HMRC launch tax catch-up plan

HMRC have launched yet another initiative aimed at encouraging taxpayers to come forward with previously unrevealed earnings.

The tax catch-up plan is aimed at educators of all kinds – those who profit from tuition and coaching as a main or secondary job – but who have not put up their hand to fully disclosed their income to the Revenue.

It follows similar schemes of late, one of which targeted doctors and dentists and another that focused on plumbers and associated trades. Traders who are unlawfully not registered for VAT are currently the subject of a disclosure campaign by the taxman.

The latest opportunity is available to all those who teach, regardless of qualifications, meaning it covers not only tuition of traditional academic subjects, but also fitness and dance instruction, musical tuition, and other such services.

The plan has two stages:
1. From 10 October 2011 to 6 January 2012, individuals must register with HMRC to notify they department that they plan to make a voluntary tax disclosure.
2. By 31 March 2012, those who have registered must tell the Revenue what they owe and pay the tax, interest and penalties.

Taxpayers who come forward by the deadlines are likely to receive the best possible terms for paying the sums owed. Penalties are unlikely to be more than 20% of the unpaid tax.

Those who are discovered by the Revenue at a later date will find they have to pay much higher fines and may face criminal prosecution.

If you are in receipt of income that has not been declared, whether tuition fees or otherwise, you should contact us immediately.

Advantages and Disadvantages of the Scheme

The advantages of the scheme are as follows.

• Output tax is not due until the business receives payment of its sales invoices. If customers pay promptly, the advantage will be limited. Even so, the gain may be material.
• There is automatic bad debt relief because, if no payment is received, no output tax is due.
• Most businesses find it easier to think in terms of cash flows in and out of their business than invoiced amounts.

The potential disadvantages are as follows.

• There is no input tax recovery until payment of suppliers’ invoices.
• The scheme will not be beneficial for net repayment businesses – for example, a business just starting up, which has substantial initial expenditure on equipment, stocks etc so that input tax exceeds the output tax, should delay starting to use the scheme. That way, it recovers the initial input tax on the basis of input invoices as opposed to payments.

Key Rules

From 1 April 2007 a business can join the scheme if it has reasonable grounds for believing that taxable turnover in the next 12 months will not exceed £1,350,000 provided that it:

• is up to date with VAT returns
• has paid over all VAT due or agreed a basis for settling any outstanding amount in instalments
• has not in the previous year been convicted of any VAT offences.

All standard and zero-rated supplies count towards the £1,350,000 except anticipated sales of capital assets previously used within the business. Exempt supplies are excluded.

When a business joins the scheme, it must be careful not to account again for VAT on any amounts already dealt with previously on the basis of invoices issued and received.

A business can start using the scheme without informing HMRC. It does not cover:

• goods bought or sold under lease or hire-purchase agreements
• goods bought or sold under credit sale or conditional sale agreements
• supplies invoiced where full payment is not due within six months
• supplies invoiced in advance of delivering the goods or performing the services.

Once annual turnover reaches £1,600,000 the business must leave the scheme immediately.

On leaving the scheme, VAT is due on all supplies on which it has not already been accounted for. However outstanding VAT can be accounted for on a cash basis for a further six months after leaving the scheme.

Accounting for VAT

Output tax must be accounted for when payment is received.

Cheque. Treated as received on the date the cheque is received or if later the date on the cheque. If the cheque is not honoured an adjustment can be made.

Credit/debit card. Treated as received/paid on the date of the sales voucher.

Standing order/direct debits. Treated as received/paid on the day the bank account is credited.

Part payments. VAT must be accounted for on all receipts/payments even where they are part payments. Part payments are allocated to invoices in date order (earliest first) and any part payment of an invoice allocated to VAT by making a fair and reasonable apportionment.

Records

Under the cash accounting scheme the prime record will be a cash book summarising all payments made and received with a separate column for VAT. The payments need to be clearly cross-referenced to the appropriate purchase/sales invoice.

In addition the normal requirements regarding copies of VAT invoices and evidence of input tax apply.

How we can help

We can advise on whether the cash accounting scheme would be suitable for your business.

What is the Annual Accounting Scheme?

The annual accounting scheme helps small businesses by allowing them to submit only one VAT return annually rather than the normal four. During the year they pay instalments based on an estimated liability for the year with a balancing payment due with the return. The scheme is intended to help with budgeting and cash flow and reduce paperwork.

Joining the Scheme

A business can apply to join the scheme if it expects taxable supplies in the next 12 months will not exceed £1,350,000.

Businesses must be up to date with their VAT returns and cannot register as a group of companies.

Application to join the scheme must be made on form 600(AA) which can be found at the back of VAT Notice 732. HMRC will advise the business in writing if the application is accepted.

