Enterprise Investment Scheme (EIS) – The Tax Reliefs Condensed

Apr1

A LOOK AT THE TAX RELIEFS AVAILABLE UNDER THE EIS SCHEME

The Chancellor, George Osborne, has identified the Enterprise Investment Scheme as being an important scheme for encouraging investment in small business. The scheme has been with us since 1994, having taken over from the business expansion scheme but, given the current landscape with regard to obtaining business finance, the government are keen to promote the scheme as an alternative means of promoting business finance.

The rules and restrictions of the EIS Scheme are considered in our separate Guide to Enterprise Investment Scheme – The Rules Condensed. The Office of Tax Simplification recently identified the EIS scheme as being ‘four reliefs in one’; here we look at those reliefs.

1. Income Tax Relief

From 6 April 2012, the investor may up to £1,000,000 (combined maximum for Enterprise Investment Scheme and Venture Capital Trust investment) in a tax year and obtain a tax reducer of 30% of the amount of investment. It is possible to carry back the amount paid to the previous tax year. Any amount may be carried back, subject to the overriding maximum for the previous year not being exceeded. Dividends received are not subject to income tax.

2. Capital Gains Tax Exemption

If the investor has received Income Tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for at least three years from the date of issue of the shares (or three years from the date of commencement of the qualifying trade, if later), then any capital gain on the disposal of the EIS shares will be exempt from capital gains tax.

3. Capital Gains Tax Deferral

Capital gains realised on the sale of any asset may be deferred against investments in an EIS scheme; the gains crystallise when the EIS investment is disposed of.

4. Loss Relief

If the shares are disposed of at a loss, you can elect that the amount of the loss, less any Income Tax relief given, can be set against income of the year in which they were disposed of, or any income of the previous year, instead of being set off against any capital gains.

Let us look at some of these reliefs more closely by way of an example:

_____________________________________________________________________

Mr Yorke has taxable income, after allowances, for 2012/13 of £200,000. He makes an EIS investment on 1 November 2012 of £100,000. Mr Yorke had previously made a capital gain on 14 October 2011 on a sculpture (after his annual capital gains tax exemption) of £100,000.

Mr Yorke has been told that he could significantly reduce his tax liabilities if he makes an investment under the enterprise investment scheme and is considering an investment of £100,000.

Let us compare his tax position firstly on the assumption that he makes no EIS investment with the position if he makes the £100,000 EIS investment:

Without EIS investment:		With £100,000 EIS Investment:

2011/12 Capital Gains Tax Position:		2011/12 Capital Gains Tax Position:

	£		£

Gain after annual exemption	100,000	Gain after annual exemption	100,000

		Less: Gain rolled over against
		cost of EIS investment	-100,000


Gain chargeable to CGT	100,000		0


CGT thereon @28%		CGT thereon @28%
(Mr Yorke has fully utilised his		(Mr Yorke has fully utilised his
basic rate tax band against		basic rate tax band against
his income)	£28,000	his income)	£0



2012/13 Income Tax Position:		2012/13 Income Tax Position:

Taxable income	200,000	Taxable income	200,000

Income tax thereon:		Income tax thereon:
34,370 x 20% =	6,874	34,370 x 20% =	6,874
115,630 x 40% =	46,252	115,630 x 40% =	46,252
50,000 x 50% =	25,000	50,000 x 50% =	25,000
	78,126		78,126

		Less:
		Tax reducer (EIS investment):
		£100,000 x 30% =	-30,000


Income tax liability	£78,126	Income tax liability	£48,126



TOTAL OF 2011/12 CGT AND 2012/13 INCOME TAX LIABILITIES	£106,126		£48,126

Tax saving:			£58,000

In the above scenario, Mr Yorke has achieved a tax saving equal to 58% of the cost of the investment or, to put it another way, he has made a £100,000 investment at a cost of £42,000.

If the shares are held for the requisite three year period, any eventual capital gain on the sale of the EIS shares themselves will be free from capital gains tax. It is important to note, however that the gain held over from 2011/12 is only “deferred” against the EIS shares and is not itself exempt. It may be possible for Mr Yorke to sell the EIS shares piecemeal at a later date and realise the deferred 2011/12 in stages by making part disposals of the EIS holding, thereby utilising several years’ annual CGT exemptions in the process.

If we continue the above example further:

____________________________________________________________________

Let us assume that that in 2015/16, the EIS investment goes bad and the company is wound-up with Mr Yorke receiving nothing for his shares. Mr Yorke’s taxable income, after any allowances but before share loss relief, is £300,000 and he has made no other capital gains or losses during the year. Let us compare the tax position both with and without a claim for relief for the losses on the shares against income. (assume all rates and allowances remain the same as for 2011/12.)

2015/16 Income Tax Position		2015/16 Income Tax Position:
assuming NO share loss relief claimed:		assuming EIS share loss relief claimed:

	£			£

Taxable income	300,000	Taxable income		300,000

		Less: Share loss relief:
		Loss on EIS shares
			100,000
		Income tax relief
		given 2011/12	-30,000
				-70,000
Chargeable to tax	300,000	Chargeable to tax		230,000



Income tax thereon*:		Income tax thereon:
32,245 x 20% =	6,449	32,245 x 20% =		6,449
117,755 x 40% =	47,102	117,755 x 40% =		47,102
150,000 x 45% =	67,500	80,000 x 45% =		36,000
	121,051			93,551


Income tax liability	£121,051	Income tax liability		£89,551


Tax saving 2015/16				£31,500

Plus: Tax Savings from 2010/11 and 2011/12				£58,000

TOTAL TAX SAVINGS				£89,500

(NB: 2013/14 Tax rates used in above example)

Note: In the above scenario, the capital gain deferred from 2010/11 would crystallise but Mr Yorke could “serial” defer the gain into a further EIS investment.

_____________________________________________________________________

It can therefore be seen that, even though the worst case scenario has happened in the above example and the investment has become valueless, the tax savings achieved can be as high as 89.5% of the original cost of the investment. So, even though the enterprise investment is aimed at encouraging investment in smaller, higher risk companies, the tax reliefs available can make them look considerably less “risky” in the eyes of a potential investor.

