Monday 31 August 2009

Tax repayment deadlines shortened




The time limit for individuals to claim a repayment of overpaid tax  has been reduced  from six to four years. Thus if you are entitled to claim a repayment of  tax, you may have to make it earlier than anticipated.


Most self assessment taxpayers claim any repayment  they are entitled to in the year they make their tax return. However, if your circumstances change you may be entitled to claim back tax you paid in earlier years. This may apply  where:
  • you incur losses that can be claimed against income in an earlier tax year;
  • pension contributions were paid late;
  • your employer used the wrong tax code;
  • your savings/investment income has reduced since you last told HM Revenue & Customs about it;
  • you retired, changed from full-time to part time work, became self-employed, or stopped working altogether and did not receive any taxable earnings or benefits for the rest of the tax year.

The new deadlines are particularly pressing if you have a claim for the 2004-05 or 2005-06 tax years that you have not yet made. To meet the new deadline, you must submit your claim for the 2004-05 tax year by 31 March 2010 and for the 2005-06 tax year by 5 April 2010. HM Revenue & Customs have advised taxpayers to check their records carefully to ascertain if they are entitled to a repayment for these years.


If you are not a self assessment tax payer (i.e. you pay all your tax under PAYE and do not normally file a tax return) you can also claim back tax if you have overpaid due to a change in your circumstances.

August 2009 tax round up

New Disclosure Opportunity

HMRC have provided more details of the New Disclosure Opportunity (NDO) which is due to take place from 1 September 2009 to 12 March 2010. The NDO is for people with unpaid tax connected to offshore accounts and assets and will give the taxpayers one final opportunity to disclose.


'False self-employment' in the construction industry

The government has been looking at the best way to address the issue of what they believe is 'false self-employment' in the construction industry.

HMRC warn of more scam emails

HMRC have updated their guidance on scam emails as they are aware that a large number of individuals are receiving emails offering tax rebates. 

'Paper' tax return deadline looming

For those wishing to complete paper self assessment tax returns, the filing deadline of 31 October 2009 is fast approaching. 

VAT increase to 17.5%


HMRC have issued guidance for businesses dealing with the increase in the standard rate of VAT from 15% to 17.5%.

Cross-border VAT changes 2010

HMRC have issued important updates in advance of the changes in the place of supply of services rules which take effect from 1 January 2010.

Tax relief through Gift Aid donations

 

Gift Aid increases the value of donations to UK charities and Community Amateur Sports Clubs (CASCs) by allowing them to reclaim basic rate tax on your gift. If you pay higher rate tax you can claim extra relief on your donations. If you claim age-related allowances or tax credits, Gift Aid donations can sometimes increase your entitlement.


How Gift Aid works


The Gift Aid scheme is for gifts of money by UK taxpayers. Charities or CASCs take your donation – which is money you've already paid tax on – and reclaim basic rate tax from HM Revenue & Customs (HMRC) on its 'gross' equivalent – the amount before basic rate tax was deducted.

Basic rate tax is 20 per cent, so this means that if you give £10 using Gift Aid, it's worth £12.50 to the charity. For donations between 6 April 2008 and 5 April 2011 the charity or CASC will also get a separate government supplement of 3p on every pound you give.


How to make a donation using Gift Aid


In order to make a Gift Aid donation you'll need to make a Gift Aid declaration. The charity will normally ask you to complete a simple form – one form can cover every gift made to the same charity or CASC for whatever period you choose and can cover gifts you have already made and/or gifts you may make in the future.


Gifts made jointly by people living together


You can use Gift Aid for gifts you make jointly if you tell the charity or CASC how much each of you is giving and if you each make a Gift Aid declaration.

Making sure you've paid enough tax to use Gift Aid


You can use Gift Aid if the amount of Income Tax and/or Capital Gains Tax you've paid in the tax year (6 April one year to 5 April the next) in which your donation is made is at least equal to the amount of basic rate tax the charity or CASC is reclaiming on your gift. If you make a number of donations you will need to consider the tax you've paid on each donation on an accumulative basis.


You don't necessarily have to be working to be paying tax. Apart from tax on income from a job or self-employment, the tax you've paid could include:


  • tax deducted at source from savings interest
  • tax on State Pension and/or other pensions
  • tax on investment or rental income
  • Capital Gains Tax on gains


But only UK tax counts, so if you only pay tax outside the UK you won't be able to use Gift Aid.

UK: VAT update - August 2009

The problem with 'management services'

A recent Tribunal decision has highlighted the  problem of applying the correct VAT treatment of management services to an overseas entity and, in particular, where such services should be deemed to be supplied for VAT purposes.

A UK subsidiary contended that the management services it supplied to its Japanese parent were consultancy services, with the consequence that the place of supply of these services was in Japan and therefore outside the scope of VAT.

However, HM Revenue & Customs (HMRC) argued that the services were essentially managerial in nature, and consequently should be treated as supplied in the UK and subject to VAT at the standard rate. The Tribunal agreed with HMRC and commented that consultants could not be considered to be part of any ongoing management processes, as an essential characteristic of the consulting services was that they were given in an independent manner (independent of the ongoing management processes). In this case, as there was no clear dividing line between the services supplied and the day-to-day jobs of the executives of the UK subsidiary, the services could not be independent.

What next?

If you supply management services from the UK to an overseas entity, or vice versa,  consider reviewing the arrangements and agreements to ensure  the correct VAT treatment has been adopted. Given the nature of the supplies, and the new penalty regime, this could be potentially costly if the services have been incorrectly treated. In addition you should be aware that changes to the place of supply of service rules will be effective from 1 January 2010.  [2009 UKFTT 121 (TC)]

Check VAT registration numbers online

To combat VAT fraud, especially regarding European Union (EU) cross-border activities, the European Commission has launched a revised online VAT number checking facility EU VAT registration service. http://ec.europa.eu/taxation_customs/ vies/vieshome.do?selectedLanguage=EN

The service allows businesses to get a certificate, provided that they have checked the validity of the VAT registration number of any client at a given time. This certificate can be used as one of the elements of evidence supporting the VAT treatment adopted on supplies to other business customers in other EU member states. This will be essential in demonstrating that a business has acted in good faith in these situations.

What next?

This is a welcome tool for businesses involved in EU cross-border activities and should provide some reassurance in this area. 

Option to tax – new automatic permission rules

In certain situations businesses are required to ask permission from HMRC before they are entitled to opt to tax. However, if businesses are able to meet specific automatic permission conditions published by HMRC in VAT Notice 742A, there is no need to obtain permission before opting.

HMRC has introduced a new automatic permission condition (APC) which replaces condition three contained in Notice 742A. The new APC came into effect on 1 May 2009. It is rather complicated and has been split into two separate tests that will need to be passed in order to qualify.

What next?

If you would like to find out more details and think you may be affected by these changes, please speak to me.

VAT returns to go online in 2010

From April 2010, the electronic submission of VAT returns will be compulsory for businesses with an annual turnover greater than £100,000 and for new VAT registrations. From April 2012 this will be extended to all VAT registrations.

There are considerable administrative benefits to making the change to online filing, so while the mandatory filing of VAT returns online may be some time away, it is still worth considering sooner rather than later. The benefits include the following.

  • Postal delays, and unnecessary default surcharge disputes with HMRC, can be avoided.
  • VAT return submissions to HMRC are instantaneous and secure.
  • There is up to seven extra days to submit a VAT return, providing it is not a repayment or nil return.
  • There is up to seven extra days to pay any VAT due to HMRC; where payment is made by direct debit this is extended by a further three working days.
  • An electronic acknowledgement of submission is received from HMRC immediately.

Any VAT payments due to HMRC in respect of VAT returns filed online must be paid electronically (i.e. through the internet, telephone banking, BACS, direct credit, CHAPS, or direct debit). Consideration should be given to any charges that may be levied by the banks. Cleared funds must reach HMRC's bank account by the extended due date. 

However, large businesses submitting quarterly VAT returns with an annual VAT liability over £2m, are required to make monthly payments on account and cannot take advantage of the  payment and return submission deadline extensions.

What next?

If you are interested in registering for the online service or would like any further information, please speak to me.

