Paying VAT on time, Paying the NMW correctly, and Paying to settle tax on loans

The headline above is taken from our latest tax tips email for accountants in which we said:

It often feels like this time of year is all about spending money, so it’s crucial to remind clients to hold some funds in reserve in order to pay tax liabilities due in the New Year. This week we look at why paying VAT on time is so important, and which reasonable excuses may be accepted. We also have a timely warning about paying the correct NMW, and news of a small change in HMRC’s approach to settling tax due on loans.

Below is just an extract from our latest email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device).

When most taxes are paid late by 30 days or more there is a statutory penalty of 5% of the unpaid amount, which increases to 10% for a delay of 6 months, and to 15% for a delay of 12 months or more. Interest on the late paid amount may also be charged.

The penalty is calculatedly separately for each tax liability, so if the taxpayer regularly pays his self-assessed income tax late by a few days no penalty is due. This is not how it works for late paid PAYE or VAT. For those taxes the penalty builds up according the number of late payments within the tax year (PAYE) or surcharge period (VAT), and every day late is counted as a default.

For late paid VAT it is not easy to spot that a 12-month surcharge period has started, as its triggered, and extended, by each late payment or late return filed. The taxpayer should be notified by letter, but no penalty will be payable for up to four defaults, if the amount due is less than £400.

When the business pays VAT late on the fifth occasion, even by one day, the penalty will be 10% of the amount due, or 15% where the annual turnover of the business is £150,000 or more. This can come as a nasty surprise to the business especially where the late payment was due to a failure of the banking system.

The Tribunal judge may be sympathetic if the failure of the bank to transfer funds was unforeseen, as in case of Stylographics Ltd. However, key staff not having access to the internet to operate online banking while on holiday was not regarded as a reasonable excuse for Galaxy Decorators Ltd.

Reciprocal Ltd claimed it had agreed a time to pay (TTP) arrangement with HMRC, but neither the company or HMRC could produce any documentary evidence of the detail of this TTP agreement. So when VAT payments were not correctly allocated by HMRC, or repaid as the taxpayer expected, it was apparently the taxpayer’s fault for not spotting the missed payments. The penalty was upheld.

Accounting for an APN, Flat rate scheme for Farmers, and Trust Registration Service

In our latest tax tips email for accountants we said:

Tax solutions generally have to be found to solve issues arising from accounting transactions, but when an Accelerated Payment Notice (APN) is received, an accounting solution must be found for this tax-generated problem, as we explain below. There is good news for farmers who use the special VAT flat rate scheme for their industry, and further good news for tax advisers who are trying to register trusts with HMRC.

Below is just an extract from that email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

Flat rate scheme for Farmers

If you have clients in the farming or forestry sectors you should be familiar with the VAT agricultural flat rate scheme (AFRS). It’s an alternative to regular VAT for farmers, and is designed to compensate farmers for the VAT they suffer on purchases by simplifying the cashflow.

Under the AFRS the farming business is not VAT registered, so it can’t reclaim VAT on its input costs. Instead the business charges a flat rate addition (FRA) at 4% on its qualifying sales to VAT registered businesses, who reclaim the FRA as if it was VAT. The farmer keeps the 4% FRA he charges on his sales. The scheme has been around for years, but HMRC don’t publicise it.

HMRC has routinely cancelled farmers’ entitlement to use the AFRS where their earnings under the scheme substantially exceed the input VAT which they would have been able to deduct if they were subject to normal VAT arrangements. This is not one of the conditions which precipitate compulsory cancellation of the AFRS set out in the VAT regulations.

Shields and Sons is a farming partnership which was removed from the AFRS by HMRC in 2012, as it had benefited from the scheme by approximately £375,000 over seven years. Shields challenged HMRC’s decision, and eventually won their case when it reached the European Court of Justice (CJEU).