Withdrawal of Relief

One of the biggest problems with EIS is that the tax reliefs will be withdrawn if, during the three year qualifying period, either:

the investor or an associate becomes connected with the company
the company loses its qualifying status
any of the shares are disposed of (unless the disposal is to a spouse or civil partner – in those circumstances the shares are treated as if the spouse or civil partner had subscribed for them)
the investor (or an associate) ‘receive value’ from the company (or a person connected with that company). Receiving value is broadly defined and includes receiving a loan or benefit from the company, or receiving an asset from the company at below market value..

There is an obligation to inform your HMRC within 60 days of any of the events above occurring.

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

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

A guide to VAT Registration

Mar20

LEGAL

The requirement for a taxable person/business to register for VAT in the UK is included in the Value Added Tax Act 1994 (VATA 94).

The administration of VAT and registration is performed by HM Revenue & Customs (HMRC). For a simple VAT registration, form VAT1 (form VAT2 for partnerships) needs to be completed and submitted to HMRC. Details of registering and completing the registration form can be found in the VAT Notice 700/1, titled “Should I be registered for VAT?”

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&propertyType=document&columns=1&id=HMCE_CL_000086

TYPES OF REGISTRATION
There are a number ways of registering for VAT, each one has been detailed below with a small example to help you decide the timing of your effective date of registration.
Compulsory VAT registration: The current VAT registration threshold is £73,000 from 1 April 2011 (previously £70,000). VAT registration threshold is usually increased annually, therefore to see if the threshold has been exceeded the annual change must be taken into account. There are two prescribed methods of determining the obligation to compulsorily register for VAT.

When working out a person’s taxable income, all income must be aggregated to determine the liability to register for VAT. There is anti-avoidance provision, known as disaggregation, which prevents businesses being artificially separated. In these circumstances HMRC looks at financial, economic or organisational links.

The first method can be simply described as the ‘looking back’ rule. Essentially, you look back at the previous 12 months to see if the taxable turnover has exceeded the registration threshold. Once the VAT registration threshold has been exceeded, HMRC must be notified by the end of the following month and registration by the beginning of the following month or earlier by mutual agreement.

Example 1

A business commenced 1 April 2011 and supplies of £10,000 per month are made. The business does not wish to register for VAT until it is obliged to do so.

The registration threshold is exceeded in month eight, i.e. November 2011 (8 x £10,000 = £80,000). As the requirement to register was exceeded at the end of November, the business would therefore need to notify HMRC by 31 December and will be registered for VAT from 1 January 2012.

The second method can be simply described as the ‘looking forward’ rule. If you know that within the next 30 days that you will exceed the registration threshold you will have an obligation to register for VAT.

Example 2

A business commenced 1 April 2011 and supplies of £10,000 per month. On the 21 June 2011 an order of £80,000 is placed and needs to be completed by the end of the month. As the registration threshold is exceeded notification needs to be made to HMRC by 20 July and the business needs to be registered from 21 June.

Voluntary VAT registration: There are a number of advantages for voluntarily registering for VAT. This is a way of improving the status of a company and for growing businesses registering for VAT earlier than required avoids any later registration penalties. This also allows a business to claim input tax on initial expenditure.

Intending trader registration: This method of registration is used by businesses prior to beginning to trade. HMRC need to be satisfied that a business intends to make taxable supplies and is entitled to be registered for VAT. If there are changes to the intention once the business is registered, the business must notify HMRC if its intention is no longer to make taxable supplies.

Exemption from VAT registration: An exemption is available for businesses that only make zero-rated supplies. Though not regularly used, these businesses are usually in a net VAT repayment situation. This exemption may be useful in situations where the administrative burden and cost would be greater than the actual VAT recovered.

Group Registration: Group companies under common control can apply for a group VAT registration. There are a number of advantages; intra-group transfers are ignored for VAT purposes. The group registration has to elect a representative member, who must account for the group Output tax and Input tax. This does not vindicate other group members of any liability as all members are held as jointly and severally liable.

To be included within a VAT group, members must be “bodies corporate”, establishments or fixed establishments in the UK and be under “common control”.

Further details can be found in VAT Notice 700/2

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&propertyType=document&columns=1&id=HMCE_CL_000094

Divisional Registration: This type of registration is adequately described in the title, a divisional registration. This is a special type of registration available that provides some administrative advantages, though due to complexities it is not often used.

Further details can be found in VAT Notice 700/2

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&propertyType=document&columns=1&id=HMCE_CL_000094

DEREGISTRATION

Though this guide is about registering for VAT, it is important to know the two main types of deregistration, compulsory deregistration and voluntary deregistration. There are a number of circumstances that will force a trader to be compulsorily deregistered. For current voluntary deregistration the threshold is £71,000 from 1 April 2011 (previously £68,000). Please note that the VAT deregistration threshold is usually increased annually.

TAXABLE SUPPLIES

Taxable turnover includes standard rated, zero rated, private use, reverse charge, self-supplies and acquisitions from other EU member states. Exempt and outside the scope supplies do not need to be included.

Another category of sales that would bring a supplier to become liable to UK VAT is ‘Distance Selling’. This is where supplies are made from another EC country directly to a non-VAT registered entity, a typical example is a mail order business. The threshold to note here is £70,000, distance sales to the UK exceeding this threshold will require the business to register for UK VAT, the option of earlier voluntary registration is also available.

PRE-VAT REGISTRATION EXPENSES AND ADMINISTRATION

Pre-registration expenses

One of the key questions businesses ask in VAT registration situations is regarding pre-registration input tax recovery.

There are separate rules for goods and services. For goods to qualify for input tax recovery they must have been purchased for the purposes of the business and not supplied onwards or consumed before the date of registration, and finally the VAT must have been incurred within three years of the date of registration.

For services for qualify, the cost must have been incurred for business purposes and the VAT must have been incurred within six months of the date of VAT registration.

