VAT flat rate scheme, Cash basis for landlords, Tax tables and rates corrected

HMRC has announced further restrictions for limited cost traders who use the VAT flat rate scheme, as we explained in our most recent tax tips. Individual landlords could suffer an additional restriction on loan interest, if they don’t opt out of the new cash basis for property businesses. Finally, beware of inaccurate tax tables – HMRC has corrected two tables recently concerning tax thresholds and mileage rates.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every week.

VAT flat rate scheme

We are not suggesting that HMRC are making up the rules as they go along, but their webinar on the flat rate scheme (FRS) included an additional condition, which isn’t in the new version of the FRS leaflet (Notice 733).

Limited cost traders (LCT) must use a FRS percentage of 16.5%, rather than the normal flat rate for their trade sector. To avoid being categorised as a LCT, the business must purchase at least £250 of relevant goods in the VAT period, and the value of those goods must also be equal to or exceed 2% of the gross sales for the same period.

The draft legislation excludes the following from “relevant goods”:

  • Capital items (which HMRC say is anything expected to have a useful life of more than one year).
  • Road fuel and motor parts (except for businesses in the transport sector e.g. road haulage and hire cars).
  • Food and drink for employees and business proprietor.
  • The three new exclusions from relevant goods are:
  • Goods for resale, leasing, letting or hiring out if the main business activity doesn’t ordinarily consist of selling, leasing, letting or hiring out such goods.
  • Goods that the trader intends to re-sell or hire out, unless selling or hiring is the main business activity.
  • Goods for disposal as promotional items, gifts or donations.

The first two bullet points are set out in paragraphs 4.4 to 4.6 of the latest version of Notice 733, but the third one was announced in the HMRC webinar on 1 March 2017.

The new conditions are designed to prevent businesses buying goods, which are not related to its main trade, just to avoid being categorised as a LCT. These new rules may generate lots or arguments about what is the trader’s “main business activity”. Our VAT experts will be happy to discuss how these new conditions will apply to your client.


Requirement to send HMRC leaflet, CGT for non-residents, VAT responsibilities of online markets

We live in an interconnected world; your UK-based clients may have investments in other countries, and non-resident clients may have invested in UK property. We have tips on actions required in respect of both categories of investor. Clients who run online marketplaces also need to know about new VAT rules, which will impact their businesses.

This is an
extract from our topical tax tips newsletter dated 6 October
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

VAT responsibilities of online markets 
From 15 September 2016 online marketplaces (such as Ebay and Etsy) can be held jointly and severally liable for VAT which remains unpaid by overseas businesses which sell through those sites. 
The basic VAT rule is that overseas retailers must pay UK VAT on goods they sell which are stored within the UK at the point of sale. This rule has always applied, but it has not been enforced effectively. Hence overseas suppliers have been able to undercut UK traders on price. 
In VAT terminology an overseas supplier which has no place of business in the UK is referred to as a non-established taxable person (NETP). The NETP must register for VAT from its first sale in the UK, as there is a zero VAT registration threshold for such supplies. 
Any NETP whose home base is outside the EU can now be required to appoint a UK-based VAT representative, which may in turn be made liable for any unpaid VAT due by the NETP. However, the online marketplace through which the NETP sells its goods can also be made liable for the VAT due to be paid by the NETP. HMRC say it will normally pursue the overseas business first before issuing a notice for joint and several liability for VAT to the online marketplace. The marketplace business will be given a 30-day warning to allow it to take action against the errant trader to either secure the VAT due, or ban the trader from the site. 

Businesses who run online marketplaces need to ensure that all traders who are based outside of the UK provide evidence of their VAT registered status. 

This is an
extract from our topical tax tips newsletter dated 6 October
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained the remainder of this item plus links to related source material and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Trading or capital gain, VAT on unusual homes, ER on sale of business premises

Last week was property week! You need to be aware of new rules that may treat gains made from UK property as trading income, subject to income tax or corporation tax. HMRC has changed its view of the VAT treatment applicable when two or more buildings are constructed or converted into a single dwelling. Finally, we examine when entrepreneurs’ relief can be claimed on the disposal of a business premises.

