September 2nd, 2011
Areas of risk within VAT input tax
The main areas of risk within VAT input tax broadly fall into the following categories:
Good record keeping is essential otherwise your VAT Return may be prepared on the basis of inaccurate or incomplete information.
Where a business operates from more than one location it is also important that procedures are in place to ensure that all relevant accounting information needed for completing the return is reported to the person that prepares it in time for inclusion on the return.
Even when records are well kept, mistakes, duplications and omissions may occur, resulting in input tax being claimed too early, too late or in the incorrect amount. If a computer package is used to calculate VAT Return values, care should be taken to ensure that correct date ranges are set and that all relevant transactions within the period date range are included.
The requirement to add back input tax if the related expenditure remains unpaid six months after the date of the supply or the due date for payment (whichever is the later) is also often overlooked.
Private and non-business use
In many businesses personal and business finances can be closely linked and input tax may be claimed incorrectly on expenditure which is partly or wholly for private or non-business purposes.
A ‘Business purpose’ can be a complex area in relation to input tax.
When expenditure has a mixed business and private/non-business purpose the related VAT should generally be apportioned and only the business element claimed.
When a business purchases an asset, or services resulting in the construction of a new asset, which has mixed business and private use (but not mixed business and non-business use other than private use), the VAT may currently be claimed in full at the time of purchase but output tax must subsequently be declared to reflect private use.
The application of this “Lennartz” approach to new purchases of land, property, boats and aircraft will be restricted from 1 January 2011
When goods on which a business has claimed input tax in full (such as an item of stock or an office computer) are subsequently put to private or non-business use, there is a deemed supply for VAT purposes and output tax is normally due on the cost of the supply. The deemed supply is one of goods if the change of use is permanent and of services if temporary.
When a business has expenditure which relates wholly or partly to existing or intended exempt supplies it becomes partly exempt and can only claim the related input tax if it is below the prescribed de minimis limit.
The partial exemption standard method determines how much input tax can be claimed unless an individual special method has been approved by HMRC. Many businesses do not recognise that they are partly exempt or carry out partial exemption calculations incorrectly, for example by using an unapproved special method or by omitting to carry out a longer period calculation.
If certain assets (computers or land/building works over specified values) have been purchased for use in the business, those assets are subject to adjustments under the Capital Goods Scheme (CGS) to reflect changes in the degree of taxable use. The need to consider CGS adjustments is often overlooked.
Input tax is often claimed in error on the provision of business entertainment.
Business entertainment includes the provision of hospitality or entrance to theatres, concerts and sporting events and similar expenditure. Entertainment costs analysed to expense headings such as advertising or marketing are often overlooked and the related VAT claimed in error.
Cars and motoring expenses
Input tax errors frequently occur in relation to the purchase or lease of cars and to motoring expenses in general. Input tax cannot be claimed on the purchase of most cars while the recovery of VAT incurred in leasing a car which is available for private use should generally be restricted to 50 per cent.
If a business supplies fuel for cars, an output tax scale charge is generally due for each car unless records are maintained to demonstrate that fuel has only been provided for business journeys.
Input tax claimed in respect of business mileage payments must be restricted to the fuel element of the mileage rate and be supported by original fuel purchase invoices.
There are distinct mechanisms for the payment and recovery of VAT on goods purchased from suppliers outside the EU (imports) and inside the EU (acquisitions).
If these are not applied correctly input tax error can result.
The purchase of many services from overseas suppliers requires the UK recipient to account for both output tax and input tax on the supply (the reverse charge), applying any appropriate restrictions to input tax recovery – this requirement is often overlooked or incorrectly performed.
August 2nd, 2011
Many expenses and benefits must be reported to the Taxman on forms P11D and P9D at the end of the tax year which is the 5 April.
It’s important to choose correctly between forms P11D and P9D for each employee. The form to use depends on the employee’s earnings and on whether they’re a director of your company.
Employees earning £8,500 or more a year – form P11D
Use form P11D to report expenses and benefits provided to an employee earning £8,500 or more per year; but see below for what to include when looking at the £8,500 threshold.
Employees earning less than £8,500 – form P9D
Use form P9D to report expenses and benefits provided to employees earning at a rate of less than £8,500 per year again see below for what to include when looking at the £8,500 threshold.
What the £8,500 threshold includes
The £8,500 threshold doesn’t only include wages or salary that you pay the employee. You must also include the value of the expenses and benefits they receive from you. You will need to work out what benefits would have to be included if their earnings were above £8,500, then add this notional amount to see if the threshold is exceeded.