In both situations the input tax recovery is subject to being supported by an appropriate VAT invoice. Also, the input VAT would be claimed through the businesses first VAT registration.

Administration

Output VAT only needs to be accounted for from the date of VAT registration. VAT invoices cannot be issued until a VAT registration number has been issued. This can present businesses that are waiting for their VAT registration number with an administrative issue. The general practice is to issue invoices ‘gross’ with the legend ‘VAT registration number applied for’. The invoice must not show a VAT amount on the invoice.

Once a VAT number is attained, invoices issued with the legend mentioned above would need to be re-issued correctly displaying the VAT amount.

FAILURE TO NOTIFY

Failure to register your business on time or to notify HMRC of your liability will result in a penalty. The penalties regime has been reconstructed and is effective for periods commencing 1 April 2009. For further details on the new penalties regime, please refer to ACCA’s ‘Guide to…The New Penalties Regime’:

http://www.accaglobal.com/documents/penalties.doc

A trader may wish to challenge the penalty with a reasonable excuse. However, HMRC has stated that a lack of funding or reliance on a third party will not be accepted as reasonable excuses.

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

A guide to Reasonable excuse

Mar13

INTRODUCTION

‘Reasonable excuse’ is a term which regularly appears in indirect tax legislation, but has only recently received much attention in relation to direct tax matters.

Where ‘reasonable excuse’ is established, penalties are withdrawn or not charged, however, there is no definition of ‘reasonable excuse’ in the legislation.

Some cases recently heard by the tribunals have concerned HMRC’s insistence that ‘reasonable excuse must involve an exceptional event beyond the control of the taxpayer,’ which appears to have no basis in law.

Penalties usually relate to late filing of a tax return or late payment of tax. Section 71(1) VAT Act 1994 states:

‘For the purpose of sections 59 to 70 which refers to a reasonable excuse for any conduct –

(a) an insufficiency of funds to pay any VAT due is not a reasonable excuse; and

(b) where reliance is placed upon any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse…’

HMRC have always refused to accept as a reasonable excuse:

ignorance of the law
oversight or misunderstanding
error
preoccupation with work
inexperience of business affairs
no intention to escape payment of tax.

There is no definition of ‘reasonable excuse’ in the legislation, so the recent First-Tier Tribunal cases are of particular interest.

Successful appeals:

HMRC failed to issue a notice of cancellation of gross payment for CIS Scheme
late payment of tax was due to insufficiency of funds. This is not normally a ‘reasonable excuse’, but was caused by HMRC having cancelled gross payment status on an earlier occasion, which had been subsequently overturned on appeal
ten failures to comply had been put forward as grounds for cancellation of the gross payment scheme. HMRC admitted that eight were their fault and one was allowed as a ‘reasonable excuse’. HMRC had failed to exercise their discretion as required by the law. Indeed they appear to consider that they must apply penalties
a taxpayer had heard from the media that the Government had announced that firms suffering difficulties would be able to spread their payment on a timetable they could afford. He was not computer-literate and therefore did not visit HMRC’s website and did not realise that this must be agreed in advance. The tribunal accepted that taxpayers do have their limitations and that this was a misunderstanding
the directors of a company had received incorrect advice that they did not have to file a return and could ignore filing penalties because they did not have any income. The directors tried dealing with HMRC who sent replacement returns to the wrong address. This is interesting, since HMRC will not accept reliance on a third party as a reasonable excuse, but does reflect the fact that taxpayers can be vulnerable to incorrect advice.
the majority of tax related to the sale of a partnership and LLP and the consequent capital gain. The taxpayer decided to pay the income tax immediately and pay the capital gains tax by instalments. He agreed a plan of ten monthly instalments which was confirmed by HMRC, but did not realise that HMRC did not have details of his bank account. He had contacted HMRC and told them that payments were not being collected. The tribunal has no power to mitigate a penalty, but decided that the taxpayer’s actions had been reasonable and quashed the penalty.

Unsuccessful appeals:

an American was paid removal expenses by his company, but failed to show the excess over £8,000. When he filed the return, he had not received his P11D and HMRC were aware of this. He had relied upon his accountants to prepare the return and did not know that, unlike American tax, UK tax is charged on removal expenses to the extent that they exceed £8,000. HMRC’s compliance handbook states that ‘a person who goes to an apparently competent professional adviser, gives the adviser a full and accurate set of facts, checks the adviser’s work or advice to the best of their ability and competence and adopts it, will have taken reasonable care to avoid inaccuracy.’ Despite this, his appeal was rejected
a taxpayer submitted an appeal against 243 penalties imposed for late filing of 31 monthly CIS returns. His marriage had broken down and he had been locked out of his house, from which he ran his business. Despite claiming ill health, he had been able to continue running his business. The appeal was dismissed
a late filing penalty of a self assessment return was the subject of another appeal. The taxpayer felt that he had a reasonable excuse as he was on sick leave, having had a mild stroke. He had recently been through a divorce and was supporting two daughters. His appeal was rejected

CIS returns were submitted late and penalties imposed. The taxpayer had appointed new agents, who submitted paper returns; the previous agent had submitted returns online. Penalty notices were issued, but some time later the agents wrote to HMRC. Meanwhile, HMRC wrote to the taxpayer, enclosing a 64-8. The agents stated that the form was ‘re-completed’ and sent on 4 June, but as the form was enclosed with HMRC’s letter dated 4 June, the tribunal was not convinced that this was the case. The appeal was dismissed as they could find no evidence that the taxpayer’s returns had been submitted prior to 29 June. This illustrates that proof of posting is important.

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

A guide to The Flat Rate Scheme

Mar6

UNDERSTANDING THE FLAT RATE SCHEME
As an overview, the Flat Rate Scheme allows you to apply a single percentage to your turnover to work out your VAT liability. This is one amongst a number of schemes offered by HM Revenue & Customs (HMRC) aimed at easing the administrative burdens small businesses face.

