Posts Tagged ‘VAT’

Tax and the Christmas party

Tuesday, November 17th, 2009

Christmas is drawing in on us at an ever increasing pace and at this time of year we, as business people, think about how to reward our teams for a hard years work.  A great way to do this is to throw a Christmas “bash” free of charge to attendees.

Employers can spend up to £150 a head annually on staff events, without HMRCE treating it as a taxable perk.

However, there are a few things that you need to be aware of and, if they aren’t followed, could cost you or your staff dearly.

  1. The allowance is £150 - on the nose. Go just £1 over this and the entire event becomes taxable, not just the excess.  The taxable benefit becomes £151, which means that tax and national insurance must be added on top.  This would make the event very expensive, either for the employer or the employee.
  2. You can spend the £150 on virtually anything you like, but make sure you keep the taxi fares and hotel accommodation within the £150
  3. The £150 also includes VAT, so be aware of including VAT in your budget
  4. The event must be open to all employees, not just a select few (although not all have to attend).  You can also extend the invitation to partners/ spouses and they too can benefit from the £150 allowance
  5. You don’t have to limit yourself to just one function a year.  You may decide to have two events a year at a cost of £75 each.  Be aware though, if the second event costs £76, then the whole £76 becomes a taxable benefit.
  6. Only annual events qualify, so going to the pub on a Friday teatime is out.  HMRCE have been known to pursue tax on an event which, despite it being within the limits, was to celebrate the companys 40th birthday.  Whilst this is an extreme interpretation of the rules, you need to weigh up the risk against the benefit

The HMRCE approach is to aggregate the cost of the event and divide it by the number of attendees, so there’s no need to worry that John in Marketing ordered the fillet steak!  Do make sure, however, that you keep accurate records of the costs of the event, and whatever you do - Don’t forget to close the free bar in time!

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HMRC New Penalty Regime

Tuesday, October 6th, 2009

HMRC have recently introduced a new penalty regime that applies to tax returns that under declare the amount of tax payable.  It applies to all tax return documents filed on or after 1st April 2009.  The penalties all centre around the care applied when producing and submitting the return.  In this article, we’ll look at why a penalty might be charged, the amounts of the penalty and what you can do to avoid getting charged.

Why might you get charged a HMRC penalty

The penalty regime is focused on both the accuracy of submitted information and the care that was taken in preparing the information.  HMRC state that there are four differant types of inacuracy:

  • An inacuracy made, despite the taxpayer taking reasonable care (in which case there will be no penalty)
  • A careless inacuracy
  • A deliberate, but not concealed error
  • A deliberate and concealed error

Penalties for inacuracies will impact across VAT, CIS, Income tax, Corporation Tax, Capital Gains Tax, PAYE and National insurance.

The penalty regime is designed to address the behaviours that led to the inacuracy.  As a result, the penalties for deliberate and concealed errors are substantially higher.

How much will you be charged

The penalties determined will depend upon how the error occured in the first place.  The regime has been put in place to encourage “correct compliance”.  An inacurate document must satisfy two conditions before the penalty can be charged:

  1. It must have led to an underpayment of tax, or a false reclaim of tax, and
  2. It must have been careless, deliberate or deliberate and concealed

If those two conditions are met, then a penalty can be applied.

The maximum levels of penalty range from 30% of the understatement of tax for a careless error, right through to 100% of tax due for a deliberate and concealed error.  A deliberate, but not concealed error, will lead to a maximum penalty of 70% of the tax due.

How to avoid being charged a penalty

The most obvious way of avoiding a penalty is not to make any mistakes on your tax returns!

However, occassionally mistakes do occur, so how can you reduce your penalties should you find yourself in thsi situation?

Quality of disclosure

Reductions of penalties can be made, dependant upon the quality of the disclosure following the discovery of the error:

  1. You can tell HMRC of the error, explaining how the error arose and making full disclosure of the inacuracies
  2. You can help HMRC in quantifying the under assessment
  3. You respond positively to requests for information and documents from HMRC

(These responses are taken from HMRC website)

The final way to avoid receiving penalties in the first place is to use your accountant to undertake as much of the work as possible in the first place.  Yes, it may cost you a few pounds more than you are currently paying, but could be well worth it in the long run to avoid being caught up in the penalty regime process.

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Do you have a valid VAT invoice?

Saturday, October 3rd, 2009

In my last post about reclaiming VAT on expenses incurred by an employee, I talked about getting a supplier to make out an invoice directly to the company.  But what should be included on a VAT invoice, and what will happen if any of the items that should be included, aren’t?