This is an
extract from our topical tax tips newsletter dated 1 September
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

VAT on unusual homes 
The first sale of newly constructed home (or conversion from a commercial building) is zero rated, subsequent sales are exempt for VAT. The zero rating allows the builder to reclaim VAT incurred on building costs. Until now HMRC has insisted that a single dwelling must consist of a single building. 

This view was challenged by Mr Fox and Mr Catchpole in two cases in 2012. The taxpayers won, but it has taken four years for HMRC to change their official view. They have now released Revenue & Customs Brief 13/2016 which sets out their revised policy. 

HMRC now accept that if a dwelling is designed to incorporate more than one building, say a guest house across a courtyard from the main building, the result can be zero rated. However, all the construction or conversion work must be undertaken as one project with no unreasonable delays between the project stages. 

If your client incurred costs on converting two or more non-residential buildings into a single home, and either had their VAT claim blocked, or did not attempt to reclaim the VAT, they can now submit a claim. However, HMRC will only consider claims relating to the last four years. Our VAT experts can advise you on the format of claims which will be acceptable to HMRC.

This is an
extract from our topical tax tips newsletter dated 1 September
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>> 
 
The
full newsletter contained the remainder of this item plus links to related source material and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Use EIS to defer and reduce CGT, VAT annual scheme, Access to tax refund

Last week we shared an idea on how to defer and reduce CGT payable on the sale of residential property. We also had a warning about the VAT annual accounting scheme, and have news of how HMRC are nudging taxpayers into using their personal tax accounts.

This is an
extract from our topical tax tips newsletter dated 11 August
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

VAT annual scheme 
Taxpayers opt to use the VAT annual accounting scheme because they want to complete only one VAT return once a year, instead of four. You may have arranged to process that one VAT return for your client, which will work well if the client pays all the VAT instalments as agreed and on time. 

If the taxpayer doesn’t pay the VAT as due, HMRC will unilaterally take the business out of the annual accounting scheme, and will write to inform them that quarterly VAT returns and payments are due. You may not get a copy of that letter. 

This is what happened to Angela Spence, a solicitor on the VAT annual accounting scheme. She failed to pay the full amount as agreed for her VAT instalments on four occasions, so HMRC sent her two warning letters. She didn’t read those letters properly and claimed she didn’t receive the final letter which removed her from the annual accounting scheme.      

As Miss Spence didn’t appreciate she was no longer in the annual accounting scheme, she carried on paying VAT by instalments and didn’t complete quarterly VAT returns. This lead to HMRC issuing estimated VAT assessments and three default surcharges. It took a year of such correspondence before she rang HMRC to find out what had gone wrong. 

If you let your clients deal with their own VAT affairs, impress upon them that they must read carefully and respond to any letters they receive from HMRC.

This is an
extract from our topical tax tips newsletter dated 11 August
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

The
full newsletter contained the remainder of this item plus links to related source material and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


CGT relief on incorporation, VAT flat rate scheme, Fake HMRC contacts

Many businesses still want to incorporate for non-tax reasons, so last
week we reviewed the reliefs which can postpone or reduce CGT due
on incorporation. We also examined a problem found when applying for the
VAT flat rate scheme, and we had a warning about convincing tax
repayment scams which may catch-out your clients. 

This is an
extract from our topical tax tips newsletter dated 7 July
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>> 

VAT flat rate scheme
The VAT flat rate scheme (FRS) for small businesses is very useful. It reduces the work needed to complete a VAT return, as generally only the sales income is considered. Many businesses can also make a small profit purely from using the scheme. 

However, that profit depends on the trade category the business opts to use. This category determines the FRS percentage which must be applied to the gross sales income to calculate the VAT payable to HMRC each quarter. 

When the business applies to use the FRS it should pick the trade category which best fits a plain English description of the majority of its trade. For example, a mechanical engineer would not pick the category “architect, civil and structural engineers”, as a mechanical engineer (dealing with machines) is a very different job to a civil engineer (dealing with buildings and structures). If there is no category which is a good fit, the business should choose one of the catch-all categories such as “business services that are not listed elsewhere”. 