The scheme provides a number of advantages, such as:

the simplicity of the scheme, removing some administrative burdens

no partial exempt calculation needs to be performed
no fuel scale charge needs to be paid for businesses paying road fuel.
HMRC offer a 1% discount for new VAT registered businesses under this scheme (the discount only applies to the first year of registration)

HMRC produce a ‘Ready Reckoner’ to see how using the scheme will affect your business, this can be found at: http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm

Please note that this scheme can be used by partially exempt businesses, and with ‘Annual accounting scheme’. The Flat Rate Scheme has its own versions of a cash accounting and retail scheme, but is not applicable to margin scheme, retail scheme and cash accounting scheme users.

Eligibility for the scheme

A business is eligible for the scheme providing both the following two tests are satisfied.

Test 1 is the value of your taxable supplies in the next year does not to exceed £150,000 excluding VAT ignoring the sale of capital assets but include:

standard, reduced and zero rated supplies.

sale of second-hand goods sold outside the margin scheme
sale of investment gold detailed in the VAT Act Section 55 (see VAT Notice 701/21 Gold for further details)

Test 2 is the value of your taxable supplies in the next year does not to exceed £191,500 including VAT ignoring the sale of capital assets but include:

all the items included for Test 1

the value of exempt supplies (such as rent, lottery commission, bank interest etc.)
any other income received or receivable (such as non-business etc.)

The scheme can be used until your total turnover exceeds £230,000 excluding ‘one-off’ increases in sales (which need to be notified to HMRC in order to remain in the scheme This must be checked on the anniversary of joining the scheme. If you are aware that within the next 30 days the threshold of £230,000 will be exceeded you will have to leave the scheme.

There are also a number of other restrictions to joining the scheme, you cannot join the scheme if:

you are not VAT registered

you use the second-hand margin scheme or the auctioneers’ scheme
you are required to use the tour operators margin scheme
you are required to use the Capital Goods Scheme
you have stopped using the Flat Rate scheme in the previous 12 months
you have accepted a compound penalty offer or been convicted of an offence in connection with VAT in the last 12 months;
you have been assessed to a penalty for conduct involving dishonest conduct in the last 12 months;
you have been registered for VAT in a VAT Group in the last 24 months
you have been registered for VAT in a VAT division in the last 24 months
you have been eligible for a VAT group registration in the last 24 months
your business is ‘associated’ or closely linked with another business within the last two years

APPLYING FOR THE SCHEME

The scheme does not automatically apply, application is made by completing and submitting form VAT 600FRS:

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&id=HMCE_CL_000057&propertyType=document

The application form has to be sent to:

National Registration Service

HM Revenue & Customs

Imperial House

77 Victoria Street

Grimsby

Lincolnshire

DN31 1DB

The application form can also be submitted by email to: frsapplications@hmrc.gsi.gov.uk

If you are also registering for VAT, the form VAT 600FRS can be submitted with the VAT registration form VAT1. In addition a business can join the ‘Annual Accounting Scheme’ together with this scheme, please see the ‘Guide to The Annual Accounting Scheme’ for further details.

The Flat Rate Scheme will usually begin from the next VAT period following the receipt of the application form. Applying the scheme to an earlier period must be agreed with HMRC. HMRC will notify you when your business can start using the scheme.

If you wish to leave the scheme notice must be made in writing to the Annual Accounting Registration Unit.

USING THE SCHEME

Calculating the Flat Rate percentage

The key issue with this scheme is determining the appropriate flat rate percentage. HMRC have recommended a four step process in order to establish the correct percentage.

Step 1 – Review the table of flat rates percentages and see if your business is mentioned

Step 2 – Re-review the table making sure that your business is not mentioned in a composite sector
Step 3 – If your sector is not mentioned look at the Businesses not mentioned elsewhere
Step 4 – Finally If you are still unsure then phone the National Advice Service on 0845 010 9000

The choice you make should be on a sensible and reasonable basis, evidence should be retained as to why a particular choice was made. This could help prevent issues later if HMRC were to challenge the rate used.

If your business looks like it fits into two or more sectors, the percentage of your main business activity (by reference to turnover) should be used. If this balance of business activity changes, continue using the current percentage for the remainder of the VAT year and then change the percentage used if appropriate.

Where a business activity starts or stops the same review needs to be done in addition to checking that this change does not make your business ineligible for the scheme. Any change in flat rate percentage must be notified to HMRC within 30 days of the change or to: Enquiries.estn@hmrc.gsi.gov.uk

Calculating the turnover

The next step is applying the percentage to your turnover, which includes:

VAT inclusive sales and takings of standard rated, zero rates and reduced rate supplies

Exempt supplies (such as rent or lottery commission)
Supplies of capital expenditure goods unless they are in relation to goods where the VAT has been calculated outside the flat rate scheme
Despatches to other European Commission countries

Amounts excluded from turnover are:

Private income

Proceeds from the sale of goods you own but not used in the business
Sales of gold detailed in the VAT Act Section 55 (see VAT Notice 701/21 Gold for further details)
Non-business income and supplies outside the scope of UK VAT
Sale of capital expenditure on which input tax was claimed

Without confusing matters, your business will have to determine how the turnover is calculated as there are three ways of calculating your turnover.

Basic turnover – Mainly for businesses that deal with other VAT registered businesses.

Cash based turnover – Similar to the Cash Accounting Scheme, the turnover is on a cash received basis.
Retailer’s turnover – Similar to the retail scheme, used mainly for businesses that sell goods to the public.

Care must be taken if you have any special circumstances to your business, if you buy or sell goods/services within or without the EU, partially exempt business, fuel scale charges, sales of second-hand margin goods and if you act as an agent. In addition, there are special rules for business like florists and Barristers.

Capital Expenditure

The scheme allows for capital expenditure, subject to rules, to be treated outside the scheme. Effectively, the input tax on a capital purchases costing more than £2,000 (including VAT) can be claimed in the normal manner, i.e. through box 4 of the VAT return. The expenditure must be for more than one purchase, over £2,000 and not for a service to qualify. An apportionment must be performed on capital items with a private use element.