Paying the VAT

Businesses that have been registered for 12 months or more will pay their VAT in nine monthly instalments of 10% of the previous year’s liability. The instalments are payable at the end of months 4-12 of the current annual accounting period.

Alternatively such businesses may choose to pay their VAT in three quarterly instalments of 25% of the previous year’s liability falling due at the end of months 4, 7 and 10.

The balance of VAT for the year is then due together with the VAT return two months after the end of the annual accounting period.

Businesses that have not been registered for at least 12 months may still join the scheme but each instalment – whether monthly or quarterly – is based on an estimate of the VAT liability.

In all cases HMRC will advise the amount of the instalments to be paid.

The annual accounting period will usually begin at the start of the quarter in which the application is made. If the application is made late in a quarter it may begin at the start of the next quarter.

All businesses are able to apply to HMRC to change the level of the instalments if business has increased or decreased significantly.

Leaving the Scheme

Any business can leave the scheme voluntarily at any time by writing to HMRC.

A business can no longer be in the scheme once its annual taxable turnover exceeds £1,600,000.

Advantages of the Scheme

Potential Disadvantages

Interim payments may be higher than needed because they are based on the previous year. However, they can be adjusted if the difference is significant.

A business is obliged to notify HMRC if the VAT liability is likely to be significantly higher or lower than in the previous year.

How we can help

We can help you to plan your VAT administration and consider with you whether the annual accounting scheme would be beneficial for your business.

The VAT system is policed by HMRC with heavy penalties for breaches of the legislation. Ignorance is not an acceptable excuse for not complying with the rules.

We highlight below some of the areas that you need to consider.

It is however important for you to seek specific professional advice appropriate to your circumstances.

What is VAT?

Scope

A transaction is within the scope of VAT if:

• there is a supply of goods or services
• made in the UK
• by a taxable person
• in the course or furtherance of business.

Inputs and outputs

Businesses charge VAT on their sales. This is known as output VAT and the sales are referred to as outputs. Similarly VAT is charged on most goods and services purchased by the business. This is known as input VAT.

The output VAT is being collected from the customer by the business on behalf of HMRC and must be regularly paid over to them.

However the input VAT suffered on the goods and services purchased can be deducted from the amount of output tax owed. Please note that certain categories of input tax can never be reclaimed, such as that in respect of third party UK business entertainment and for most business cars.

Points to consider

Supplies

Taxable supplies are mainly either standard rated (20%) or zero rated (0%). The standard rate was 17.5% prior to 4 January 2011.

There is in addition a reduced rate of 5% which applies to a small number of certain specific taxable supplies.

There are certain supplies that are not taxable and these are known as exempt supplies.

There is an important distinction between exempt and zero rated supplies.

• If your business is making only exempt supplies you cannot register for VAT and therefore cannot recover any input tax.
• If your business is making zero rated supplies you should register for VAT as your supplies are taxable (but at 0%) and recovery of input tax is allowed.

Registration – is it necessary?

You are required to register for VAT if the value of your taxable supplies exceeds a set annual figure (£73,000 from 1 April 2011).

If you are making taxable supplies below the limit you can apply for voluntary registration. This would allow you to reclaim input VAT, which could result in a repayment of VAT if your business was principally making zero rated supplies.

If you have not yet started to make taxable supplies but intend to do so, you can apply for registration. In this way input tax on start up expenses can be recovered.

Taxable person

A taxable person is anyone who makes or intends to make taxable supplies and is required to be registered. For the purpose of VAT registration a person includes:

• individuals
• partnerships
• companies, clubs and associations
• charities.

If any individual carries on two or more businesses all the supplies made in those businesses will be added together in determining whether or not the individual is required to register for VAT.

Administration

Once registered you must make a quarterly return to HMRC showing amounts of output tax to be accounted for and of deductible input tax together with other statistical information. For businesses whose turnover is more than £100,000 (excluding VAT) returns must be filed online. In addition, smaller businesses which registered for VAT on or after 1 April 2010 have to file online, regardless of turnover. By April 2012 all other businesses will have to file online.

Returns must be completed within one month of the end of the period it covers, although generally an extra seven calendar days are allowed for online forms.

Electronic payment is also compulsory for those businesses filing online.

Businesses who make zero rated supplies and who receive repayments of VAT may find it beneficial to submit monthly returns.

Businesses with expected annual taxable supplies not exceeding £1,350,000 may apply to join the annual accounting scheme whereby they will make monthly or quarterly payments of VAT but will only have to complete one VAT return at the end of the year.

Record keeping

It is important that a VAT registered business maintains complete and up to date records. This includes details of all supplies, purchases and expenses.

In addition a VAT account should be maintained. This is a summary of output tax payable and input tax recoverable by the business. These records should be kept for six years.

