This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!!
Tax Point of a Transaction for VAT
Q: I have recently registered for VAT and I am getting slightly confused regarding when my supplies and purchases take place in regards to VAT quarters. Could you please explain to me when a transaction takes place for VAT purposes?
A: The date when a transaction takes place for VAT is called its tax point. It is not always the date the supply is actually made. It is vital that you apply the correct tax point to a transaction to ensure that the VAT is declared on the right VAT return and at the correct rate.
The basic tax point is the date at which the goods are made available to the customer (or for services the date they are performed). If a VAT invoice is issued before this date, the date of the invoice becomes the tax point. Similarly, if payment is received before the goods are supplied/ work is done, then the date of payment becomes the tax point.
The date a VAT invoice is issued will also become the tax point if it is issued between 1 to 14 days after the supply takes place. If an invoice is issued 15 days or more after, then the date of supply remains the tax point.
It is possible to raise a pro-forma invoice for goods which you have not yet supplied or received payment for. A pro-forma invoice is not a VAT invoice, but it does enable the business to raise a sales document. No VAT is due on this document and it must be clearly display a message such as ‘This is not a VAT invoice’.
Share Transfer Procedure
Q: I am a shareholder and director of a close limited company. There are four shareholders, each owning a 25% share in the company. One of the shareholders wishes to pursue other ventures and wishes to transfer his share holding equally among the remaining 3 shareholders. Could you please explain the process and any tax implications?
A: The first thing you must do is check the company’s articles of association to ensure that a share transfer of this type is allowed. When Table A model articles have been adopted, share transfers are permitted.
An ordinary resolution must be passed by the board of directors either at a general meeting or by written resolution.
The stock transfer form J10 should be filled in and sent to HM Revenue & Customs for ‘stamping’ if the consideration (payment) for the transferred shares is over £1,000. If the consideration is over £1,000 stamp duty will be payable to HM Revenue & Customs at a rate of 0.5%.
A share certificate should be issued to the new shareholder(s) stating the company name, location of registered office, company registration number, shareholders name, share holding details and signatures.
The company’s internal books and registers should be updated and Companies House must be informed of the transfer on the next annual return.
This is one of the many services included within our Company Secretarial Support Services.
Q: My business has just taken out a 10 year lease on a new factory. We have been charged a lease premium of £12,500. Could you please advise me what a lease premium is and how it will be treated for my accounts and tax?
A: A lease premium is a non-refundable lump sum paid by the tenant (lessee) to the owner (grantor) upon signing a tenancy agreement.
As the lease is under 50 years, it will be classed as a short lease.
In the accounts, the premium will be capitalised as a leasehold asset and amortised (written off) over the term of the lease. The amortisation is then added back for tax purposes.
To calculate the actual relief available for tax purposes, first find the amount of the premium assessable on the grantor to capital gains tax using a simple formula:
Premium x 2% x (duration (in years) – 1) = Amount assessable on grantor
This figure is taken away from the premium leaving the amount assessable to income tax on the grantor as property income. This is also the amount allowable for tax for the lessee, using the straight line basis over the number of years of the lease.
Q: I am about to buy a new van through my limited company. It will be used 100% for business purposes. I have been looking into various ways of financing the purchase and I am a little bit unsure of what is meant by the term hire purchase. Could you please explain to me how hire purchase works and also how to account for it in my company bookkeeping? We are a VAT registered company so what happens with VAT?
A: A hire purchase agreement is a method of spreading the cost of capital items over a number of years. The purchaser enters into a contract with a finance company who initially funds the purchase.
The buyer usually pays a deposit and spreads the remainder of the cost into monthly repayments over the course of the agreement. The monthly repayments will include interest at a pre-agreed rate. Legally, the asset remains the property of the finance company until the final payment is made. The final payment is normally higher than the monthly repayments. This is often referred to as a ‘balloon payment’.
To account for the hire purchase you will need to make the following entries in your company’s books:
- When the asset is initially purchased:
Debit the assets code with the net amount of the purchase
Debit the full amount of VAT to input VAT (assuming you are not partially exempt)
Credit a hire purchase creditor on the balance sheet with the full amount
The VAT is reclaimable in the relevant VAT period in which you acquired the van..
- Monthly payments will decrease the liability but will also contain an element of interest which must be added to the liability. The entries are as follows:
Debit the hire purchase interest code on the profit and loss account
Debit the liability with the amount of the repayment less the aforementioned interest
Credit the bank with the gross repayment.
Over the course of the agreement, the balance sheet creditor will therefore diminish.
- The asset will need to be depreciated as a normal asset each year
For tax purposes, the interest in the profit and loss is allowable, the depreciation will be added back, but the van will qualify for capital allowances- potentially 100% relief in the year of purchase if you have not used all of your Annual Investment Allowance.
Where we carry out bookkeeping for our clients we take of the entries ourselves. Where our clients carry out their own bookkeeping we will, if requested, provide a schedule showing how all payments throughout the term of the hire purchase agreement should be treated.