To mirror the input tax treatment, if input tax was claimed on the purchase of a capital item, output tax must be charged on the sale. If the capital item was within the flat rate scheme, as for example it cost less than £2,000 then there is no output tax accountable on the sale.

Record keeping and administration

In regard to record keeping, the requirements relate to the flat rate turnover, details of the percentage used and how the tax was calculated. Additional requirements relate to certain capital expenditure in excess of £2,000 in value.

VAT invoices must still be issued for VAT registered customers. The rate of VAT on these invoices should be the appropriate rate of VAT and not the Flat rate percentage. Care must be taken when calculating your VAT liability, the calculation is based on the VAT inclusive total.

Care must be taken when completing the VAT return, as the normal rules are not followed. The differences are:

Box 1 – this will contain the flat rate scheme amount payable. In addition there maybe output tax on certain capital goods.
Box 2 – standard rated VAT on goods bought from other EC countries
Box 3 – completed in the normal way
Box 4 – this will normally be zero unless there have been capital goods purchased. In addition you can recover VAT on stocks and assets held at registration
Box 5 – completed in the normal way
Box 6 – the VAT inclusive amount is included. In addition supplies outside the scheme should be added as excluding VAT
Box 7 – this will normally be zero unless there have been capital goods purchased or acquired goods from other EU countries
Box 8 & 9 – completed in the normal way

Accounting treatment

The accounts for your entity need to be compiled using gross amounts. It is normal practice for the flat rate VAT due to be included as a deduction from the turnover figure. This is then disclosed by way of a ‘Turnover’ note to the accounts, for example:

“Turnover shown in the profit and low account shall exclude either VAT on taxable outputs or VAT imputed under the flat rate scheme.”

Alternatively the Flat rate VAT can be shown as a separate expense item within the Profit and Loss account.

FURTHER CONSIDERATION

Further details can be found on the HMRC website, as a source of reference please refer to the VAT Notice 733.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&propertyType=document&columns=1&id=HMCE_CL_000345#P39_3090

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

October Key Tax Dates

Mar4

1 – Due date for payment of Corporation Tax for the year ended 31 December 2011

5 – If a Tax Return has not been received, individuals and trustees must notify HMRC of new sources of income and chargeability in 2011/12

14 – Return and payment of CT61 tax due for quarter to 30 September 2012

19 – Tax and Class 1B NI due on PAYE settlements for 2011/12

19/22 – PAYE/NIC and CIS deductions due for month to 5/10/2012 or quarter 2 of 2012/13 for small employers

31 – Deadline for 2011/12 self assessment paper returns to be filed for HMRC to do the tax calculation. If a paper return is being filed also the deadline for tax underpaid to be collected by adjustment to your 2013/14 PAYE code (for underpayments of up to £3000 only)

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

A guide to The Capital Allowances Regime

Feb27

A SIMPLE GUIDE OF PROPOSED CHANGES TO THE CAPITAL ALLOWANCES REGIME

This is a basic guide and should not be used as a definitive guide, since individual circumstances may vary. Specific advice should be obtained, where necessary.

The capital allowances regime has undergone some significant changes in recent years. The most significant changes were introduced in the Finance Act 2008 but further changes were also introduced in subsequent Budgets.

Annual investment allowance

The Annual investment allowance (AIA) was originally introduced in the Finance Act 2008. AIA is available to small and medium-sized enterprises (SMEs) and entitles them to claim 100% relief on capital expenditure up to

certain monetary limits. Since inception, the AIA threshold has changed twice and the appropriate limits are as follows:

Date Expenditure incurred:	AIA limit

Companies: On or after 1 April 2012Unincorporated: On or after 6 April 2012	£25,000

Companies: 1 April 2010 – 31 March 2012Unincorporated: 6 April 2010 – 5 April 2012	£100,000

Companies: 1 April 2008 – 31 March 2010Unincorporated: 6 April 2008 – 5 April 2010	£50,000

If the basis period straddles 1 April for companies, or 6 April for unincorporated entities, the AIA must be time-apportioned accordingly. As a result of the reduction of the AIA limit in April 2012, it is important to

understand how the rules will operate where an accounting period straddles that date:

Example: Giacami Ltd has a year-end of 30 September 2012. Its maximum entitlement to the AIA for the period is as follows:6/12 x £100,000 (annual limit to 31 March 2012) = £50,000

6/12 x £ 25,000 (annual limit to 30 September 2012) = £12,500
Total maximum AIA for y/e 30 September 2012 = £62,500

The maximum AIA that may be claimed in the period is, therefore, £62,500. However, where there has been a reduction in the AIA limit, the amount of expenditure that may qualify for AIA in the component period following the change is restricted looked at in isolation.

So, continuing the example, let us assume that Giacami Ltd made a single acquisition of plant during the year; a new lorry costing £60,000.

If the lorry was acquired before 1 April 2012, the amount of AIA due for the year would be £60,000, as this falls within the maximum entitlement of £62,500.

However, if the lorry was bought on or after 1 April 2012, the amount of AIA due would be restricted to £12,500, with the balance of £47,500 attracting writing down allowance.

An important point to note is that the AIA may be allocated in the most beneficial way.

Example:Brendan Ltd incurs the following expenditure on plant and machinery during the year ended 30 September 2012:

1 January 2012 New lathe (general pool item) £100,000
1 February 2012 New lift shaft (reduced rate pool item) £100,000

Brendan Ltd should use its entitlement to AIA against the assets which attract the lower rate of writing down allowance (WDA) first and claim the higher WDA on the additions to the general pool.
Assuming there are no brought forward capital allowance pools brought forward, Brendan Ltd’s maximum capital allowances entitlement for the year ended 30 September 2012 would be as follows:

			10%	20%	Rate of	Allowances
		AIA	Pool	Pool	C/A	Due

Lift shaft:
Max AIA:
6/12 x £100,000	50,000
+
6/12 x £ 25,000	12,500
Total Maximum AIA	62,500	62,500			100%	62,500

Balance (£100,000 – £62,500)				37,500	20%	7,500

New lathe			100,000		10%	10,000

Total capital allowances						£86,250

Enhanced Capital Allowance

100% capital allowances are available on for expenditure on certain categories of new plant and machinery. If you would like further details on any of these, please contact us:

Energy Saving Plant and Machinery	The equipment be new and meet the eligibility criteria.

