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The tax advantages of Troncmasters
If your employees receive tips directly from your customers and are allowed to keep them, then you do not need to do anything for PAYE tax or NICs. There are no NICs due on the money, and the tax due is the employee’s responsibility. Your employees should declare the money to HMRC, who will usually adjust their tax code to collect any tax due.
A tronc is an arrangement for pooling and distributing tips and service charges and the person who operates the tronc is known as a troncmaster. If your employees use a tronc you must tell HMRC who the troncmaster is so that they can set up a PAYE scheme for the tronc.
http://www.hmrc.gov.uk/helpsheets/e24.pdf
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 standard rated.
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
steve@bicknells.net
Odd VAT rules for Hotels
Tax is made up of bizarre and complicated rules and for accountants that’s a good thing, keeps us in work, but why tax can’t be simplified is beyond me, its a crazy tax world out there.
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.
A guest’s stay must be continuous to qualify for the reduced value rule. For example, if a guest stays for three weeks every month, you must always charge them VAT in full. If another guest stays for five weeks, leaves for a week, and returns to stay for five more weeks, the reduced value rule applies only to the fifth week of each separate stay.
However, a guest’s departure is not seen to end their stay provided the guest:
- is a long-term resident and leaves for an occasional weekend or holiday,
- is a student who leaves during the vacation but returns to the same accommodation for the following term, or
- pays a retaining fee
In these cases the time away is ignored and you only have to charge VAT in full for the first 28 days of the overall stay.
It does not matter whether the guest returns to the same room or not.
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.
If you make an exempt supply such as providing a room for a meeting or a conference and you provide minimal refreshments such as tea, coffee and biscuits, the room and the incidental catering will be treated as a single exempt supply. But, if you serve substantial refreshments such as a meal or buffet, the catering should be treated as a separate supply and you must account for VAT based on the normal charges you would make for such catering.
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. This includes amounts debited from credit cards using details provided at the time of the booking. Where the cancellation charge takes the form of a retained deposit, you can reclaim any VAT already accounted for as an adjustment to your next return.
Reclaim Overpaid VAT
If you have overpaid VAT you can now go back up to 4 years and reclaim it.
steve@bicknells.net
What is a Pool Car? can you reclaim VAT? will it be tax free to drive?
Pool cars must meet the following conditions:
- used by more than one employee
- not ordinarily used by one employee to the exclusion of others
- not normally kept at or near employees’ homes
- used only for business journeys – private use is only permitted if it is merely incidental to a business journey (for example, commuting home with the car to allow an early start to a business journey the next morning)
Provided all these conditions are met, you have:
- no reporting requirements
- no tax or NICs to pay
To back this up it would be worth having:
- A written ‘no private use policy’
- Business Only insurance
- A mileage log to show that there’s no private mileage
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 as one of the following:
- exclusively for a business purpose
- a taxi, for driving instruction or self-drive hire
http://www.hmrc.gov.uk/vat/managing/reclaiming/motoring.htm
The following are VAT cases relating to Pool Cars and support the reclaiming of VAT Input Tax:
Masterguard Security Services Ltd VTD 18631
A business provided cars to the security guards that it employed. It was allowed to recover input tax on the cars because it banned the employees from using the cars for private use. It was able to show that all the employees had their own cars which they used privately.
Peter Jackson Jewellers Ltd VTD 19474
A company that had four shops bought a car. The tribunal allowed input tax to be recovered on the car. The company had evidence to show that the car was used to transport stock and that private use of the car was prohibited.
http://www.hmrc.gov.uk/manuals/vitmanual/VIT64690.htm
What counts as private use?
Private use that is not merely incidental to business use should in practice be ignored in deciding whether the vehicle comes under the protection of either Section 167 ITEPA 2003 (cars) or Section 168 ITEPA 2003 (vans) where such private use is:
- small in extent and infrequent and
- consists of either or both of:
-
- use limited to meeting the immediate need for transport in an emergency where the use of the vehicle is provided on compassionate grounds
- use for the purposes of the provision of another benefit that does not itself give rise to a tax charge where the use of the vehicle is merely incidental to the provision of that other benefit.
Small in extent and infrequent will generally be not more than 5% of the vehicle’s annual mileage on occasions that are neither regular nor protracted.
Use meeting the immediate need for transport in an emergency where the use of the vehicle is provided on compassionate grounds covers the kind of case where an employee is taken ill at work, or learns at work that a member of his or her family has been involved in an accident. It does not apply where an employee’s normal vehicle breaks down and the pool vehicle is used as a substitute.