Zero rating – new rules for residential and charitable buildings

HMRC has announced that, from 1 July 2010, the two concessions associated with the zero-rating of buildings used 'solely' for a relevant residential or charitable use will be withdrawn. Instead, a de minimis use test will be included in legislation providing that if a building is used for at least 95% charitable purposes (currently the concession permits to 90% charitable use) it will be eligible for zero-rating. The method of calculating the 'use' of the building will no longer be defined by HMRC, but should be 'fair and reasonable'. This will be of most concern to charities wishing to take advantage of the zerorating provisions for construction of and acquisition of a building intended for use solely for a relevant charitable purpose.

UK: The Liechtenstein Disclosure Facility

UK and Liechtenstein sign landmark 5-year tax disclosure agreement

On 11 August 2009  the Government of Liechtenstein and the UK tax authority ('HMRC') signed a Memorandum of Understanding relating to cooperation in tax matters. 

Liechtenstein and HMRC agreed to the introduction of a 5-year 'taxpayer assistance and compliance programme'. As part of the programme, Liechtenstein financial intermediaries will be under a duty to identify clients who may have a liability to UK tax and, if a client cannot provide evidence of his or her compliance with UK tax, the financial intermediary will have to cease acting for the client. In return, HMRC has offered a special disclosure facility with reduced penalties ('LDF').

HMRC and Liechtenstein have agreed to continue to consider procedures over the 5-year period, such as fines or retention taxes on property in Liechtenstein to provide incentives and sanctions to encourage disclosure to HMRC.

The UK and Liechtenstein have also entered into a tax information exchange agreement.

Scope of the LDF

The LDF is available to a person with UK tax liabilities in respect of financial interests in Liechtenstein structures, which includes bank accounts, companies, trusts and foundations, which are formed, administered, or managed in Liechtenstein.

HMRC is expected to issue further guidance before the start of the LDF.

Penalties

In most cases a penalty of 10% will be applied (in addition to the unpaid tax and interest) for a period of up to 10 years. A person who was contacted in relation to the Offshore Disclosure Facility in 2007 or the New Disclosure Opportunity starting in September this year ('NDO'), will be able to use the LDF, but will have the penalties of the NDO applied. (

HMRC has agreed that a person making a full disclosure will not be subject to criminal investigation by HMRC, unless the source of the funds constitutes criminal property (other than from illegal tax evasion).

Timing

The LDF will start from 1 September 2009 and end in March 2015.

Comparison with the NDO

In contrast to the NDO, the LDF offers assurance against criminal prosecution and confirmation as to how HMRC will tax certain entities (e.g. foundations), for the purposes of the LDF only. These factors, in addition to the shorter limitation period of 10 years, make the LDF a more attractive regime under which to disclose and pay UK tax liabilities.

In the light of this fact, where a person has an interest in a Liechtenstein entity and other undeclared assets, there may be an advantage to utilising the LDF and the NDO, rather than only the NDO.

HMRC has stated that taxpayers who do not make use of the NDO or LDF will face a penalty of 30% (rising to 100%), and/or possibly criminal prosecution. 

HMRC's ability to identify taxpayers with offshore accounts has been strengthened after it succeeded  in obtaining approval from the courts to issue a 'blanket' information notice, requiring more than 300 UK and foreign banks and financial institutions to disclose information to HMRC about clients who have offshore accounts. HMRC is now expected to obtain details of over 500,000 account holders. Furthermore, in its 2009 Budget, the UK Government announced plans to publish (on the internet) a list of taxpayers who have deliberately understated their tax liability and have not taken advantage of an opportunity to make a voluntary disclosure.


Monday 24 August 2009

Tax planning for kids


It appears that my prediction of a baby boom is certainly happening.



So I thought I will outline some old and new tax incentives.

So here we go:


1. £190 Tax Free Grant For Mums To Be
From April 2009 mothers-to-be can now claim a tax- free cash sum of £190 in the form of the new Health in Pregnancy Grant (HiPG).

This £190 is a one-off payment, and although not a massive amount, it will buy a few SMAs and Nappies.

2. Child Benefit
An old incentive, but are you maximising the potential of this benefit?
The trick is to make sure this money goes straight into the child's account or set up a DD and let the power of compound interest do the rest.

3. Child Tax Credits
Some parents are aware of this but few actually claim it.




4. Childcare Vouchers
If you run your own business, do make the most of this £55 per week per parent tax free allowance.


For a husband and wife business, that's about £5k a year tax free income to go towards childcare.

5. Tax free income from grandparents
We all know how grandparents adore their little ones. Good news is any income from grandparents to grandchildren are tax free.



6. Friendly Societies
You may not have heard of this and the taxman may not want you know, but they do offer some great tax free savings plan for children.


Do a google search on them and decide for your self.

7. The Use Of Trusts
Please do not believe in all the hype that trusts are dead in waters.

Trusts still provide useful and powerful tax planning tools for children.

8. Child Trust Fund Vouchers
You should receive an initial amount of £250 to open an account for the child.


When you receive the booklet that comes with the voucher, look out for friendly society providers.

9. Maternity Allowance
Make sure you qualify for the maximum allowance.


If you currently do not pay yourself wages from your business, you may have to start paying something now to avoid missing out.





Saturday 22 August 2009

Vat: Pay it when you get paid

Currently banks have less money to lend, and when they do lend interest rates charged are "realistic".

Consequently the management of your cash resources is critical as businesses chase liquidity by tightening their credit control, - likely to be frustrated as debtors hang on to cash reserves by extending the credit they take from suppliers.

If your business qualifies, and you are not already using the scheme, the VAT Cash Accounting scheme could well be a lifesaver.

What is cash accounting?

Using standard VAT accounting you:



  • pay VAT on any invoices you have issued, even if you have not received the payment from your customer.
  • reclaim VAT on any invoices you have received, even if you have not yet paid your supplier
Using cash accounting for VAT, you:



  • pay VAT on your sales when your customers pay you
  • reclaim VAT on your purchases when you have paid your suppliers

Cash accounting enables you to account for VAT on the basis of payments received and made instead of on tax invoices issued and received.

The VAT payable or repayable for each accounting period is the difference between the total amount of VAT included in payments received from your customers and the total amount of VAT included in payments made to your suppliers.

Who can use the scheme?

The scheme is open to any VAT registered business with expected annual taxable sales of £1.35m or less. (Taxable supplies include any standard, reduced and zero-rate sales and other taxable supplies, but excludes VAT itself, supplies that are exempt from VAT, and capital asset sales.).
Once you start to use cash accounting, you can continue to do so until your turnover reaches £1.6 million.

The main conditions are that you should have made all necessary VAT returns and made arrangements with HM Revenue & Customs to clear any arrears of VAT payments.
How does a business apply to join the cash accounting scheme?

There is no requirement to notify HMRC in advance of using the scheme. It Scheme can be adopted by any eligible user (i.e. taxable sales of £1.35m or less) at the beginning of any VAT period but can only be used from a current VAT period i.e. no retrospective use.
What conditions are there once I start using the scheme?




  • You must use it for the whole of your business and must normally stay in it for at least two years (unless you exceed the turnover limit). However, you are allowed to leave the scheme at any time if you are not gaining any benefit or if your accounting system cannot cope with the requirements.
  • You must be careful that you do not account again for any VAT on receipts and payments already dealt with on invoices issued and received before you started using the scheme.
  • You may no longer use the scheme for sales of goods and services invoiced in advance of the supply being made, or for sales where the payment is not due for more than six months after the invoice date..

What are the advantages of using the cash accounting scheme

  • Using cash accounting may help your cash flow, especially if your customers are slow payers.
  • You do not need to pay VAT until you have received payment from your customers. So if a customer never pays you, you don't have to pay VAT on that bad debt as long as you continue to use the cash accounting scheme. Under conventional VAT accounting you have to pay VAT whether you have been paid by your customer or not, and VAT bad debt relief is not available until the debt is at least six months old
What are the disadvantages of using the cash accounting scheme?



  • Input tax cannot be claimed until payment is made to a supplier
  • The scheme will not benefit a business where most/all sales are zero-rated e.g. a milkman
  • The scheme will not benefit a business where sales are paid for, either in advance of invoicing, or at the same time a sales invoice is raised.
  • Using cash accounting may affect your cash flow in that:
  • You cannot reclaim VAT on your purchases until you have paid your suppliers. This can be a disadvantage if you buy most of your goods and services on credit.
  • If you regularly reclaim more VAT than you pay, you will usually receive your repayment later under cash accounting than under standard VAT accounting, unless you pay for everything at the time of purchase.
  • If you provide continuous services such as accounting or other professional services.
  • If you start using cash accounting when you start trading, you will not be able to reclaim VAT on most start up expenditure, such as initial stock, tools or machinery, until you have actually paid for those items.
  • If you leave the cash accounting scheme if your turnover goes over £1.6 million or directed to so by HMRC you will have to account for all outstanding VAT due including any bad debts.
Will it benefit me?