You can apply for the FRS online as part of the process of registering the business for VAT. This allows the business to benefit from a reduction in its FRS percentage by 1% point during the first 12 months in which it is VAT registered. However, the HMRC computer may not register the business category which you have picked. 

As part of the FRS application you can enter a free text description of the business activity. If that doesn’t match one of the trade categories, you can use the more precise Standard Industrial Classification (SIC) code. The computer then matches the SIC code to one of the trade categories, but not always as you would expect. An online message should tell you which trade category has been selected. 

If you are not happy with the computer’s choice of trade category your only option is to cancel the online application, and use the stand alone form VAT600FRS to apply for the FRS. This is an interactive form, but it doesn’t try to guess the trade category for you. It must be completed then printed out for signing and submission to HMRC.

This is an
extract from our topical tax tips newsletter dated 7 July
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
 
The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Class 1A NIC reports, CIS gross payment status, When can VAT be reclaimed?

Much of tax compliance is about detail – sending the correct information to HMRC at the right time in the specified form. Last week we had some tips on how to comply with the requirements for class 1A NIC, and the new compliance test for CIS gross payment status. We also reported a VAT case which may have wider implications for businesses which are trying to raise funding from a variety of sources. 

This is an
extract from our topical tax tips newsletter dated 21 April
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>> 

When can VAT be reclaimed? 
A VAT registered trader can reclaim VAT he incurs on goods and services to be used for the purpose of making taxable business supplies. Goods or services which are used for non-business activities, or for generating VAT-exempt sales, can’t be included in a VAT claim, unless the partial exemption rules apply. 
  
This is the foundation of the VAT system, and clients need to be reminded of this occasionally. HMRC are increasing questioning whether costly purchases are used for a purpose that generates VATable sales, and thus whether the VAT can be reclaimed. In a recent case HMRC attempted to block the repayment of VAT paid on the purchase on single farm payment entitlements (SFPE). 
  
SFPE units gave the farmer entitlement to receive certain EU farming support payments. The SFPE units could be traded, and gains made on their sale qualified for business asset roll-over relief for CGT. The SFPE scheme was replaced by the Basic Payment scheme which came into effect from December 2013, but the principles are the same. 
  
Frank Smart & Sons Ltd was building up its beef cattle farming business. The company acquired 34,777 units of SFPE and paid VAT on that purchase of £1.054m. Those units generated between £1.7m to £2.4m per year of single farm payments for the farm, which used that money to pay down its overdraft, build additional farm buildings and acquire surrounding farm land. 
  
HMRC argued that the SFPE units were acquired for the purpose of generating income which was a non-economic activity outside the scope of VAT, so the VAT paid on the purchase of the units could not be reclaimed. HMRC chose to ignore the fact that the single farm payments were used to build assets for the business. The First-tier and the Upper-tier Tribunals both agreed that the purchase of the SFPE were an integrated feature of the farming enterprise. Also the costs of acquiring the SFPE units were part of the business overheads, which formed a component of the price of the farm’s products – in this case beef cattle. 
  
This case could have wider implications for businesses who incur costs to generate sources of finance such as grants or crowd funding. Our VAT experts can advise on any unusual VAT-reclaim situations which your clients may experience.

This is an
extract from our topical tax tips newsletter dated 21 April
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
 
The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>> 


VAT MOSS, VAT flat rate scheme, Trust tax returns

This issue highlighted two VAT issues which affect small businesses; the ridiculous VAT MOSS rules, and the VAT flat rate scheme which should make life easier for small businesses but can trip them up. We also have news about incorrect penalties issued in respect of trust and estate tax returns.

This is an
extract from our topical tax tips newsletter dated 14 January 2016
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

VAT MOSS 
All VAT MOSS returns must be submitted for calendar quarters, irrespective of the period for which the trader submits his domestic VAT returns. Thus the next VAT MOSS return must be submitted by 20 January 2015, for the quarter to 31 December 2015. 
  
