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Tax FAQ’s

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Here you will find some answers to the questions we are often asked.

We have popped these into categories to make them easier to find. Click on the category to get going.

VAT

A change to the VAT rules first announced at Budget 2018 will come into effect from 1 October 2019.

This change will make the supply of construction services between construction or building businesses subject to the domestic reverse charge.

The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector. The introduction of this reverse charge targets fraud where VAT due to HMRC is never paid by a building subcontractor.

New guidance on the workings of the domestic reverse charge (referred to as the reverse charge) has been published by HMRC. Using the reverse charge procedure changes the usual VAT treatment such that the customer receiving the service is liable to account for the VAT due rather than the supplier.

There is no cash impact for building clients affected. The main contractor will pay the subcontractor the amount of their charge excluding VAT. They will simply add the VAT reverse charge to their return and claim back the VAT amount as input VAT.

The reverse charge will affect certain specified supplies of building and construction services supplied at the standard or reduced rates that are reported under the Construction Industry Scheme (CIS). These are called specified supplies. This will place the onus for dealing with the VAT charge due on subcontractors’ bills to the main contractor.

There are now less than 4 months until the new rules come into effect and businesses that will be impacted should already be making the necessary preparations. HMRC has said that they understand that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: VAT

When you issue a VAT invoice to your customer, you must ensure that you charge the correct rate of VAT.

Whilst most businesses in the UK charge VAT at the standard rate of 20% there are a number of different VAT rates and exemptions that you will need to be aware of. 

In the UK, there are three separate VAT rates, the standard rate of 20%, the reduced rate of 5% and the zero rate 0%. In addition, there are two other categories that the supplies of goods and services can fall under:

Exempt – where no VAT is charged on the supply.Supplies that are ‘outside the scope’ of the UK VAT system altogether.
Where a transaction is a standard, reduced or zero-rated taxable supply, you must:

Charge the right rate of VATWork out the VAT if a single price is shown that includes or excludes VATShow the VAT information on your invoiceShow the transaction in your VAT account – a summary of your VATShow the amount on your VAT Return
If you charged the wrong amount of VAT and it is too high, then you are still responsible for accounting for the higher sum.

If the amount is too low, then you must account for the amount you should have charged. Your customer can also ask for a replacement invoice to be issued reducing / increasing the amount of VAT due.

The timing of finding an error can also impact on how the issue is resolved.It is important to be aware that if the amount of VAT you charge is too high, your customer can only claim back the correct amount of VAT they should have been charged. A credit note will usually be required to rectify the situation.

If you are concerned that you may not be charging VAT at the correct rate, please call.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: VAT

For most fully taxable businesses, VAT can be reclaimed on goods and services used in the business.

This means that businesses must consider where there is any personal or private use of goods or services purchased for the business as the business can only reclaim the business proportion of the VAT.

For example, VAT is recoverable on all the costs of mobile phones provided to employees where no personal use is allowed. Where businesses allow private calls to be made at no charge, the VAT recovery must be apportioned on a fair and reasonable basis. Where employees pay for the private use of their phones, the business is allowed to reclaim the input tax in full provided an output tax charge is accounted for in respect of private use payments received from employees.

You cannot reclaim VAT for:

  • anything that’s only for private use;
  • goods and services your business uses to make VAT-exempt supplies;
  • business entertainment costs;
  • anything you’ve bought from other EU countries (you may be able to reclaim VAT charged under the electronic cross-border refund system);
  • goods sold to you under one of the VAT second-hand margin schemes;
  • business assets that are transferred to you as a going concern.

There are different rules for a business that incurs expenditure on taxable and exempt business activities. These businesses are partially exempt for VAT purposes and are required to make an apportionment between their taxable and exempt activities using a ‘partial exemption method’ in order to calculate how much input tax is recoverable.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: VAT

In short NO but many try and fall foul of HMRC regulations.

The artificial separation of businesses is where one busness or two or more are split, and each “separate” entity operates below the VAT registration threshold (currently £85,000). 

This is known as disaggregation. 

HMRC has legal powers to direct that businesses that have been artificially separated to avoid VAT be treated as a single entity for VAT purposes.

The underlying legislation requires HMRC to consider the extent to which businesses are ‘closely bound to one another by financial, economic and organisational links’ when determining it there has been an artificial separation of businesses for the purposes of VAT avoidance.

HMRC must be able to prove that businesses are linked by all three criteria as set-out in the legislation. If this is done, then the businesses will need to be treated as one entity for VAT (subject to the usual appeals process). Businesses that have deliberately avoided VAT registration may be liable to penalties and prosecution following a direction by HMRC to aggregate their businesses.

This measure can also have retrospective effect dating as far back as 20 years. This can result in significant amounts of additional VAT and penalties being chargeable.