It will benefit you if your sales are pedominantly standard-rated amd made on extended credit terms.
It will not usually benefit you if your sales are chiefly cash or zero-rated becuase you cannot claim the input tax attributable to your purchases until you pay your suppliers.

What records must I keep?

Changing to cash accounting doesn’t mean you can just keep a record of your cash position - you must also keep track of debtors and creditors, so you know the real position with regard to what you owe and are owed. You need this information for Income Tax or Corporation Tax purposes.

In addition to keeping all required VAT records and accounts for standard VAT accounting, you must also use the following procedures for sales and purchases.

Invoices




  • If you are paid in cash you must, if asked by your customer, endorse the customer's copy of your sales invoice with the amount and date paid.
  • If you settle an invoice using cash, you must keep a copy of the purchase invoice endorsed with the amount and date paid.
Payment records

Your records must clearly cross refer payments received or made by you to the corresponding sales or purchase invoices. You must also make sure that you cross refer these payments and receipts to evidence such as bank statements, cheque stubs and paying-in slips

These requirements are easily met by keeping a cash book summarising all payments made and received, with a separate column for the relevant VAT. You will also need to keep the corresponding tax invoices and ensure that there is a satisfactory system of cross-referencing.

These VAT records must be kept for six years, unless you have agreed a shorter period with your local VAT office.

Are there any special rules for cheques and credit cards?

A cheque receipt occurs on the date you receive the cheque or the date on the cheque, whichever is the later. If the cheque is subsequently dishonoured, you should adjust the VAT account accordingly.

Likewise, a cheque payment takes place on the date you send the cheque to your supplier or the date on the cheque, whichever is the later. However, if your cheque is dishonoured you cannot reclaim the VAT.

Credit card payments are to be accounted for by the date on the sales voucher - not the date you receive payment from, or make payment to, the card company.

What about part payments?

You must account for VAT each time you make or receive a payment, even if it is a part payment, and even if it is a payment in kind. Normally the VAT will be calculated using the VAT fraction (currently 3/23). However, a fair and reasonable apportionment must be applied if there is a mixed supply at different rates.

What if my turnover exceeds £1,350,000?

There is a 25% tolerance built into the scheme. This means that once you are using cash accounting, you can normally continue to use it until the annual value of your taxable supplies reaches £1,600,000.

You must review your taxable turnover in the year ending at the end of each tax period. If you exceed the tolerance of £1,600,000, you must leave the scheme immediately, unless HMRC allows or directs otherwise.

All outstanding tax must be accounted for within six months of the period in which you leave the scheme.

Will HMRC ever prevent a business from using the scheme?


  • As long as a business is up-to-date with its VAT returns and payments, and has not been convicted of a VAT offence within the last 12 months, then use of the scheme will always be allowed.
  • A business must withdraw from the scheme if its taxable sales exceed £1.6m per year (VAT exclusive)
At what point may or must a business leave the scheme?


  • A business can voluntarily withdraw from the scheme at the end of any VAT period
  • A business must withdraw from the scheme if the value of its taxable supplies has exceeded £1.6m per annum

When you must not use cash accounting

Even if you use cash accounting, you must still account for VAT using standard VAT accounting when you:


  • buy or sell goods using lease purchase, hire purchase, conditional sale or credit sale
  • import goods or acquire goods from other EU states
  • remove goods from a Customs warehouse or free zone
  • issue a VAT invoice and full payment is not due within six months
  • issue a VAT invoice in advance of providing goods or services
HMRC may also withdraw your use of the cash accounting scheme for a number of reasons, including:
  • if you calculate your VAT incorrectly
  • if you are convicted of a VAT offence
  • if you are assessed for a penalty for VAT evasion
  • if your turnover has gone over £1.6m and you have not notified HMRC
Once you have left the scheme you must account for any outstanding VAT within six months.

If you leave the scheme, you can rejoin at the beginning of any VAT accounting period, provided you meet the criteria at that point in time.

Using cash accounting for VAT with other schemes

Annual Accounting

You may be able to use cash accounting for VAT together with the annual accounting scheme.
Using annual VAT accounting, you make nine monthly or three quarterly interim payments throughout the year. You only need to complete one VAT return at the end of the year when you either make a balancing payment or receive a balancing refund.

Flat Rate Scheme

You can’t use the Cash Accounting Scheme with the Flat Rate Scheme. Instead, the Flat Rate Scheme contains its own cash-based turnover method.

Retail schemes

If you are a retailer, there are several schemes where you can simplify your calculation of VAT by not having to account for VAT on each individual sale.

Margin schemes for second-hand goods, art, antiques, collectibles

If you buy or sell second-hand goods, antiques, collectibles or art, you only need to account for VAT on the difference between the price you paid for an item and the price at which you sell it - your margin.

Tour operator's margin scheme

The tour operator's margin scheme makes VAT accounting easier for tour operator's who buy and sell travel, accommodation and certain other services internationally. There is more about VAT and tour operators in VAT Notice 709/5

Friday 21 August 2009

Can you legally make money from VAT?

Introduction

The Flat Rate Scheme (FRS) was introduced in April 2002 to make VAT accounting for small businesses simpler.

If your VAT taxable turnover is less than £150,000, you can simplify VAT accounting by calculating your VAT payments as a percentage of your total VAT-inclusive turnover. Although you cannot reclaim VAT on purchases - it is taken into account in calculating the flat rate percentage - FRS can reduce the time you need to spend accounting for and working out your VAT. Even though you still need to show a VAT amount on each sales invoice, you don't need to record how much VAT you charge on every sale in your accounts. Nor do you need to record the VAT you pay on every purchase.

If you register for FRS in your first year of VAT registration, you can take advantage of a one per cent reduction in your flat rate percentage.

What is the FRS for VAT?

Under standard VAT accounting, the VAT you pay to HM Revenue & Customs (HMRC) or claim back is the difference between the VAT you charge your customers and the VAT you pay on your purchases.

Using FRS you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage depends on your type of business.

Who can join FRS?

You can join the Flat Rate Scheme and so pay VAT as a flat rate percentage of your turnover if:

Your estimated VAT taxable turnover - excluding VAT - in the next year will be £150,000 or less.

Your VAT taxable turnover is the total of everything that you sell during the year that is liable for VAT. It includes standard, reduced rate or zero rated sales or other supplies. It excludes the actual VAT that you charge, VAT exempt sales and sales of any capital assets.

Your estimated total business income - including VAT - in the next year will be £187,500 or less.

Your total business income is the total value - including VAT - of everything you supply, including exempt and non-business income, but does not include income from the sale of any capital assets.

Generally you don't reclaim any of the VAT that you pay on purchases, although you may be able to claim back the VAT on capital assets worth more than £2,000.

Once you join the scheme you can stay in it until your total business income is more than £225,000.

Who can't join FRS?

You can't join if:

your total turnover is over £187,500 per year
you were in the scheme and left during the previous 12 months
you are, or have been within the previous 24 months, registered for VAT as the division of a larger business, or as part of a group, or you are eligible to do so
you use one of the margin schemes for second-hand goods, art, antiques and collectibles, the Tour Operators' Margin Scheme, or the Capital Goods Scheme
you have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year
your business is closely associated with another business

The pros and cons of FRS

Benefits of using FRS

Using the scheme can save you time and smooth your cash flow. It offers these benefits:
You don't have to record the VAT that you charge on every sale and purchase, as you would with standard VAT accounting.

This can mean you spending less time on the books, and more time on your business. You do need to show VAT separately on your invoices, just as you do for normal VAT accounting.

A first year discount.

If you are in your first year of VAT registration you get a one per cent reduction in your flat rate percentage until the day before the first anniversary you became VAT registered.

Fewer rules to follow.

You no longer have to work out what VAT on purchases you can and can't reclaim.

Peace of mind.

With less chance of mistakes, you have fewer worries about getting your VAT right.

Certainty.

You always know what percentage of your takings you will have to pay to HMRC.

