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May questions and answers

Newsletter issue - May 2019.

Q. I have realised that I made a mistake on my most recent VAT return. What do I need to do to put things right?

A. You can make adjustments to correct errors on past returns if the error:

  • was below the reporting threshold (broadly, less than £10,000, or up to 1% of your box 6 figure (up to a maximum of £50,000);
  • was not deliberate; and
  • relates to an accounting period that ended less than 4 years ago.

When you submit your next return, add the net value to box 1 for tax due to HMRC, or to box 4 for tax due to you.

Alternatively, you can notify HMRC of the error by submitting form VAT652 to the VAT Error Correction Team. Further information can be found here.

Make sure you keep good accurate records relating to the adjustment.

Q. I intend to start my own business later this year but have yet to decide whether to trade through a limited company straight away. I will need to make a substantial initial investment in the business, so it is likely that I will make a loss in the first, and maybe even second, year of trading. Is loss relief the same for sole traders and limited companies?

A. There are various advantages and disadvantages of incorporating a business, and taking everything into account, you may come to the conclusion that it would be best to carry on your business as a sole trader in the early years. This situation may be particularly relevant if you envisage making losses in the early years of trading, because you can carry back losses made in the first four years against personal income of the three preceding years, often resulting in a substantial refund of tax becoming due. Loss relief for limited companies will generally be more restrictive in the early years of trading. However, don't miss out on the opportunity of forming a limited company later on when the benefits of company status may be more valuable.

Q. I would like to give my daughter a gift of £5,000 cash. What are the inheritance tax implications of this gift?

A. The inheritance tax (IHT) annual exemption enables a person to give away up to £3,000 per annum free of IHT. In addition, any unused exemptions from the previous year, may be carried forward, although any unused exemptions earlier than a year will be lost. This means that if no gifts have been made in the previous tax year, a person could make an IHT-free gift in the current tax year of £6,000. If the amount exceeded the annual exemption available, it could still remain exempt from IHT if the person making the gift survives seven years.

In addition to the annual exemption, small gifts of up to £250 per year may be made free from IHT. The gift must be an outright gift to any one person each tax year.

Gifts on marriage can also be free of IHT provided that the gift does not exceed set limits. The limits depend on the relationship to the married couple/ civil partners and are as follows:

  • Parents - £5,000
  • Grandparents, great-grandparents - £2,500
  • Bride to groom/ groom to bride/ bride to bride/ groom to groom - £2,500
  • Anyone else - £1,000

These exemptions may be combined in certain circumstances to reduce a potentially exempt transfer (PET).

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