Entries Tagged 'Tax tips' ↓

VAT penalties

Are VAT officers taking their new penalty powers too seriously?  Well, the fact that more than half of them are overturned on appeal would suggest so.

A Freedom of Information Act request shows that 16,270 penalties were reversed out of a total of 28,912.  HMRC said that alot of these reversals were because it was found that the taxpayer has a reasonable excuse for their actions and that this does not mean that the penalties were incorrectly levied in the first place.

We say, don’t pay a penalty just because it has been charged.  Seek advice as to whether or not you have grounds to overturn it.

Are your dividends legal?

HMRC has announced that in late in 2011 they will introduce a programme of Business Record Checks (BRCs) and in particular will be looking at dividends.

Therefore it is now time to consider how you vote dividends and to ensure that a correct procedure is in place so that HMRC cannot claim the dividend to be illegal, nor that inadequate records have been maintained.

Where regular amounts have been withdrawn as dividends the amounts will be deemed ‘illegal’ if at the date of each payment the interim accounts show that the profit cannot cover the distribution.

If a distribution can be made legally then the procedure to approve the dividend and the record of payment must be correctly maintained. 

The relevant date for an interim dividend is the actual date of payment because a resolution is not needed to confirm payment. An interim dividend can be varied or rescinded. It is important to note that HMRC consider the date of payment of interim dividends to be the date of entry in the company’s books.

Many accountants consider that backdating documents to confirm consideration of profit and payment of dividend is a paperwork tidying up exercise but technically it is fraud and again case law exists to support this position.

Failure to observe the correct procedure could lead to not only additional tax liabilities but interest and penalties as well.

Staff parties and annual functions

A staff party or annual function is a tax-free benefit for employees, directors (and their other-halves) providing that the following conditions are met:

  • The total cost must not exceed £150 per head, per year.
  • Cost includes VAT, transport and accommodation.
  • £150 is not an allowance, so if the cost is £151, the whole benefit is taxable.
  • The event or events must be primarily for entertaining staff.
  • It must be open to all staff (in that location, if you have several branches or departments).
  • The event is not just for directors (unless there are no employees).
  • The cost is an allowable expense for your business.
  • You can claim back input VAT (unless it is a party for just the owner) but only a proportion if the event is also to entertain customers.

Travel and subsistence claims

Here’s a refresher for contractors with limited companies as HMRC have been reported as cracking down on this tax rule recently.

The expenses you can claim against tax for travel and susbsistence varies massively depending on whether you are at a “temporary workplace” or a “permanent workplace”.

Firstly, to have a temporary workplace (which is tax advantageous) you must also have a permanent workplace.  For contractors with their own personal service company, it could be argued that the permanent workplace is where their limited company is based which typically is their home address.  It is envisaged that this permanent workplace will exist for many years and will overarch several temporary contracts with agencies/end clients.

Contracts that oblige you to travel to geographical locations to undertake work then have the potential to qualify as temporary workplaces enabling enhanced tax claims for travel and subsistence costs.

However, as soon as you anticipate working at a temporary workplace for more than 24 months it will be reclassified as a permanent workplace resulting in the loss of these tax claims.  E.g. if you have been working at a location for 20 months and your contract is re-newed for a further 6 months you can no longer claim travel/subsistence costs after month 20.

In order to reset your workplace to temporary status you have to satisfy two rules

  • the location must be at least 10 miles from the previous workplace;
  • the route/journey must be substantially different.

VAT on business costs paid personally

If you pay for your company’s business costs personally there are a couple of things to look out for if you want to reclaim the VAT.

  • ensure you have a valid VAT receipt
  • ensure the receipt/invoice is made out to the company and not to you personally

There are exceptions to these rules such as low value items and travel and subsistence costs of a director/employee.  Also, remember that the VATman can allow a claim by discretion if it looks reasonable – quote his Statement of Practice dated March 2007.

Further information can be found here: http://www.hmrc.gov.uk/vat/managing/charging/vat-invoices.htm#6

No receipts are required at all for items such as parking and toll charges where the cost is less than £25.

VAT tips for businesses

1. Should you be VAT registered?

If your taxable UK supplies are above £70,000 p.a., you must register compulsorily, unless they are all zero-rated, in which case, you could apply for exemption from registration. If your taxable supplies are below £70,000, and your customers are mainly or wholly VAT-registered, you can register voluntarily to recover UK input tax.

2. Make sure you recover all pre-registration VAT

VAT incurred up to four years previously on capital assets and stock which is still on hand at the registration date can be recovered. VAT paid for services received up to six months before the registration date can usually be deducted.

3. Unregistered businesses can also save VAT

The use of unregistered suppliers may help. If you are looking to rent premises, consider looking for a property with a non-VAT rent, or else raise the issue of your inability to recover VAT in the rent negotiations.