Potential disadvantages of using FRS

The flat rate percentages are calculated in a way that takes into account zero-rated and exempt sales. They also contain an allowance for the VAT you spend on your purchases. So FRS might not be right for your business if:
you buy mostly standard-rated items, as you cannot generally reclaim any VAT on your purchases
you regularly receive a VAT repayment under standard VAT accounting
you make a lot of zero-rated or exempt sales.


Working out your flat rate percentage and the VAT you pay

Working out your flat rate percentage

There is a range of flat rate percentages corresponding to different business sectors. You must choose the sector best describing your main business activity for the coming year. You must only use one percentage. So if you work in more than one business sector, you must use the one representing the greater part of your turnover. You then apply that percentage to your total turnover.

Discount in your first year of VAT registration

There's a one per cent reduction in the flat rate percentages for your first year of VAT registration. So if you are in your first year of VAT registration, you can reduce the flat rate percentage for your sector by one, until the day before the first anniversary of your VAT registration. This discount applies even if the flat rate percentage for your sector changes during your first year of registration.

Working out how much VAT you pay using your flat rate percentage

You calculate your VAT payable to HMRC by applying your flat rate VAT percentage to your 'flat rate turnover'. If you are still in your first year of VAT registration, remember to reduce your flat rate percentage by one.

Your flat rate turnover is all the supplies your business makes including all:

VAT inclusive sales for standard rate, zero rate and reduced rate supplies
sales of exempt supplies, such as rent or lottery commission - you don't have to make any partial exemption calculations
sales of capital expenditure goods - unless you have previously reclaimed the VAT, in which case they must be accounted for at the standard rate and not the flat rate.
sales to other EU countries
bank interest received on a business account
sales of second-hand goods - but if you sell a lot of these, you may be better off leaving FRS and using a margin scheme.

Don't include:

services you've purchased from outside the UK that you've had to reverse charge
disbursements - costs you pass on to your clients that meet the necessary VAT conditions
private income, for example income from shares
the proceeds from the sale of goods you own but which have not been used in your business
any sales of gold that are covered by the VAT Act, Section 55
non-business income and any supplies outside the scope of UK VAT
sales of capital expenditure goods on which you have claimed back the VAT you paid


FRS percentage rates from 1 December 2008

Accountancy or book-keeping 11.5
Advertising 8.5
Agricultural services 7
Any other activity not listed elsewhere 9
Architect, civil and structural engineer or surveyor 11
Boarding or care of animals 9.5
Business services that are not listed elsewhere 9.5
Catering services including restaurants and takeaways 10.5
Computer and IT consultancy or data processing 11.5
Computer repair services 10
Dealing in waste or scrap 8.5
Entertainment or journalism 9.5
Estate agency or property management services 9.5
Farming or agriculture that is not listed elsewhere 5.5
Film, radio, television or video production 9.5
Financial services 10.5
Forestry or fishing 8
General building or construction services* 7.5
Hairdressing or other beauty treatment services 10.5
Hiring or renting goods 7.5
Hotel or accommodation 8.5
Investigation or security 9
Labour-only building or construction services* 11.5
Laundry or dry-cleaning services 9.5
Lawyer or legal services 12
Library, archive, museum or other cultural activity 7.5
Management consultancy 11
Manufacturing that is not listed elsewhere 7.5
Manufacturing fabricated metal products 8.5
Manufacturing food 7
Manufacturing yarn, textiles or clothing 7.5
Membership organisation 5.5
Mining or quarrying 8
Packaging 7.5
Photography 8.5
Post offices 2
Printing 6.5
Publishing 8.5
Pubs 5.5
Real estate activity not listed elsewhere 11
Repairing personal or household goods 7.5
Repairing vehicles 6.5
Retailing food, confectionary, tobacco, newspapers or children’s clothing 2
Retailing pharmaceuticals, medical goods, cosmetics or toiletries 6
Retailing that is not listed elsewhere 5.5
Retailing vehicles or fuel 5.5
Secretarial services 9.5
Social work 8
Sport or recreation 6
Transport or storage, including couriers, freight, removals and taxis 8
Travel agency 8
Veterinary medicine 8
Wholesaling agricultural products 5.5
Wholesaling food 5
Wholesaling that is not listed elsewhere 6
*"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"


What to do if your flat rate percentage changes

If the Table of flat rates changes, you must use the new percentage for your sector from the date it comes into force. If HMRC changes your sector or it is affected by a change in your business activity you should refer to VAT Notice 733.

If the rate changes during a VAT accounting period, you will have to do the following calculations for that period:

apply the old percentage rate to your flat rate turnover from the start of the period up to the day before the rate changes
apply the new percentage rate to your flat rate turnover from the first day of the new rate to the end of the period
add the two figures together to produce the total VAT you owe to HMRC for the period

Cash-based turnover method

This method allows you to account for your VAT liability when you receive payment. It does not affect the time of supply (tax point). So if your flat rate percentage changes, you must apply the rate that was in place at the time of supply and not the rate that is in place when payment is received.

Invoicing, record-keeping and VAT returns

Invoicing

Although you only have to pay HMRC a percentage of your turnover, you must still show VAT at the appropriate normal rate (standard, reduced or zero) on the invoices you issue.

Record-keeping

Once you are using the scheme, you must keep a record in your VAT account of the flat rate calculation that you do for each VAT period showing:

the flat rate turnover that you used to calculate your flat rate VAT payment (or if the percentage changed during the period, the turnover figures used for each part of the period)
the flat rate percentage you used (or if the percentage changed during the period, the percentages used for each part of the period)
your VAT due.

Completing your VAT Return

FRS does not have its own VAT Return, so you must complete a standard return in a different way.

Claiming back VAT on capital assets

If you use FRS, you can't normally claim back the VAT you spend on capital assets you buy for your business. This is already taken into account in the flat rate percentage for your type of business. However, you may be able to claim back the VAT on certain capital asset purchases with a VAT-inclusive price of £2,000 or more. You make these claims by putting the amount of VAT you were charged in Box 4 of your VAT Return.

These are the rules for claiming back VAT when you buy capital assets:

It must be a single purchase of capital goods with a VAT-inclusive price of £2,000 or more.

That doesn't mean you are restricted to claiming back the VAT on a single item - for example, you could buy a server, work stations, monitors keyboards and mice as long as you buy them at the same time from the same supplier and the price is more than £2,000 including VAT.

It must be a purchase of capital goods, not services.

Capital goods are goods you can use in the business but are not used up by it - for example, a van, computer or bottling machine are capital goods, but not the fuel, printer ink or bottles that go in them. A van leased or hired to you is a continuous supply of services, but one bought on hire purchase is considered a supply of capital goods.

You can't claim back VAT on goods that you intend to either resell, or incorporate into other goods to supply on to someone else.

You can't claim back VAT on goods that you will let, lease or hire out - for example, a bouncy castle.

You can't claim back VAT on goods that you intend to use up (consume) within a year.

Building materials and work are not capital goods. You can't claim back the VAT if you have building work done (even if it includes expenditure on materials), and you can't claim back the VAT if you buy building materials yourself for someone else to build with.

As long as all the other conditions are met, you can claim back all the VAT even if the goods will have some private use. For example, if you buy a van but employees are allowed free use at weekends to move private belongings, you can still claim back all the VAT.

There is an upper limit on claims for certain items.

If you buy something that falls within the Capital Goods Scheme you must write and tell HMRC and leave FRS immediately. Goods that fall within the Capital Goods Scheme are computers or items of computer equipment with a VAT-exclusive price of £50,000 or more, or land and buildings, civil engineering works and refurbishments with a VAT-exclusive value of £250,000 or more.

Selling a capital asset

If you meet all the conditions and claim back the VAT on a capital asset, then when you have finished with the asset and sell it, you must charge VAT at the full standard rate - not at your flat rate percentage.

Farmers, barristers and florists and FRS

Farmers

If you're a farmer, there is a separate Agricultural Flat Rate Scheme, which is an alternative to registering for VAT. You don't charge VAT, but you can add - and keep - a flat rate addition of four per cent on sales that you make to VAT-registered customers. The flat rate addition isn't VAT, but compensates you for some of the VAT that you pay on your purchases.

Barristers

Barristers and advocates who use FRS and who share premises with others may need to use special accounting rules.

Florists

Florists using FRS who are members of organisations such as Interflora, Teleflorist or Flowergram must use special methods to account for their sales and purchases.

Joining and leaving FRS

How to join FRS

You can join the FRS at the beginning of any VAT accounting period.