Taxpayers that are seeking to avoid VAT registration are likely to be caught by HMRC’s rules.

However, as many Tribunal cases on this issue have demonstrated it is possible for businesses to be separate even if they appear closely related at first glance.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: VAT

Here is a short guide to VAT and when to register.

What is VAT?

VAT is short for ‘Value Added Tax’. It’s a tax on the sale of most goods and services. Registration for VAT is compulsory when the annual turnover of your business, calculated to the end of any month, reaches the VAT registration threshold of (currently) £85,000.

If your turnover is close to this figure and you think it may reach the threshold you have to register as soon as this happens. Do not make the mistake of waiting until the end of a calendar quarter, or until your annual income tax return is due.

You should also register if you expect that your turnover will exceed the threshold in the next 30 days – and this period can start at any time.

What happens if I do not register?

If you fail to register for VAT at the appropriate time you will be liable to a penalty. This is calculated at 5%, 10% or 15%, depending on the delay between the date of hitting the threshold and the date which HMRC received registration notification.Up to 9 months delay incurs a penalty of 5%, then up to 18 months is 10% and over 18 months is 15%.

Can I register for VAT even if my turnover is lower?

Yes, and this can be advantageous.

Some of the main advantages are:

Registering and having a VAT number may help give your company the appearance of being larger than it is. Some companies insist that suppliers must be VAT registered and you can claim VAT back on items purchased.

Voluntary Registration

If you want to register despite not reaching the threshold, you can make a voluntary registration. You may need to satisfy HMRC that you are carrying on a business, or intending to carry on a business, and that you are making what is known as ‘taxable supplies’ e.g. selling products or services on which VAT could be applied.

When do I start charging for VAT?

You start charging on the day you register for VAT. Do not wait until you receive your certificate; it can take up to 30 days for this to arrive.

Whilst waiting for your VAT certificate, you will need to raise your invoices as a total figure, which includes the sale amount and the VAT amount.Then, once you have received confirmation of you VAT number, you can add this to your invoices, separate the sale and VAT amounts, and re-issue to your customers; who will then be able to claim the VAT which you have charged.

Standard VAT scheme

If you have elected to use the standard method of accounting for VAT, the return must show all your ‘output’ tax i.e. the total VAT your company has charged your customers on products and services which you have provided. It must also include the VAT you wish to claim back against charge you have incurred on purchases for your company, such as supplies, equipment and stock. This is known as ‘input’ tax. The key thing to remember is that the VAT return must include all income invoices during that quarter, not income received – even if you do not get paid for 30 days or more afterwards. Once the VAT form is submitted, HMRC will then review it. Should your outputs exceed your inputs, you must then pay the difference to HMRC. However, if your inputs exceed your outputs, your company is entitled to a refund.

Flat Rate VAT scheme

The Flat Rate VAT scheme is a simplified way to account for VAT. HMRC have introduced a new higher rate (16.5%) for business where goods cost less than 2% of turnover or £1000. This has removed the advantage of the flat rate scheme for some businesses.

However, you should be aware that if your annual turnover exceeds £230,000 per year then you are not eligible for the Flat Rate VAT scheme.

The way the Flat Rate scheme works, is that you charge VAT on your invoices at 20% but only pay back HMRC at a lower rate; typically, 12% or 13%. This rate differs depending on your profession or trade. A table of business types and rates can be found on HMRC’s website.

In your first year as a VAT registered company, when using the flat rate scheme, you receive an extra 1% discount for the year.

Companies on the Flat Rate scheme are unable to claim back any VAT on purchased goods and expenses for their business. You can however reclaim VAT on capital asset purchases over £2,000, for example on a PC and printer, providing the capital purchases are on the same receipt. You cannot, however, buy these items on separate months and then file them together; they have to be on the same receipt.

The Flat Rate scheme still requires you to complete a quarterly VAT return form. As mentioned, you will need to charge the standard VAT rate on your invoices, but when you complete the form you calculate your VAT payable as the relevant percentage of the amount you have invoiced that quarter – including the VAT.

So, for example, if you have invoiced £10,000 VAT in a quarter, you must calculate your payment as 13.5% of £12,000, not 13.5% of £10,000. Can generate extra income through paying less VAT than you charge A massively reduced amount of paperwork for you to handle An extra 1% reduction in your first VAT registered year Flat Rate scheme disadvantages If you buy lots of stock or other item for your business, then you cannot claim the VAT back on these.

The Cash Accounting Scheme

The cash accounting scheme is as its name implies; based on the amounts received and paid.

You cannot claim or reclaim VAT on purchases or services that have not yet been paid for. So even though an invoice was raised in January, if the payment was not received until April, then you would not include this in your VAT return for the quarter ending in March. Instead this would be included in your quarter ending in June.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: VAT
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