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Child Benefit Clawback

Dec10

If your net taxable income last year was £50,000 or more you will shortly receive a letter from the Tax Office about child benefit. You can safely bin this missive if your children are no longer eligible for child benefit, but where you or your partner/spouse claim child benefit you need to pay attention.

This is because from 7 January 2013 the higher earner in the family (where that person has £50,000 or more of income) will be landed with a tax charge to clawback the child benefit claimed in respect of the children. The tax charge will equal 1% of the child benefit received by the family for every £100 of income over £50,000, so 100% of the child benefit will be clawed-back when the higher earner has net taxable income of £60,000 per year.

The tax charge only applies to child benefit paid from 7 January 2013 onwards, and will be calculated on your net taxable income for the current tax year: 2012/13. Net taxable income is income after deduction of losses, pension contributions and gift aid payments but before personal allowances. So there is some scope for reducing your net income below £50,000 by paying pension contributions, gift aid donations, or by taking a smaller dividend from your own company in the current tax year. But those strategies, and other ways to manage your income, need to continue until the children are no longer eligible for child benefit.

You will be given the option of declining to receive child benefit to avoid the tax charge, and this will be explained in the Taxman’s letter. However, this is not the same as not making a claim for child benefit. It is important to make a claim for child benefit (even if you decline to receive it) as the claim can help entitlements to the state pension for a non-working parent, and ensures the child receives an NI number at age 15.

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

A guide to Benefits in Kind

Dec5

A SIMPLE GUIDE TO BENEFITS IN KIND

This is a basic guide and should not be used as a definitive guide, since individual circumstances may differ, in which case specific advice should be obtained, where necessary.

 

Expenses and Benefits in Employment – Overview

Expenses and benefits received by reason of employment (whether paid by the employer or another person (e.g. tips) are generally taxable.

 

The way in which a benefit in kind is provided will determine its tax treatment and the manner in which it should be reported, as follows:

 

Manner in which provided:

Tax/NIC due:

Report on:
Employer arranges and pays directly for benefit

Class 1A

P11D/P9D
Employee arranges benefit; employer pays for it

Class 1 (employee and employers)

Account for NIC through payroll; report benefit on P11D/P9D
Employee arranges and pays for benefit; employer reimburses cost

PAYE Tax and Class 1 NIC (employees and employers)

Through payroll; P35

 

RETURNS

  • An end of year return P35 has to be submitted by the employer before 20 May after the tax year:
  • P11D in respect of an employee earning £8,500 or more or
  • P9D in respect of an employee earning less than £8,500.
  • P11D(b) return of Class 1A contributions due on all benefits in kind for all employees.

 

A copy P11D or P9D must be given to the employee before 7 July after the tax year and the P11D/P9D returns must be submitted to HMRC by the same date.

 

Note: the £8,500 threshold includes the normal pay plus the amount of any benefit without deduction for business use, superannuation contributions or profit related pay.

 

 

TAX TREATMENT OF BENEFITS

Value of benefit

The normal value of a benefit is cost to the employer, less any contribution made by the employee. This cost includes VAT, even if the employer can reclaim the input VAT.

 

Where the benefit is shared facilities, only the additional (marginal) cost is charged (e.g. a schoolmaster whose child attends the school at which he teaches).

 

HMRC have a useful facility on their website (www.hmrc.gov.uk) which gives an “A-Z” of benefits in kind and the associated tax treatment. To use this, visit, http://www.hmrc.gov.uk/paye/exb/a-z/a/index.htm

 

Special Rules

There are special rules for:

  • Vans, cars and petrol
  • Mileage allowances
  • Beneficial loans
  • Directors’ tax paid by employer
  • Scholarships
  • Shares acquired at undervalue.

 

Exemptions

The following do not have to be included:

  • Mobile phones. From April 2006 only one mobile lent to an employee – not his family – is exempt (this does not affect arrangements entered into prior to April 2006). NB. HMRC previously used to regard iPhone, Blackberries and other smartphones as mini-computers rather than mobile phones and therefore not eligible for the exemption. HMRC has, however, recently changed its view. (Visit http://www.hmrc.gov.uk/briefs/income-tax/brief0212.htm for details).
  • In-house recreational benefits – extended to other persons working on the premises from 2005-06.
  • Accommodation on employer’s premises to enable employee to carry out his duties in very limited circumstances.
  • Lump sum pension/gratuity on death/retirement of an employee.
  • Canteen meals if available for all staff.
  • Workplace nurseries, accommodation on employer’s premises or approved premises arranged by him. This must not be in a private dwelling.
  • Childcare vouchers up to £55 per week. Note that for employees taxed at the higher rate or the additional rate of tax, who join a childcare voucher scheme after 5 April 2011, income tax relief is restricted to the basic rate.
  • Hospitality from third persons if not for specific services.
  • Medical treatment or insurance in respect of overseas business trips.
  • Parking facilities (car, motor cycle, or cycle) at or near workplace.
  • Incidental overnight expenses
  • Security assets and services
  • Contribution to employees working from home towards additional household costs.
  • Pension advice and information, up to £150 per year.

 

Minor benefits

These can be exempted. Under current regulations, the following are exempted:

  • Cycles and safety equipment and cyclists’ breakfasts
  • Lunchtime use of works’ buses
  • Welfare counselling
  • Hearing aids, services and facilities available to disabled employees to enable them to fulfil their duties.

 

Assets transferred

Assets transferred to ‘lower paid’ (under £8,500) employees are normally valued at second-hand value, less any contribution from the employee.

 

The value of an asset transferred to a ‘higher paid’ employee or director will depend upon whether the asset has been used or depreciated prior to the transfer.

 

A new asset is valued at the greater of:

  • Cost or
  • Second-hand value

less any contribution by the employee.

 

Used assets transferred are valued at market value at the date of transfer less any contribution made by the employee.

 

Assets previously made available to the employee are charged at the higher of:

  • Market value at the date of transfer, and
  • Market value when first made available to the employee, less any amounts already charged in respect of that use, less any contribution from the employee.

 

No charge is made where employees/directors buy computers or bicycles from their employer, provided they pay market value.

 

Assets made available to employees

Where an asset is made available to an employee for private use, the benefit is the higher of:

  • 20% of the market value when first made available; and
  • the annual rent or hire charge of the asset,

 

together with any additional costs in association with the provision of the asset ( minus any amount made good by the employee).

 

Living accommodation and related expenses

Living accommodation provided by the employer is a taxable benefit whatever the rate of pay, but there are exceptions.

 

Where a director or ‘higher paid employee’ has the normal expenses of occupation paid by the employer, that will be a normal chargeable benefit.

 

For further details on accommodation benefit, visit http://www.hmrc.gov.uk/paye/exb/a-z/l/accommodation.htm

 

Job-related occupation

The amount of benefit charged for occupation is partially exempt where the employee is in job-related occupation. The partial exemption reduces the charge on what would otherwise be the full cost of expenses such as repairs, heating and lighting, cleaning, maintenance up to an amount not more than 10% of the emoluments of the employee, less any contribution made by the employee. ‘Emoluments’ includes any emoluments of employment with an associated company.

