Tax Questions and Answers
I work in the building industry, with most of my work being short-term contracts on various sites. Do I need to register as self-employed each time I start a new contract?
When you are working as self-employed, regardless of the industry, you will need to register with HMRC. They will issue you with a 10-digit Unique Tax Reference (UTR) and will expect you to complete a tax return every year. You can register online here. (tinyurl.com/k4usk8y). As long as you intend to remain self-employed (i.e. look for new contracts each time one finishes) then there is no need to deregister between contracts. If you do stop self-employment, you should keep a record of your UTR. This is because the UTR remains attached to your tax record permanently once it has been issued. This means that, if you start self-employment again later, you simply have to inform HMRC of your UTR to tell them you are active again.
However, because you are working in the building industry, there is an additional step you need to take. Most work within the building industry falls under the Construction Industry Scheme (CIS). Under this scheme, contractors are required to deduct tax up front from any subcontractors they employ. You then include any tax deducted on your tax return, leaving either a balancing payment due or, more commonly, claiming a refund of any excess paid.
The standard rate of deduction is 20%, but this is only if the contractor can verify you as registered under the scheme. If they are unable to verify you, they will deduct 30% instead. This is because HMRC consider unverified subcontractors are more likely not to report their income at all. You can register for the scheme by telephoning the CIS helpline 0300 200 3210. You will need your UTR and National Insurance number when calling.
It is possible to register under CIS without having tax deducted. This is known as gross payment status. In order to qualify for this, you will need to have been in operation for at least a year. The other requirements for this are that you have always paid your taxes on time, you have a turnover of at least £30,000 and you operate your business through a bank account. Even if you meet the criteria, there is no requirement to apply for gross payment status. If you do apply for it, you need to remember that, whilst you will get more cash up front, you will need to set money aside for your tax bill as well.
I forgot to make my second payment on account at the end of July. What should I do now?
As you will be aware, tax is normally due for payment on 31st January each year. If your tax bill is under £1,000 or you have paid at least 80% of your tax in advance (e.g. through deduction under PAYE) then you are not required to make any other payments.
If you exceed either of these criteria, then you will also be expected to make payments on account. These are due on 31st January and 31st July and are payments in advance for the following tax year. On the assumption that your tax bill will be the same, these are calculated as 50% of your last liability. When you submit your tax return for that year, these payments are offset against any tax due, leaving a refund or balance due.
There are two things you can do to limit the effects of your late payment.
Firstly, you should pay as much as you can as soon as you can. Late payments on account attract interest based on the amount outstanding. The lower this figure, the lower the interest that you will end up getting charged for late payment.
Secondly, you may wish to file your tax return now. As noted above, payments on account assume your tax bill will be the same. If you had less income in the following year, then submitting your return will reduce the second payment on account to whatever balance is due. If your income is higher then the payment on account is not increased by submitting a return.
I rent out a property but, because of the size of the mortgage, I am actually making losses on the rental. As I have no taxable income from this, do I still need to report it?
If you have property income over £10,000 per annum, you are required to report it on a tax return regardless. If you genuinely are making losses then there will be no penalties from failing to file a return. This is because penalties are based on tax due. However, HMRC use information from the Land Registry to identify unreported rentals. If they identify your property in this way and you have not submitted returns, you could find yourself in time-consuming correspondence with them trying to set the record straight.
But there is a more important reason for reporting this income. At the moment you are making losses, but you may start making profits at some point in the future. By reporting the losses now, you create a clear record within HMRC’s systems of them. These losses can then be offset against any such future profits, reducing your tax bill accordingly. This can include profits from renting other properties, as all such rentals are considered a single rental activity. Unfortunately you cannot offset rental losses against other income.
As you say that it is the large mortgage that is creating the losses in your case, I should raise two important points.
Only mortgage interest is tax-deductible for rental properties. It is a common mistake to deduct all of the mortgage payments from rents, even though some of them are actually repaying the mortgage itself. That said, a lot of buy-to-let mortgage payments are interest only arrangements. If this is the case, the whole of the payments is interest and hence deductible.
Rather more importantly, a significant change in the way mortgage interest is handled for rental properties is currently taking place. Historically the interest has simply been deducted, producing a lower taxable profit. In future, the interest will instead be a basic rate “tax reducer”. This means that interest will reduce the tax due by basic rate (currently 20%) instead of reducing the profits. This change is being phased in over several years as follows:
At first glance, this will seem to result in the same answer. But, depending on how much rental income you have plus your other income, this may not be the case. At present, if
your total income, including rental profits, is below £46,350 then you will only pay tax at
basic rate. Without the deduction of mortgage interest, it is possible that your future rental profits will push your total income above this figure. This would mean that some of your income is taxed at higher rate (currently 40%), but you would only get a reduction of 20%
for your mortgage interest payments. This therefore has the potential to increase
your future tax bills without any other change in your activities. As the effect of this
is very much dependent on individual circumstances, you should seek professional advice if you think you will be affected by this.
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