Valid VAT invoices

For an invoice to be valid in the taxman’s eyes, all of the following  must be present on the invoice:

  1. The invoice must contain a unique identifying invoice numberautomated-invoice-processing2
  2. The date of supply of goods/ services should be displayed
  3. The date of the invoice (the tax point)
  4. The name and address of the purchaser
  5. The type of supply (e.g sale of goods, lease, rental, commission etc)
  6. A description of the goods or services supplied
  7. For each description, a quantity of goods or extent of services supplied
  8. The total amount payable excluding VAT
  9. The rate and amount of any discounts offered
  10. The rates of VAT applied
  11. The amount of tax chargeable at each VAT rate
  12. The total amount of VAT chargeable

If any of the above is missing from an invoice, it is not a valid invoice for tax purposes and there is no legal entitlement to reclaim VAT on it.  It has been known for input VAT claims to be refused because of minor ommissions.

VAT invoice Tip

I would recommend using the list above as a checklist for supplier invoices.  Make sure you carry out spot checks on invoices you receive to ensure they meet all the criteria for being valid and that you don’t miss out on potential VAT reclaims.

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Don’t fall foul of the VAT reclaim trap

Saturday, October 3rd, 2009

There are occassions where the director of a business will need to pay for business expenditure out of his or her own pocket.  For example, you could be away on a trip and see a shiny new must have piece of equipment at a knock down price.  You don’t have your company card with you, but do have enough cash in your personal account, so you buy it and then claim it back on expenses from the company.  The problem is that the receipt is likely to be in your name, rather than the company’s, so how will the VAT inspector react on a VAT inspection?

The VAT reclaim rules in black and white

The law states that if a business wishes to reclaim VAT on purchases, several conditions must first be met, otherwise the VAT inspector could refuse your claim.  The two basic rules are:

  • The VAT must have been incurred by the person reclaiming it
  • The person making the reclaim must hold a valid VAT invoice for the supply

Exceptions to the rules

There are a couple of exceptions to these rules which all relate to small value purchases incurred in the course of business (i.e. less than £25 per transaction), such as:

  • Coin operated machinery
  • Car Parking
  • Toll charges
  • Telephone calls
  • subsistence claims

In these cases, the original receipt should be passed to the company by the employee/ director, but VAT can be reclaimed.

However, that doesn’t help with our original problem of the director buying a significant piece of equipment for the business on his personal card.

How to avoid the VAT trap

When you are buying goods in this way, you are really just acting as a conduit for your company, who are the real buyer, so you have met the first condition.

To meet the second it would be wise to ask the seller to make the invoice out to the company, even though you are paying the bill.  To avoid any concerns the seller may have, show him a business card to prove you are an employee of the company.

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Special schemes to account for VAT

Thursday, September 3rd, 2009

vat_thumbThere are a number of special VAT accounting schemes, which may have benefits for your business.  Three of the most popular are explained below:

Annual Accounting for VAT

If your business turnover is less than £1.35m, you may apply to HMRCE not to fill in quarterly VAT returns, but instead to complete one return a year.

Under this scheme, you must pay a monthly direct debit equal to an estimate of the years VAT liability (usually calculated by reference to the previous 12 months).  Any additional liability is then paid as a lump sum at the end of the year.

Under this scheme, businesses must remain self disciplined and ensure they keep a close eye on any VAT liability accruing throughout the year.  The last thing you need is a large balance to pay that you weren’t expecting.

The schemes main advantage is that there is certainty over the monthly VAT payment so you can correctly budget for it within your cashflow.

Cash Accounting for VAT

If your turnover is less than £1.35m, you may choose to only pay VAT to HMRC once your customers have paid you, rather than when you raise invoices to your customers.  however, similarly, you can only claim VAT back on your purchases once you have settled the bill with your supplier.

The main advantage of this scheme is that you don’t have to fund the VAT to HMRC out of sales proceeds as you only pay it across once you have received the VAT cash in.

Flat rate accounting for VAT

This scheme can be applied to businesses with turnovers less than £150,000 (excluding VAT).

Those who join the scheme do not need to record the VAT on their expenses.  Instead, the business continues to charge its customers at the full VAT rate (currently 15%), and then pays a fixed percentage of the gross sales over to HMRC.

The fixed percentage is based on the industry that the business is involved in.

This scheme is particularly beneficial to businesses who have few VAT’able expenses or who are looking to simplify their VAT recording.

Of course, you shouldn’t enter into any of these schemes without full consideration of all the facts.  Why not give us a call to see if any of these schemes would be beneficial to your business

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