Use for the purposes of the provision of another benefit that does not itself give rise to a tax charge where the use of the vehicle is merely incidental to the provision of that other benefit might apply in a number of different situations. One example would be the use of a pool vehicle to take employee-provided equipment, such as a table tennis table, to an employer-provided sports facility. (Subject to various conditions, employer provided recreational facilities do not give rise to a tax charge.)
http://www.hmrc.gov.uk/manuals/eimanual/eim23460.htm
Type of Car
You could have any car as a Pool Car and some businesses might decide to have a luxury car as the Pool Car befitting of the company image, but makesure you can prove that it hasn’t had more the a small (5%) amount of private use (as noted above).
So you could have a personally owned car to get to and from the office and then use the Company Pool Car during business hours.
Change of Use
If the car stops being a Pool Car and gets allocated to an employee you will need to do a self-supply charge for VAT at the time of change. Basically this means you account for the VAT on the ‘current value’ of the car at the time of change.
VAT Act 1994 Section 56 (9) – Fuel rules
(9)In any prescribed accounting period a vehicle shall not be regarded as allocated to an individual by reason of his employment if—
(a)in that period it was made available to, and actually used by, more than one of the employees of one or more employers and, in the case of each of them, it was made available to him by reason of his employment but was not in that period ordinarily used by any one of them to the exclusion of the others; and
(b)in the case of each of the employees, any private use of the vehicle made by him in that period was merely incidental to his other use of it in that period; and
(c)it was in that period not normally kept overnight on or in the vicinity of any residential premises where any of the employees was residing, except while being kept overnight on premises occupied by the person making the vehicle available to them.
steve@bicknells.net
Can you reclaim the VAT on Sponsorship? Probably but not always
Generally sponsorship is subject to VAT because normally the organisation you sponsor will be making taxable supplies to you because in return for sponsorship, they are obliged to provide the sponsor with a significant benefit. Typically this might include any of the following:
- naming an event after the sponsor;
- displaying the sponsor’s company logo or trading name;
- participating in the sponsors promotional or advertising activities;
- allowing the sponsor to use your name or logo;
- giving free or reduced price tickets;
- allowing access to special events such as premieres or gala evenings;
- providing entertainment or hospitality facilities; or
- giving the sponsor exclusive or priority booking rights.
Donations and gift are not normally subject to VAT.
The rules are in HMRC Reference:Notice 701/41 (March 2002)
A business can recover input tax on their legitimate costs when it:
- promotes its business; or
- provide facilities to its staff.
When a business only makes sporting or recreational facilities available to:
- the proprietor
- the partners
- the directors of a company
- the relatives and friends of the proprietor, partners or company directors
it is unlikely that this expense can be treated as being for the purpose of the business. Therefore, the VAT incurred would not qualify as input tax.
In the case of smaller businesses there is an increased risk that the sponsorship is conducted for a private purpose so the VATman has come up with a set of tests:
VIT44300 – Specific issues: test for sporting and recreational activities
Does the proprietor, partner or director actively take part in the sport?
If the proprietor, partner or director cannot take part because of injury or business commitments is another (independent) person employed to drive?
Does a member of the proprietor, partner or director’s family actively take part in the sport?
Is there a connection between the sport and the business?
Where does the sporting activity take place?
Is there extra advertising at the racing venue or in programmes?
Is there related advertising or promotional material?
Does the business name appear on the sporting vehicle, transporter or clothing?
For companies and partnerships is there a record of a decision to use sporting facilities for advertising?
Can the business produce any evidence of research into the benefits to be gained from the advertising?
Are the benefits of the advertising monitored?
Is the car or boat an asset of the company?
What other forms of advertising are there?
Has HMRC given a ruling for direct tax purposes?
Could the business cope with an expansion of trade?
steve@bicknells.net
How do taxi businesses account for VAT?
Generally taxi businesses use self employed taxi drivers and the taxi business provide the back office admin, radios and sometimes the cars.
There are two key types of work:
- Cash work – the passenger pays the driver when they reach their destination
- Account work – the client pays the taxi business on a periodic basis
If the taxi firm directly employs its drivers, then VAT is due on all fare income.
Where the drivers are self employed, the taxi business will often collect the income from the account work and deduct the costs for car rental, insurance, administration and radio hire (known as ‘settles’) and then pay the balance to the self employed driver.
A common mistake is that the taxi business then only accounts for VAT on the amount it retains.
HMRC will argue that the full VAT should be accounted for on the Account work and the driver should be charged VAT on the ‘settles’.
You may, depending on the terms of any written or oral contract between you and the drivers and the actual working practices of your business, be acting as an agent for the drivers for the cash work they perform, and as a principal for the work done for account customers. However, if you are to account for VAT on this basis you must be able to satisfy us that:
-
the arrangements are reflected in the terms agreed with your drivers and
-
there is a genuine difference in the operation of the cash and account sides of your business.
