I have just taken on another new client this evening and he has been self-employed for 4/5 years, hes not very big although will have to probably go VAT reg this year. He is a Sole trader. He does his own SA on line although I will have a look at these in more detail when I come of holiday in September, I already said to him that I was fully booked until my hols. Anyway he also threw into the melting pot that he has a flat that he rents out, not really an issue you all might say! Well that seems fine for yr 2010/2011 he keeps receipts and has a tennant. The problem is the last 2 tax returns he has not declared the income which I said he should have, so I asked when he first rented it out (he use to live there), did he make any money and he said that the rent was less than the mortgage as when he brought it the interest rate was high, he said he was loosing about £170 per month so that was why he didn't put it on the SA. My thoughts are but I could be wrong as I am NO tax expert if he had put it down on there would he have been able to offset his loses against his profits of his self-employment business?????? Hope I have worded that correctly? Like I said earlier is is Self employed NOT a Ltd comany.
Anyway in the yr 2010-2011 he is now making money on the rent ie the mortgage is less than the rent and I have told him that will have to be declared this time around. He still wants to fill in his own tax return to save money. If its the case that he could have offset the loses on the flat against his income from self-employment, is it best going back over the last 2 years worth of stuff and seeing if we can get him a refund??? Or is that not how it works?
Sorry for sounding abit thick had the day off today at the local farm with my youngest and his friend, so not had to use my brain today! I'm going to enrol on AAT level 4 in September so hopefully my Tax knowlegde will improve no end!
Any thoughts greatly appreciated as always.
Many thanks
-- Edited by Amanda on Friday 5th of August 2011 11:49:18 PM
Normally, rental losses can be carried forward against future rental profits. See here for more detail: http://www.hmrc.gov.uk/manuals/pimmanual/pim4210.htm For situations when rental losses can be set against general income, see here: http://www.hmrc.gov.uk/manuals/pimmanual/pim4220.htm
Very roughly, self employment is generally a trade, profession etc. Income from property is property income except from a B&B, which is still a trade, or or a rent-a-room scheme.
You cannot offset losses in one against profits in the the other
would you still not have to declare this income if you were self employed as it would still be income from a run business so making it part of your sole trader income
Rental income is on a different section of the tax return, separate from sole-trader part. But yes, you would still normally declare it.
Apart from setting rental losses against future rental income, there are three other methods of relieving rental losses but they are not available in all cases:
relief against general income to the extent the loss is due to certain capital allowances (see PIM4220),
sideways relief against general income to the extent the loss is due to certain agricultural expenses (see PIM4220),
sideways relief against general income to the extent the loss is due to furnished holiday lettings (see PIM4130).
The amount of the loss attributable to these items can be set against the general income of the year of loss or the following year.
A claim has to be made by the 31 January just under 22 months from the end of the year of assessment.
( - quoted from HMRC website.)
There are full notes and examples on the link I put earlier and also here: http://www.hmrc.gov.uk/manuals/pimmanual/PIM4205.htm (and subsequent pages).
[edit: of course, I have no idea if any of the above will be applicable to the OP's new client ]
-- Edited by Figurate on Sunday 7th of August 2011 04:23:54 PM
Thanks everyone, Hopefully will get abit more time tomorrow to have alook a the links that 'Figurate' posted.
I think I might ask him for his previous years tax returns that he did himself and first check them to see if they are correct and then find out exactly how much money he has lost on his flat previously.
It's quite common to come across people who several years down the line remember they have a rented flat/house, I have had many! Not only has he lost out on the benefit of the accrued loss to offset against the now profit making flat, his previous tax returns are also technically wrong. If HMRC had noticed (via the land registry, or other enquiries) that he owned a second property they would open an enquiry which would be costly, even though there is no tax to pay on a loss it still takes time to deal with the questions etc, and HMRC still want to see it on the tax return otherwise how do they know he's not making a profit. Guilty until proven innocent and all that.
Really he should make a voluntary disclosure for the previous years to correct the returns.
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Jenny
Responses are my opinion based on the information provided. All information should be thoroughly checked before being relied on.
Thanks for the info, I'm about to go on holiday in a weeks time and haven't got the time to sort him out before I go, I told him we will get together again after my hols in September and go through it more. I was of the opinion after first meeting him that he should have put something on the SA that he had already done sone time ago. Is there a form that he would have to fill in? I think his loss and I'm guessing abit, were probably around £2K per year, thats based on what he told me although that could be slightly different when I see all the paperwork.
I've always done voluntary disclosures by letter, enclosing the additional SA pages for each year, with the calculations set out in the letter and not had any issues with HMRC accepting them.
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Jenny
Responses are my opinion based on the information provided. All information should be thoroughly checked before being relied on.
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