You can download and complete an application form from the HMRC website and send the form to:

HM Revenue & Customs
Imperial House
77 Victoria Street
Grimsby
DN31 1DB

Get form VAT 600FRS 'Flat Rate Scheme application'

Get form VAT 600 AA/FRS for joining the Annual Accounting Scheme and the Flat Rate Scheme at the same time.

Find advice on completing your application form in VAT Notice 733.


How to leave FRS

You may leave the scheme at any time by telling HMRC - you will normally leave at the end of your next VAT accounting period, but you can leave the scheme at any time. HMRC will confirm the date you left the scheme in writing.

You must notify HMRC if there are significant changes to your business which may affect your eligibility to use the scheme.

You must leave the scheme if:

on the anniversary of your joining the scheme your previous year's VAT-inclusive turnover was more than £225,000
you think your turnover in the next 30 days alone will be more than £225,000
you start to use one of the other special schemes such as one of the margin schemes for second-hand goods, art, antiques and collectibles, the Tour Operators' Margin Scheme, or the Capital Goods Scheme
you become part of a larger group or division or become eligible to do so

You may also be taken off the scheme by HMRC if they find you have calculated your VAT incorrectly or that you have become ineligible but have not told them.

If you leave FRS, you can't rejoin it for at least 12 months.


FRS and other VAT schemes

Annual Accounting Scheme

You can use FRS together with the Annual Accounting Scheme.

Using annual VAT accounting, you make nine monthly or three quarterly interim payments throughout the year. You only need to complete one VAT Return at the end of the year when you either make a balancing payment or receive a balancing refund.

You can join FRS and the Annual Accounting Scheme at the same time using a single application form.

Get form VAT 600 AA/FRS for joining the Annual Accounting Scheme and the Flat Rate Scheme at the same time.

Cash Accounting Scheme

You can't use FRS with the Cash Accounting Scheme.

Instead, the Flat Rate Scheme has its own cash based method for calculating the turnover. There is more about the cash based turnover method in VAT Notice 733.

Retail schemes

You can't use FRS with the retail schemes, but if you are a retailer, FRS has its own retailer's method for calculating the turnover.



Example Calculation

P is a book-keeper. His flat rate percentage is 11.5. His annual turnover, bank interest and purchases are:

Sales of £25,000 of services + 15% vat = £,500 Gross

Bank interest £500

Purchases of £3,500 as expenses
Purchase of £4,600 computer equipment (£4,000 +15% VAT) (capital)

Using a Flat Rate of 11.5%

Box 1 £2,932.50 (£25,000 + £500=£25,500 x 11.5%)

Box 2 None

Box 3 £2,932,50

Box 4 £600

Box 5 £2,332.50

Box 6 £29,250 (£28,750 + £500)

Box 7 £7,500

Box 8 None

Box 9 None

FRS Profit

If your Flat Rate Scheme percentage is - for example - 11.5% then you or your company will be making 3.5% (4.5% in the first year) profit from VAT by being in the scheme.

This will appear as extra sales in your profit and loss account, so you will pay income or corporation tax on this extra income.

You need to carefully examine how much of your purchases are standard-rated and how much of your sales are either zero-rated or exempt before concluding that FRS would benefit you.

You can find full information on the scheme on the HMRC website.

Top ten tips

First year discount

Don’t forget you are entitled to an extra 1% discount on your relevant flat rate percentage in your first year of VAT registration. For a business with sales of £187,500 (scheme maximum), this saving is worth an extra £1,875 in a full year.

Capital expenditure

A feature of the scheme is that a business does not reclaim input tax unless it relates to capital expenditure costing more than £2,000 including VAT. So make sure you consider this when buying new machinery or a van for their business.

Annual category review

The chosen flat rate category needs to be reviewed each year, on the anniversary date of when you first joined the scheme. If a business has two or more activities, which come within different flat rate categories, then the chosen category is the one with the highest level of turnover. The mix of turnover again needs to be reviewed each year.

All income is included

A downside of the scheme is that the flat rate percentage is applied to any zero-rated or exempt income of the business. This can create a big problem because tax is then being paid on income where no VAT has been charged to customers. A business that has an unpredictable level of zero-rated income e.g. a builder carrying out some work on new houses is probably best advised to steer clear of the scheme.

Winners and losers

Some taxpayers will pay less tax by using the scheme and others will pay the same amount or more. It all depends on the nature of trading of the business in question. For example, I do most of my business travel by rail (no VAT on train fares) so I am sacrificing less input tax by using the scheme than a someone who goes everywhere in a low economy car.

Bank interest received

As explained above, the flat rate scheme needs to be applied to any exempt income, which includes bank interest earned by the business. However, interest received from a private bank account is excluded and there is no need to worry about dividend income. The latter income is outside the scope of VAT rather than exempt.

Services to overseas customers

There are many situations where work carried out for an overseas customer does not produce a UK charge of VAT because the place of supply is outside the UK e.g. accountancy services for a business customer in another EU country. The good news is that income from such supplies is outside the scope of UK VAT and does not need to be included in the flat rate calculation.

Acquisitions from other EU countries

When a UK business acquires goods from another EU country, it normally accounts for acquisition tax in Box 2 of its return and then claims the same amount as input tax in Box 4 (assuming the goods are wholly used for taxable rather than exempt supplies). For scheme users, the Box 2 entry still applies but not the Box 4 entry unless the acquisition relates to capital expenditure costing more than £2,000 including VAT (as explained above).

Cash based method – a scheme user can either account for tax based on the invoice date of his sale – but the more preferable route is to gain a cash flow advantage by using the cash based turnover method i.e. no tax is paid until payment has been received from a customer.

Annual accounting scheme

There is an incorrect assumption that the scheme cannot be used simultaneously with other schemes. That is incorrect – there is no problem with jointly using both the flat rate scheme and annual accounting scheme. So as well as simplified VAT accounting, you only need to work out the figures once a year rather than every three months!

I would be pleased to answer any question you have upon FRS and its implementation.

Thursday 20 August 2009

Top 5 tax tips for owner managers

Assess reward package

Aim for a tax efficient mix of salary, dividends, bonuses and benefits. Consider Enterprise Management Incentives and Approved share option schemes. These arrangements can prove tax efficient for both employers and staff.

Consider further pension contributions

Pension schemes still represent one of the few Government sponsored tax saving vehicles where significant tax relief is still available.

Where the company makes a contribution on behalf of the employee, or the individual makes a net payment to the pension provider, it is now possible to receive tax relief on an amount equal to earnings (subject to a cap of £245,000 for 2009/10).

Furthermore, where an employee agrees to sacrifice a portion of salary in exchange for an employer making an equivalent employer pension contribution, there can be NIC savings for both employee and employer.

However, additional care is required for high earners considering additional pension contributions before 6 April 2011 over and above their usual monthly contributions (whether personal or employer paid) due to anti-forestalling rules introduced in Budget 2009. These rules could mean that additional contributions result in a tax charge on the employee. High earners for these rules are those with total income (note not just employment income) of £150,000 or more in the current tax year, or in one of the previous two tax years.

Maximise tax breaks on capital expenditure

Capital allowance claims permit taxpayers to offset certain capital expenditure against their business income. These include, amongst others, the Annual Investment Allowance and Enhanced Capital Allowances for qualifying energy and water efficient expenditure, which are relevant for both corporate and unincorporated businesses.

There is an additional temporary 40% rate of first year allowance available to all businesses for expenditure incurred on plant or machinery qualifying for the ‘general pool of expenditure’ in the 12 months from 1 April 2009.

Review loss relief claims

An extended loss relief was announced in November 2008 enabling businesses to carry back trading losses of up to £50,000 for up to three years instead of the usual one year limit. Budget 2009 announced an extension of this relief, to cover an additional £50,000 of trade losses incurred in the year following that announced in November 2008.

Furnished holiday letting properties

Overseas furnished holiday letting properties located outside the UK, but within the European Economic Area, can qualify for the furnished holiday lettings regime. This treats the furnished holiday lettings business as a trade rather than an investment activity, with favourable capital allowance, loss relief and capital gains consequences.

Monday 17 August 2009

Maximise your capital allowances

Introduction


As a business you can claim tax allowances, called capital allowances, on certain purchases or investments. This means you can deduct a proportion of these costs from your taxable profits and reduce your tax bill.

Capital allowances are available on plant and machinery, buildings - including converting space above commercial premises to flats for renting - and research and development.