Low emission cars	The car must be new, emit 100g/km or less and be acquired before 31 March 2013.The car must be new and acquired before 31 March 2013. An extension to the scheme was announced in the 2012 Budget. However, the CO2 threshold has been reduced from 110g/km to 95g/km.

Zero emission goods vehicles	The vehicle must be new and acquired between 1 April 2010 and 31 March 2015 (or 6 April 2010 and 5 April 2015 for unincorporated entities).

Plant and machinery installed at a gas refuelling station to refuel vehicles with biogas, natural gas or hydrogen	The plant must be new. The scheme was due to expire on 31 March 2012 but it was announced in the 2012 Budget that it would be extended for a further 2 years until 31 March 2015.

Environmentally beneficial plant and machinery	The equipment must be new and meet the eligibility criteria.

Capital expenditure on Research and Development (Research and Development Allowance (RDA))	Contact us for details of requirements.

Business premises renovation allowance	Available for expenditure on renovated disused or derelict properties in certain disadvantaged areas. The scheme was due to expire on 11 April 2012 but it was announced in the Budget that this would be extended for a further 5 years until 2017.

Flat conversion allowance	For expenditure on converting unused space above shops and other commercial premises into residential flats. The government announced in the Budget 2011 that this allowance will be withdrawn “after 2012”.

Enterprise Zones

As announced in the Autumn Statement 2011, legislation will be introduced in Finance Bill 2012 to provide 100 per cent first-year allowances for trading companies investing in plant or machinery for use primarily in designated assisted areas within certain Enterprise Zones. These are:

Royal Docks, London
Irvine, Scotlnd
Nigg, Scotland
Dundee, Scotland
Deeside, North Wales

The allowances will be available from 1 April 2012.

Writing Down Allowance (WDA)

Expenditure on qualifying plant and machinery, which is not eligible for either AIA or enhanced capital allowances is put into a pool of expenditure, on which writing down allowances (WDA) may be claimed.

The rate of writing down allowances on both the general and reduced rate pools has been reduced with effect from 1 April 2012 (6 April 2012 for unincorporated entities).

There are two separate pools, as follows:

Main Rate Pool – for expenditure on general plant and machinery
Reduced Rate Pool – for expenditure on the following:
- integral features of buildings and structures, i.e:
- an electrical system (including a lighting system);
- a cold water system;
- a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system;
- a lift, escalator or moving walkway; or

external solar shading
expenditure on thermal insulation
expenditure on long-life assets (assets with an expected life of 25 years or more)
from 6 April 2009, expenditure on certain cars (see below).

The rates are as follows:

	General Pool	Reduced Rate Pool

From 1 April 2012(From 6 April 2012 for unincorporated businesses)	18%	8%

Up to 31 March 2012(Up to 5 April 2012 for unincorporated businesses)	20%	10%

Hybrid rates will need to be calculated if an accounting period straddles the date that the rate of WDA changes.

Example:Liberty Ltd has an accounting period of 31 December. What would be its WDA rate for general pool for the year ended 31 December 2012?3 months @ 20% 5.00%

9 Months @ 18% 13.50%

Hybrid rate 18.50%

If the residual vale of either the general pool or the reduced rate pool is less than £1,000, a writing down allowance equal to the full amount of the pool may be claimed.

Business Cars

From 1 April 2009 (6 April 2009 for unincorporated entities)

The rules were changed by Finance Act 2009 for cars purchased from 1 April 2009 (6 April 2009 for unincorporated entities). The rate of capital allowances which may be claimed on cars are dependant on the car’s CO2 emissions of the cars. The car will either be eligible for 100% first year allowances (FYA) or will go either into the general or reduced rate plant and machinery pools, as follows:

CO2 emissions of the Car:	Capital allowances

Cars with CO2 emissions of 110g/km or less	100% FYA

Cars with CO2 emissions of between 111g/km and 160g/km	General Pool

Cars with CO2 emissions of 161g/km or more	Reduced rate pool

It was announced in the Budget that with effect from April 2013, the capital allowances on cars will be as follows:

CO2 emissions of the Car:	Capital allowances

Cars with CO2 emissions of 95g/km or less	100% FYA

Cars with CO2 emissions of between 96g/km and 130g/km	General Pool

Cars with CO2 emissions of 131g/km or more	Reduced rate pool

Rules before 1 April 2009 (6 April 2009 for unincorporated entities)

Prior to the change in the rules with effect from April 2008, the capital allowances regime for cars was as follows:

Cars costing less than £12,000 went into the general pool
Cars costing more than £12,000 or with private use were de-pooled
The writing down allowance available on cars was the same as the general pool rate,
The writing down allowance on cars was restricted to £3,000 if the cost or written down value brought forward exceeded £12,000

The above rules will continue to apply for cars acquired before 1 April 2008 (6 April 2008) for unincorporated entities) for accounting periods beginning before 1 April 2014 (6 April 2014). After this date, any written down value brought forward will be transferred into the main rate plant and machinery pool.

Long Life Assets

Long-life assets are defined as assets with a useful economic life of 25 years or more. The rate of writing down allowance is changing with effect from 1 April 2012 (6 April 2012 for unincorporated businesses) and the rates are as follows:

Up to 31 March 2012(Up to 5 April 2012 for unincorporated businesses)	10%

From 1 April 2012(From 6 April 2012 for unincorporated businesses)	8%

Long life assets are pooled with other reduced-rate assets in the reduced rate pool.