 

Vans used by employees

  • Where an employee has to take a van home and is not allowed any other private use, there is no benefit charge.
  • Where private use is unrestricted, a fixed benefit charge of £3,000 applies.
  • If the employer provides fuel for unrestricted use, a fuel charge of £550 will also apply.

 

 

 

Shared vans

Where vans are shared (other than pool vans, where there is no benefit), the employees are charged on their share of the use of all the employer’s vans. Maximum charge £3,000, is reduced by any period of 30 days when a van was not available for use.

 

For further details of van benefit, visit http://www.hmrc.gov.uk/paye/exb/a-z/v/vans.htm

 

 

Company cars

The charge is based on a percentage of the car’s list price, graduated according to the car’s carbon dioxide emission levels, maximum 35%. http://www.vcacarfueldata.org.uk/

  • For a petrol car, the benefit is calculated by the percentage charge of the car’s price and the appropriate percentage, based upon the car’s CO2 emissions. Note that prior to 6 April 2011, the cost of the car was capped at £80,000 but this no longer applies for 2011/12 onwards.
  • Where a disabled driver must use an automatic car, the benefit is that for an equivalent manual car.
  • If the car is unavailable for part of the year, the charge is proportionately reduced.
  • If the employee makes a contribution towards private use, this will reduce the benefit in kind.
  • HMRC have a useful car at fuel benefit calculator on their website at http://www.hmrc.gov.uk/calcs/cars.htm

Classic cars

Classic cars (more than 15 years old at the end of the tax year), where the market value is greater than the list price and is at least £15,000, the chargeable benefit is the relevant percentage of the greater of list price and market value.

Fuel benefit

Where an employer provides an employee with free fuel for private purposes, the taxable benefit is linked to carbon dioxide emissions. The percentage used for the fuel benefit is applied to a figure set by the Treasury, currently £18,800 for 2011/12. If the free fuel benefit is withdrawn during the year, the taxable figure is apportioned. If the employee makes a contribution towards private fuel, this will not reduce the fuel benefit unless every drop of private fuel is reimbursed, i.e. it is an “all or nothing” benefit.

 

If the free fuel benefit is withdrawn during the year, the taxable figure is apportioned.

 

 

Changes to car and fuel benefit

 

With effect from 6 April 2012:

  •             The 10% benefit category for cars with emissions of 120g/km or less will be removed.
  • Cars the emit 99g/km or less of CO2 will be subject to a 10% benefit charge

·        The benefit charge will increase by 1% over and above the 10% rate for every 5g/km increment in CO2 emissions over 99 g/km.

Mileage allowances

There is a tax-free approved amount, currently 45p per mile up to 10,000 miles and 25p thereafter, where an employee uses their own car for business use. If the employer pays more than that, only the excess is taxed.

 

If the driver of the vehicle carries at least one passenger on a business trip, he may claim an additional 5p per mile.

 

Mileage payments within the HMRC approved rates do not need to be reported on form P11D.
Passenger Payments

If the driver of a vehicle carries at least one passenger on a business trip, he may claim an additional 5p per mile. This applies whether to both cars and vans and to use of an employee’s own vehicle OR a company vehicle.

 

Note, if the employer pays less than 5p per mile (or nothing at all), there is no equivalent to Mileage Allowance Relief, i.e. the employee is not entitled to claim a deduction under ITEPA 2003,s336 for the shortfall.

 

Works bus services

·        Benefits arising from an employer providing or subsidising a works bus service are exempt.

  • Where the benefit is provided by a ticket or voucher, any benefit under the voucher rules is exempt.
  • The bus must have a seating capacity of at least 12 and must be available to employees generally.

 

Beneficial loans

A tax charge arises on the benefit of a loan. Where it is a loan with little or no interest, the benefit is charged on the difference between the interest paid in a tax year and interest payable at the official rate.

 

In calculating this, the standard way is to multiply the average amount outstanding at the beginning and end of the year and apply the official rate of interest. An alternative method of calculation, based on the day-to-day outstanding balance may be used at the request of either HMRC or the taxpayer.

 

Small loans totalling £5,000 or less, e.g. season ticket loans, can be disregarded.

 

For further information on beneficial loans, visit http://www.hmrc.gov.uk/paye/exb/a-z/l/loans.htm.

Director’s tax paid by employer

Where the company fails to deduct PAYE from a director’s emoluments, but accounts to HMRC for the tax, the amount not reimbursed by the director is taxed as a benefit in kind.

 

Scholarships

Scholarships made to a child of a director or higher paid employee are taxed as benefits where made as a result of ‘arrangements entered into by an employer, or a connected person’.

 

There is an exception, where 75% of scholarships awarded from the fund are to scholars who are not children of employees e.g. where the connection is coincidental.

 

Workplace Nurseries

Childcare provided by an employer in a workplace nursery or similar facility is exempt:

  • The employee must have parental responsibility for the child, or reside with it, or maintain it at his expense;
  • The care is provided on premises which are not wholly or mainly used as a private residence;
  • Either the care is provided on premises made available by the employer or the care is provided under arrangements by the employer and others and make him responsible or partly responsible for managing and financing the care provision; and
  • Where the registration requirement applies, it is met, i.e. either the premises or carer must be registered and they are registered.

 

In order to satisfy the condition that the employer must be at least partly responsible for managing and financing the care provision, his role must be a real one which makes him accountable if things go wrong.

 

External Childcare

An employer may pay for employees’ childcare with a registered child-minder or nursery. The employee can receive benefit up to £55 per week towards the cost of childcare, in the following circumstances:

  • The employer contracts directly with the child-minder or nursery for the provision of the childcare, or
  • The employer provides childcare vouchers which the employee may then use to pay for childcare with a registered childminder or nursery.

 

Prior to 6 April 2011, tax relied on the provision of childcare vouchers was given at the taxpayer’s marginal rate of tax. This continues to be the case after 6 April 2011 where the taxpayer was already registered on a scheme.

 

For those joining a scheme after 5 April 2011, tax relief is restricted to the basic rate and the employer must carry out an assessment of the employer’s earnings to determine whether to restrict the tax relief to basic rate at source.

 

Eye tests and spectacles

The provision of eye tests and /or spectacles for VDU work is exempt if:

  • The test or appliances are required by the Health and Safety at Work Act 1974
  • The tests and appliances are available generally to employees working with VDUs.

 

Dispensations

An employer can agree with his tax office that certain benefits e.g. business travel will not be taxable, if for example, only business expenses are reimbursed. This is known as a dispensation. This obviates the necessity for the employee to report the ‘benefit’ on his return and for the employer to include it on the form P11D or P9D. Obtaining a dispensation agreement with HMRC can significantly reduce the administrative burden of having to report expenses on forms P11D/P11D and for the employee then having to make a cliam for the expenses to be non-taxable due to being incurred wholly, exclusively and necessarily in carrying out the duties of employment.

