How to avoid a VAT penalty

When a business submits its VAT returns or VAT payments late, whether via MTD sofware or the old HMRC website, the business will enter the VAT penalty surcharge system.

Small businesses with turnover of less than £150,000 get one free pass, so will receive an advice letter from HMRC on the first instance of lateness. All other businesses should receive a surcharge liability notice (SLN) when they enter the surcharge system. If a
business repeatedly files VAT returns and/or pays VAT late the SLNs will continue
to arrive and the penalties will mount up. These start at the higher of £400 and
2% of the late-paid VAT and increase each time an SLN is issued until they reach
15% of the late-paid VAT. The penalty applies even if the VAT is paid just one day
late.

If you do not receive an SLN you may not be aware that you are in the surcharge system. If you receive a VAT penalty out of the blue and you do not remember receiving an SLN, be sure to appeal against that penalty or we can do that for you. A penalty issued without an SLN is invalid. HMRC do not always record exactly which address each SLN is sent to nor the date on which it is issued. Any review of your appeal against the VAT penalty should require HMRC to produce evidence of when the SLN was issued and the address to which it was sent.

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Trivial Benefits

Home › Trivial Benefits

Trivial Benefits

Employees react well to lit tle rewards from their employer, especially if the treat is unexpected and seen as a genuine “thank you”.

These occasional trivial benefits can be provided tax free if all four of the following conditions are met:
• the reward is neither cash nor a voucher that can be exchanged for cash;
• the cost of providing the reward does not exceed £50 per employee;
• the employee is not entitled to receive it through any contractual obligation; and
• it is not provided in recognition of services performed by the employee as part of their employment duties.

If, for example, the employer promises to provide bacon rolls to employees who attend
an early training session every Friday, that would amount to a reward for performing duties connected with their employment.

If an employer decides to buy each member of staff an ice-cream on a hot day, that cool treat is not a reward for services as the employees are not required to do anything in order to receive it. The surprise ice-cream is thus a tax-free trivial benefit while the regular weekly
bacon roll is potentially taxable. If all staff are provided with a free or subsidised breakfast at the workplace that could be tax-free under the rules applying to a staff canteen.

There is no limit on the number of trivial benefits which can be provided to an employee in a single tax year as long as each item provided meets all of the conditions above. However each gift must be distinct and not part of another promise or item. If the employer gives
each employee a gift card which is topped up at the employer’s discretion, that gift card including all the top-ups counts as one gift.

Where trivial benefits are provided to a director of a close company or to a member of their family or household there is an annual cap of £300 on the value of items which can be treated as trivial benefits.

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Selling a let property

Many landlords are deciding to sell their residential properties.

From 6th April 2020, none of the interest and finance charges relating to those properties can be deducted from the rental income. Instead, the landlord receives a tax credit equal to 20% of the interest to set against their income tax bill.

Any gain you make from selling your residential property is taxed at 28% if you are a higher rate taxpayer, or at 18% if you are a basic rate taxpayer. However, you can deduct the following from the proceeds to calculate the taxable gain:

  • solicitor’s and estate agent’s fees paid on the sale and purchase;
  • cost of improvements you made to the property (as long as not claimed against rental income);
  • stamp duty land tax paid on purchase; and
  • your annual capital gains tax exemption in year of sale (currently £12,000 for 2019/20).

If the property was ever your main home for tax purposes you can also eliminate the proportion of the gain which relates to the period during which you occupied it as your home, plus the gain relating to the last 18 months of ownership.  As your former home was let you can also claim lettings relief which reduces the gain by up to £40,000.

Beware, if you sell  the property after 6th April 2020, the exempt gain for the last period of ownership is reduced to only 9 months and the lettings relief may be completely eliminated.

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Marriage Allowance

The UK tax system is based on the independent taxation of each individual so it is difficult to reward couples for being married, but the marriage allowance attempts to do that.

It is a transfer of 10% of the personal allowance from the partner who does not have sufficient income to use their full allowance (currently £12,500 for 2019/20), to their spouse or civil partner. The recipient of the marriage allowance must pay tax at no more than the basic rate of 20% (21% in Scotland).

When claimed, the marriage allowance is worth £250 for 2019/20.  If you have claimed the marriage allowance for all years from its introduction in 2015/16 you will be £900 better off.  The deadline for claiming the marriage allowance for 2015/16 is 5th April 2020.

You can claim it online:  www.gov.uk/apply-marriage-allowance; by telephoning HMRC: 0300 200 3300; by writing a letter; or in a tax return.

If you were widowed in the past four years, you can still claim the marriage allowance for years in which your partner was living from 6th April 2015 onwards.

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We are now Xero certified

We are delighted to become a Xero certified advisor. Xero is one of the UK’s most popular online accounting software, particularly for more complex small businesses, and enables us to provide support to the full range of small business clients.

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Winding Up

If you have stopped trading through your own personal limited company and have no further use for it you could sell the shares or wind it up taking out any value as cash.

There is a very limited market for second hand companies which do not hold any valuable assets, so winding up the company is probably the next best solution.

There are two ways to do this: a formal liquidation or an informal dissolution when you simply apply for the company to be struck off the register at Companies House.

A licensed insolvency practitioner needs to be appointed to carry out a liquidation and their fee will be at least £1,500.  However, all the surplus  funds can be paid to you as a capital gain.  If this is done within three years of the date the company stopped trading you may be eligible to claim entreprenneurs’ relief, reducing the rate of tax payable on the gain to just 10%.

All the conditions for entreprenneurs’ relief need to be met for at least 24 months to the cessation of trade, so we need to look closely at who held the shares during that period.