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

Minimum Waged Employees

Feb25

My office junior is paid exactly the national minimum wage (NMW). Do I have to put his wages up from 1 October 2012?
It depends how old your employee is. From 1 October 2012 the NMW rate for those aged 21 and over rises from £6.08 to £6.19 per hour, and the apprentice rate is increased to £2.65 per hour. However the rates for 16 to 20 year olds have not been increased.

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

Corporation tax

Feb20

Corporation tax is the tax paid by companies on their profits. Unincorporated organisations (such as clubs and societies) also pay corporation tax, if they have taxable income. Partners in both traditional and limited liability partnerships and sole traders pay income tax instead.

If you use accountants to prepare your year-end figures, or auditors to check them, they may calculate your corporation tax liability, too. But you cannot afford to ignore corporation tax until the year end, because your activities during the year could have a significant impact on the final bill.

This briefing explains:

How corporation tax is calculated.
When you have to pay it.
When you can offset losses.
How to minimise your tax bill.

1. Calculating taxable profits

Tax is levied on all the profits made during an accounting period.

1.1 Profits can arise from several sources. They have to be calculated separately and totalled at the end.

Trading profits — income from your company’s trading activities, less allowable expenses.

For example, if you run a manufacturing or service company, you will have to pay tax on the profits made from selling the goods or services, after allowing for labour, raw material costs, etc.

Capital gains — the profits made from selling certain company assets.

For example, if you make a profit from selling a factory, it will be taxable unless you reinvest the money (see 5.3).

Income from letting out land or buildings.
Interest on any money held on deposit.

Unlike individuals, companies generally receive interest without tax having been deducted.

Most other forms of income or capital gain. For example, any profits made on currency movements.

Profits from different sources have to be calculated separately, because different rules apply to income and expenditure on each.

The rules are complex. Ask your accountant, tax adviser or auditor for advice.

1.2 Companies are taxed on the profits made in an accounting period — normally their financial year.

The end of an accounting period can also be triggered by the company going into liquidation or ceasing to trade.
Tax rates are set for the tax year, which (for corporation tax purposes) runs from 1 April to 31 March.
Where the company’s accounting period and the tax year do not coincide, the profits must be time-apportioned to decide which rate should apply.

1.3 The geographical basis for the tax charge depends on where the company is resident for tax purposes.

Companies resident in the UK pay corporation tax on their worldwide profits.
Companies resident elsewhere normally pay corporation tax only on their profits from a UK branch or agency.

Non-UK profits are generally taxed (often at higher rates) elsewhere.

Check your situation with your accountant or tax adviser.

2. How much tax?

The rate at which tax is paid depends on the level of the company’s profits, with lower profits taxed at a lower rate. But there are provisions to prevent companies from splitting themselves up to reduce tax charges (see 2.2).

2.1 There are three corporation tax bands in the tax year 2012/13:

profit (£) tax rate

0–300,000 20%

300,000–1,500,000 20-24%

Over 1,500,000 24%

If your profits fall between £300,000 and £1.5 million, you are eligible for marginal relief. This is designed to ease the transition from one rate to the next. The limits are reduced for companies belonging to groups.

2.2 Where there are several companies under common control the above limits will be split between them, unless it can be proved that they are not carrying on a trade or business.

3. Payment

Companies are responsible for assessing their own liability to corporation tax and for ensuring that all the money which is due is paid on time.

3.1 Most companies have to pay corporation tax within nine months and one day of the end of their accounting period.

This rule applies to small and medium-sized companies (ie those with profits of up to £1.5 million).
Tax must be paid in full at the due date, whether or not HM Revenue & Customs (HMRC) is challenging the figures shown on the return (see 3.3).
Interest is charged on late payments.

3.2 Larger companies have to pay the tax due in quarterly instalments.

The first instalment has to be paid six months and 14 days after the end of the preceding accounting period (ie halfway through the accounting period to which the payments relate).
Two further quarterly payments then have to be made with the balance payable within three months and 14 days of the end of the accounting period.

Special rules apply where the accounting period is not 12 months.

3.3 All companies have to notify HMRC of their profits by submitting their corporation tax return.

The corporation tax return must be made within 12 months of the end of the accounting period.

There are penalties for failing to file on time.

If HMRC disputes any of the figures shown on the corporation tax return, the company may face an enquiry or a demand for extra tax. The Inspector normally has 12 months from the filing deadline to make enquiries into a return.
Company tax returns for corporation tax must be delivered electronically. Corporation tax, and related interest and penalties, must also be paid electronically.

4. Losses

Losses can sometimes be used to reduce the corporation tax bill. However, their use is subject to strict rules, to prevent tax evasion.

4.1 Trading losses can be offset against any other profits (including capital gains) made in the same accounting period.

They can also be carried back against profits made in the preceding accounting period.
Alternatively, they can be carried forward and set off against future profits from the same trade.
But they cannot be carried forward if the company changes hands and there is a major change in the business.

So there is no point in buying or selling companies purely for the sake of their tax losses.

4.2 It may be possible for other companies within the same group to make use of a company’s trading losses.

To qualify, at least 75% of the shares must be owned by the parent company.
There are other restrictions. For example, when a company joins or leaves the group.

4.3 Capital losses can only be offset against capital gains.

They cannot be offset against trading income.

However, they can be carried forward indefinitely, so they should always be recorded, even if they cannot be used immediately.

Take the example of a company which makes a loss of £20,000 on the sale of an asset in one year, cannot use the loss for three years, but then makes a profit of £30,000 on the sale of a lease.

The capital loss can be offset against the later gain to reduce it to £10,000 for tax purposes.

5. Minimising the tax bill

Increasing profits is generally more important than avoiding tax. However, you may be able to reduce unnecessary tax payments.

5.1 Limit the number of your subsidiary or associate companies.

This is because the top limit on the tax band applying to each subsidiary will be split according to the number of companies within a group.

Profits above that limit will be taxed at the marginal rate applying to the next band. So the existence of small companies within a group could have a serious impact on the amount of tax paid.
If you must set up subsidiary or associate companies, try to spread profits evenly between them.

It may be possible to use inter-company management fees to do this, although HMRC could disallow them if there is not a legitimate business reason for the service.