The CJEU confirmed that the UK doesn’t have a general discretion to remove individual farmers from AFRS where they are simply recovering more using the scheme than they would under standard VAT accounting rules. The European VAT Directive does allow the exclusion of “categories” of farmers, but not those who are simply good at working the system.

The CJEU also said that a farmer must be able to objectively assess, in advance, if he can legitimately expect to meet the criteria to access and to remain in AFRS. Excluding successful farmers from the AFRS on the basis that their reward from the scheme is “substantially more” than that of another farmer does not meet the objective criteria of being a “category” of farmer.

If you have farming clients who have been incorrectly removed from the AFRS, they may now be entitled to a repayment of VAT, or compensation, from HMRC. The Government could decide to lower the FRA from 4% to another percentage, or once the UK has left the EU, scrap the scheme altogether.

Fix for SA filing problems, Exempt or zero rated, Tax credits renewal

Last week we offered an update on the online filing issues for self-assessment tax returns. We also looked at a case where the taxpayer was confused about zero rating and exempt goods for VAT, and took advice from his suppliers. Finally, don’t forget the tax credits renewal deadline is 31 July; your clients may need you to provide some estimated figures of profit for 2016/17.

Below is just an extract from last week’s tax tips email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

Exempt or zero rated

Do your clients and your staff understand the difference between goods which are zero rated for VAT, and goods which are exempt? Sales which are zero rated must be included within the turnover which counts towards the test for compulsory VAT registration, exempt sales are not included.

This distinction is particularly important for e-bay traders whose turnover may quickly exceed the VAT threshold (now £85,000). This happened to Nathaniel Hendrickson who sold motorbike protective clothing online, including helmets. He didn’t think he had to register for VAT as his supplier had assured him that the protective clothing was exempt from VAT. In fact, VAT notice 701/23 make it clear that motorcycle helmets and certain safety boots are zero rated (not exempt), but all other clothing for adults is standard rated.

Hendrickson claimed his accountant had told him in 2015 that all the clothing he supplied would not be subject to VAT. He took this as meaning that he wouldn’t have to register for VAT. However, the accountant changed her advice, and apologised for her oversight, once HMRC started to enquire into Hendrickson’s tax affairs.

Hendrickson had to pay VAT of £23,962 in respect of sales made in the period for which he should have been VAT registered, plus a penalty of £4,792, which was the minimum penalty chargeable at 20% of the late paid VAT. The tax tribunal did not accept that his ignorance of the law, or his reliance on advice from his accountant was a reasonable excuse.

Employment allowance, VAT and disbursements, Problems with online CT service

Last week we examined circumstances in which the employment allowance can be claimed for earlier years, and when an expense is treated as a disbursement. We also had warning about problems with HMRC’s online corporation tax service.

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 and disbursements

Lots of people get confused about the VAT treatment of expenses which are recharged to customers. The rule to remember is; all recharged expenses carry VAT, unless the item is a disbursement.

You must not charge VAT on the value of the disbursement and neither can you reclaim any VAT which forms part of the cost of the disbursement.

An expense is a disbursement if it belongs to the customer and business has paid the expense on behalf of its customer. For example, a solicitor may pay the land registry fees on behalf of his client, but those fees “belong to” the client who bought the property. It is the client who is ultimately responsible for paying the land registry fee in respect of his property.

Conversely the solicitor may incur a courier fee to send documents to his client for signature. The courier fee belongs to the solicitor, as he engaged the courier, so where the cost is recharged to the solicitor’s client the courier fee must carry VAT.

It is important that recharged expenses and disbursements are clearly distinguished on the VAT invoice. Ellon Car Clinic got into trouble with HMRC, as it recharged MoT fees to its customers but did not separately show those fees as disbursements, although it correctly excluded the MoT fees from the amount charged to VAT. The Ellon Car Clinic won its case at the First-tier tribunal, but it would have saved a lot of trouble if its VAT invoices had been clearly set out.

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>>>

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>>>