Inspection of records

The maintenance of records and calculation of the liability is the responsibility of the registered person but HMRC will need to be able to check that the correct amount of VAT is being paid over. From time to time therefore a VAT officer may come and inspect the business records. This is known as a control visit.

The VAT officer will want to ensure that VAT is applied correctly and that the returns and other VAT records are properly written up.

However, you should not assume that in the absence of any errors being discovered, your business has been given a clean bill of health.

Offences and penalties

HMRC have wide powers to penalise businesses who ignore or incorrectly apply the VAT regulations. Penalties can be levied in respect of the following:

• late returns/payments
• late registration
• errors in returns.

Cash accounting scheme

If your annual turnover does not exceed £1,350,000 you can account for VAT on the basis of the cash you pay and receive rather than on the basis of invoice dates.

Retail schemes

There are special schemes for retailers as it is impractical for most retailers to maintain all the records required of a registered trader.

Flat Rate scheme

This is a scheme allowing smaller businesses to pay VAT as a percentage of their total business income. Therefore no specific claims to recover input tax need to be made. The aim of the scheme is to simplify the way small businesses account for VAT, but for some businesses it can also result in a reduction in the amount of VAT that is payable.

How we can help

Ensuring that you comply with all the VAT regulations is essential. We can assist you in a number of ways including the following:

• tailoring your accounting systems to bring together the VAT information accurately and quickly
• ensuring that your business is VAT efficient and that adequate finance is available to meet your VAT liability on time
• providing assistance with the completion of VAT returns
• negotiating with HMRC if disagreements arise and in reaching settlement
• advising as to whether any of the available schemes may be appropriate for you.

If you would like to discuss any of the points mentioned above please contact us.

Methods of acquisition

Motoring costs, like other costs incurred which are wholly and exclusively for the purposes of the trade are tax deductible but the timing of any relief varies considerably according to the type of expenditure. In particular, there is a fundamental distinction between capital costs and ongoing running costs.

Purchase of vehicles

Where vehicles are purchased outright, the accounting treatment is to capitalise the asset and to write off the cost over the useful business life as a deduction against profits. This is known as depreciation.

The same treatment applies to vehicles financed through hire purchase with the equivalent of the cash price being treated as a capital purchase at the start with the addition of a deduction from profit for the finance charge as it arises. However, the tax relief position depends primarily on the type of vehicle, and the date of expenditure.

A tax distinction is made for all businesses between a normal car and other forms of commercial vehicles including vans, lorries and some specialist forms of car such as a driving school car or taxi.

Tax relief on purchases

Vehicles which are not classed as cars are eligible for the Annual Investment Allowance (AIA) for expenditure incurred. This allowance allows a 100% write off against profits on plant and machinery purchases of £100,000 per year (the allowance was £50,000 before 1 April 2010 for a business within the charge to corporation tax and before 6 April 2010 for a business within the charge to income tax). It is proposed that this will reduce to £25,000 in 2012.

As the chargeable accounting periods of many businesses will span the operative date of change, a pro rata calculation of their maximum entitlement will be required.

A restriction has been set so that only £50,000 of that available amount can be used for expenditure incurred before 1 April 2010 (for corporation tax) or 6 April 2010 (for income tax).

Where purchases exceed the AIA, a writing down allowance (WDA) is due on any excess in the same period. This WDA is currently at a rate of 20%. Cars are not eligible for the AIA, so will only benefit from the WDA.

Capital allowance boost for low-carbon transport

A 100% first year allowance is available for capital expenditure on new electric vans from 1 April 2010 for companies and 6 April 2010 for an unincorporated business.

Complex cars!

The green car

Cars generally only attract the WDA but there is one exception to this and that is where a business purchases a new car with low emissions – a so called ‘green’ car. Such purchases attract a 100% allowance to encourage businesses to purchase cars which are more environmentally friendly. The 100% write off is only available where the CO2 emissions of the car do not exceed 110 grams per kilometre (g/km). The cost of the car is irrelevant and the allowance is available to all types of business.

When did you buy?

There have been significant changes to the basis of capital allowances for car purchases and the tax relief thereon from 1 April 2009 for companies and 6 April 2009 for individuals in business.

For purchases from April 2009:

The annual allowance is dependent on the CO₂ emissions of the car rather than the cost.

• Cars between 110 -160 g/km are placed in the main pool and will qualify for an annual allowance of 20%. It is proposed that this will reduce to 18% in 2012.
• Cars in excess of 160 g/km are placed in the special rate pool and will qualify for an annual allowance of 10%. It is proposed that this will reduce to 8% in 2012.

If a used car is purchased with CO2 emissions of 110 g/km or less, this will be placed in the main pool and will receive an annual allowance of 20%.

Any cars used by the self employed where there is part non-business use will still be separately allocated to a single asset pool. The annual allowance will initially be either the current 20% or 10% depending on the CO₂ emissions and then the available allowance will be restricted for the private use element.

