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

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.

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.

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:

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:

http://www.hmrc.gov.uk/about/new-penalties/faqs.htm

http://www.hmrc.gov.uk/about/new-penalties.htm.

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.

Restricted Losses Ahead

Nov5

Have you signed-up with the Tax Office to submit your VAT returns online, or agreed that we will do this online filing for you? If neither applies then you will shortly receive a letter from the Taxman reminding you of your online filing obligations. Almost all VAT businesses are now required to submit their VAT returns online for periods starting on and after 1 April 2012. The only exceptions are for:

those who are subject to insolvency proceedings; or
where the person is a practising member of a religious order whose beliefs are incompatible with the use of electronic communications.

You must also pay any VAT due electronically, but this includes many more options than just using online banking. For example you can set up a direct debit (by phone or letter), which will automatically collect the amount of VAT reported on the online VAT return, three days after the deadline for submitting that return. However, the direct debit does need to be in place before your VAT return is submitted and at least two working days before the deadline for that return. So Friday 3 August 2012 is the last day for setting up a direct debit for VAT returns to be submitted by 7 August 2012.

You can use a debit or credit card to pay VAT due of less than £100,000 (but not any penalties or interest due), via the BillPay service online. However, if a credit card is used a fee of 1.4% will be added to the VAT amount due, and the payment will take three working days to arrive.

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

A guide to Enterprise Investment Scheme (EIS) – the rules condensed

Oct31

A LOOK AT THE RULES AND RESTRICTIONS OF THE EIS SCHEME

Introduction

We are all acutely aware of the difficulties that businesses are currently facing in accessing finance. On the one hand, we have the government proclamations that the UK massively reliant on small businesses and entrepreneurial spirit but, on the other hand, banks are still not lending sufficiently, as their main focus is to build up their capital reserves. Small business and the economy are suffering as a direct consequence of the banks’ unwillingness or inability to lend.

The government is in ongoing dialogue with the banks regarding their lending policies but is also encouraging businesses to explore alternative means of finance, one of which is the ‘Business Angel’. A business angel is defined as a wealthy individual who provides finance to companies in exchange for a share of the companies’ equity.

As far as tax breaks go for this type of investor, the Enterprise Investment Scheme (EIS) is targeted at precisely this kind of financing arrangement. EIS has been with us for a long time now but, due the current reluctance of the banks to lend, is of considerable more relevance now than it was maybe ten years ago.

The Office of Tax Simplification (OTS) has identified EIS as one of the main reliefs requiring urgent simplification.

A Minefield

The tax reliefs available under EIS are actually very generous and these are considered in our separate Guide to Enterprise Investment Scheme – The Tax Reliefs Condensed.

However, many businesses and investors have been reluctant to use it…….which brings us to the main problem with the EIS. The scheme is so complex and full of traps, that it is an immediate turn-off for many would-be investors and businesses alike. In the early days of EIS (and its predecessors, the Business Start-Up Scheme and Business Expansion Scheme) the system was quite open to abuse and so, over the years, more and more anti-avoidance legislation has been thrown into the mix, making for a really complicated set of rules.

It has also historically been an extremely high-risk area for accountants and tax advisers and HMRC have historically been fastidious in applying the rules to the letter which can often result in difficulties.

What the business community is crying out for is a radically simplified set of rules to make EIS a far more attractive proposition for investors and businesses alike.

EIS in Outline

Due to the complex and sprawling nature of the EIS legislation, which runs to 69 pages, it is difficult to condense the rules easily but let us try. These are the rules that apply following the changes as a result of the 2011 and 2012 Budgets.

The EIS scheme allows a company which meets certain conditions (a qualifying company) to raise funds by issuing full-risk ordinary shares to individual investors previously unconnected with the company.

The funds raised must be used to finance a qualifying trade carried on in the UK or for research and development. The funds must be used within 12 months of the commencement of the trade, and this must take place within two years of the share issue.

The trades which qualify are severely restricted so as to exclude trades where the investors’ capital is at little or no risk.

In general, an individual who is or has been connected with the company or its trade will not qualify for relief, but business angels may receive a reasonable remuneration as a director.

Although there is no statutory clearance procedure, HMRC will, on application, give an advance opinion on whether a proposed share issue will qualify for relief.