This is just another example of how the VAT MOSS rules are a bad-fit for micro-traders. HMRC are starting to realise this, as they have issued new guidance on VAT MOSS for small traders. These are businesses with annual turnover below the UK VAT registration threshold, so they aren’t required to be registered for VAT in the UK. However, they must operate VAT MOSS. In theory just one international sale of an electronic service to a non-business consumer in another EU country brings the business within the VAT MOSS reporting regime. 
  
HMRC say they have analysed the VAT MOSS returns submitted so far. From this incomplete data HMRC have concluded that some people registered for VAT MOSS may not be in business. A person who is not “in business” doesn’t have to register for VAT MOSS as the supplies are not made in the course of a business. Problem solved!    
  
No, the problem is not solved. HMRC can’t accurately determine whether a trader is “in business” from three VAT MOSS returns, but they are writing to those people they believe aren’t “in business” suggesting the trader should deregister from VAT MOSS. If your client receives such a letter he will be confused, as HMRC is constantly telling people to declare all of their income for tax purposes. 
  
If you have advised your client to register for VAT MOSS, you will have already reviewed whether he is in business or not, and concluded that he is. If the international sales are merely part of a “hobby” and not part of a business, then you wouldn’t have advised the individual to register for VAT MOSS. 
  
For those small traders who decide to stay registered with VAT MOSS, a further concession is offered: they only have to retain one piece of evidence of where their customer is located. However, the trade needs to abide by the VAT laws of the country he is selling into. A concession applied by HMRC won’t necessarily be recognised by another EU tax authority.

This is an
extract from our topical tax tips newsletter dated 14 January 2016
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>> 

The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
You can obtain future issues by registering here>>>


Dividend tax, Dentists and VAT, Employment intermediaries

As a tax adviser you have to look forwards and sideways for your clients, and well as cushioning the burden of stifling regulations, as we illustrate this week. The new dividend tax requires some predictions to assess the tax saving or cost comparing this year to next. A VAT case concerning a dental practice may be relevant to a wide range of healthcare providers. Reporting under the employment intermediaries is an unnecessary burden, but HMRC is trying to make it as easy as possible for those affected.

Dentists and VAT

Many dentists have incorporated their businesses since 2006 when the rules were changed to allow this. However, a stumbling block has often been the contract between the local NHS trust and the dentist’s firm, which may not be possible to transfer to the new company.
A solution is to run the new company alongside the old dental practice which continues to operate the NHS contract. The company employs the staff and undertakes the dental work subcontracted from the old unincorporated practice.
Dental work is classified as the provision of medical care, so is exempt from VAT under VATA 1994, Sch 9, gp 7. The new dental company should be able to rely on this exemption to avoid having to register for VAT. However, HMRC may take the view that the old dental practice is carrying on the dental work and the new company is merely providing staff, not medical care.
This was their argument in City Fresh Services Ltd, where HMRC said the company should be VAT registered. The Tax Tribunal disagreed with HMRC, saying that the legal form of the person providing the medical care is irrelevant so long as the essential nature of the supply being made does not change. The Tribunal also noted that there was no need for supplies of medical care to be made directly to the final patient.
This case is significant for any business that provides medical care or medical services via a company. Our VAT experts are happy to advise where the VAT exemption can be utilised. 

This is an
extract from our tax tips newsletter dated 6 August 2015 (5 days before we publish an extract on this blog). The newsletter
itself contained links to related source material for this story and the
other two topical, timely and commercial tax tips. It’s clearly written
and extremely good value for accountants in general practice. Try it
for free by registering here>>>


Group relief, Pre-registration VAT, Contacting HMRC

Tax law can be complicated – especially when claiming relief for corporate losses or pre-registration VAT. Last week we shared two examples of why you can’t afford to let your knowledge fall behind in those areas. We also had a little moan about getting through to HMRC by phone and offered some constructive suggestions. 

Pre-registration VAT

The rules for reclaiming pre-registration VAT are fairly straight forward, or we thought they were until a change in HMRC practice came to light this week. Are you advising your clients correctly?
 