The amount of the allowance depends on what you're claiming for. In some cases, the rates are different in the year you make the purchase from those in subsequent years.

This guide will tell you what purchases or investments qualify for a capital allowance, how much you can claim and the simplest way to make your claim.

Most businesses purchase equipment as a necessary part of their day to day running. This means that often, due to obsolescence or wear and tear, most businesses need to replace such assets on a regular basis.

Capital allowances are tax allowances that one can claim in relation to the purchase of capital equipment or fixed assets.

Generally the tax rules allows that you can only claim a percentage of the equipment cost in the year in puchaseand the remainder of the equipment cost over future years.

To maximise your allowance, if possible, make new equipment purchases before the year end rather than at the begining of the next accounting year.

The result is that you can benefit from bringing your capital allowances forward one year.

Capital allowance on plant and machinery

You can claim capital allowances on:

the cost of vans and cars, machines, scaffolding, ladders, tools, equipment, furniture, computers and similar items you use in your business
expenditure on plant and machinery
items you used privately before using them in your business

You cannot claim for things you buy or sell as your trade - these are claimed as business expenses. If you buy on hire purchase, you can claim a capital allowance on the original cost of the item but the interest and other charges count as business expenses.


How much you can claim


If you're buying equipment, 20 per cent is the standard annual allowance for businesses each year. There is a special rate pool containing expenditure on integral features, long life assets and thermal insulation. The annual rate of allowance for it is 10 per cent. In a few cases you can claim 100 per cent in the year you make the purchase. See what purchases qualify in our guide on first-year allowances. Note that 'a year' refers to a tax year, not a calendar year.

For the 2008/09 tax year, all businesses have an Annual Investment Allowance (AIA) on the first £50,000 of expenditure on plant and machinery. There is also a tax credit for losses incurred through capital expenditure on some types of environmentally-friendly technologies. In addition, small businesses may be able to claim a plant and machinery writing-down allowance of up to £1,000 where the balance of the pool is less than £1,000 in a 12 month accounting period.

The AIA replaces the previous system of first-year allowances on plant and machinery expenditure of 50 per cent for small businesses and 40 per cent for medium-sized businesses.

Capital allowance on buildings

You can claim capital allowances on the cost of:

renovating or converting space above shops and other commercial premises to provide flats for rent - for example, money spent on building dividing walls or fitting a new kitchen
converting or renovating unused business premises in a disadvantaged area
You cannot claim capital allowances on the cost of:

houses, showrooms, offices and shops
the land itself, such as buying the freehold of a property or acquiring a lease
extensions, unless it provides access to qualifying flats
developing adjacent land
furnishing qualifying flats

How much you can claim

The allowance for buying industrial and agricultural buildings is 4 per cent, in both the first and subsequent years. The allowance is progressively reduced from 1 April 2008 for companies, and from 6 April 2008 for income tax cases. Both of these allowances will be withdrawn from April 2011. You can usually claim 100 per cent of the cost of converting underused or vacant space above commercial property into flats or converting or renovating unused business premises in a disadvantaged area. You can read a guide on flat-conversion allowances on the HM Revenue & Customs (HMRC) website - Opens in a new window.

You can claim 100 per cent of the construction cost of commercial and industrial buildings, including offices, in enterprise zones. If you buy a used building in an enterprise zone within two years of its first use, you can claim 100 per cent of the cost or 25 per cent a year of the cost. However, this allowance is to be withdrawn from April 2011.

The rate of writing-down allowances on some integral features of a building is 10 per cent for the 2008/09 tax year.

Research and development capital allowances

You can claim tax credits on certain types of research and development (R&D) expenditure. As a general rule, an activity qualifies as research and development if:

it involves innovation and creativity in science and technology
the research is relevant to your business
you are classed as a trader and not working in a profession or vocation
How much you can claim
Small and medium-sized companies can claim enhanced tax relief of 175 per cent of qualifying R&D expenditure in the form of tax credits. For large companies, the enhanced deduction is 130 per cent.


Extra relief is also available for certain revenue expenditure. I will with tax reliefs and allowances for research and development in a separate article..

Work out your capital allowance claim

Most first-year capital allowances have been replaced by an Annual Investment Allowance (AIA) of £50,000 for all businesses. However, in certain circumstances both small and medium-sized businesses can still claim capital allowances of 100 per cent in the year they make the purchase, for example with the purchase of energy-saving technologies.

Claiming for subsequent years


The writing-down allowance for most plant and machinery purchases is 20 per cent. If the expenditure is 'special rate expenditure' the writing down allowance is 10 per cent. In addition, small businesses may be able to claim a plant and machinery writing-down allowance of up to £1,000 if the pool value falls below £1,000 in a 12 month accounting period.

Capital allowances on buildings are calculated on a straight-line basis. This means you can claim 4 per cent of the initial investment every year. For example, if you spend £100,000 on constructing an industrial property, you can claim £4,000 a year.

Many of these allowances are due to be withdrawn from April 2011.

Balancing charges


If you sell an item, give it away or stop using it in your business, you may need to add a balancing charge onto your profit before you calculate your tax.

Claiming capital allowances

Use your income or corporation tax return to claim for capital allowances.

When making the claim:

You must make a separate claim for each accounting period of your business. If this is longer than 18 months, you'll need to split it into shorter periods and make separate claims for each. The first 12 months is one period, and each subsequent 12 months, or less than 12 months, is another period.

You can make a capital allowance claim any time up to the normal time limit for making or amending your tax return (income tax) or 12 months after the filing date for your Company Tax Return. This will be extended if there is an enquiry into the return.

There is no obligation to claim for the full amount of an allowance. If you claim only part, eg 10 per cent instead of the 25 per cent you are entitled to, then the pool balance carried forward will be higher so claims for later years will be higher.

If your business is a partnership, you need to claim your capital allowances collectively, not as individual partners.

If you're registered for VAT, you only claim capital allowances on the net cost of the asset. If you're not registered for VAT, you claim capital allowances on the total cost including VAT.

Special cases - capital allowance

You can claim capital allowances for assets you own and lease to other users. Some of these rules cover items you use privately as well as for business.

Cars


The following applies to expenditure incurred on or after 1 April 2009 for businesses in the charge to corporation tax, and on or after 6 April 2009 for businesses in the charge to income tax. However, note that these arrangements are subject to Parliamentary approval.

Qualifying expenditure on cars (except cars used by income tax payers for both business and non-business purposes, which is allocated to single asset pools) must be allocated to one of the two general plant and machinery pools. Which pool is appropriate depends on the car's CO2 emissions:

expenditure on cars with CO2 emissions over 160 grams per kilometre (g/km) driven will be dealt with in the special-rate pool and will attract writing-down allowances at 10 per cent
expenditure on cars with CO2 emissions of 160g/km driven or less will be dealt with in the main pool and will attract writing-down allowances at 20 per cent

Note that if the car has CO2 emissions are below 110g/km, it qualifies for 100 per cent first-year allowance.

Cars purchased before 1/6 April 2009 continue to be treated under the old rules for a transitional period of five years. This means that cars costing:

less than £12,000 continue to be handled in the main rate pool (20 per cent capital allowance) regardless of their emissions
£12,000 or more continue to be pooled in a single asset pool with a 20 per cent capital allowance capped at £3,000 per year

The transitional period for cars purchased before 1 April 2009 for corporation tax and before 6 April 2009 for income tax will end on the last day of the business' first chargeable period to end on or after 31 March 2014 for corporation tax and 5 April 2014 for income tax

Friday 14 August 2009

Coming to UK - Structure your affairs

Organise your assets tax-efficiently before coming to UK

All UK resident individuals who are not domiciled here or who are ‘not ordinarily resident in the UK’ can claim the benefit of the ‘remittance’ basis of taxation on their overseas income. This means that income from overseas assets is not taxable in the UK.

However, from 6 April 2008, making such a claim means that  UK tax allowances are lost – increasing the tax bill on your UK income. Where a non-UK domiciled individual’s overseas income and capital gains are less than £2,000 in a tax year, the remittance basis will apply automatically but without loss of allowances. Non-UK domiciled couples who organise their assets efficiently between them may be able to keep their annual individual overseas income and gains below £2,000 or put it all into one spouse’s name to maximise the UK tax allowances available.