To qualify for the tax reliefs, an investment needs to be made by a qualifying individual in a qualifying company.

Qualifying Individuals

An individual is eligible for EIS relief if he subscribes for relevant shares in a qualifying company with which he is not connected.

For the purposes of establishing whether an individual is connected with a company, a 30% test applies. If an individual, together his associates, holds more than 30% of the share capital, loan capital, voting rights or rights on winding-up, they will be ‘connected’ and therefore not eligible for relief under the scheme.

‘Associates’ are any partner or relative of the investor and, in certain circumstances, trustees and personal representatives of trusts/estates in which the investor was either settler or had an interest.

Irrespective of the 30 per cent test, an individual is connected with the issuing company if he, or any associate, is an employee or partner of the issuing company or any of its subsidiaries at the time of issue.

An individual is also connected with the issuing company if he is a director (unless unpaid) of that company or of a subsidiary or partner of that company. Business angels, who have had no previous connection with the EIS company, may receive a ‘reasonable remuneration’ for their services as a director. However, new companies are not excluded in the legislation. It would therefore appear to be acceptable for a small group of individuals to set up a new company, be paid reasonable remuneration for the services they provide to the company and claim EIS relief for their investment. However, care must be taken that at the time of the issue of their EIS shares they are not already connected with the company or its trade.

The annual maximum amount that an individual investor may invest under the EIS scheme is £1,000,000 per tax year from 6 April 2012, although if the investor has also made an investment into a Venture Capital Trust (VCT), the amount of investment would need to deducted from the £1,000,000 maximum limit, since it is a combined EIS/VCT limit.

Qualifying companies

The rules start to get really complicated when looking at the requirements for a qualifying company. The main rules are outlined below are an ‘in a nutshell’ version of the rules, which run to many pages of legislation.

For shares to be eligible for EIS relief, the company must

be unquoted at the time of issue of the shares, with no arrangements in place for the company to become quoted
not be under the control of another company, nor must there be arrangements in place at the time of the share issue
meet certain conditions in respect of subsidiaries that it may have
be a ‘small’ company. The definition of small or these purposes does not follow the Companies Act definition of a small company. To qualify as small for EIS purposes, the company (or group, if there are subsidiaries), the gross asset value of the company must not exceed £15,000,000 before the issue of the EIS shares and £16,000,000 afterwards
carry on a qualifying trade either itself or through a qualifying subsidiary
raise no more than £5,000,000 per annum by way of EIS and venture capital trust subscriptions combined
apply the funds for qualifying trading purposes within two years of the share issue
have less than 250 employees.

Qualifying Trades

Most trades will qualify as a ‘qualifying trade’. However, certain trades are excluded by legislation. The excluded, non-qualifying trades are as follows:

dealing in land, in commodities or futures in shares, securities or other financial instruments
dealing in goods, other than in an ordinary trade of retail or wholesale distribution
financial activities such as banking, insurance, money-lending, debt-factoring, hire-purchase financing or any other financial activities
leasing or letting assets on hire, except in the case of certain ship-chartering activities
receiving royalties or licence fees (though if these arise from the exploitation of an intangible asset which the company itself has created, that is not an excluded activity)
providing legal or accountancy services
property development
farming or market gardening
holding, managing or occupying woodlands, any other forestry activities or timber production
shipbuilding
coal production
steel production
operating or managing hotels or comparable establishments or managing property used as an hotel or comparable establishment
operating or managing nursing homes or residential care homes, or managing property used as a nursing home or residential care home
providing services to another person where that person’s trade consists, to a substantial extent, of excluded activities, and the person controlling that trade also controls the company providing the services.

A company can carry on some excluded activities, but these must not be ‘substantial’ part of the company’s trade. HMRC take ‘substantial’ to mean more than 20% of the company’s activities.

There is no requirement that the qualifying company is resident in the UK, but for shares issued on or after 6 April 2011, the company must have a ‘permanent establishment’ in the UK.

HMRC Clearance Procedure

The Enterprise Investment Scheme (EIS) is administered in HM Revenue & Customs (HMRC) by the Small Company Enterprise Centre (SCEC).

