Mike Tombs's Blog

This blog provides information about tax, accounting and other issues affecting small owner-managed businesses in the UK. It is intended as a general source of information but you should not assume that everything applies to your specific circumstances. We are always happy to discuss providing tailor-made solutions to suit your individul needs. Visit www.tlaservices.co.uk to sign up for our free monthly Tax Tips and News newsletter.

Monthly Archives: March 2011

VAT Flat Rate Scheme

When advising clients, one of the areas we examine in some detail is value added tax, not just whether or not they should register (if they have a choice!) but also which of the various schemes available is most suitable. The Flat Rate Scheme is intended to simplify VAT accounting, but in the right circumstances it can also result in improved profits. We have put together this guide to how the scheme operates; if you think it may be beneficial to your business please get in touch (email here or telephone 01905 21411) for a free, no-obligation discussion.

VAT Flat Rate Scheme

The flat rate scheme for small businesses was introduced to reduce the administrative burden imposed when operating VAT.

Under the scheme a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase you make.

Who can join?

The scheme is optional and open to businesses that do not breach the relevant limits which have recently changed due to the increase in the standard rate of VAT. From 4 January 2011, a business must leave the scheme when income in the last twelve months exceeds £230,000, unless this is due to a one off transaction and income will fall below £191,500 in the following year. A business must also leave the scheme if there are reasonable grounds to believe that total income is likely to exceed £230,000 in the next 30 days.

The turnover test applies to your anticipated turnover in the following 12 months. Your turnover may be calculated in any reasonable way but would usually be based on the previous 12 months if you have been registered for VAT for at least a year.

To join the scheme you can apply by post, email or phone and if you are not already registered for VAT you must submit a form VAT1 at the same time.

You may not operate the scheme until you have received notification that your application has been accepted and HMRC will inform you of the date of commencement.

When is the scheme not available?

The flat rate scheme cannot be used if you:

  • use the second hand margin scheme or auctioneers’ scheme
  • use the tour operators’ margin scheme
  • are required to operate the capital goods scheme for certain items.

In addition the scheme cannot be used if, within the previous 12 months, you have:

  • ceased to operate the flat rate scheme
  • been convicted of an offence connected with VAT
  • been assessed with a penalty for conduct involving dishonesty.

The scheme will clearly be inappropriate if you regularly receive VAT repayments.

How the scheme operates

VAT due is calculated by applying a predetermined flat rate percentage to the business turnover of the VAT period. This will include any exempt supplies and it will therefore not generally be beneficial to join the scheme where there are significant exempt supplies.

The percentage rates are determined according to the trade sector of your business and range from 4% to 14.5%. The table in the appendix to this factsheet summarises the percentages. In addition there is a further 1% reduction off the normal rates for businesses in their first year of VAT registration. The percentages used in the scheme changed from 4 January 2011 to reflect the increase to 20% in the standard rate of VAT.

If your business falls into more than one sector it is the main business activity as measured by turnover which counts. This can be advantageous if you have a large percentage rate secondary activity and a modest major percentage trade. You should review the position on each anniversary and if the main business activity changes or you expect it to change during the following year you should use the appropriate rate for that sector.

Although you pay VAT at the flat rate percentage under the scheme you will still be required to prepare invoices to VAT registered customers showing the normal rate of VAT. This is so that they can reclaim input VAT at the appropriate rate.

Example of the calculation

Cook & Co is a partnership operating a café and renting out a flat. If its results for 2011 are as follows:

VAT inclusive turnover:

£

Standard rated catering supplies

70,000

Zero rated takeaway foods

5,500

Exempt flat rentals

3,500

£79,000

Flat rate 12.5% x £79,000 = £9,875
Normally £70,000 x 20/120 = £11,667 less input tax

Treatment of capital assets

The purchase of capital assets costing more than £2,000 (including VAT) may be dealt with outside the scheme. You can claim input VAT on such items on your VAT return in the normal way. Where the input VAT is reclaimed you must account for VAT on a subsequent sale of the asset at the normal rate instead of the flat rate.

Items under the capital goods scheme are excluded from the flat rate scheme.

Transactions within the European Community

Income from sales of goods is included in your turnover figure.

Where there are acquisitions from EC member states you will still be required to record the VAT on your VAT return in the normal way even though you will not be able to reclaim the input VAT unless it is a capital item as outlined above.