On registering for VAT the trader can reclaim VAT on goods acquired within four years before the date of registration, and on services provided with the previous six months. As long as the purchases were used for the business, and the goods were still held at the date of registration, all the VAT can be reclaimed.
 
This the impression you would get by reading paragraph 11 of VAT Notice 700, which is titled “VAT paid on goods and services obtained before VAT registration”. However, HMRC apparently changed their practice on this point from 1 January 2011, and the new approach is hidden deep within the VAT Input Tax manual at para VIT32000.
 
HMRC’s new interpretation of the VAT regulations (SI 1995/2518)
reg 111, says the use of the asset in the period before the VAT
registration date should be taken into account. If the asset has been
used in relation to supplies that have not had VAT applied, a portion of the input VAT should be disallowed to reflect that use.   
  
Example
Ken in the business of transporting racing pigeons to the point where they are released for a race. On 1 April 2012 he purchased a lorry for £90,000, including VAT of 15,000, which he expects to use for 10 years.
 
Ken registered for VAT with effect from 1 April 2015, exactly three years into the lorry’s life. Under the new interpretation of VAT reg 111 Ken can only reclaim 7/10ths of the VAT incurred on the lorry: £10,500 rather than £15,000.
 
The new HMRC interpretation may be correct, but
it is certainly not clear from the public VAT notices. If your clients
have reclaimed VAT on the pre-2011 understanding of the rules, they should not adjust those claims. However, if challenged by HMRC they should be able to claim they had a legitimate expectation to rely on the guidance in the public VAT notices. Talk to our VAT experts if your client is affected by this. 

This is an
extract from our tax tips newsletter dated 11 June 2015. The newsletter
itself contained links to related source material for this story and the
other two topical, timely and commercial tax tips. It’s clearly written
and extremely good value for accountants in general practice. Try it
for free by registering here>>>


NIC avoidance, Late filing penalties, VAT MOSS TAN/newsletters

Tax was in the
news again last week for all the wrong reasons: the BBC uncovered a
blatant NIC avoidance scheme, and The Telegraph newspaper published a
leaked HMRC memo concerning late filing penalties. We explain how both
these issues could affect you and your clients. We also have news of
developments relating to the operation of VAT MOSS.

VAT MOSS


New rules for applying
local rates of VAT to digital services supplied across EU borders came
into effect on 1 January 2015, but guidance on how to account for the
VAT due under VAT-MOSS was released very late. A concession for UK
traders who aren’t VAT registered, to allow them to use VAT-MOSS without
having to charge VAT to their UK-based customers, was issued almost at
the last minute.


 


A second concession
concerns the records required to determine where the customer is based.
Small businesses are allowed to rely on the customer location
information provided by their payment service provider (eg PayPal). This
concession was announced as a temporary measure to apply to 30 June
2015, but it is now permanent for UK businesses who are not VAT
registered.


 


The role of the tax
agent in helping clients to comply with VAT-MOSS appears to have been
added as an after-thought in the design of that system. As a tax agent
you can’t register your clients for VAT-MOSS, but you can submit
VAT-MOSS returns on their behalf if you register as a VAT-MOSS agent.
Details of how agents can register were published on the GOV.UK website on 21 May 2015. The first deadline for submitting a VAT-MOSS return was 20 April 2015.


 


If your clients are
providing digital services they are likely to be invoicing
electronically as well. Take a look at the new guidance on electronic
invoicing in VAT Notice 700/63.


 


Finally for clients who
are disgruntled about the VAT-MOSS regime, there may be light at the
end of the tunnel. The EC has acknowledged in a report on the digital
single market the administrative burden that VAT imposes, and has
recommended there should be a common EU-wide VAT threshold to help small
e-commerce businesses. 

This is an
extract from our tax tips newsletter dated 4 June 2015. The newsletter
itself contained links to related source material for this story and the
other two topical, timely and commercial tax tips. It’s clearly written
and extremely good value for accountants in general practice. Try it
for free by registering here>>>