 

HMRC are keen to encourage the use of dispensations and have introduced a facility to apply for dispensations online at https://online.hmrc.gov.uk/shortforms/form/P11DX?dept-name=&sub-dept-name=&location=1&origin=http://www.hmrc.gov.uk

PAYE Settlement Agreements

This is another helpful scheme that allows an organisation to settle any PAYE and NIC’s on certain expenses and benefits, directly on behalf of its employees. Items covered by a PSA do not need to shown on forms P11D or put through the payroll.

 

The following expenses/benefits may be covered by a PSA:

  • minor items (e.g. small gifts s to employees)
    • irregular items (e.g. non-qualifying business trip for spouse)
    • items which are impractical or difficult to value for P9D/P11D purposes (e.g. items difficult to attribute to a single employee)

 

The employer calculates the tax due on the grossed-up value of the benefits in kind. A special class of NIC, Class 1B is payable on the grossed-up value of the benefit.

 

For further details, visit http://www.hmrc.gov.uk/paye/exb/schemes/psa.htm

 

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Home Usage

Dec3

Q. I want to buy a new business but the only way I can do that is to increase the mortgage on my house. Will the interest I pay on the extra mortgage be tax allowable for the business?

A. In principle yes, but there are restrictions to prevent improper use of this tax relief. Further restrictions are also proposed from 6 April 2013 (see above). Interest paid on loans used to buy into a partnership or to buy shares in a closely controlled company, or lend to such a company are generally tax allowable. However, it would be best to have a separate loan for this business investment, as when you repay any part of the mortgage the business part will be deemed to be reduced first. You will also have to hold at least 5% of the ordinary shares of the company and work for it for the greater part of your time.

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

A guide to Child Tax Credits

Nov28

A SIMPLE GUIDE TO CHILD TAX CREDITS

This is a basic guide. It should not be used as a definitive guide, since individual circumstances may differ, in which case specific advice should be obtained, where necessary. There are two main tax credits:

  • working tax credit, available to working people on low incomes,
  • and child tax credit, which is for people with children, whether they are working or not.

Prior to 6 April 2012, the basic element of child tax credit was protected up to a family income level of £40,000 but this has now been removed. Child tax credits are now tapered away much earlier. The child tax credit calculation is very complicated. However, HMRC have a tax credit calculator on their website at http://taxcredits.hmrc.gov.uk/Qualify/DIQHousehold.aspx which enables people to check their entitlement.   From 6 April 2012, the backdating provisions have been shortened to one month., so it is important to take prompt action to ensure credits due are not lost. It is possible to make a protective claim where a person is not eligible because their income is too high, but would otherwise meet the criteria. This gives them an identity for tax credit purposes and means that if their income falls, they may be entitled to tax credits recalculated to the start of the tax year, whereas if they do not claim until income does fall, the claim can only be backdated for one month.   Tax credit applications have to be joint applications if the claimant is part of a couple. Child tax credit is made up of several elements:                                                                                                           Maximum annual rate Element                                                                                                              2012-13   Family element                                                                                                           £545 Child or young person element                                                                             £2,690 Disability element – where the child or young person is disabled**                   £5,640 Severe disability element – where the child or young person is severely disabled** £6,830     *The child or young person elements, including the higher amounts in respect of disability or severe disability, are mutually exclusive: one element, the highest for which the child or young person qualifies, will be payable for each child or young person.   The renewal deadline is 31 July. At the start of the tax year, tax credits are paid on a provisional basis, based on the previous year’s income and will be finalised and recalculated after the year end. If income has increased, tax credits will only be recalculated if the increase is more than £10,000 (£25,000 for years prior to 2011-12). A disregard of £2,500 for income falls has been introduced from 6 April 2012.   Self employed income for this purpose will be the taxable profit for the tax year. If a loss is made, it will be set against any other income for that year, including that of any joint claimant. Losses carried back against the previous year’s income for income tax purposes will be treated differently for tax credit purposes. For tax credits, any loss will be set against other income in the same year, and any not so utilised can be carried forward.   A capital allowances claim will reduce taxable profit, thereby reducing the level of income to be taken into account for tax credit purposes. Carefully timed capital allowances claims, taken in conjunction with the income disregard, can have an impact on the amount of tax credits that can be claimed, although the effects of this are now significantly less following the reduction in the income disregard.

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.  

Buying car being Director

Nov26

Q. My company is doing well and I’d like a new car, possibly a BMW series 5. Should the company lease or buy this car, or does it make more sense for me to take a dividend from the company and to buy the car personally?

A. As the car is available to you for personal journeys you will be taxed on the ‘benefit’ of driving that car giving rise each year to a tax bill for yourself and a NI bill for your company at 13.8%.

The company will get a deduction against profits for the cost of leasing the car, but that deduction is limited if the car has CO2 emissions over 160g/km (reducing to 135g/km from April 2013). Likewise the capital allowances are restricted for cars with CO2 emissions over 160g/km. The company can pay for the car’s insurance, servicing and repairs, with no further cost to you, the driver. However, if fuel is provided there is an additional benefit in kind to be taxed on you.

In reality the calculations need to take into account other factors such as the cost of insurance and whether you need to borrow money to buy the car.

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

A guide to Research and Development

Nov21

A SIMPLE GUIDE TO RESEARCH AND DEVELOPMENT TAX RELIEF

This is a basic guide prepared by the Technical Advisory Service for members and their clients. It is an introduction only and should not be used as a definitive guide, since individual circumstances may vary. Specific advice should be obtained, where necessary.

 

The Government wants to send out the signal loud and clear that Britain is open for business.

 

Central to the government’s plans is to provide ‘the most competitive corporate tax system in the G20, in order to support strong and sustainable growth’. In recent years numerous businesses have left the UK amid concerns over tax competitiveness and the government is keen to stem and indeed reverse this trend. The government has undertaken a staged program of cuts in corporation tax rates and has also been consulting on the modernisation the taxation of foreign subsidiaries, as well as looking at targeted measures in certain areas.

 

Creativity and innovation will be crucial to the future of the UK economy and it is therefore crucial that ‘the most competitive corporate tax system in the G20’ includes sufficient tax breaks for expenditure on innovation.

 

One of the key features of the proposed corporation tax reforms is to create a more favourable tax regime for expenditure on innovation and intellectual property. The government has been consulting on the future of the research and development tax system. The current system of R&D tax credits is quite generous up to a point but the consultation will look at extending tax breaks further into the life-cycle of innovative products.

 

Below we look at the Research and Development tax regime as it currently stands following the 2012 Budget.

 

Research And Development (R&D) Tax Regime

Tax relief for expenditure on R&D is provided for in Part 13 of Corporation Tax Act 2009 and offers a system of enhanced tax deductions/credits for qualifying expenditure

 

What Qualifies as R&D Expenditure

R&D is defined as activities falling to be treated as research and development in accordance with generally accepted accounting practice, but the Treasury have powers to modify the definition by specific regulations The relevant standards for this are SSAP 13 under UK GAAP and IAS 38 under International GAAP.