The rules on services are complex. Please get in touch if this is an issue so that we can give you specific advice.

Records to keep

Under the scheme you must keep a record of your flat rate calculation showing:

  • your flat rate turnover
  • the flat rate percentage you have used
  • the tax calculated as due.

You must still keep a VAT account although if the only VAT to be accounted for is that calculated under the scheme there will only be one entry for each period.

Summary

The scheme is designed to reduce administration although it will only be attractive if it does not result in additional VAT liabilities. The only way to establish whether your business will benefit is to carry out a calculation and comparison of the normal rules and the flat rate rules.

How we can help

We can advise as to whether the flat rate scheme would be beneficial for your business and help you to operate the scheme. Please do not hesitate to contact us.

 

APPENDIX: Table of sectors and rates

 

Trade Sector

Appropriate % from 1 Jan 2010 to 3 January 2011

Appropriate % from 4 January 2011

Accountancy or book-keeping

13

14.5

Advertising

10

11

Agricultural services

10

11

Any other activity not listed elsewhere

10.5

12

Architect, civil and structural engineer or surveyor

13

14.5

Boarding or care of animals

10.5

12

Business services that are not listed elsewhere

10.5

12

Catering services including restaurants and takeaways

11

12.5

Computer and IT consultancy or data processing

13

14.5

Computer repair services

9.5

10.5

Dealing in waste or scrap

9.5

10.5

Entertainment or journalism

11

12.5

Estate agency or property management services

10.5

12

Farming or agriculture that is not listed elsewhere

6

6.5

Film, radio, television or video production

11.5

13

Financial services

12

13.5

Forestry or fishing

9.5

10.5

General building or construction services*

8.5

9.5

Hairdressing or other beauty treatment services

11.5

13

Hiring or renting goods

8.5

9.5

Hotel or accommodation

9.5

10.5

Investigation or security

10.5

12

Labour-only building or construction services*

13

14.5

Laundry or dry-cleaning services

10.5

12

Lawyer or legal services

13

14.5

Library, archive, museum or other cultural activity

8.5

9.5

Management consultancy

12.5

14

Manufacturing fabricated metal products

9.5

10.5

Manufacturing food

8

9

Manufacturing that is not listed elsewhere

8.5

9.5

Manufacturing yarn, textiles or clothing

8

9

Membership organisation

7

8

Mining or quarrying

9

10

Packaging

8

9

Photography

10

11

Post offices

4.5

5

Printing

7.5

8.5

Publishing

10

11

Pubs

6

6.5

Real estate activity not listed elsewhere

12.5

14

Repairing personal or household goods

9

10

Repairing vehicles

7.5

8.5

Retailing food, confectionary, tobacco, newspapers or children’s clothing

3.5

4

Retailing pharmaceuticals, medical goods, cosmetics or toiletries

7

8

Retailing that is not listed elsewhere

6.5

7.5

Retailing vehicles or fuel

6

6.5

Secretarial services

11.5

13

Social work

10

11

Sport or recreation

7.5

8.5

Transport or storage, including couriers, freight, removals and taxis

9

10

Travel agency

9.5

10.5

Veterinary medicine

10

11

Wholesaling agricultural products

7

8

Wholesaling food

6.5

7.5

Wholesaling that is not listed elsewhere

7.5

8.5

“Labour-only building or construction services” means building or construction services where the value of materials supplied is less than 10 per cent of relevant turnover from such services; any other building or construction services are “general building or construction services”.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

Advertisements

March 2011 Questions and Answers

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!!!

Bad debt adjustments

Q: I have recently found out that one of my customers has been declared bankrupt. Unfortunately, I invoiced them four months ago for £1,000 plus VAT of £175 and as this is still outstanding, there is a good chance I won’t receive this and will need to write it off.

How do I account for this in my December 2010 year-end accounts and what income tax relief can I get? And what do I do about the VAT?

A: As the debt is only possibly irrecoverable at this stage you may only ‘provide’ for the debt. You will therefore reduce the amounts owing to you at 31 December by £1175.

For income tax purposes, the doubtful debt expense of £1,000 is allowable because it is for a specific debt and therefore written off in the profit and loss account.