HMRC Reference:Notice 700/25 (May 2002)
steve@bicknells.net
Should a subcontractor Zero Rate supplies to a housing main contractor?
This question comes up on a regular basis because it has cash flow implications for the main contractor.
If a contractor constructs a new building they will normally have to charge VAT at the standard rate. The contractor may, however, be able to zero-rate your supply if they are involved in constructing a qualifying building. A qualifying building can be:
- a building ‘designed as a dwelling’ ;
- a building that will be used solely for a ‘relevant residential purpose’ ; or
- a building that will be used solely for a ‘relevant charitable purpose’ (for non-business use or as a village hall).
If the building qualifies the client issues a certificate to the Main Contractor (section 17 of Notice 708)
| This certificate has the force of law. |
|---|
| Certificate for zero-rated and reduced-rated building work. |
| 1. Address of the building: |
| 2. Name and address of organisation receiving the building work: VAT Registration number (if registered): Charity registration (if registered): |
| 3. Date of completion (or estimated date of completion) of the work: Value (or estimated value) of the supply: £ Name, address and VAT registration number of building contractor: |
| 4. I have read the relevant parts of Notice 708 Buildings and construction and certify that this organisation (in conjunction with any other organisation where applicable) will use the building, or the part of the building, for which zero-rating or reduced-rating is being sought solely for (tick as appropriate ): a relevant charitable purpose, namely by a charity in either or both of the following ways: otherwise than in the course or furtherance of business or as a village hall or similarly in providing social or recreational facilities for a local community a relevant residential purpose, namely as: (a) a home or other institution providing residential accommodation for children (b) a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder a hospice residential accommodation for students or school pupils residential accommodation for members of any of the armed forces a monastery, nunnery or similar establishment or an institution which is the sole or main residence of at least 90 per cent of its residents and will not be used as a hospital, prison or similar institution or an hotel, inn or similar establishment. |
5 I certify that the information given is complete and accurate and acknowledge that if the building, or the part of the building, for which zero-rated supplies have been obtained, within a period of 10 years from the date of its completion:
a taxable supply will have been made, on which this organisation will have to account for VAT at the standard rate. . |
| General warning 1. HMRC reserves the right to alter the format of the certificate through the publication of a new notice. You must ensure that the certificate used is current at the time of issue. Warnings for the issuer 2. You may be liable to a penalty if you issue a false certificate. 3. You are responsible for the information provided on the completed certificate. Warnings for the contractor 4. You must take all reasonable steps to check the validity of the declaration given to you on this certificate. 5. This certificate does not automatically confer zero-rating or reduced-rating on your supplies. You must check that you meet all the conditions for zero-rating or reduced-rating your supply – see Notice 708 Buildings and construction. |
However, the main contractor can not issue certificates to its subcontractors…
16.4 Should subcontractors accept certificates?
No. If you are a contractor working to a main contractor, you should not be issued with a certificate. You must always standard-rate your supply when working on a certificated building.
This means the Main Contractor has to pay the VAT to the subcontractors and then recover the VAT on its next VAT return which for smaller Main Contractors can cause problems.
steve@bicknells.net
Have you claimed Pre-Trading Tax Relief?
By the time you actually start trading, you may have spent thousands of pounds on research and setting up the business.
Provided you have formally notified HM Revenue & Customs that you have started up a business, most of these costs are usually allowable as business expenses in the first year.
Income Tax (Trading and Other Income) Act 2005
Pre-trading expenses
(1)This section applies if a person incurs expenses for the purposes of a trade before (but not more than 7 years before) the date on which the person starts to carry on the trade (“the start date”).
(2)If, in calculating the profits of the trade—
(a)no deduction would otherwise be allowed for the expenses, but
(b)a deduction would be allowed for them if they were incurred on the start date,
the expenses are treated as if they were incurred on the start date (and therefore a deduction is allowed for them).
http://www.legislation.gov.uk/ukpga/2005/5/section/57
http://www.hmrc.gov.uk/manuals/bimmanual/bim46355.htm
VAT Paid Before VAT Registration
You can reclaim any VAT you are charged on goods or services that you use to set up your business.
Normally, this will include:
• VAT on goods you bought for your business within the last 4 years and which you have not yet sold.
• VAT on services, which you received not more than 6 months before your date of registration.
You should include this VAT on your first VAT return. (Notice 700/1 Oct 2012 4.2)
CIMA can help you make a success of your new business, here is a checklist Making a success of your business
steve@bicknells.net
Business Accountant 