 

For the purpose of the tax reliefs available, research and development (R&D) has the meaning given by section 1138 of the Corporation Tax Act 2010. This means activities which fall to be so treated in accordance with generally accepted accounting practice, but not including oil and gas exploration and appraisal. The BIS website contains Guidelines on the Meaning of Research and Development for Tax Purposes at http://www.bis.gov.uk/assets/biscore/corporate/docs/r/rd-tax-purposes

 

The current definition is:

 

‘R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D. Certain qualifying indirect activities related to the project are also R&D. Activities other than qualifying indirect activities which do not directly contribute to the resolution of the project’s scientific or technological uncertainty are not R&D.’


Related to the trade

There is a requirement that the R&D carried on by the company is either related a trade carried on by the company or from which it is intended that such a trade will be derived. R&D related to a trade includes any R&D which may lead to or facilitate an extension of the trade and medical research that has a special relation to the welfare of workers employed in that trade.

 

There are two schemes for claiming relief, depending of the size of the company:

  • The Small or Medium-sized Enterprise (SME) Scheme
  • The Large Company Scheme

 

Definition of Small and Medium-sized Enterprise
Although Commission Recommendation 2003/361/EC sets limits defining a micro, small or medium-sized enterprise, these limits are extended for the purposes of R&D relief in relation to expenditure incurred on or after 1 August 2008 by limits set by Treasury regulations.
For the purposes of R&D relief from 1 August 2008, an SME is a company meeting the EU SME definition but with the following wider limits:

 

2003/361/EC definition Limits for expenditure incurred on or after 1 August 2008
Number of employees < 250 < 500
Annual turnover ≤ EUR 50 million ≤ EUR 100 million
Balance sheet total ≤ EUR 43 million ≤ EUR 86 million

 

An entity’s employee, turnover and balance sheet figures must be aggregated with figures for certain ‘linked enterprises’ and ‘partner enterprises’.

 


The Small or Medium-sized Enterprise (SME) Scheme

From 1 April 2012, the £10,000 minimum spend requirement is removed for SMEs. Prior to that, an SME was entitled to R&D tax relief for an accounting period in which it has total qualifying R&D expenditure of not less than £10,000.

 

Some conditions are specific to the SME scheme. These are:

 

  • The company must not be in receipt of a notified state aid in respect of the project
  • Expenditure must not be subsidised
  • The company must not have been contracted to carry out the R&D
  • The company must be a going concern (see below)
  • The R&D project must not receive total aid of more than €7.5million

 

Method of Relief

  • Small and medium-sized companies as defined can claim R&D tax relief for 225% of their qualifying revenue expenditure from 1 April 2012 (previously 200%) on research and. The relief would normally be claimed by deducting from taxable profits in the company’s corporation tax computation, an additional amount equal to 125% (or 100% prior to 1 April 2012) of the R&D expenditure.
  • Relief at 225% of the expenditure gives companies liable to pay the small profits rate of 20% a tax saving equal to 45% of the R&D expenditure.
  • Companies carrying on R&D before they start to trade may treat the R&D relief as a trading loss.
  • Where a company has a surrenderable trading loss, it may surrender the R&D tax relief (or the unrelieved loss if lower) in exchange for a tax credit equal to 12.5% of the surrendered amount (equal to 25% of the qualifying expenditure). Prior to 1 April 2012, the repayable tax credit could not exceed the company’s PAYE tax and NIC liabilities for payment periods ending in the relevant accounting period. The tax credit will be paid to the company, or used to discharge outstanding corporation tax liabilities.
  • Where a large company subcontracts work to a small or medium-sized company, the small/medium-sized company may claim R&D relief of 130% of the qualifying expenditure.

 

The Large Company Scheme

A large company is a company which is not an SME. A large company is entitled to R&D tax relief under Part 13 Chapter 5 of Corporation Tax Act 2009 for an accounting period if it meets the following conditions:

  • The company is a large company throughout the period.
  • The company carries on a trade in the period.

 

Prior to 1 April 2012, the company was required to spend at least £10,000 on qualifying R&D expenditure but this requirement is removed from 1 April 2012.

 

Method of Relief

  • Large companies (i.e. those not within the definition of small and medium-sized companies above) may claim R&D relief of 130% of their qualifying revenue expenditure on R&D.
  • Relief at 130% of the expenditure gives companies liable to pay the tax at the main corporation tax rate of 26% a tax saving equal to 33.8% of the R&D expenditure.
  • Qualifying expenditure includes direct R&D expenditure, expenditure subcontracted by the company to an individual, partnership, university, charity or other qualifying body, and contributions to individuals, partnerships and qualifying bodies for independent R&D which is relevant to the company.
  •  There is no provision for large companies to surrender R&D relief for a tax credit payment.
  • Where a large company subcontracts work to a small or medium-sized company, the small/medium-sized company may claim R&D relief of 130% of the qualifying expenditure.

 

 

What Expenditure Qualifies for Relief?

If the company and the project meet the necessary conditions, then tax relief can be claimed on the following items of revenue expenditure:

 

  • Staff Costs – This means the cost of employing staff directly who are actively engaged in carrying out R&D itself.
  • Externally provided workers and sub-contractors – This covers the cost of paying a staff provider for staff provided to the company, or a sub-contractor who are directly and actively engaged in carrying out R&D.
  • Consumable Items – These include consumable or transformable materials used directly in carrying out R&D.
  • Software – Revenue expenditure incurred on computer software employed directly in R&D.
  • Utility Costs – Power, water, fuel used directly in carrying out R&D, but not for instance telecommunication costs and data costs.

Research & Development – Capital Expenditure

Enhanced capital allowances are available for capital expenditure on research and development. Allowances are only due if the research and development is related to the trade of the business. The allowance is known as the Research & Development Allowance (RDA) and qualifying expenditure will be eligible for capital allowances of 100%. For further details, see http://www.hmrc.gov.uk/manuals/camanual/CA60000.htm.

 

Specialist HMRC R&D Units

HMRC have set up specialist R&D units for examining claims to R & D tax relief. These offices deal specifically with R&D claims and will give a ruling on whether certain expenditure qualifies for R&D tax relief.

 

For a list of these specialist offices, see http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD80350.htm

For details of which office deals with which postcode, see http://www.hmrc.gov.uk/manuals/cirdmanual/CIRD80360.htm

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Company cars and tax

Nov21

Company cars are one of the most popular employee benefits. Altogether, more than one million UK directors and employees drive company cars. Of these, half receive free fuel for private use.

 

Successive governments have increased taxation on cars and fuel. Both employers and employees now need to consider the tax implications of company cars before making decisions. Companies are now encouraged to run ‘greener’ cars. A car’s CO2 emission levels determine the tax paid for both new and existing vehicles, though older vehicles (registered before 1998) are still taxed on engine size.