The £8,500 operates on a pro rata basis if the employee only works for part of the year. For example, if an employee only works for six months of the year then you’ll need to use a form P11D if their earnings in that period are £4,250 or more.
Company directors – usually form P11D
Use form P11D for almost all company directors. Only use form P9D if all of the following apply:
1. they earn at a rate of less than £8,500 per year, and
2. they do NOT own or can control more than five per cent of its ordinary share capital and
3. they are a full-time working director
July 28th, 2011
If you work at or from home, the part of the property used for work may be liable for business rates.
If the Valuation Office Agency (VOA) has given a rateable value to a part of your home then you will have to pay business rates on that part.
The remainder of the property will still be liable for council tax.
How is the assessment made?
There are a number of factors that the VOA will consider when they are deciding whether or not the part of your property used for work is liable for business rates. These include:
- the extent and frequency that the room (or rooms) is used for work
- if any modifications have been made to the building to accommodate work use
Each case is considered on its own merits, and the VOA will normally ask to visit your property to check the facts before an assessment is made.
Your local authority will use the rateable value to calculate the business rates bill and send it out annually.
There are several rate relief schemes available which may reduce your bill. Your local authority will administer these.
What is a composite property?
The Valuation Office Agency use the term ‘composite’, or ‘comp’, to indicate whether a property is mixed use. This means it contains both domestic and business/non-domestic areas, and these areas are used by the same occupiers.
Examples of composite properties include:
- a guest house with living accommodation for the owner
- a hotel with staff quarters
- a house that contains an area used exclusively for working from home
The domestic area of a composite property will be liable for council tax. The business or non-domestic area will be liable for business rates. You will not pay both taxes on the same part of the property.
Use of home as an office
Many small businesses use their home as the principle place of business. Where part of the house is used solely for business purposes there is a genuine risk that Business Rates will apply.
A balance needs to be made between maximizing the claim for tax relief for use of home as office and the extra cost of business rates compared with domestic council tax.
Generally those small businesses that merely set aside part of a room or use a study as a workplace, but also use the same room for domestic purposes are not especially at risk.
However where a person builds a loft or garage conversion, or builds a “summer house” in the garden for business use should consider themselves likely to be caught out as a composite property.
July 28th, 2011
To put your business on a proper footing with HM Revenue & Customs (HMRC) and other authorities, you need to make sure that it has the right legal structure. It’s worth thinking carefully about which structure best suits the way that you do business, as this will affect the tax and National Insurance that you pay, the records and accounts that you have to keep and your financial liability if the business runs into trouble.
There are several structures to choose from, depending on your situation.
To be a sole trader, a partner, or a member of a limited liability partnership as an individual rather than a company, you must be self-employed – and registered as such with HM Revenue & Customs (HMRC).
This does not mean that you can’t also do other work as an employee, but the work you do for your own business must be done on a self-employed basis.
If you are not sure whether your work counts as self-employment, ask yourself these questions:
- Do you present your clients with invoices for the work that you do for them?
- Do you carry out work for a number of clients?
- Are you responsible for the losses of your business as well as taking the profits?
- Can you hire other people on your own terms to do the work that you have taken on?
- Do you have control over what work has to be done, how the work has to be done and the time and place where the work has to be done?
- Have you invested your own money in your business or partnership?
- Do you provide any major items of equipment which are a fundamental requirement of the work you carry out?
- Do you have to correct unsatisfactory work in your own time and at your own expense?
If you can answer ‘yes’ to most of these questions then you are probably self-employed already, and should let HMRC know this immediately if you have not already done so.
You may be fined £100 if you fail to register within three months of becoming self-employed. There is no fee for registration.
If you answer ‘no’ to most of the questions above, you will normally be an employee.
Being a sole trader is the simplest way to run a business – it does not involve paying any registration fees, keeping records and accounts is straightforward, and you get to keep all the profits.
However, you are personally liable for any debts that your business runs up, which make this a risky option for businesses that need a lot of investment.
You need to register as self-employed with HM Revenue & Customs (HMRC) and will probably have to notify HMRC that you will have to submit Self Assessment Tax Returns
- As you are self-employed, your profits are taxed as income.
- You also need to pay fixed-rate Class 2 and Class 4 National Insurance contributions on your profits.
Class 2 is normally paid by direct debit and is a fixed weekly amount. Class 4 is variable and a percentage based on profits.
In a partnership, two or more people share the risks, costs and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.
Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved – although the business can still continue.
A partnership is a relatively simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.
Each partner needs to register as self-employed and will be responsible for compiling Self Assessment Tax Return.
The partnership itself is also required to file a Self Assessment Tax return
It’s a good idea to draw up a written partnership agreement.
