAT receipts to the value of the fuel used. The VAT receipts do not have to exactly match the dates of your journeys. When travelling by public transport keep the receipt for the ticket.

Q. I've always calculated my business income for a full year to 30 April. On my tax return for 2010/11 I've recorded my business profits, income and expenses for the year to 30 April 2010. But when I rang the Tax Office with a query the adviser told me that my accounts should always be drawn up to 5 April. Have I been doing it wrong for 20 years?

A. The adviser at the tax office is wrong. You can draw up your business accounts to any date you please. The year end of 30 April gives you a long delay between the end of your accounting year and the date on which you need to pay tax on the profits for that period.

Q. A friend told me I'd pay less tax if I held my let properties through a company. Is that true?

A. The answer depends on whether you need to get your hands on the proceeds from your lettings business and your current highest tax rate. Let's assume you need the cash and your highest tax rate is 40%.

If the properties are in a company, the company will probably pay tax at 20% on the rental profits. But its tax rate could be up to 27.5% if the annual profits exceed £300,000, or you control a number of companies. When you extract the profits from the company as dividends you will pay a further 25% income tax. So for rental profits of £100, you will end up with £60 in your hands.

If you hold the properties personally, and pay tax at 40%, for every £100 of rental profits you will receive £60 in your hands. No different to holding the properties in a company. However, if you had not extracted the profits from the company until a later year when you are a basic rate tax payer you would then be paying less tax. It can also be beneficial to keep the profits in the company to re-invest in further properties. The company may pay tax of 20% on the gain it makes when it sells the let properties. If you sell the properties you will probably pay tax at 28%, but you will be able to set-off a tax-free allowance of £10,600 against the gain, which is not available to the company. You may have to also pay further tax when extracting the profits out of the company.