October Question and Answer Section
Newsletter issue - October 2011.
Q. My café was badly damaged in the recent riots, but my loyal customers have collected £3,000 to help me open the business as quickly as possible. How should I treat this sum for tax purposes? Is it a personal gift, or a contribution to be set against my repair costs?
A. The taxman would view that this gift from your customers should be treated as income for your business for income tax or corporation tax purposes. You are likely to have a lot of repair expenditure to set against your income for the current period, so you may well not have a profit to declare even after including the gift as income.
Q. I've received a tax refund for 2010/11, but I'm worried that it's not correct as I usually have tax to pay each year. Also I haven't even submitted my 2010/11 tax return yet.
A. You are right to be worried about the tax refund, as the Taxman's computer has issued some incorrect refunds recently. If you normally complete a self-assessment tax return but also have some income taxed under PAYE, the computer should wait until your tax return has been submitted before calculating the tax to be refunded. In a few cases this has not happened, and the tax refund has been based only on the taxpayer's PAYE income. Please ask us to check the tax calculation that should have arrived with your refund cheque.
Q. The Tax Office has written to me saying £2,800 tax I owe will be collected by restricting my PAYE code for 2012/13. What does this mean?
A. The Taxman is now permitted to collect up to £3,000 of unpaid tax or overpaid tax credits through PAYE codes. Your PAYE code tells your employer how much of your income to treat as tax free, and thus how much tax to deduct from the rest. A common PAYE code for 2011/12 would be 747L, which gives you tax free income of £7,475 for the year. If you owe £2,800 in unpaid tax, and your highest marginal tax rate is 40%, your tax free income will be reduced by £7,000 (£2,800/ 40%), leaving you with tax free income of £475 and a PAYE code of 47L. The numbers will be slightly different in 2012/13, but essentially you will pay more tax each month from April 2012 until the tax debt is eliminated.