Monday 28 April 2014

Flat Rate VAT

The flat rate VAT scheme for small businesses is designed to reduce administration hassle for the businesses that use it, not to reduce the amount of VAT the business pays over to HMRC, but that is often a side effect of using the scheme.

You can use the flat rate VAT scheme if you have an annual turnover up to £150,000 (net of VAT). Once registered to use the scheme, you must apply VAT to your sales at the rates required for the particular product or service (20%, 5% or zero). However, when completing the quarterly VAT returns you ignore any VAT paid on purchases, apart from large assets costing over £2000. You calculate the VAT to be paid over to HMRC as a flat percentage of your gross sales, with the percentage used determined by the trade sector which most of your sales fall into.

For example a hairdresser which is registered for the flat rate scheme must use a flat rate of 13%. On sales of £3,000 in the quarter she charges VAT at 20%: £600. She will pay VAT to HMRC of: 13% x £3,600 = £468.

You must choose to register for the flat rate VAT scheme, it will not be offered to you, even if you would be better off using the scheme. When you register you must choose which of 55 trade categories best fits the majority of sales made by your business. This is important as the flat rate percentages vary from 4% to 14.5% for different trade sectors, so an incorrect choice of trade sector can be very expensive.

You can change the trade sector you opt to use, but HMRC generally only permit a change to be made from the beginning of the current VAT quarter. You must also review the trade sector chosen on the anniversary of starting to use the flat rate VAT scheme. If your sales mix has altered so most of the sales are in a different trade sector, you must switch to using the flat rate percentage relevant to the majority of your sales. We can help you decide if the flat rate scheme would be advantageous for your business.

Tax Nudge

A "nudge" in this context is a piece of advice or an arrangement designed to encourage you pick the option the Government wants you to choose, such as contributing to a pension, or eating healthier foods.

In this case the nudge is information about the average profit ratios businesses in your business sector make, as reported on their tax returns. Working out these average profit ratios is called "benchmarking".

The Taxman is writing to a sample of traders in selected trade sectors quoting benchmarked profit ratios for those sectors. He asks the trader to review his turnover and expense figures before completing the 2013/14 tax return, with a view to ensuring the reported net profit (also known as bottom line) lies in a range around the benchmarked net profit ratio.

If you receive one of these benchmark letters, please send us a copy as the Taxman is unlikely to have copied us in. We can help you review your income and expenses to be reported on your tax return.

Don't take the letter as a sign that the Taxman has any evidence that your reported figures are wrong. There are many valid reasons why your business may not be typical. For example you operate in a difficult geographical location, or your business may open for different hours than other similar businesses.

However, if you have been hiding sales which have been paid by credit or debit cards, the Taxman can now easily prove that your sales are understated. This is because he can request details of all transactions processed by debit and credit card companies.

That sales data can be broken down by trader, and compared to the VAT and tax returns you have submitted. However, remember the credit and debit card data could contain errors.So if you are challenged on the basis of your credit card sales don't assume the Taxmans information is 100% correct.

Second Homes

If you have more than one home, - properties actually used as your home - you can elect for one of those properties to be your tax-exempt main home. Once this election is made, it can be changed at any time, and this allows you to manage the tax you pay when disposing of your properties.

However, from April 2015 the ability to elect for one property or another to be tax-exempt may well be removed. This is because the Government wants to tax overseas residents on the profits they make when they sell their homes in the UK.

Such overseas residents live in their UK homes for only a small part of the tax year, but currently pay no UK tax when those properties are sold (although they may pay tax in another country on the gain). If the election to opt for one property to be tax-exempt remained in place, all overseas residents would opt to have their UK home treated as their tax-exempt main home, and no additional tax would be raised.

So from April 2015 which property is your tax-exempt main home will be determined by factors such as where you are located most of the tax year, or where your family is based, or where the children go to school etc. It's not clear how the elections which are currently in place will be treated.

If you are planning to dispose of one of your properties after April 2015 we can help you plan how to make the best use of the other continuing tax exemptions.

Second Incomes

The Taxman is reaching out to employees with second incomes; which could be anything from selling home-made items, to working as a self-employed consultant. All of the income and expenses from that second source of income should be declared to HMRC, and the correct tax must be paid where a profit has been made.

The Second Incomes Campaign provides a means to declare any "forgotten" second income with minimal fuss and penalties. All the tax due must be paid alongside any interest, this will be calculated from the date the tax was originally due to be paid.

To use the Second Incomes Campaign you must first notify HMRC either by completing an online form, or by calling: 0300 123 0945. HMRC will then respond with a disclosure reference number. You then have four months in which to make a full disclosure of the second source of income (quoting the reference number) and pay all the tax, interest and penalties due. We can help you calculate the amounts to be paid, and claim any losses.

Tuesday 1 April 2014

Search for Landlords

In our March newsletter we told you about HMRC's let property campaign (LPC) which aims to nudge landlords into confessing undeclared rental income. We also warned that HMRC is actively looking for errant landlords. We now know how those landlords will be found.