 

This briefing covers:

 

  • How employees and employers are currently taxed on company cars.
  • Ways to reduce the tax paid.
  • The difference between buying and leasing.

 

1. Employee tax

 

1.1        Company cars are taxed as a benefit in kind for most employees. There are some special cases.

 

  • Employees earning less than £8,500 a year (including the value of any benefits they receive) are not taxed on the benefit. But directors are almost always taxed, regardless of what they earn.
  • Pool cars used by more than one employee for their work are not taxed. A pool car must not normally be kept overnight at an employee’s home.

 

1.2        Employees pay tax at their top rate.

 

  • The tax charge is based on an assumed benefit calculated as a percentage of the car’s list price. The percentage normally varies between 15 and 35 per cent, depending on the car’s CO2 emissions. The higher the emissions, the higher the assumed benefit will be.
  • For example, in 2008/09 the assumed benefit on a car emitting 210gm of CO2 per kilometre (gm/km) was 30 per cent.

 

Assuming that the list price of the car was £18,000, the tax charge (to a basic rate taxpayer at 20 per cent) would be £1,080 (£18,000 x 30/100 x 20/100).

 

  • From 2008/09, cars with CO2 emissions of 120 gm/km or lower attract a new lower percentage charge of 10 per cent (13 per cent for diesels). There are also discounts for cars run on alternative fuels or alternative technology (see 3.3)
  • Diesel-powered cars attract an extra charge of 3 per cent, unless they are Euro IV compliant and were registered before 2006, subject to the same 35 per cent maximum charge.
  • The level of CO2 emissions at which a particular charge applies may decline annually.

 

The intention is to persuade businesses to buy more fuel-efficient cars.

 

The lower threshold (at which the 15 per cent rate applies) has been reduced to 125gm/km for 2011/12.

 

  • Higher business mileage now has no effect on the tax charge. Nor has the age of the car, except that a special scale charge applies to cars registered before 1998.

 

1.3        The list price is based on the price published by the manufacturer, importer or distributor, plus delivery charges, tax and VAT (but not vehicle excise duty).

 

  • It also includes the list price of accessories (plus fitting and VAT).
  • Accessories worth up to £100, fitted after the car has been delivered to the employee, are excluded. So are mobile phones, equipment necessary to a disabled driver, and equipment necessary to the driver to perform his duties.
  • The cost of enabling the car to run on compressed natural gas (CNG) or liquid petroleum gas (LPG) is also excluded.

 

1.4       Employees provided with a van pay tax if there is any significant private use.

 

  • Employees are taxed on a benefit of £3,000.
  • If the only private use is travelling between home and work, employees pay nothing.
  • If several employees share the same van, the value of the benefit for each employee is reduced on a just and reasonable basis.

 

1.5       Since 6 April 2010, the list price percentage for electric cars and vans is 0 per cent for the purposes of company car tax.

 

  • This reduces the car benefit charge for electric cars and vans to nil.

 

2. Tax on fuel

 

If any free or subsidised fuel is provided for private use in a company car, the employee is taxed on this benefit. The value of the benefit depends on the fuel efficiency of the engine, not on how much fuel is provided.

 

2.1        The percentage charge for each car is the same as that car’s charge for car benefit.

  • Cars with higher CO2 emissions have a higher percentage charge.

 

2.2        The percentage charge is applied to an annual figure for fuel benefit to determine the amount of taxable benefit.

 

  • For 2011/12 the annual figure is £18,000.

 

So for a car emitting 210gm/km, with a percentage charge of 30 per cent, the tax for a basic rate taxpayer would be £1,080 (£18,000 x 30/100 x 20/100).

 

2.3        Since April 2007 van drivers have been exempted from the fuel benefit charge if the van is used solely for business purposes. If there is any significant private use of the van, drivers are taxed on a benefit of £550.

 

3. Reducing tax costs

 

Employees and directors can reduce the tax paid on company vehicles in several ways.

 

3.1        Contribute up to £5,000 towards the cost of buying the car. This decreases the taxable value of the car by the amount contributed.

 

  • You will need to keep the car for several years before you save money. How long depends on the car’s size and age, your tax rate and the amount contributed. In practice, this approach is not particularly tax-efficient. It is of most use to directors or owner-managers who want more expensive cars or who want to reduce the amount of capital the business has tied up in cars.

 

3.2        If you pay the full cost of fuel for private travel, including journeys to and from work, you do not have to pay private fuel tax.

 

For people who only make light private use of a company car there is a strong incentive to pay for their own fuel under the new system. For example:

 

  • For a car emitting 185gm/km, and therefore subject to a 25 per cent charge, a basic rate taxpayer would be paying £845 a year in tax on the fuel benefit, if the employer pays for fuel. If the private fuel they use costs £70 a month or less, they would be better off paying for their petrol.
  • A 40 per cent taxpayer driving a car with emissions of 240gm/km giving rise to a 35 per cent charge would have a tax bill of £2,366 and would have to be using petrol worth almost £197 a month to make it worthwhile accepting fuel for private use from the employer.

 

Paying for only part of the fuel does not reduce the tax paid.

 

3.3        Using alternative fuels or technology lowers the cost of a company car.

 

  • Since 6 April 2010, no income tax is payable on the benefit for electric cars and vans.
    • Hybrid electric/petrol cars attract an extra 3 per cent discount whatever their emissions.
    • Since April 2006, cars registered on or after 1 January 2000 which are manufactured to run on liquid petroleum gas or compressed natural gas attract a 2 per cent discount, whatever their emissions.
    • Since April 2008, there is a 2 per cent discount for cars that can use E85 ethanol fuel.

 

3.4        Second cars are taxed on the same basis as first cars.

 

3.5        Sharing a car reduces the benefit each employee pays tax on.

 

  • The value of the benefit for each employee is reduced on a just and reasonable basis. For example, if two employees share a company car equally, normally each of them would be taxed on half the usual benefit.
  • If the employees are also taxed on fuel provided for private use, the value of this benefit is reduced in the same way.

 

3.6        You are only taxed on the proportion of the year you use the car.

 

Tax due on fuel can also be worked out proportionately if you give up the ‘free’ fuel and so long as the fuel is not reinstated later.

 

4. No car or your own car?

 

Some staff will be better off with a company car. It depends on what the company offers.

 

4.1       Some companies offer employees extra salary instead of a company car.

 

  • This is worth considering if the company car has high emissions. The number of miles you drive on company business no longer reduces the tax charge. But it will affect your running costs.

 

4.2       Some companies provide benefits for employees who use their own cars for business.

 

  • These are normally paid as mileage allowances (see 4.3 or 4.4). The size of the allowance will be decided by the company.
  • Companies may decide to pay the optional passenger rate of up to 5p a mile for each passenger. The passenger must be an employee who also needs to travel on business.