Consider how long you are going to stay


The date from which you are treated as ordinarily resident depends upon your intentions when you arrive in the UK and whether you actually carry them out. If, after 6 April 2008, you have been resident in the UK in more than seven of the previous nine tax years, to claim the remittance basis described above, you will be required to pay a flat tax charge of £30,000 each year. If you do not claim the remittance basis, all of your worldwide income will be taxable in the UK.

Close offshore bank accounts & set up new income and capital accounts


Foreign domiciled individuals are only taxable in the UK on remittances of offshore income and capital gains arising after they become resident in the UK. It is important to be able to clearly identify these sources, so any offshore accounts should be closed shortly before your arrival in the UK and new income and capital accounts set up. Arrangements should then be put in place so that any interest arising on the capital account should be credited directly to the income account. Remittances to the UK can then be made from the capital account without additional UK tax charges.

Owning an offshore company

If you own 10% or more of the shares of an offshore company, any capital gains it makes while you are resident in the UK will be taxable on you in the UK. Transferring your shares to an offshore trust before you come to the UK will ensure that such gains are only taxable in the UK if the trustees make a capital payment to you in the UK.

Are you entitled to temporary relocation expenses for employees seconded to the UK?

If you have been seconded to the UK by a non-UK resident employer for a period of two years or less, your employer (or the employer to whom you have been seconded) can provide "reasonable" accommodation expenses, and pay the associated utility costs tax free. This relief is available until it becomes clear that the two year period will be exceeded, but in this event, the relief will not be withdrawn retrospectively.

Minimise your taxable accommodation benefit, if you do not qualify for tax-free temporary relocation expenses


If your employer provides you with rent-free accommodation, a taxable benefit will normally arise based on the rent paid to an independent landlord by your employer. The benefit may be substantially reduced, if instead of renting the property, a short lease is acquired from the landlord at a peppercorn rent, although this may be subject to challenge by UK taxing authorities.

If the property is owned by your employer the size of the benefit you are taxed on will depend on factors such as the cost of the property, when it was bought and the current market value.

Maximise your tax free travel allowance


Foreign domiciled individuals, who do not have a recent history of UK residence prior to their arrival in the UK, are allowed an unlimited number of journeys between the UK and their normal country of residence, tax free, providing that the cost is met by their employer. In addition, the employer can also meet the cost of two journeys per tax year for the spouse and children, tax free.

If your employer is unwilling to pay for your trips home, but does provide other taxable benefits, consider asking your employer if he will agree to allow you to "swap benefits". This save you tax and your employer may also save National Insurance Contributions (NIC).

Separate capital gains and losses

For individuals claiming the remittance basis, overseas capital gains are only taxable if the proceeds are remitted to the UK but relief for overseas capital losses is limited. Such losses must be set against gains remitted to the UK and unremitted overseas gains before any balance can be used against UK gains. It is therefore important to keep the proceeds of transactions which have produced the capital losses completely separate. The proceeds from such transactions can then be remitted to the UK with no additional UK tax consequences.

Keep your assets outside the UK inheritance tax net

Once you become resident in the UK, any assets that you own in the UK would fall into the UK inheritance tax net if you were to die whilst here (or within 3 calendar years of leaving if you had stayed here long-term). Therefore, consider renting a property to live in rather than buying a UK home. You might also consider setting up a trust to hold your foreign assets outside the UK inheritance tax net, although there may be other tax implications so expert advice should be taken.

Take advantage of reciprocal social security agreements

The UK has reciprocal social security agreements with all EEC, and most other developed, countries. Under the terms of such agreements social security contributions are only payable in one of the contracting states. In certain circumstances, it is possible to obtain a certificate of coverage from your normal country of residence, and avoid both NIC and overseas social security liabilities on overseas earnings carried out under an overseas contract of employment. You should check if such an arrangement can be effective in your particular personal circumstances.

Thursday 13 August 2009

UK Offshore tax amnesties - details

NB HMRC have extended the deadline for initial registration of intent to make disclosure under NDO to 4 January 2010 and in the PBR on 9 December the Chancellor indicated that a 200% penalty will be imposed on those who do not disclose and are sebsequently found out.





Tax dodgers have been given a "last chance" to pay tax on money hidden in offshore bank accounts, as HM Revenue and Customs (HMRC) announced a new tax amnesty.


HMRC regards the offshore disclosure facility it offered to holders of offshore bank accounts in 2007 to have been a success and has launched the ‘new disclosure opportunity’ (NDO) to repeat it. HMRC will shortly offer individuals, companies and trustees the chance to come forward and disclose previously undeclared income and pay back taxes without suffering large tax penalties.


NDO allows people who come forward between September 2009 and March 12, 2010 to be fined just 10 per cent of the unpaid tax, instead of 100 per cent.


Why is it being offered?



If you are resident in the UK, you must pay UK tax on all your income and gains unless you are a foreign national who is not domiciled in the UK. HMRC is now stepping up its tax enquiry work against UK residents who have not declared their offshore income, whether from offshore accounts or other sources, and their offshore gains.


Over the past few months, HMRC has started to obtain the offshore account details of thousands of individuals from hundreds of financial institutions offering accounts outside the UK to UK residents. It is determined to collect any UK tax due on funds held in or paid into these accounts. However, raising individual tax investigations into all these individuals would take time and money. By offering the new disclosure facility, HMRC expects to collect most of the tax outstanding (for relatively little effort) even though it means collecting less in penalties from each taxpayer.


Who can use it?


Any UK resident individual, company or trustee who has failed to declare overseas income and/or gains that are taxable in the UK can use the new disclosure opportunity. You do not need to have an offshore bank account. Even if you declined the chance to use the previous offshore disclosure facility, you can still use the new disclosure opportunity – although the terms may not be as favourable for you and you should take advice on your specific circumstances.


It is possible to voluntarily disclose wholly UK tax irregularities to your local tax office. In most cases of voluntary disclosure, it is possible to secure low penalty rates but this cannot be guaranteed. If you wish to put right wholly UK tax irregularities, please contact mr to discuss your options and the likely overall cost.


Anyone with a UK address who has an offshore account could come under scrutiny


This time HMRC are targeting UK residents with offshore accounts operated by 308 banks and other financial institutions with a presence in the UK.


The Tax Chamber of the First-tier Tribunal on 12 August 2009 ordered these banks to give details to HMRC about their customers who hold offshore accounts.


HMRC are now issuing the information notices to banks ahead of the NDO. The NDO will allow people with unpaid taxes linked to offshore accounts or assets to settle their tax liabilities at a favourable penalty rate.


HMRC will use this information to ensure everyone pays the right tax and to check that NDO disclosures are complete.


Anyone with a UK address who has an offshore account could therefore come under scrutiny from HMRC and should therefore review their tax affairs.


What information are HMRC requesting?


I am deeply indebted to Mark Lee (Chairman of the Tax Advice Network) for the detail of what is comprised in the notice issued to the banks by HMRC.


The notices being issued include a wide ranging definition of 'account' to include holdings of cash, time, notice and demand deposits. It also includes accounts which do not carry interest or any other return and also any account into which money or investment assets have been deposited, including portfolio asset management accounts, whether managed by the account holder directly or managed bny another or others. So the types of account which will be disclosed include:


  • current account
  • deposit account
  • capital account
  • wealth management account
  • discretionary account
  • alternative investment account
  • property investment account
  • trustee account
  • client account
  • investment trust account
  • bond account
Which accounts will NOT be disclosed by the banks?

The notices state that information and documents related to the following need not be disclosed:


  • account holders who have authorised exchange of information for the purpose of the EU savings tax directive (or int'l equivalent) - for periods covered by such agreements:
  • accounts where the account holder died more than 4 years ago;
  • accounts where all account holders are PLCs, governments, charities, churches, mutuals, trade associations or clubs
  • ISA accounts
Information to be disclosed by the banks

This is much as you would expect but also includes:


  • Account holder's date of birth
  • Date account was opened
  • Date account was closed (if closed)
  • The account balance at 31 March 2004, 2005.....2009
  • Transaction information for a number of specified periods including
  • - April-June 2004,
  • - First 3 months of operation for accounts opened after 31 March 2004
  • - Jan, Feb and March 2009 for accounts open at 31 March 2009

It is not just interest income from offshore accounts that is being targeted


HMRC is not simply interested in undisclosed income from these accounts, but also the possibility that the capital comes from an untaxed source such as undeclared takings from UK businesses, rental income from overseas properties and income earned overseas by UK residents that was undeclared in the UK.

What is covered?