As partners are self-employed, they are taxed on their share of the profits. Each partner also needs to pay Class 2 and Class 4 National Insurance contributions.
Creditors can claim a partner’s personal assets to pay off any debts – even those debts caused by other partners. In England, Wales and Northern Ireland, partners are jointly liable for debts owed by the partnership and so are equally responsible for paying off the whole debt. They are not severally liable, which would mean each partner is responsible for paying off the entire debt.
Partners in Scotland are both jointly and severally liable.
However, if a partner leaves the partnership, the remaining partners may be liable for the entire debt of the partnership. Also, a creditor may choose to pursue any of the partners for the full debt owed in the case of insolvency.
Limited liability partnership
A limited liability partnership (LLP) is similar to an ordinary partnership – in that a number of individuals or limited companies share in the risks, costs, responsibilities and profits of the business.
The difference is that liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance. This means that members have some protection if the business runs into trouble.
Each member needs to register as self-employed
There must be a minimum of two designated members – the law places extra responsibilities on them. If the LLP reduces in number and there are fewer than two designated members then every member is deemed to be a designated member.
LLPs must register at Companies House.
It’s a good idea to draw up a written agreement between the members.
The LLP itself and each individual member must make annual self-assessment returns to HM Revenue & Customs (HMRC).
All LLPs must file accounts with Companies House.
Members of a partnership pay tax and National Insurance contributions on their share of the profits.
The profits of a member of an LLP are taxable as profits of a trade, profession or vocation and members remain self-employed and subject to Class 2 and Class 4 National Insurance contributions.
Limited liability companies
Limited companies exist in their own right. This means the company’s finances are separate from the personal finances of their owners.
Shareholders may be individuals or other companies. They are not responsible for the company’s debts unless they have given guarantees – for example, a bank loan. However, they may lose the money they have invested in the company if it fails.
Must be registered (incorporated) at Companies House.
Must have at least one director (two if it’s a plc) who may also be shareholders. Directors must be at least 16 years of age. At least one director must be an individual, rather than a company.
Private companies are not obliged to appoint a company secretary but if one is appointed this must be notified to Companies House. Plcs must have a qualified company secretary.
A director or board of directors make the management decisions.
Accounts must be filed with Companies House before the filing deadline to avoid a late filing penalty.
Accounts must be audited each year unless the company is exempt.
When you file your annual return for the first time a letter will be issued to the Registered Office containing the company’s authentication code and instructions for use of Companies House web filing services. You should follow the instructions in the letter.
Directors are responsible for notifying Companies House of changes in the structure and management of the business.
If a company has any taxable income or profits, it must tell HM Revenue & Customs (HMRC) that it exists and is liable to corporation tax.
Companies liable to corporation tax must make an annual return to HMRC.
Company directors are an office holder of the company and therefore regarded as an employed earner for National Insurance. As such, company directors must pay both income tax and Class 1 National Insurance contributions on their director’s earnings. However, while regular employees’ Class 1 NICs are calculated on their monthly or weekly earnings separately, directors’ NICs are calculated on an annual cumulative basis.
Shareholders are not personally responsible for the company’s debts, but directors may be asked to give personal guarantees of loans to the company.
Overview of legal structures
independence, ease of set up and running, and all the profits go to you.
lack of support, unlimited liability and you are personally responsible for any debts your business runs up.
ease of set up and running, and the range of skills and experience different partners can bring to the business.
problems can occur when there are disagreements between partners, unlimited liability and you are personally responsible for any debts that the business runs up.
Limited liability partnership (LLP)
retain the flexibility of a partnership, personal liability is limited. At least two members must be ‘designated members’ – the law places extra responsibilities on them.
the formation is more complex and costly and problems can occur when there are disagreements between the members. If the number of partners is reduced, and there are fewer than two designated members, then every member is deemed to be a designated member.
Limited liability company
your personal financial risk is restricted by how much you invest and any guarantees you give in order to obtain financing.
this type of company brings a range of extra legal duties, including the maintenance of the company’s public records, eg for the purpose of the filing of accounts.
July 28th, 2011
Work related training:
If an employer pays for staff training, or reimburses an employee training costs, any benefit to the employee is not subject to tax.
An employee is generally unable to claim training costs as deduction for their own tax if the employer does not reimburse his costs.
Recent case law indicates that training costs will be deductible in the employee’s hands if training is part and parcel of the employee’s job specification.
The term “work-related” is defined very widely; it can include anything from a first aid course to a motivational team building activity course.
Other (non work related) training costs:
Training not related to the employees’ duties are taxable as benefits in kind for higher paid employees or taxable as earnings if employer reimburses employee (all employees).