Provided that you have paid the VAT over to HMRC, you can reclaim VAT that you paid and which you have not received from the customer, provided that either the Official Receiver has notified you that no monies will be forthcoming or the debt becomes six months old or more.

You add the amount of VAT you are reclaiming to the amount of VAT you are reclaiming on your purchases (input tax) and put the total figure in Box 4 of your VAT Return.

If you cash account for VAT, you will never have paid the VAT over to HMRC and therefore, you are not due a refund from HMRC. You will merely need to do the accounting adjustment above.

If you would like more information of the treatment of bad debts, and a referral to help with collecting overdue amounts, get in touch.

Qualifying years for National Insurance

Q: Last year I incorporated my business and I now draw a small monthly salary and quarterly dividends, which means I do not have to pay any tax or National Insurance. Should I be paying National Insurance to protect my rights to state pension and benefits?

A: National Insurance is charged on income from employment when the earnings exceed £110 per week. However, if your earnings are above the Lower Earnings Limit (currently £97 per week) you are still credited with a qualifying earnings period for state pension and benefits.

If your earnings fall under the Lower Earnings Limit, you can consider making voluntary National Insurance Contributions.

Certain individuals may also be entitled to National Insurance credits where they have not been earning due to caring for a younger child or disabled person, or where they are an approved foster carer. There are also credits available for people in receipt of certain state benefits.

You have not stated your age, but if you are concerned about your state pension, you should apply online for a forecast at www.direct.gov.uk.

High earners tax tips

Q: I am the Director of Marketing for a London-based company and have a salary of £120,000 per annum, plus benefits. What changes are going to affect me during 2011/12, and how can I mitigate these changes?

A: From April 2011, the Government is lowering the 40% higher rate band from £37,401 of taxable income to £35,001, to ensure high earners do not benefit from the £1,000 increase in the personal allowance. National Insurance will also rise by 1%.

Furthermore, those earning over £100,000 like you will lose their personal allowance at a rate of £1 for every £2 of income in excess of this band. And worst of all, income in excess of £150,000 will be taxed at the Additional Rate of 50%. You’ve mentioned that your employer gives you benefits in kind, so this may well apply to you.

High earners have been one of the hardest hit by the Budget, so you need to be more aware of the allowances available to you and smarter with your tax planning. Here are some really simple ideas for you to consider:

  • Investing up to £10,680 in an ISA
  • Top up your pension. Whilst relief has reduced to contributions below £50,000, contributing to your pension remains one of the best ways to reduce your tax liability
  • Transferring assets to someone you trust such as your spouse if they are a lower tax rate payer, to cut your overall tax bill as a couple. There are pitfalls here for the unwary!
  • Childcare vouchers. Their benefits have been reduced for higher rate tax payers, but there are still some tax savings
  • Putting your money in investments with capital growth; rather than income such as dividends, to make use of your Annual Exemption of £10,100
  • Consider investments in Venture Capital Trusts or through the Enterprise Investment Scheme
  • Donating under the Gift Aid scheme

Staff suggestion box

Q: We have a staff suggestion scheme in place and one of the staff has come up with a great idea that we think will create less waste during our manufacturing processes. Consequently, we think it will save us about £14,000 over the next twelve months and about £10,000 annually.

What is the maximum that I can pay him without having to deduct tax and NI?

A: As a result of you adopting the suggestion and it being expected to lead to efficiencies that you estimate will save you money, you meet the exemptions under the ‘financial benefit award’ rules for staff suggestion schemes.

There are two ways of calculating the award. The first is to pay 50% of the expected first year savings.  The second method is to apply 10% to the expected savings over the first five years. 

With both of these methods, there is an overriding amount of £5,000 that can be paid without the employee being subject to PAYE and NI.  Any payment above this will be subject to PAYE and NI and should be added to your employee’s wages in your normal payroll calculations.

The first method results in an award of £7,000 and the second £5,400. However, if you wish to avoid tax, then the maximum you can pay him is £5,000. You would then not need to make any deductions and have no additional reporting requirements.

Use of home

Q: I’ve been talking to my mates down the pub, and I’ve found out that some of them claim lots more Use of Home in their accounts than I do- yet we do similar things. Why is that?