For purchases before April 2009 the following rules apply:

Cars costing up to £12,000 were included in the main plant pool and get the annual 20% reducing allowance only. There are proposals to reduce this to 18% in 2012.

Cars costing more than £12,000 (so called expensive cars) usually had to be allocated to a separate single asset pool. Each qualifies for the annual allowance of 20% but with a maximum annual allowance on each car of £3,000. There are proposals to reduce this to 18% in 2012. On disposal of each separate asset an extra allowance is available on any overall net cost.

Any cars used by the self employed with part non business use were also separately allocated to a single asset pool so that any private use element can be restricted. This does not apply to employee provided cars.

Example

A company purchases three cars for £20,000 in its 12 month accounting period to 31 December 2009. The dates of purchase and CO₂ emissions are as follows:

Allowances in the year to 31 December 2009 relating to these purchases will be:

In the following year to 31 December 2010 the allowances will be:

Disposals

Where there is a disposal of plant and machinery from the main or special rate pools any balance of expenditure, after taking into account sale proceeds, continues to attract the annual allowance.

Where there is a disposal of a car held in a single asset pool, there is an additional allowance if there is an unrelieved cost. This is often referred to as a balancing allowance.

This applies to:

• cars which cost greater than £12,000 prior to April 2009
• any cars used by the self employed with part non business use whenever purchased.

In the less usual situation of a car disposal where all costs have been recovered and there is an excess of sale proceeds then this is clawed back as a ‘negative’ capital allowance.

What difference will it make?

The key change here is that certain employee or director provided cars would have been placed in a single asset pool when the cost of the purchase exceeded £12,000. Therefore on disposal any shortfall in allowances would have been available at the time of disposal. For cars purchased from April 2009 this will not apply as the cars will be included in one of the two plant pools (main or special rate). Instead the annual allowance will continue to be claimed in that and subsequent periods.

Example

The company above sells all three cars in its accounting period to 31 December 2012 for £7,000. The tax balances immediately prior to sale and the effects of the sales are as follows:

What if vehicles are leased?

The first fact to establish with a leased vehicle is whether the lease is really a rental agreement or whether it is a type of purchase agreement, usually referred to as a finance lease. This is because there is a distinction between the accounting and tax treatment of different types of leases.

Tax treatment of rental type operating leases (contract hire)

The lease payments on operating leases are treated like rent and are deductible against profits. However where the lease relates to a car there may be a portion disallowed for tax.

For 2009/10 onwards for new lease agreements a disallowance of 15% will apply for cars with CO2 emissions which exceed 160 g/km.

For 2008/09 and earlier years this applies where the car has CO2 emissions in excess of 110 g/km and a retail price when new which exceeds £12,000. An adjustment is made to disallow part of that excess. These rules continue to apply for lease agreements entered into before 1 April 2009 for companies and 6 April 2009 for businesses within the charge to income tax

Example

Contract signed 1 April 2009 by a company:

The car has CO2 emissions of 166 g/km and a £6,000 annual lease charge. The disallowed portion would be £900 (15%) so £5,100 would be tax deductible.

Contract signed pre 1 April 2009 by a company:

The car has CO2 emissions of 175 g/km, a retail list price of £20,000 and an annual lease charge of £6,000 There would be a disallowance of £1,200 (calculated by applying a formula) so only £4,800 would be tax deductible.

Tax treatment of finance leased assets

These will generally be included in your accounts as fixed assets and depreciated over the useful business life but as these vehicles do not qualify as a purchase at the outset, the expenditure does not qualify for capital allowances unless classified as a long funded lease. Tax relief is generally obtained instead by allowing the accounting depreciation and any interest/finance charges in the profit and loss account – a little unusual but a simple solution! A disallowance still applies if the vehicle is an expensive car.

Private use of business vehicles

The private use of a business vehicle has tax implications for either the business or the individual depending on the type of business and vehicle.

Sole traders and partners

Where you are in business on your own account and use a vehicle owned by the business – irrespective of whether it is a car or van – the business will only be able to claim the business portion of any allowances. This applies to capital allowances, rental and lease costs, and other running costs such as servicing, fuel etc.

Providing vehicles to employees

Where vehicles are provided to employees irrespective of the form of business structure – sole trader/partnership/ company – a taxable benefit generally arises for private use. A tax charge will also apply where private fuel is provided for use in an employer provided vehicle. For the employer such taxable benefits attract 13.8% (12.8% before 6 April 2011) Class 1A National Insurance.

Vans

No charge applies where employees have the use of a van and a restricted private use condition is met. For details on what this means please contact us. Where the condition is not met there is a flat rate charge per annum of £3,000 for the unrestricted private use plus an additional £550 for private fuel.

How we can help

If you would like further details on any matter contained in this factsheet please do get contact us.