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Here are my top 10 ways to pay less VAT
1 Choose the best VAT Scheme for your business
Standard VAT Scheme – on this scheme the VAT is based on tax points from invoices
Flat Rate Scheme – try our calculator
VAT Cash Accounting Scheme – if your turnover is below £1.35m you can account for VAT on a Cash basis, this is particularly helpful if your customers pay you on slower terms than you pay your suppliers
Annual Accounting Scheme for VAT – if your turnover is below £1.35m you could join the Annual Scheme and complete one return for the year but you make either 9 interim payments or 3 quarterly interim payments
Retail VAT Schemes – These are specific schemes aimed at mainly at shops and help to overcome the issues of mixed vat rate goods
VAT Margin Scheme – The margin scheme relates to second hand goods and accounts for VAT on the margin, for example on the sale of cars
2 Claim Pre-registration VAT
When you register for VAT, there’s a time limit for backdating claims for VAT paid before registration. From your date of registration the time limit is:
- 4 years for goods you still have, or that were used to make other goods you still have
- 6 months for services
Be careful not to over claim – see this blog for details http://stevejbicknell.com/2015/06/24/preregistration-vat-confusion/
3 Property Investors might benefit from a Development Company
Property Development is a trade, where as Property Investment isn’t – renting out a residential property is a VAT exempt supply.
If you are planning significant building work, setting up a Development Company or using a building contractor might save VAT.
Assuming you employ a builder…
The VAT Rules are in VAT Notice 708 Buildings & Construction
Your builder may be able to charge you VAT at the reduced rate of 5 per cent if you are converting premises into:
- a ‘single household dwelling’
- a different number of ‘single household dwellings’
- a ‘multiple occupancy dwelling’, such as bed-sits, or
- premises intended for use solely for a ‘relevant residential purpose’
As your builder will be VAT registered, they reclaim the VAT they are charged and then charge you VAT at 5%.
If your business is property rental and you do the work yourself, you can’t take advantage of the 5% rate.
If your Development Company is VAT registered you can reclaim all the VAT.
4 Do you need to charge VAT on Intercompany Charges
There are situations where one company is VAT registered and other related companies are either partially exempt or not registered for VAT, so in these circumstances not charging VAT is an advantage.
The following are not Taxable supplies for VAT:
Common Directors – Notice 700/34 (May 2012)
Joint Employment – Notice 700/34 (May 2012)
Paying a Bill on behalf of an associated business
5 Use VAT Groups for Business Acquisition Costs
Basically HMRC disallow Input VAT relating to Investments.
The most well known example of this was when BAA purchased Airport Development Investments Limited in June 2006, the decision was upheld by the Court of Appeal in February 2013.
The BAA VAT group sought to recover the VAT (£6.7m) incurred on the acquisition costs but recovery was refused by HMRC on the basis that they considered ADIL had not made onward taxable supplies, had not demonstrated any intention to make taxable supplies and was not a member of the VAT group at the time costs were incurred.
BAA used an SPV (Ferrovial) to purchase ADIL but did not bring the SPV into the BAA VAT Group until September 2006, 3 months after the acquisition.
The lessons to learn from this are:
- Once you have successfully made the acquisition join a VAT Group immediately and make it clear in correspondence that the SPV intends to join the VAT Group at the earliest opportunity
- Consider not using an SPV
- Buy the Assets instead of the Shares
- Show that the SPV will make taxable management charges
- Consider the scope of the advisors work, HMRC may disallow advice focussed on passively holding shares
6 How Hotels save VAT
Here are some VAT examples for Hotels – HMRC Reference:Notice 709/3 (October 2011) :
The Long Stay Rule
If a guest stays in your establishment for a continuous period of more than 28 days, then from the 29th day of the stay you should charge VAT only on that part of the payment that is not for accommodation.
VAT Exempt Meeting Rooms and Refreshments
Hiring a room for a meeting, or letting of shops and display cases are generally exempt, but you may choose to standard-rate them by opting to tax, see Notice 742A Opting to tax land and buildings.