 

4.3       Employees who use their own cars usually receive a mileage allowance.

 

  • If mileage allowances are paid in line with the HM Revenue & Customs (HMRC) Approved Mileage Allowance Payments (AMAP), there is no tax or NIC liability.
  • AMAP for all cars (and vans) are 45p a mile for the first 10,000 miles, and 25p a mile thereafter.
  • The rate for employees who use their own motorcycles for business is 24p a mile.

 

4.4       Employees who do not receive full mileage allowances may claim the balance as relief on their tax return (ie on the difference between the AMAP and the amount paid by their employer).

 

4.5       Employer contributions to the running costs of employees’ cars are taxable, unless they are paid as a mileage allowance.

 

  • But employees can claim a tax deduction, using AMAP.

 

5. Tax for employers

 

5.1        Employers must pay Class 1A National Insurance contributions on the taxable value of cars and fuel given to employees.

 

  • The rate of contributions is 13.8 per cent.
  • Employers must use the car benefit and fuel scale charges when calculating these.

 

5.2        The tax due on company cars and private fuel is collected through PAYE by an adjustment of the PAYE code.

 

  • You must notify HMRC of any changes in company car use every quarter on form P46 (Car), due on the second day of February, May, August and November.

 

There are penalties if you miss the deadlines.

 

5.3        There are additional rules regarding VAT.

 

  • Employers can recover VAT on fuel used for business purposes only. This applies even if an employee pays for the fuel and then claims the cost on expenses.
  • Employers who provide fuel for private use at or below cost can recover VAT on the fuel purchase, but must then pay VAT following the set fuel scale charges. These are based on the car’s CO2 emissions. Since 1 May 2008, the VAT payable for a three-month VAT period ranges from £20.55 to £71.94.
  • Employers do not have to apply the scale charges if they do not recover VAT on the purchase of private fuel.
  • Employers do not account for VAT if they charge employees for the use of cars.

 

6. Buying company cars

 

6.1        Businesses can claim the cost of purchase through capital allowances. This reduces taxable profits and is used by profitable companies with healthy cashflow.

 

  • With conventional cars, all businesses can claim 20 per cent of the written-down cost every year, until the car is no longer in use by the business.
  • The maximum that can be written off against tax is £3,000 in one year.
  • Businesses can claim 100 per cent first year allowances on low-emission cars and new zero-emissions goods vehicles purchased for business use. Cars must be registered on or after 17 April 2002 and emit less than 110gm/km of CO2 or run on electricity.
  • In April 2009 the annual allowance fell to 10 per cent for cars with CO2 emissions above 160gm/km.
  • Sole traders who buy cars for business and private use can only claim the business portion of the writing-down allowance.

 

6.2        Tax relief is available in full for two items:

 

  • Maintenance and other running costs.
  • Interest paid on a loan to buy the car.

 

6.3        A business cannot recover VAT on the purchase of a new car unless it can prove that the car is for business use only.

 

Typically, car dealers and leasing firms are the only business able to recover VAT.

 

7. Leasing company cars

 

7.1        For cars leased before April 2009, all the costs of leasing can be deducted from taxable profits as expenses, unless the car has a retail price of over £12,000.

  • For cars leased after April 2009, there is a flat rate disallowance of 15 per cent of relevant payments for cars with CO2 emissions above 160g/km.

 

7.2        Only 50 per cent of the VAT charged on rentals can be claimed, unless the car is used wholly for business purposes.

 

7.3    Capital allowances can only be claimed if there is an option to purchase the car.

 

  • The allowances are limited to £3,000 per year (see 6.1).

 

8. Getting help

 

8.1      Both employees and employers need advice before deciding what to do.

  • Consult an accountant for advice.

 

8.2      HMRC provides useful leaflets and online tools (www.hmrc.gov.uk/cars).

 

The tax-free benefits

 

Though the use of a car and the value of the fuel are taxed, company car drivers do not pay extra tax on some other benefits.

 

The benefits that escape extra tax are:

 

  • Maintenance and servicing.
  • Repairs.
  • Insurance.
  • Road tax.
  • Membership of a motoring organisation.

 

The cash value of these benefits often outweighs the cost of any car tax paid. Depending on the vehicle and its reliability, the value to the employee will be at least £600 a year, and could be much higher.

 

Knowing there will be no surprises in the shape of repair bills or insurance increases allows employees to take motoring costs out of the family budget

 

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Salary, dividends and Directors

Nov19

Q. Our company is owned jointly by myself and my wife, and we are both directors of the company. I do most of the work and draw a lot of funds out of the business, so my director’s account with the company is often overdrawn. My wife has another paid position, so doesn’t draw so much from the company. Her director’s account with the company is always in credit. Can our two director’s accounts be combined and set-off against each other for tax reporting requirements?

A. Married individuals are taxed as separate persons in the UK, and their income and liabilities cannot be amalgamated to present a better picture for tax purposes. The Taxman is dead against the overdrawn balance on one person’s account being set against the credit balance on another person’s account, even if those two people are married.

 

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Common VAT problems

Nov14

Once you understand the basics, VAT is reasonably straightforward. But there are some areas where it is easy to make mistakes. These can lead to stringent penalties, and ignorance is no defence. In this briefing, we assume you understand the basics and concentrate on some of the more unexpected pitfalls. It covers:

 

  • Timing and paperwork problems.
  • Unreclaimable VAT.
  • Exceptions for unusual supplies.
  • Where to get help and advice.

 

1. Getting the timing right

 

Timing is crucial. Generally every transaction must be shown in your VAT return if the ‘tax point’ (the point at which VAT is accountable) falls within that particular VAT return period, whether or not payment has been received.

 

1.1        The tax point is usually the date goods were supplied or services completed (the ‘basic tax point’). There are some variations.

 

  • If a VAT invoice is issued or payment is made before the basic tax point, the date of invoicing or payment becomes the tax point, whichever is the earlier.
  • If you issue a VAT invoice up to 14 days after the basic tax point, the date the invoice was issued becomes the tax point. It is possible to agree an extension to the ’14-day rule’ by making an application to HM Revenue & Customs (HMRC).
  • If you receive a VAT invoice up to 14 days after the basic tax point, you can assume the invoice date is the tax point, unless the invoice shows a separate tax point date.
  • With continuous supplies, the tax point occurs when a VAT invoice is issued or payment is made — whichever is earlier.

 

1.2        As a buyer, you cannot reclaim the input VAT you paid without a valid VAT invoice.

 

  • If you pay your supplier in advance, you cannot reclaim the VAT element of the payment without a valid VAT invoice.
  • If you reclaim input VAT on a supplier’s invoice, but fail to pay the supplier within six months you normally have to repay the VAT.

 

1.3        Relief is available for bad debts.

 

  • The invoice must be more than six months overdue and be written off in a specific VAT bad debt account.
  • Customers no longer need to be told that bad debt relief claims are being made.

 

1.4        In practice, many small businesses use the cash accounting scheme.

 

  • VAT returns are based on payments made and money received during the period, regardless of where the tax points fall.
  • Generally, any business with an estimated VAT taxable turnover of up to £1.35 million can apply to join.