HMRC is writing to letting agents in the UK, asking them to provide details of the properties they have let in 2012/13, including the amount collected per property and the addresses of the let property and the landlord. The letting agent is given just 60 days to provide the information, or face a penalty of £300, and further penalties of £60 per day for additional delays.

The agent also can't refuse to provide its customers' details on the grounds that such personal information is protected by Data Protection Act 1998, as the tax law overrules the Data Protection Act in these circumstances.

If you have received such a request from HMRC we can help you compile the information in the form demanded - which must be on a pre-defined spreadsheet.

If you think your overseas property will never be found by the Taxman, think again. HMRC is using its "connect" programme to search holiday rental websites for UK residents who are letting overseas properties. If you live in the UK your overseas rents should be declared in the UK, as well as to the local tax authorities. Even if you make no profit from the property, you still need to show all the income and expenses on your tax return.

Cross-border Services

You may have heard that the price of electronic books and music will rise on 1 January 2015. This because electronic services (including e-books and music), will be subject to VAT in the country where the customer lives from 2015. Currently large suppliers of electronic services tend base themselves in the EU country with the lowest rate of VAT, so they can sell their services with that low rate attached.

This change in the law could affect your business if you sell electronic services to non-business customers in other EU countries. "Electronic services" includes a wide range of things including the provision of software online, writing or supporting websites.

Say you design a website for someone in France (who is not a business). From 2015 that sale will be subject to French VAT rates and you will probably have to register for VAT in France, as the French VAT registration threshold is very low. Similarly you may have to register for VAT in other EU countries where you sell electronic services to non-business customers.

Fortunately there will be a "mini one stop shop" (MOSS) on the HMRC website that will allow you to register for VAT in all the EU countries in which you sell electronic services, and make a single VAT return for all those countries. The MOSS will be open to start the registration process from October 2014.

In the meantime you need to check which of your products will come within the definition of "electronic services" for these new rules. We can help you with that.

If you are selling across EU borders you also need to think about the following:

- How to identify the location of your customers, and store that information.
- How to determine if your customer is a business or not, and what evidence will you need to support this decision.
- If you sell through an agency, check what the contract says about who takes responsibility for VAT registration.

Salaried Members of LLPs

Do you operate your business as an LLP? If you do, you need to be aware of the change in tax treatment of certain LLP members from 6 April 2014. Members who meet all of these conditions will be taxed as employees:

A. works for the LLP as an LLP member and at least 80% of the amounts paid to him for that work are disguised salary;
B. does not have significant influence over the affairs of the whole of the LLP; and
C. is not required to contribute funds to the LLP (a capital contribution), or if he does contribute funds that contribution is less than 25% of his disguised salary for the current tax year.

From the member's perspective the easiest of the conditions to break is C - provide capital to the LLP (aka: partner's loan). Current members of the LLP will have until 6 July 2014 to contribute the required level of capital, but they must make a firm commitment to do this by 6 April 2014. Members who join the LLP on or after 6 April 2014 will have two months in which to raise the required level of capital to break condition C.

If you are caught by these new rules and become a deemed employee of the LLP on 6 April 2014, you will cease being self-employed on 5 April 2014. Depending on the accounts year-end of the LLP, you could be taxed on up to 23 months of profit in 2013/14, subject to any overlap relief. The on-account tax payment you made on 31 January 2014 will almost certainly be incorrect. Talk to us about recalculating your tax payments for 2013/14 and 2014/15.

The LLP business that has members caught by these new rules will have to set up PAYE scheme if it doesn't already have one. We can help you with that.

Salary and Dividend Strategy 2014/15

As a director and shareholder of your own company you can decide how much salary to pay yourself each month in order to use your tax-free personal allowance in the most tax efficient way. Any further funds you need can be extracted as a dividend if the company is making a profit.

If you are a director of your company and you don't have a contract that sets out terms of employment with the company, you don't have to pay yourself the national minimum wage. So how much should you pay yourself?

For 2014/15 if you were born after 5 April 1948 you have a tax free personal allowance of £833 per month (£10,000 per year). You could take a salary at that level and pay no income tax, assuming you have no other taxable benefits from the company such as a car.

However, you will pay national insurance (NICs) on that salary as the NICs threshold is only £663 per month. From a gross salary of £833 the company must deduct NI of £20.40 and set-aside employer's NI of £23.46 on top. The company will have an employment allowance of £2,000 for the year to set against its employer's NI due on all its employees, so it won't have to pay over employer's NI until that £2000 is used up.

If you take a salary of just above the NI lower earnings threshold of £481 per month, you will get an NI credit towards your state pension, but you don't pay any tax or NI. However, at that annual salary level (£5,772) you will be "wasting" £4,228 of your tax free personal allowance, unless you have other income to cover it.

Talk to us about the best salary level for you, which takes into account all your other sources of income.