VAT on Deposits
Most deposits serve as advanced payments, and you must account for VAT in the return period in which you receive the payment. If you have to refund a deposit, you can reclaim any VAT you have accounted for in your next return.
Normally, if you make a cancellation charge to a guest who cancels a booking, VAT is not due, because it is compensation.
7 VAT on Pool Cars
When you buy a car you generally can’t reclaim the VAT. There are some exceptions – for example, when the car is used mainly as one of the following:
- a taxi
- for driving instruction
- for self-drive hire
If you lease a car for business purposes you’ll normally be able to reclaim 50 per cent of the VAT you pay. But you can reclaim 100 per cent of the VAT if the car is used exclusively for a business purpose.
8 Use a Tronc for Tips
Tips are outside the scope of VAT when genuinely freely given. This is so regardless of whether:
• the customer requires the amount to be included on the bill
• payment is made by cheque or credit/debit card
• or not the amount is passed to employees.
Restaurant service charges are part of the consideration for the underlying supply of the meals if customers are required to pay them and are therefore
If customers have a genuine option as to whether to pay the service charges, it is accepted that they are not consideration (even if the amounts appear on the invoice) and therefore fall outside the scope of VAT.
Further information is available from: Notices 700 The VAT guide and 709/1 Catering and takeaway food
9 Get your TOGC right – Transfer of a Going Concern
Normally the sale of the assets of a VAT registered or VAT registerable business will be subject to VAT at the appropriate rate. A transfer of a business as a going concern for VAT purposes (TOGC) however is the sale of a business including assets which must be treated as a matter of law, as ‘neither a supply of goods nor a supply of services’ by virtue of meeting certain conditions. Where the sale meets the conditions then the supply is outside the scope of VAT and therefore VAT is not chargeable.
It is important to be aware that the TOGC rules are mandatory and not optional. So it is important to establish from the outset whether the sale is or is not a TOGC.
The main conditions are:
- the assets must be sold as part of the transfer of a ‘business’ as a ‘going concern’
- the assets are to be used by the purchaser with the intention of carrying on the same kind of ‘business’ as the seller (but not necessarily identical)
- where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer
- in respect of land which would be standard rated if it were supplied, the purchaser must notify HMRC that he has opted to tax the land by the relevant date, and must notify the seller that their option has not been disapplied by the same date
- where only part of the ‘business’ is sold it must be capable of operating separately
- there must not be a series of immediately consecutive transfers of ‘business’
The TOGC rules are compulsory. You cannot choose to ‘opt out’. So, it is very important that you establish from the outset whether the business is being sold as a TOGC. Incorrect treatment could result in corrective action by HMRC which may attract a penalty and or interest.
10 Choose the best time to register for VAT
You may decide to voluntarily register to reclaim VAT you have paid out to set up you business or you might decide to wait till you have to register to gain a competitive advantage.
You must register for VAT if:
- your VAT taxable turnover is more than £82,000 (the ‘threshold’) in a 12 month period
- you receive goods in the UK from the EU worth more than £82,000
- you expect to go over the threshold in a single 30 day period
As reported last year by the Telegraph –
Five million people may have been billed incorrectly by HMRC.
You’ll find your tax code on:
- your pay slip
- your PAYE Coding Notice – you usually get this a couple of months before the start of the tax year and you may also get one if something has changed but not everyone needs to get one
- form P60 – you get this at the end of each tax year
- form P45 – you get this when you leave a job
Among those most likely to be affected are veterans who have taken a civilian job after leaving the Armed Forces, but who also draw a military pension. Pensioners with two pensions and those who have continued to work part-time after retirement are also more likely to be hit.
Taxpayers, who must complete their self-assessment tax returns before Jan 31, are being warned to check their paperwork again to make sure they are not affected.
Problems arise because various tax offices around Britain are failing to share information about taxpayers’ incomes on a central database.