5.2 Consider using loans, rather than shares, to finance the company.

Interest on loans is an allowable expense against profits, whereas dividends on shares are not.

5.3 Ask your professional advisers about the standard methods of reducing profits without damaging the company or its prospects.

Take advantage of capital allowances and the Annual Investment Allowance available on equipment purchases. The Annual Investment Allowance limit is £25,000 in 2012/13.
If possible, reinvest the proceeds of any asset sale and use ‘rollover relief’ to reduce capital gains.

5.4 Consider using benefits in kind, rather than extra salary, as a mechanism for taking money out of the company.

Employers have to pay National Insurance (NI) on almost all benefits in kind.

But employees do not pay NI on most benefits.

Income tax has to be paid on such benefits, but they qualify as earnings when you calculate how much you can pay into a personal pension scheme.
It is important that the company purchases the benefit (eg medical insurance), rather than reimbursing you.

5.5 Consider using dividends, rather than a higher salary, to take money out of the company.

All profits paid as dividends to a shareholder which is not a company are taxed at a minimum of 20%. The zero rate remains if profits are re-invested in the business.
But, in a company with profits up to £300,000, dividends might still be more tax efficient than pay.

They are exempt from NI, and for basic rate taxpayers there is no income tax to pay.

Higher rate taxpayers would have to pay more income tax, but not immediately as with earnings.
You may need advice on how to structure any dividend payments.
Payment by dividend may limit the amount you can contribute to an approved pension scheme, as the amounts do not count as earnings.
Payment by dividend may also limit your rights to state benefits.

This sort of planning may not be effective if yours is a personal service company and you work under the control and management of any of your clients.

In such cases you may be caught by the IR35 rules and be deemed to receive a salary larger than the one you actually draw. If you run such a company, seek professional help.

6. Where to get help

6.1 HMRC assumes that you will employ a properly qualified accountant or tax adviser to help you with corporation tax.

Appoint an adviser to deal with correspondence with HMRC (see 6.2).
HMRC will send you the appropriate forms as soon as a company has been registered with Companies House.
Your local tax office can assist with minor problems.

6.2 Most firms of accountants can provide you with advice on corporation tax.

The service and expertise offered by accountants varies greatly. The fees charged vary accordingly.

Shop around for the right level of advice at the right price level for your circumstances.

Accountants should be members of the Institute of Chartered Accountants (signified by the initials ACA or FCA) or the Association of Chartered Certified Accountants (ACCA or FCCA) or the Chartered Institute of Management Accountants (signified by the initials FCMA or ACMA).

6.3 Chartered Tax Advisers who are members of the Chartered Institute of Taxation (CTA, ATII or FTII) can advise you on your tax affairs and calculate your tax liability.

Contact the Chartered Institute of Taxation for more information (020 7340 0550 or www.tax.org.uk).

6.4 Solicitors can advise you on the legal aspects of corporation tax.

The company bank account

Owner managers should avoid using the company bank account as a second personal account.

Every payment must be accounted for.

If cash payments to owner managers cannot be identified as salary or dividends, they will be treated as loans from the company.
Such loans can have serious tax consequences.

To avoid these, it is generally necessary to repay the loan within nine months of the year end.

Use of the company’s bank account for personal expenditure also creates extra work for the company’s accountants, and may lead to increased fees.
If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Invoices not issued on every sale

Feb18

I’m a painter and decorator, working mainly for individual householders. I only give out an invoice for work done if my customer asks for one. Is this acceptable to the Taxman? I’m not VAT registered.
As you are not VAT registered there is no legal requirement to issue invoices for every sale, but it is good business practice. If you accurately record the money you receive from customers, and those amounts can be tied up to the cash and cheques you bank, the Taxman should not have a problem with your business records. However, if the Taxman suspects that you have been under-recording your sales, because you receive many payments in cash which are not immediately banked, you may have a problem. We can help you set up a system which will accurately record your sales, and keep the Taxman happy.

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

A guide to Termination Payments

Feb13

Taxation of termination payments

A payment to any director or to an employee when their period of office or employment ends is taxable on general principles if it is a reward for services.

If a payment is made to compensate an employee for loss of rights in respect of their employment, the position is more complicated.

EXEMPT PAYMENTS

Statutory redundancy payments.

Outplacement counselling and related fees or travelling expenses

Genuine non-statutory redundancy payments, even if they form part of the employee’s contract of employment.

TAXABLE PAYMENTS

Payments in lieu of notice (PILONs)

These are taxable as normal where the employee has been paid a lump sum, but has not worked after giving notice. For example, where an employee is on ‘gardening leave’ prior to joining a competitor. Normal taxation also applies where the employee’s contract provides for PILON to be paid as an alternative to notice.

Charge under Section 403 ITEPA 2003

Employer and employee agree at the time of termination that the employment is to be terminated without proper notice, but on making a PILON
Contract does not provide for a PILON, the employer terminates the contract and offers a PILON.

Section 403 exempts the first £30,000 of payments made in respect of termination in the relevant tax year.

The £30,000 threshold applies in respect of:

the same employment;
- different employments with the same employer
- employments with employers who are associated

FURTHER EXEMPTIONS

These include:

Contributions to approved personal pension schemes

Death or disability payments or benefits

Payments and benefits under tax-exempt schemes

Contributions to registered pension schemes.

Partial or full exemption for overseas service under Sections 413 and 414 ITEPA 2003

Funded unapproved benefit schemes (FURBS)

Unapproved schemes are often used to top up benefits arising under an approved pension scheme. If an employer sponsors a payment to such scheme in advance of any payout, it becomes a funded unapproved benefit scheme (FURBS). Any benefit is chargeable on the cash or cash equivalent of the payment or benefit.

Non-cash benefits are valued in accordance with the benefit in kind rules for earnings.

Ex gratia lump sums

Most ex gratia payments are charged under normal principles, subject to Section 403 ITEPA, as above.

They may, however be taxed as FURBS where the payment is made under ‘an arrangement’.

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

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