 

1.5        The flat-rate scheme allows small firms to calculate the net VAT they owe by applying a flat-rate percentage to their turnover.

 

  • The flat-rate percentage depends on your trading sector, so if your net VAT payments are generally a low percentage of turnover this scheme may not be of benefit.
  • Tax invoices must still be issued, but will not be used to calculate the VAT payable.
  • To join the scheme, estimated VATable turnover (excluding VAT) must be no more than £150,000.

 

1.6        With the annual accounting scheme only one VAT return is submitted each year. Nine monthly interim VAT payments are made based on an estimate of the total annual VAT bill. A balancing payment is made when the annual return is submitted.

 

  • Any business under the threshold of £1.35 million can apply to use the scheme from the date of VAT registration.
  • The leaving threshold is £1.6 million.

 

2. Getting the paperwork right

 

2.1        Proper VAT invoices must be issued for supplies to VAT-registered businesses.

  • A full VAT invoice should include a unique identifying number; the supplier’s name, address and VAT number; the customer’s name and address; the invoice date; the tax point (if this is different from the invoice date); the type of supply (such as sale or rent); a description of and the amount of goods or services supplied; unit price; any cash discount rate; the VAT rate; the total excluding VAT; the VAT amount and the total payable.
  • VAT invoice numbers must be sequential, with no unexplained gaps.
  • Duplicate invoices must be clearly marked.
  • If you issue other documents (eg pro-forma invoices), which show the same details, they must clearly state ‘Not a VAT invoice’.

 

2.2        If you make retail sales under £250 (including VAT), you can issue customers with a ‘less detailed’ VAT invoice.

 

  • This must show your name; address; VAT number; the date of supply; a description of the supplies; the amount (including VAT) and the VAT rate charged.

 

2.3        To reclaim the input VAT paid to suppliers, VAT invoices must be retained.

 

  • If you lose a VAT invoice, you must get a duplicate invoice from your supplier.
  • If an invoice shows product codes rather than descriptions, you must also keep a copy of the supplier’s product list.

 

2.4        If you settle an invoice on behalf of a third party, you cannot reclaim the VAT charge.

 

  • Input VAT can only be reclaimed by the recipient of the supply.
  • Consider settling the net value only. It may be worthwhile for the third party to pay the VAT portion of the invoice and then reclaim it in their own right.

 

2.5        Watch out for arithmetical errors.

 

  • If you are given an invoice which does not show VAT as a separate item, confirm the items are VATable and check what you can reclaim by multiplying the amount on the invoice by 1/6, not by 20%.

 

2.6        If you sell your business, the buyer can apply to retain your VAT registration number. However, this would make the buyer liable for any past tax overdue, so they may prefer to set up a new VAT registration.

 

  • Unless the buyer is retaining your VAT number, you must retain their VAT records. In this case, the buyer must be given full information so they can comply with their VAT duties.

 

3. Discounts and part exchange

 

3.1        Discounts can be problematic. The VAT payable on a supply depends on how the discount is offered.

 

  • If an unconditional discount (such as a trade discount) is given, the VAT is based on the discounted value of the full sale.
  • The same applies for prompt payment discounts — even if the customer does not pay promptly.

 

3.2        VAT is calculated on the full value of any part-exchange or barter transactions.

 

  • VAT must be calculated as if the transaction had been entirely for cash (ie purchases and sales at the full price). VAT invoices must be issued accordingly.

 

4. Irreclaimable tax

 

4.1       Input VAT cannot be reclaimed on supplies for personal (non-business) use.

 

  • If goods or services are bought for both business and non-business use, the input VAT may be apportioned with only the business element recovered, subject to the normal rules. Or, recovered in full on the entire purchase of goods provided output VAT is declared on a self-supply of the non-business element.

 

4.2       Input VAT can be reclaimed on some of the supplies made to employees including on:

 

  • The actual costs of employees’ subsistence when travelling on business (excluding any flat-rate expenses).
  • Any free meals that may be provided.
  • VAT can also be reclaimed on the cost of business mileage paid to employees using their own vehicles. See VAT Notice 700/64 for the calculation that must be used.

 

Generally VAT cannot be reclaimed on any free accommodation that is provided. However, if employees have to be given domestic accommodation wholly for a business purpose HMRC may agree to VAT claims being made.

 

4.3       There are strict rules applied to sole traders, partners or directors.

 

  • They cannot reclaim VAT on free meals at work, but subject to normal rules can claim for subsistence expenses while on business trips.

 

4.4       The treatment of entertainment varies, according to who is being entertained.

 

  • VAT on business entertainment for third parties can never be reclaimed.
  • Reclaims may be allowed for VAT related to staff entertainment. The entertainment must have a discernible business purpose.
  • Where the entertainment is for both employees and outsiders, it may be possible to reclaim some VAT.

 

4.5       Generally, a business cannot reclaim VAT on supplies purchased in order to make exempt sales.

 

  • Small amounts may be reclaimed if within certain set limits. The calculation of recoverable VAT in this instance is complex. Get expert advice.

 

5. Overseas VAT issues

 

5.1        Imports of goods from another EU country (‘acquisitions’) will generally be free of any VAT charge.

 

  • The supplier must show the customer’s UK VAT number on their sales invoice.
  • UK output VAT must be self-charged and declared in Box 2 of the relevant VAT return covering the date of the supply (known as acquisition tax). However, as long as the purchase is used to make VATable supplies the Box 2 VAT can be reclaimed as input VAT in the same return.

 

5.2        Imports of goods from outside the EU attract import VAT, at UK rates, which is payable on entry. Subject to the normal rules this can be reclaimed as input VAT. The import may also attract customs duty which is also collected by HMRC.

 

  • Customs duty is not recoverable.
  • To reclaim import VAT, a VAT certificate C79 must be held.
  • Payment of both import VAT and duty can be deferred which can speed through entry of goods into the UK.

 

5.3        Exports of goods to VAT-registered buyers in other EU countries (‘dispatches’) can usually be zero-rated.

 

  • VAT should be added to sales invoices if a customer is not VAT-registered or a valid domestic EU VAT number is not quoted on the invoice. Such sales could give rise to EU registration requirements if sales volumes exceed local limits.

 

5.4        Exports of goods to countries outside the EU are zero-rated.

 

  • VAT will be due on the sale unless evidence is held that the goods have left the UK within specified time limits.

 

5.5        Trade with the EU requires extra information to be provided.

 

  • Total dispatches and arrivals are required in boxes 8 and 9 of the VAT return.
  • Details of zero-rated supplies to VAT-registered EU customers must be declared on a separate EC Sales List.
  • Additional Intrastat returns are required if the value of arrivals in a calendar year exceeds £600,000 or the value of dispatches exceeds £250,000.

 

6. Watch out

 

VAT must be charged in a number of familiar situations outside the normal run of business.

 

6.1        Business gifts are usually treated as though they have been sold as VATable supplies, with output VAT due on the value. There are some exceptions.