People with more than one income, whether from pensions, PAYE employment or a mixture of the two, are being allocated their personal tax-free allowance multiple times. It means the tax codes issued for their various income sources are incorrect, so not enough tax is taken. Often the mistakes are discovered by HMRC years later, leading to unexpected tax demands. Telegraph
If you think your Tax Code is wrong you should tell HMRC as soon as possible using online form P2
You can check how your tax using this HMRC link
The most common tax code for tax year 2015 to 2016 is 1060L (£10,600 being the annual income tax free allowance for 2015/16) – in 2014 to 2015 it was 1000L. It’s used for most people born after 5 April 1938 with one job and no untaxed income, unpaid tax or taxable benefits (eg company car).
There have been many creative schemes promoted to contractors, entertainers and sports stars, basically using a limited company to make loans to connected parties to avoid tax.
HMRC have been attacking these schemes for years, for example the Boyle case
On the 16th September HMRC published Spotlight 26: Contractor Loan Schemes – Too good to be true
Contractors and freelancers are bombarded by promoters who make claims that they can help individuals take home as much as 80% to 90% of their income. Sounds too good to be true, that’s because it is.
So why is this considered to be tax avoidance? These promoters use schemes to reduce the amount of tax you pay on your income by making payments which purport to be ‘loans’ from a trust or a company. Normally, a contractor would receive the contract income directly and pay tax on it. These arrangements artificially divert the income through a chain of companies, trusts or partnerships and pay the contractor in the form of a ‘loan’. The ‘loans’ are claimed to be non-taxable because they don’t form part of a contractor’s income. However, in reality the ‘loans’ aren’t repaid and the money is used by the contractor as if it were his or her income.
HM Revenue and Customs (HMRC) view is that these schemes don’t work and strongly advises any contractor or freelancer who has used such a scheme to withdraw and settle their tax affairs. People who settle with HMRC avoid the costs of investigation and litigation and minimise interest and penalty charges on the tax which should have been paid.
Don’t be fooled by promoter websites..
The promoters’ websites and promotional literature claim that they are fully compliant and are HMRC approved. HMRC doesn’t view these arrangements as compliant and never approves any schemes.
Contractor loan schemes, of the sort described above, must be declared under the Disclosure of Tax Avoidance legislation. The promoter is required to pass the scheme reference number (SRN) to all the users who must put this on their tax return. A failure to show the correct SRN on your tax return will lead to additional penalty charges.
Don’t be tempted, HMRC are closing in on unpaid tax, they will find you!
Will Scottish taxpayers pay less?
From 5th April 2016 a new Scottish Rate of Income Tax (SRIT) will come into force in Scotland. Although is it currently anticipated that taxpayers in Scotland and the rest of the UK will pay the same rate of tax next year, it is likely that the regions will diverge in coming years as more power is devolved to Scotland.
Who is Scottish?
The criteria applied to determine Scottish taxpayers are based on where the individual lives, and not where they work or their feeling of national identity. All of the following would be classed as a Scottish taxpayer:
- WILLIES (Working In London Living In Edinburgh)
- Scottish Parliamentarians (regardless of where they live)
- People living and working in Scotland
- People living in Scotland and working across the border in Carlisle / Newcastle etc
HMRC are responsible for assessing whether or not someone is a Scottish taxpayer. Anyone that HMRC deems to be Scottish based on their principal residence will be issued with a new S tax code. Your payroll software should automatically process the SRIT for anyone with a new S code. As with student loans, it is not for the employer to use their own judgement about applying the SRIT. If an employee disagrees with their tax code, it for the employee to resolve this with HMRC. Employers must act on instructions from HMRC.
Do English employers need to do anything?
Even if your business operates exclusively in England (or any other region of the UK outside Scotland) you will need to comply with regulations as they apply to any of your employees who live in Scotland. Surprisingly, there is no legal obligation to inform HMRC if you move and although employers really ought to know where their employees live, it might not always be obvious, especially if an employee has more than one residence.