Using an informal dissolution up to £25,000 of value from the company can be treated as a capital gain.  If the amount distributed on dissolution of the company is greater than £25,000, then the whole amount is taxed as if it were a dividend. You may wish to reduce the value in the company by paying out a dividend before the dissolution process starts.

Beware of starting up a similar business within two years of winding-up your company as that can result in all the value received on liquidation of the old company being taxed as dividends.

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IR35 Changes

The IR35 rules are designed to discourage avoidance of payroll taxes by organisations who engage workers through personal service companies (PSCs) or other intermediaries rather than taking them on to the payroll.

The IR35 rules were altered from 6th April 2017 for public sector contracts and they will change again for large and medium sized businesses in the private sector from 6th April 2020.  From then the operation of IR35 rules should be standardised for larger engagers across the public and private sectors.

If you provide services through your own PSC or partnership you should review the working relationships with your customers, particularly  for contracts expected to extend beyond 6th April 2020.

First check whether your customer will have to apply the revised IR35 rules from 6th April 2020.  If your customer’s business is “small” your relationship with that business will continue to be governed by the existing IR35 rules.

A “small” business for this purpose is one which meets two or more of these criteria:-

  • annual turnover up to £10.2 million;
  •  balance sheet total up to £5.1 million; or
  • no more than 50 employees.

When providing services to “small” businesses you must decide if your contracts are caught by IR35, and if they are, your PSC may need to account for PAYE on a deemed salary payment to you at the end of the tax year.

If your customer is not “small” it is your customer who must decide whether your contract is caught by IR35 after 6th April, 2020.  If it is, your customer will deduct income tax and NIC under PAYE  from your invoice before paying the net amount to your PSC.  You will not become an employee of your customer but you will be taxed as if you were.

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NEW VAT RULES FOR BUILDING FIRMS

In just over six months, builders, contractors and other trades associated with the building industry will have to get to grips with a new way of accounting for VAT.

Essentially, building firms will be required to charge themselves VAT when they buy building related services from other firms. This is referred to as a ‘reverse charge’.

EXAMPLE
Subcontractor A undertakes groundwork services for contractor B. Currently firm A charges VAT at the appropriate rate on the invoice it issues to firm B, B pays the VAT to A and A pays it to HMRC.

From 1 October 2019 under the reverse charge rules, subcontractor A issues an invoice to contractor B stating that its services are subject to a reverse charge, so A does not charge VAT. Firm B adds VAT to the cost of the work undertaken by A and includes this as
output tax within its own VAT records. B claims the same amount of VAT on the same return as input tax, meaning there is no net payment due to HMRC. This new reverse charge will not apply if contractor B is the ‘end user’ who will sell the newly completed building to the final customer. It also does not apply for transactions between connected companies (eg
within a group of commonly owned businesses) or where the supplier and customer are landlord and tenant. If the services concerned would be zero-rated for VAT purposes, the reverse charge is not relevant.

To prepare for the reverse charge you should check whether your regular customers are VAT registered and record their VAT numbers. Also enquire whether your customer would be an end user in the supply chain.

We can help you check whether your accounting software will cope with this new reverse charge alongside the requirements for MTD which come into effect from 1 April 2019.

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MTD Facts and Fiction

All VAT registered businesses with annual taxable turnover exceeding £85,000 must comply with the making tax digital (MTD) rules for VAT periods beginning on and after 1 April 2019. However, a few businesses have been deferred until the period that begins on or after 1 October 2019. If you are in the latter group you should have received a letter from HMRC
explaining this.

There are two requirements for MTD: to keep your VAT records in a digital format and to submit VAT returns using MTD compatible software. This is neither as complicated nor as difficult as it first seems; if you already record transactions on a spreadsheet or some
form of accounting software you are already meeting the first MTD requirement. If you currently use a spreadsheet based system you will need to buy some new MTD software to read the relevant VAT totals from the spreadsheet and submit them to HMRC as your VAT return. This type of bridging software is not expensive.

Your VAT software does not have to be cloud based and you do not need to keep your entire VAT accounting system on one software program. As long as there are digital links between different pieces of software or spreadsheets, your VAT accounting system can be made up of several software elements.

Do not be bamboozled into upgrading to the latest version of your accounting software to allow you to submit VAT returns under MTD. Most accounting packages allow you to download the data into a spreadsheet format (CSV) which can be read by bridging software in order to submit the VAT return.

We can help you choose the most appropriate MTD software for your business and provide you with training and setting up/transitional support.

Alternatively, we can take the burden off your hands and you can “contract out” your book-keeping and data entry to us. We will then do your book-keeping on a suitable online system, and give you online access to it so that you can keep up to date with reports and information about your sales, profitability, cash flow, tax liabilities, etc.3

Contact us for more details.

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Do you need an accountant?

The question a lot of people ask is whether they need an accountant to do their book-keeping, accounts preparation and tax returns.

Well, think about your car and what you’d do if the brakes were faulty:-

(a) Would you repair them yourself by spending time doing the research, buying the tools and buying the parts needed, and take the risk you’d done it properly, or,

(b) Would you take it to a garage to have them fixed by someone qualified and experienced who could do it quicker, more efficiently, and give you peace of mind, or,

(c) Would you ignore it, continue to drive the car and eventually crash!

Book-keeping, accounting and tax return preparation is remarkably similar.  It’s not rocket-science, everything you ever need to know is available on the internet if you’ve the time to research it all properly, are well organised, and have an aptitude for figures.

The risk is that “you don’t know what you don’t know” so you may think you’ve done it all properly, but you may well have missed a tax planning opportunity that may mean you pay more tax than you need to, don’t claim a tax repayment, or you may have missed a deadline or made a mistake in your return that means you get hit by a hefty fine!

Why take the risk!

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