4. Use an appropriate simplification scheme

The Flat Rate Scheme (with a 1% discount in first year of registration), Cash Accounting, or Annual Accounting can all create cash flow and/or administrative savings.

5. Be compliant

Keeping up-to-date VAT records, submitting and paying VAT returns on time, and disclosing errors as soon as they are found will avoid interest, potential penalties, and endless hassle from HMRC.  

6. Recover VAT incurred elsewhere in the EU

You may be able to claim EU VAT via HMRC’s online portal under the EC 8th Directive.

7. Need a car?  You could save VAT by leasing

Unless there would be purely business use (e.g., a taxi, hire car, or pool car), which would allow full VAT recovery, the VAT on the purchase of a car is irrecoverable just by the car’s being ‘available’ for private use. Consider leasing rather than buying, as 50% of VAT on the lease charge is recoverable, as is 100% of roadside maintenance if it is split out on the invoice. 

8. VAT on entertainment costs

The VAT on entertaining clients, potential clients, and non-employees is not recoverable (unless a reasonable charge is made), but the cost of staff entertainment will be recoverable if incurred for the ultimate benefit of the business (e.g., a team away-day).

These tips were provided by Steve Allen of VAT Advisers Ltd.

Non-residents and the volcano

Non-UK residents have to be careful not to spend too many days in the UK in any one tax year otherwise they can become UK resident meaning additional tax liabilities.

Non-residents who have had to stay in the UK longer because of the travel disruption caused by the recent volcanic ash cloud can claim to ignore those days if the total number of days spent in the UK in the year amount to less than 183.  This is the ‘exceptional circumstances rule’.

Tax relief for Christmas gifts

Below is our summary of the tax consequences of your business sending gifts to customers and staff:

  • Gifts to customers of the products or services you normally sell are tax allowable, as long as you are not in the food business.
  • Small promotional gifts of any item are also treated as tax allowable for your business if they cost less than £50 each and carry a clear advertisement for the business. However, you cannot get income tax or corporation tax relief for the cost of gifts of food, drink, tobacco and gift tokens of any value.
  • A number of gifts worth more than £50 in total should not be made to the same person in any 12 month period.
  • If you are VAT registered you can reclaim the VAT on small gifts that cost up to £50 each, including gifts comprising of tobacco and alcohol.
  • If the gift cost more than £50 (net of VAT) you must account for the VAT on the item as if you had sold it at cost.
  • Gifts to your staff are tax allowable, but your employees could be taxed on the value of the gift as a benefit in kind. In that case you would also have to pay Class 1A NI on the value of those gifts. The Taxman does consider some small items to be trivial benefits, which can be given as tax-free gifts to staff members. Trivial items can include seasonal gifts such as a turkey, an ordinary bottle of wine (not fine vintage or champagne), or a box of chocolates.

Don’t jointly subscribe for shares

If you subscribe for shares in a trading company, and later dispose of them at a loss, you can normally offset the loss against other taxable income (section 131 of the 2007 Income Tax Act).

However, the Taxman has found a wrinkle in the tax legislation such that he thinks subscriber shares issued in joint names (usually married couples) cannot benefit from this offset.  Section 131 applies to shares “which have been subscribed for by the individual”.  The Taxman argues that jointly owned shares are subscribed for by a couple rather than an individual and thus the offset is not available.

A way round this is for one individual to subscribe for the shares and then transfer some of them to their spouse. The spouse is then treated as subscribing for the shares in their own right. 

This is how we recommend shares are subscribed for when effective joint ownership is desired.

Beware of tax helplines

The Taxman’s telephone helplines do not always give the correct answer.  There have been two recent cases where a verbal assurance from a telephone helpline was not later accepted by a Tax Officer who then raised a penalty for the incorrect tax treatment.  You, the taxpayer, suffers where there is a disagreement between the helpline advice and the Tax Inspector.

Case 1: In the first case Corkteck Ltd exported soft drinks to Poland through a third person: Sintra SA. The VAT helpline told Corkteck that the exported drinks would be zero-rated for VAT. However, the VAT Inspector decided the drinks should have been standard rated as Sintra SA was not registered for VAT within the EU.

Case2: In the second case Acrylux Ltd hired out a private residential property for various functions, some of which lasted several days. The VAT helpline told Acrylux that the hire of the property would be exempt from VAT as it was not a commercial property. However, the VAT inspector said the hire of the property was similar to short-term holiday lettings and VAT should be charged at the standard rate.

In both cases the taxpayer could not prove exactly what facts had been presented to the helpline, or exactly what the helpline had given as its advice. If the advice had been requested in writing the outcome for the taxpayer may have been different. If you have a tax question, please ask an accountant (we recommend using Chartered Accountants) before reaching for the HMRC helplines. If you act on advice that later proves to be incorrect, you could pay a high penalty!