It is common to think that any of the criteria below qualify for Scottish taxpayer status, but it isn’t the case.
- National identity
- Place of work
- Where income is generated (eg property income in Scotland)
- Regular travel to Scotland
Will Scots benefit?
The costs of the SRIT are to be borne by the Scottish Government. HMRC currently estimates that the total costs of implementing SRIT will be in the range of £30 million to £35 million over the seven-year period from 2012-13 to 2018-19. This is split between IT expenditure of between £10 million and £15 million, and non-IT expenditure of £20 million. The additional annual costs of operating the SRIT will be between £2m and £6m. The lower estimate corresponds to a SRIT where Scots pay the same rate as the rest of the UK. If the SRIT diverges from the neutral rate of 10%, the costs rise in administering the tax regime in the UK including pensions, gift aid and disputes over residence.
Why is the SRIT being introduced?
Scotland as a whole is likely to be worse off as any difference in tax raised is offset by an adjustment to the block grant from Westminster. It is estimated that 2.6m people will be issued with an S tax code. The annual running costs are therefore less that £3 per taxpayer but it is a valid question to ask if it is a good use of taxpayer’s money if tax rates are the same across the UK. It is anticipated that after additional powers are introduced in 2017 the SRIT could be more progressive, meaning that wealthier individuals would pay a higher proportion of tax. For anyone thinking about their residence status and still had a choice, now is a good time to get advice on the best situation for you!
For more information on the SRIT and for guidance on operating your payroll scheme, please contact Alterledger.
HMRC aren’t easy to speak to and unless you know the tax rules its easy to make mistakes, that’s why HMRC allow you to appoint agents to help you with your tax affairs.
To appoint an agent you use form 64-8
Form 64-8 covers authorisation for individual tax affairs (partnerships, trusts, tax credits and individuals under PAYE) and business taxes (VAT, PAYE for employers and Corporation Tax). If you’re a personal representative you can use form 64-8 in certain circumstances to ask HMRC to deal directly with an agent.
There are times when you might want extra help for example with an HMRC Compliance Visit and you can appoint a temporary agent using form COMP1.
The Comp1 relates only to the appointment of an adviser to deal with a compliance check. It does not authorise us to deal with that adviser for anything outside that check. Form Comp1 does not replace or amend any existing authorisation made using form 64-8 or the online authorisation facility, or in CITEX cases a letter giving authority for the agent to act.
The temporary authorisation can be used to:
- extend an existing authorisation, for example where there is an adviser acting for one tax under a form 64-8, and the customer wants that adviser to act for more taxes just for the purpose of the compliance check
- appoint an adviser to deal solely with the compliance check where there is no existing adviser authorisation
- appoint a ‘specialist’ tax adviser, for example in Specialist Investigation cases, just to deal with a compliance check. In such cases this will allow the existing adviser to continue to act for the customer in their day to day tax matters.
Do you need help?
Basically the current situation is that the first £30,000 of a payment which is paid in connection with the termination of employment is tax free, as long as it is not otherwise taxable as earnings. It sounds simple but can be complicated, here is a government example
The Office of Tax Simplication are currently consulting (until 16th October 2015) on changing the rules one solution is to make it more like redundancy payments, take a look at these examples
There will also be some anti avoidance rules that if you are re-engaged within 12 months in similar job with the same company the payments previously made would become subject to tax and NI.
It looks like we are in for some major changes, its not too late for you to have your say, click on this link
If you owe more than £1,000 to HMRC the Summer Finance Bill will give HMRC the power to take it from your bank account!
According to an article on accounting web…
HMRC have said they will contact the taxpayer at least four times about the debt before commencing the DRD procedure. One of those occasions will be a face to face meeting with the taxpayer to establish that they have found the right debtor and calculated the debt correctly. This should avoid the situation where the HMRC letters have failed to arrive, or the taxpayer has not understood the liability.
There are penalties for banks who fail to comply with the notices issued by HMRC.