 

  • There is no output VAT due on individual free samples given to customers.
  • One-off business gifts costing less than £50 (excluding VAT) do not attract output VAT. The £50 limit applies to all gifts made to the same person within a 12 month period.
  • Gifts of services are not normally liable to VAT.
  • Gifts of goods to charities for sale or export are zero-rated.

 

6.2        As a general rule, VAT must be charged on all sales to employees.

 

6.3        If you take items for personal use on which you have accounted for VAT, this counts as a sale (see 4.1).

 

  • If you pay nothing, VAT is charged on the cost (normally the market cost).
  • Special rules apply to cars and fuel.

 

6.4        The sale of business assets is normally treated in the same way as any other sale.

 

6.5        The sale of a business as a going concern may be VAT-free. Specific rules apply.

 

7. Help and advice

 

7.1        Include VAT records as part of your regular review with your accountant.

 

7.2        Ask your VAT adviser how your business is  affected by VAT rules. It is always advisable to check the VAT implications of a situation and the options available to you.

 

7.3        If doubts remain, you can safeguard your position by getting a decision in writing from HMRC. Contact the HMRC National Advice Service (0845 010 9000 or www.hmrc.gov.uk).

 

  • HMRC will only be bound by any ruling if all the facts have been disclosed.

 

Post and packaging

 

  1. A.          Provided the contract is for ‘delivered goods’, charges are usually taxed at the same rate as the product even if you show a separate charge on your price list or invoice.

 

  • If UK delivery is offered as an optional extra, VAT will be due on the charge.
  • If the goods are for export, or leave from outside the UK, you should take advice.

 

  1. B.          Packaging is normally taxed at the same rate as the contents.

 

  • If you make a separate charge for packaging, this will always attract VAT.

 

  1. C.          The treatment of bundled supplies depends on whether there is a mixed or composite supply.

 

  • Mixed supplies may contain components liable to different VAT rates.
  • You work out the total VAT liability in proportion to the value of each component.
  • Composite supplies have one VAT liability based on the main component.

 

Tax yes, VAT no

 

One problem is the gap between what the VAT rules allow a business as expenditure and the rules applied for other taxes. In general, any expenditure ‘wholly and exclusively for business purposes’ is deductible for direct tax purposes.

 

Before you can reclaim input VAT, expenditure must be directly attributable to the VATable supplies you are making. Your supplies might be VATable at the standard, reduced, or zero rates of VAT, or be services that are outside the scope of the tax but with VAT recovery rights (ie not exempt). If you cannot attribute your expenditure to the VATable supplies you are making, there will be a VAT cost due.

 

Note: HMRC are moving to compulsory online filing for VAT from April 2012. All VAT payments will also have to be made electronically.

 

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

A guide to The New Penalties Regime

Nov7

A SIMPLE GUIDE TO THE NEW PENALTIES REGIME

 

This is a basic guide prepared by the Technical Advisory service for members and their clients. It is an introduction only and should not be used as a definitive guide, since individual circumstances may vary. Specific advice should be obtained, where necessary.

 

The New Penalties Regime

 

The aim of the new penalties regime is to provide a simpler and more consistent approach by HM Revenue & Customs (HMRC).

 

UNDERSTANDING THE NEW PENALTIES REGIME

 

HMRC is introducing a new penalties regime applying to documents due to be filed on or after 1 April 2009.

The new regime covers the following the taxes:

  • VAT
  • PAYE
  • National Insurance contributions
  • Capital Gains Tax
  • Income Tax
  • Corporation Tax
  • Construction Industry Scheme

 

The proposal is to extend it to other taxes, levies and duties though it has been stated that it will not apply to any benefits or credits like tax credits, nor will it apply to the national minimum wage.

 

The general approach of the new regime is designed to be fairer, helping those that are compliant and punishing those who are not. The reason underlying an error will now be looked into and they have coined the term ‘reasonable care’ as key to determining the amount of penalty charged.

 

Reasonable care

 

The definition of ‘reasonable care’ varies from person to person and their unique circumstances and abilities. It is a behavioural change and tax payers and their advisors must demonstrate in their everyday work reasonable care can be demonstrated. HMRC has provided the following examples of reasonable care:

  • keeping accurate records to make sure your tax returns are correct
  • saving your records in case you need them later
  • checking what the correct position is when you don’t understand something
  • telling HMRC promptly about any error you discover in a tax return or document after you’ve sent it.

 

It stands to reason that a person with simple tax affairs will have a simple system of records and that a person with complicated tax affairs may have a complicated system of records.

 

For example, reasonable care is where a person who enters a transaction not encountered in their usual activity, takes steps to make sure the correct treatment is realised. That could be by seeking advice or checking the treatment is correct and would be similar to the reasonable steps taken once an error is discovered.

 

HMRC states that if reasonable care is taken to get things right and still an error occurs then there will be no penalty. In addition, once an error is discovered reasonable steps must be taken to promptly disclose it. Reasonable steps include:

 

  • consulting with an accountant or agent to discuss the position so they can inform HMRC
  • ringing HMRC to discuss it
  • discussing it with one of HMRC’s officers if there is an ongoing compliance check
  • e-mailing, faxing or writing to an HMRC office with details.

 

 

Penalty suspension

 

There is also a new system of penalty suspension under this new regime. A penalty can be suspended for up to two years provided certain conditions are met and you do not become liable to any other penalties during the suspension period. If at the end of two years the conditions are met the penalty will be cancelled. The suspension cannot be applied where the error was deliberate. Further details can be found on the HMRC website.

 

Calculating the penalty

 

The penalties under the new regime are based on the extra tax due and the rates depend upon the reason underlying the error. In addition to the penalty, interest will also be charged on the extra tax due.

 

The four stage sliding scale of penalties apply to: a mistake despite reasonable care, a careless mistake, a deliberate mistake and a deliberate and concealed mistake. This is best demonstrated by graph 1, that clearly demonstrates the difference between prompted and unprompted disclosure.

 

 

It is clear that there is an option of reducing the potential penalty in all circumstances, what therefore can mitigate your penalty? There are three categories for mitigating your penalty, described as:

  • Unprompted and prompted disclosures
  • Behavioural
  • Quality of disclosure

The first is clearly displayed in the diagram above, the second and third can be grouped together and are best demonstrated by looking at the definition of three terms.

  • telling HMRC about any errors (can mitigate your penalty by 30%)
  • helping HMRC work out the extra tax that is due (can mitigate your penalty by 40%)
  • giving access to HMRC to check the figures (can mitigate your penalty by 30%)

 

 

FURTHER CONSIDERATION

HMRC has produced a number of useful guides about the new penalty regime:

 

The first is a simple guide to the new penalties regime. The second is a questions and answers document containing common questions on the new penalties regime.

 

Finally, as with most penalties, there is always a system in place to appeal against any penalty levied. Further details can be found on the HMRC website.

http://www.hmrc.gov.uk/manuals/chmanual/CH84000.htm

 

This document has no regulatory status and provides an overview of the changes.

 

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.