Payments on Account
Q: I am in full time employment, but last year I also started doing some self-employed work. I am taxed at basic rate in my employment, but think I may be subject to some higher rate income tax on my self-employment. I know I will have to do a tax return after April this year, but when will I have to pay the tax on my profits?
A: The tax due on your first trading profits for 2010/11 must be paid on or before 31 January 2012. In addition, if the tax to be paid for 2010/11 exceeds £1,000 you may also need to make payments on account for 2011/12.
Payments on account are due where the underpayment at 5 April exceeds £1,000 and less than 80% of the total tax due for the year was deducted at source, eg through the PAYE system. If you do need to make payments on account for 2011/12, each one will be 50% of the previous year’s liability, becoming due on 31 January and 31 July 2012.
If the tax due for 2010/11 is less than £2,000 and you submit your 2011 tax return to HM Revenue & Customs before 31 December this year, you could opt to have the underpayment collected through your PAYE code from 6 April 2012. This method of payment is beneficial from a cashflow point of view, but also means that you do not need to make payments on account for the 2011/12 year either.
There is one more consideration that you need to make and that is regarding National Insurance. As a self-employed individual you need to be registered for Class II National Insurance, but in addition your profits may be subject to Class IV National Insurance. Where an individual has both employment and self-employment income, consideration needs to be given to claiming deferment for Class IV National Insurance, in order to avoid a potential overpayment. The rules governing the interaction of Classes I, II and IV National Insurance and complex and you should therefore consider seeking professional guidance.
Loans from directors
Q: I am a director and owner of a limited company that I have loaned money to. Can I charge the company interest on this loan?
A: The short answer is yes you can. The interest charge in the company accounts will be an allowable expense for Corporation Tax purposes. However this does mean that the interest received by you will be subject to income tax.
When companies pay interest to an individual they must deduct basic rate tax at 20% in the same way that a bank deducts tax on the interest it pays to savers. The company must also complete form CT61 every quarter to record the interest paid and tax deducted. This form must be submitted to HM Revenue & Customs along with payment of the tax deducted. For example, if a company makes an interest payment of £100 then the director will physically receive £80 and the company will pay the remaining £20 to HM Revenue & Customs. If you are a lower rate tax payer then there will be no further tax on this interest, however there will be additional tax to pay when you complete your tax return if your income is in the higher brackets.
If you would like to find out more about paying interest to directors then please contact us for specific advice.
Reclaiming VAT on mileage claims
Q: A number of my employees use their own vehicles for business purposes. They submit a monthly expenses sheet to me and I then reimburse them using the HMRC approved mileage rates. Can I claim back any VAT on these amounts?
A: Yes, but unfortunately you will not be entitled to claim back VAT on the full amount. Instead you can reclaim the VAT applicable to the deemed fuel element of the mileage rate and you need to ensure the employee submits a valid VAT receipt for fuel purchased in support of the claim.
The fuel element of the mileage rate currently varies between 9p and 21p, and depends on the size of the engine and the type of fuel being used. The rates are available from HM Revenue and Customs at http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm
The requirement to submit a valid VAT receipt was introduced as a result of a ruling made against the UK in March 2005. In that case, the European Court ruled that the UK legislation which allowed employers to reclaim the VAT element on mileage claims submitted by employees was in breach of EU legislation for two reasons:
- the purchases are actually supplied to the employees as private individuals and therefore the employers have no right to deduct because the goods are not supplied to them as taxable persons.
- even if there were a right to deduct, employers as taxable persons cannot exercise that right because they do not hold a VAT invoice.
The UK government has therefore introduced secondary legislation which allows employers to recover the VAT on fuel purchased by their employees for business purposes, as long as they hold a valid VAT invoice in support of the claims that are submitted.
Q: Lots of our friends are claiming tax credits and as our business profits have fallen in the recession, they are telling us to apply because we’ll probably be eligible. But how do we go about applying and are we likely to qualify?
A: If you don’t have children, you need to at least meet the following conditions:
- Aged 25 or over and do paid work for at least 30 hours a week
- If you are disabled, you must be at least 16 and do paid work for at least 16 hours a week
- If your partner or you are aged over 50 or over and are going back to work after being on ‘out of work’ benefits such as Jobseekers Allowance or Income Support, you must do paid work for at least 16 hours a week
If you have children, you need to be 16 or over and doing paid work for at least 16 hours a week.
If your household’s income is less than £18,000 for the year ended 5 April 2010, you are likely to qualify for tax credits.
As covered heavily by the Press, the tax credits system will be changing from April 2011 and thereafter, households with income above £40,000 will be less eligible to receive tax credits.
To make an application to claim tax credits, you must complete a claim form which can only be ordered from the Tax Credit Helpline on 0845 300 3900. You must have your National Insurance number to hand when you call.
The above list is not conclusive and there are other circumstances to take into account. But if all of the above applies, it would certainly be worth obtaining and completing a claim form.
Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.