Individuals, companies and trustees who use the new disclosure opportunity must report all matters wrongfully omitted from their tax returns in the prior 20 tax years (if the irregularity goes back that far). This includes any UK or overseas income not reported and all taxes, including PAYE and VAT, must be encompassed within the disclosure. The disclosure must cover all legal persons with a liability, with separate scheme numbers and disclosures for the individual and any company or trust controlled by the individual.


This is a complex area


There is nothing wrong with having an offshore account or assets - as long as you meet your tax obligations. Depending on your circumstances, it may be that you are not required to disclose the accounts or the income arising from them. If you believe an offshore account does not need to be disclosed, it is recommended that professional advice is taken to confirm the position.


Even if you did not realise tax was due in respect of income received from your offshore account, the NDO still applies to you


Whether you are someone who has deliberately not disclosed offshore income, or someone who has mistakenly underpaid tax, perhaps because you may not have realised the obligation to declare overseas income (such as rental income on a second home abroad), the NDO equally applies to you


A penalty of 10 per cent for those making a full disclosure by 12 March 2010


The NDO means that instead of penalties of up to 100 per cent of the tax owed, most people making a full disclosure by 12 March 2010 will pay a penalty of just 10 per cent.


A higher penalty of 20 per cent will be charged to people who received a letter from HMRC in connection with the previous facility in 2007 but who failed to make a disclosure. If the tax owed is less than £1,000, HMRC will waive penalties, although interest will be charged in all cases.

What’s in it for me?


You can own up to past tax inaccuracies and put them right at relatively low cost. Getting up to date now means that you will not have the worry and cost of a detailed tax investigation at some future date. As ever, with tax arrears, the sooner you put things right and the more you cooperate with HMRC, the less it costs.
Penalties under the new disclosure opportunity will be as low as 10% but, if HMRC catches you at a later date, it could charge penalties of up to 100% of the tax due – so you could end up paying twice what you would have originally, plus interest.
Also, if you use the new disclosure facility, it is much less likely that HMRC will prosecute you for fraud (see below) or use its new powers to ‘name and shame’ you for tax fraud.


This is not really a tax amnesty, you will still need to pay the tax and interest charges for paying it late. However, HMRC is offering:
  • a standard penalty of 20% of the tax due if you received a letter from HMRC or your bank regarding the previous offshore disclosure facility but chose not to disclose
  • a standard penalty of 10% of the tax due (if you did not receive such a letter)
  • no penalty where the disclosable income is less than £1,000
  • no penalty on pre-death liabilities of a deceased taxpayer.


The new disclosure opportunity is not to be used where tax is underpaid as a result of an innocent error by the taxpayer. In such circumstances, taxpayers must provide evidence of the error to their normal tax office and HMRC will consider whether or not penalties should be applied. However, it is vital to take advice before taking such action.

Make sure to obtain a Reference Number (DRN) from HMRC


If you think you need to make a disclosure make sure you obtain a “Disclosure Reference Number” (DRN) from HMRC by registering with them between 1 September 2009 to 30 November 2009.


The DRN is needed if you are to make a disclosure under the terms of the NDO. Obtaining a DRN does not commit you to making a disclosure report if you subsequently establish that there is no unpaid tax.


Payment needs to be made in full

Payment of all tax, interest and penalties needs to be made in full at the time the disclosure report is submitted to HMRC. If you think you will have problems paying the liability in full, then you should contact HMRC to discuss possible alternative payment arrangements as soon as possible.


An incorrect or incomplete disclosure will lead to high penalties


HMRC will target those where there is a "mismatch" between information it holds and the NDO disclosure forms or the normal tax returns. Penalties for an incorrect or incomplete disclosure are likely to be at least 30 per cent and could be significantly higher. There is also the possibility of criminal investigation in the most serious cases.

Is there an alternative?


By voluntarily coming forward now there is a reasonable prospect of agreeing to settle with HMRC for the tax and interest on the ‘in date’ years only (currently 2003/4 to 2007/8). In contrast, the new disclosure opportunity covers tax irregularities over 20 tax years. So, although the penalty rate under the new disclosure opportunity may well be lower, in many circumstances you could save money overall by making a disclosure before the new disclosure opportunity starts.

When will the deadline run out?

The registration period runs from 1 September 2009 to 30 November 2009 or 1 October 2009 – 30 November 2009 if applying online.


The completed disclosure pack must be submitted to HMRC by 31 January 2010 or 12 March 2010 if submitted online.

Will I have to go to court?


HMRC is not prepared to guarantee immunity from prosecution to anyone using the new disclosure opportunity. However, you are far less likely to be prosecuted if you do use it to bring your tax affairs up to date rather than if you just wait for HMRC to catch up with you. Using the new disclosure opportunity means following a prescriptive paperwork process (see below), so that HMRC can process large numbers of cases easily and cheaply. Although some individuals will be chosen for a more detailed investigation, if HMRC follows the pattern of the previous offshore disclosure facility, it is likely that most disclosures will be accepted and the matter regarded as closed. In such circumstances, there is no need to go to court.

Are Liechtenstein investments any different?

In short, yes.
The Government has announced a special deal with the Liechtenstein authorities which is in many ways quite different to the NDO. One major difference is that any disclosure is restricted to a maximum of only 10 years, unlike the 20 years of the NDO. There are various other differences which also need to be considered before making a disclosure.

What happens if I don’t use the NDO?


HMRC may already have obtained details of your offshore assets from your financial institution (it already has rulings against a number of financial institutions requiring them to supply specific details for all UK based account holders and others are expected to follow suit). These standard details are likely to be sufficient to enable HMRC to launch an investigation into your affairs – leading to large penalties on top of any tax you are found to owe.


The only sensible option for individuals, companies or trustees who have not fully declared their income in the past is to make a full voluntary disclosure to HMRC now. But anyone contemplating this approach should seek expert advice on how to do it in a way that keeps penalties and risks to a minimum whilst reducing exposure to further investigation and potential prosecution.


Seeking help


If you are unsure whether you have paid your tax correctly, then you should get some help to check the position - either from a tax advisor like myself or HMRC directly. HMRC are setting up a helpline for queries on the NDO that will be operational from September 1 2009.

Don’t just sit there


Individuals with more complicated tax affairs should seek professional advice urgently as the limited period for making a disclosure will make it difficult for them to comply.


HMRC has said that there will be no further amnesties and, if in future it catches up with tax evaders, they can expect to pay tax penalties of at least 30% of the tax HMRC discovers they have evaded.

Where can I get more help?

If you want to bring your tax affairs up-to-date, contact me for a FREE initial consultation to assess your position and how I can help you.


Comment


The Charterd Institute of Taxation have rightly suggested NDO should also include anyone with an undisclosed income rather than just those with offshore accounts. Such universal tax amnesties have been very effective in France and Italy.


Perhaps HMRC is concerned that a general amnesty would flood it with work putting more strain on its overstretched resources.


I can guide you through any tax investigation or disclosure process for offshore income and negotiate directly with HMRC to ensure that the tax, interest charges and any tax penalty are minimised.








Disclaimer

The information contained on this site is for general guidance only. You should neither act, nor refrain from action, on the basis of any such information. You should take appropriate professional advice on your particular circumstances because the application of laws and regulations will vary depending on particular circumstances and because tax and benefit laws and regulations undergo frequent change.

Whilst I will do the best i can to ensure that the information on this site is correct at the date of first posting, I shall not be liable for any loss or damages (including, without limitation, damages for loss of income or business or increased liabilities) arising in contract, tort or otherwise from the use of or inability to use this site, or any information contained in it, or from any action or decision taken as a result of using this site or any such information. Third parties are responsible for ensuring that material submitted for inclusion on this site complies with appropriate law. I will not be responsible for any error, omission or inaccuracy in the material submitted by third parties.

I accept no responsibility for the availability or content on any site to which a hypertext link from this site exists. The links are provided on an "as is" basis and I make no warranty, express or implied, for the information provided within them.


You are permitted to access, print and download extracts from this site on the basis that the use of all material on this site is for information and non commercial or personal use only; any copies of these pages saved to disk or to any other storage medium may only be used for subsequent viewing purposes or to print extracts for personal use.


By accessing any part of this site, you shall be deemed to have accepted these terms in full.


These terms shall be governed by and construed in accordance with English Law and the courts of England shall have exclusive jurisdiction.

I will not respond to individual queries posted as comments on this blog. If you need advice on a specific situation, email the full details to me at jpointon@gmail.com.