A: There are two main ways of calculating use of home. If there is only minor use, for example writing up the business records at home, you may put through a reasonable estimate with little risk of dispute by HMRC. Needless to say, it should be consistent with your household utility bills though.

If you were based from home, then you could apportion the household bills such as gas, electric, water etc by dividing the total costs over the number of rooms, and multiplying that figure by the number of rooms used for business purposes.

In order to satisfy tax law, when part of the house is being used for the business then that must be the sole use for that part at that time. Thus if the part of the home used for business purposes is simultaneously used for some other non-business purposes, then no deduction is available.

As you can see from the above, if you don’t work from home regularly, you may be using the first method. If you are working regularly from home, then it would be advantageous to use the second, i.e. apportionment method. 

In practical terms, you will need to be seen to be applying common sense to your claim, for example, if you only write up your books at home, there would be a far smaller charge than if you were working each day from home and treating it like an office. Although there is no fixed proportion of costs for particular trades, there is an expectation of what use of home will amount to. Any enquiries from HMRC will be more likely when the amount of use of home claimed is significant and inconsistent with the nature of the trade. If the room has a dual purpose, you must be aware that the room should not be used for any other purpose whilst it is being used for business purposes. 

Each case will be different, so if you would like advice in this area, please feel free to contact us.

VAT errors

Q: I finished drawing up my books for the year ended 31 December 2010, and realised I’d made an error with my VAT. I think when I totalled up the input VAT for the June quarter, I missed out a whole page of my cashbook expenses.

Am I able to reclaim this now somehow?

A: You may correct errors that arose in VAT accounting periods that ended up to four years ago.

At the end of your VAT accounting period, if the net value of previous return errors is less than £10,000 and 1% of the Box 6 figure on your VAT return for the period when you discover the error (subject to an upper limit of £50,000), then you can make the adjustments to correct the error on the next return.

As your mistake was not deliberate or careless, no penalties or interest should arise.

However, if you had made a deliberate or careless error, you could have been required to separately notify HMRC and in this instance, HMRC would probably have levied penalties which can be up to 100% of the error.

In conclusion, you will be able to reclaim the input VAT on your next return provided it meets the criteria above.

VAT and cashflow

Q: The settlement of my VAT liability each quarter is beginning to become a burden in these difficult times. Is there anything I can do to reduce my liability or ease my cashflow?

A: Firstly, you may be able to reduce your liability by registering for the Flat Rate Scheme (FRS). Basically, you would pay an industry specific percentage (set by HMRC) of your turnover inclusive of VAT at the standard rate. You would not be able to recover your input VAT, unless it was on capital items costing in excess of £2,000 (including VAT). You would need to assess whether the scheme would be advantageous for you. However, you should bear in mind that once you join the scheme, you must remain in it for 12 months and your VAT exclusive turnover must be below £150,000 p.a.

If your annual turnover is above £150,000 but below £1.35m, then you could apply to use the Annual Accounting Scheme. You make 9 monthly payments based on the previous 12 months with a final balancing payment and only submit one return per year.

If your customers are slow to pay and your VAT taxable turnover for the next 12 months is expected to be under £1.35m, you could apply the Cash Accounting Scheme. This will mean that all VAT is accounted for on sales invoices only once customers have settled them, and on your suppliers’ invoices when you pay them; not when they are raised.

The above schemes may be used in conjunction with one another.

As you can see, there are a number of things to consider and therefore we suggest you contact us for specific guidance and advice, before making a decision.  

Amending a tax return

Q: I rushed the preparation of my 2009/10 tax return in order to file it on time, but I have just realised that I missed off my rental accounts!

Can I revise my tax return and will I incur any fines for doing this?

A: If you make a mistake on your tax return, you’ve normally got 12 months from 31 January after the end of the tax year to correct it.

You may notify HMRC in the form of a letter to your Tax Office, detailing the omissions and which page numbers and boxes are affected. Or you may find it easier to write to them and enclose an amended return or just the particular pages that have changed. Alternatively, if you filed your return online with HMRC, you may make any alterations online.

No penalties for late filing will be applicable, but please be aware that if the amendment results in additional tax to pay, you will be charged interest from the due date of payment. As 28 February has also now passed, you will be liable to a 5% surcharge on any unpaid tax. And a second 5% surcharge will apply from 31 July 2011 if it continues to remain outstanding at that point.

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.