The SCEC decides if a company and a share issue qualifies. If they do, the SCEC then takes responsibility for checking the accounts etc of the company to ensure that it continues to meet the requirements of the Scheme.

Companies are not required to obtain such an assurance, but companies, particularly those using the EIS for the first time, may consider it prudent to do so. It gives an opportunity to spot any problems before shares are issued, and an assurance from the SCEC is also useful for companies to show to potential investors.

Full guidance on the Advance Assurance application can be found on the HMRC website.

Office of Tax Simplification (OTS)

The OTS, in its Review of Tax Reliefs – Final Report (March 2011), identified EIS as being complex, expensive to set up and administratively burdensome. Due to the requirement for the conditions to be met for a three year qualifying period, the scheme is fraught with traps for would-be investors. The OTS identified several areas of concern. Some of these were addressed by the government in the 2011 and 2012 Budgets but the following still remain areas of concern:

the legislation governing EIS runs to 69 pages and is found at different parts of tax legislation, making the rules difficult to read and to apply
the cost of obtaining professional advice to ensure compliance with the rules may make the scheme prohibitive for many
there is general confusion as to whether the relief is available to directors and employees of the company
the clearance procedure can provide assurance for investors but can take up to a month to obtain. OTS has suggested that an electronic online clearance procedure would be useful
one of the requirements is that shares are subscribed for wholly in cash and are fully paid up at the time they are issued. This condition (which was designed at a time when investors generally paid by cheque) causes complexities in the procedures undertaken during funding. Generally investors prefer to pay by electronic transfers, but if they pay prior to the shares being issued, it results in EIS relief being denied; transfers after the shares have been issued results in the shares not being fully paid up (and thus the relief is denied)
further funds. This condition also means that the proceeds from larger share issues, with some non-EIS funding, must be separately tracked.

OTS Recommendations

The OTS has made the following suggestions for simplifying the scheme:

the complex and sprawling rules be rewritten into a checklist or flowchart that makes it easy to follow to determine eligibility. Such an approach is likely to be in a Practice Note or HMRC guidance and such guidance should be binding
in particular, to simplify the administrative side of the relief, consideration could be given to clarifying the position surrounding the eligibility of directors and employees to address some of the confusion that still exists
a potential grace period for the shares to be fully paid up (of perhaps a few days) to ease the administration of electronic cash transfers
implementing an electronic certification process to streamline applications.

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.

Filing Online Reminder

Oct29

those who are subject to insolvency proceedings; or
where the person is a practising member of a religious order whose beliefs are incompatible with the use of electronic communications.

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

Shadow Director

Oct22

When a company fails to pay over the PAYE and NIC which should have been deducted from salaries paid to the employees and directors, HMRC can issue the directors and shadow directors of the company with personal demands for the tax due.

A shadow director is not registered as a director of the company with Companies House, but he or she will effectively control the company by giving instructions to the named directors, and to other staff who are accustomed to act on those instructions. Majority shareholders may be deemed to be shadow directors if they effectively run the company.

Liquidators can take action against shadow directors just as they can against the named directors for debts owing, including tax.

There have been a number of cases recently where HMRC has gone after the shadow director of the company to collect the unpaid PAYE. In those cases the individuals may have assumed they could avoid any responsibility for the company’s debts by not appointing themselves as a director of their company. However, HMRC questioned the staff involved to find out who issued the instructions to pay salary and not pay over the PAYE due, concluding that certain persons were shadow directors.

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

Mobile Phone Expenses

Oct15

Q.The company provides the sales reps with pay-as-you-go mobile phones, who purchase top-ups when they need them, claiming the cost back on expenses. Does the cost of the top-ups need to be included on the forms P11D for those employees? Does it make a difference if the employee bought the pay-as-you-go phone?

A. Where the mobile phone is owned by the company and the contract is between the company and the telecoms provider, any top-ups purchased for that phone are tax free, as the provision of the phone is tax free. The cost of the vouchers does not have to be reported on the form P11D for each employee. Note this tax free treatment only applies to one phone per employee.

If the phone was bought by, and thus owned by the employee, the top-up vouchers are taxable and need to be reported on the form P11D. The employee could claim a deduction on their tax return for the cost of business calls made with the top-up payments, but this would involve analysing all the calls made into business and non-business calls.

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