1 January 2010 heralds the restoration of 17.5% as the standard rate of VAT, the
effect of which is covered on the back cover of this newsletter. It is also the start
date for the package of cross border VAT changes announced initially at Budget
2009 and now in Finance Act 2009.
For any business involved in providing or purchasing international services, a
review of the impact of these changes on their VAT accounting is essential.
The key areas of change include:
• the place of supply of services rules
• the time of supply of services rules
• the reporting requirements and deadlines for EC sales lists
• VAT refund procedures where VAT is paid in another EU member state
Second Quarter
For VAT accounting periods commencing 1 April 2010, returns will have to be
filed online where annual turnover (exclusive of VAT) exceeds £100,000.
Electronic payment will also be required. The online filing requirement will also
apply to all newly registered businesses from that date.
This is subject to HMRC's own caveat that ‘all necessary regulations are passed’
in time. All affected businesses should receive correspondence advising of the
changes early in 2010.
transaction falls within the capital gains tax (CGT) rules and is therefore taxable
at only 18%. The gap of 32% is a very tempting one to consider but be aware that
HMRC have a strong incentive to move the other way and may seek to turn 18%
into 50%.
Where share transactions take place, there is some complex anti-avoidance
legislation that can turn a capital gain into an income tax charge which has been
in place for many years. This can apply where HMRC can show that the
arrangements were not done for commercial reasons and were done for the
purpose of avoiding tax. For example, a higher rate tax individual who owns two
companies A and B sells some of the shares in company A to company B for cash.
This may trigger the rules because all that is effectively happening is that cash is
being extracted from company B’s distributable profits to the shareholder and so
what appears to be a capital gains tax transaction is, in substance, a dividend.
Land transactions can also be an area of contention. Suppose instead of buying
land in their own name an individual uses a company to buy the land and develop
the site. Then instead of selling the development in the company, they sell the
shares in the company (the purchaser may also find this attractive for stamp duty
land tax purposes). They think they have made a capital gain on the shares but
HMRC have legislation which they can use to argue that this should be treated
as an income tax liability because if the land had been sold, there would have
been a revenue profit.
Where a land transaction is carried out directly by an individual, that individual
may want to argue that it is a capital transaction. However, the definition of a trade
for income tax purposes includes what is known as ‘an adventure in the nature of
trade’ and there is a substantial body of case law which has established the
characteristics of such an adventure which may lead to an income tax charge.
If you are planning significant one-off transactions you need to take advice before
you start to ensure that these potential problem areas can be avoided, so do
contact us.
‘Where both the worker and the engager decide that self-employed status is the
desired outcome, then it is very challenging for HMRC to build a full and accurate
picture of the true terms of the engagement. As a result, demonstrating any
mismatch between the contract and the reality can be difficult and time-consuming.
Or, if there is no written contract in place, establishing the actual terms of the
engagement can also be problematic.’
The government believes that the following three criteria are reliable indicators,
within the context of the construction industry, of a worker being in receipt of self-
employment income:
• Provision of plant and equipment - that a person provides the plant and
equipment required for the job they have been engaged to carry out. This will
exclude the tools of the trade which it is normal and traditional in the industry for
individuals to provide for themselves to do their job;
• Provision of all materials - that a person provides all materials required to
complete a job; or
• Provision of other workers - that a person provides other workers to carry out
operations under the contract and is responsible for paying them.
A worker will have to meet one or more of these three criteria in order not to be
deemed to be in receipt of employment income.
If the worker is deemed to be in receipt of employment income, PAYE will be due
on the payment he receives. The person who makes the payment to the worker
will have the obligation to apply the statutory criteria.
However, it is intended that the introduction of the test should not have an
adverse impact on those genuinely carrying on a business and the test has been
formulated to achieve this. The government recognises that a flexible labour
supply is important to the industry and that self-employed workers who are
carrying on a business make an important contribution to this.
This measure will only deem a worker to be in receipt of employment income for
the purposes of income tax and NI and will not confer employment law rights on a
worker. However, the government hopes that the tax changes will also engender
a more appropriate treatment of workers throughout the industry, leading to a
culture of responsible employers applying employment rights and providing
training opportunities.
Where the person in receipt of the worker’s services and the payer are the same,
or the payer is an employment agency, PAYE and NI will be due on the full
amount of the payment. Where the payer is an intermediary, the definition of
payment in the Managed Service Company legislation may be adopted.
These are proposals at the moment and we will keep you informed of developments
but in the meantime please contact us if you need further information.
Vehicle scrappage allowance
The original scheme which pledged £300 million has recently received a
welcome boost of a further £100 million funding. In announcing the decision
Business Secretary Lord Mandelson said:
“The automotive sector has been strongly affected by the recession, but the
scrappage scheme has delivered a boost to manufacturers and the supply chain.
We have listened to the concerns of manufacturers and are increasing the funding
of the scheme to £400 million.
“But we must make sure that the help we do offer is targeted, limited and
proportionate. This is not a blank cheque to the auto manufacturers but recognition
there is still a short term challenge to boost demand and confidence in the sector.”
Alongside the increased funding, the government scheme which offers a £2,000
discount on a new vehicle purchase, funded partly from the government and
partly by motor manufacturers is to be extended so that van owners with vehicles
over 8 years old (so registered on or after 28 February 2002) rather than the
current 10 year requirement can benefit.
Car owners will also get a boost, with the age qualification changed by 6 months
to extend the benefits to cars registered on or before 29 February 2000
(V registration).
The scheme is still to end on 28 February 2010 or earlier if the funding runs out
so act now.
Temporary first year allowance
Many businesses already obtain 100% relief on plant and machinery expenditure
but there are situations when the Annual Investment Allowance of £50,000 per
annum either has to be shared with another business or is simply insufficient for
bigger plant intensive operations. In recognition of this and to encourage
investment in the current economic climate, an extra capital allowance is available
on a temporary basis.
The additional capital allowance is only available for expenditure incurred on
plant and machinery for a qualifying activity in the 12 month period commencing
1 April 2009 for companies and 6 April 2009 for individuals and partnerships.
The temporary allowance takes the form of a first year allowance (FYA) of 40%
instead of the normal 20% annual allowance. The FYA will not apply for
expenditure on integral features, cars, long life assets and assets for leasing.
However it is available to all sizes and structures of business so take advantage
before it disappears.
hide from tax authorities due to Liechtenstein’s stringent banking secrecy laws.
HMRC have been gathering information from many banks over recent times in an
attempt to track down undeclared monies. Now, Liechtenstein and the UK have
signed a deal which concerns the introduction, by Liechtenstein, of a five-year
taxpayer assistance and compliance program. It also concerns the introduction,
by HMRC, of a five-year special disclosure facility for persons wishing to regularise
their UK tax affairs.
The deal is designed to provide an incentive for persons with assets and interests
in Liechtenstein to disclose previously undeclared income and gains to HMRC.
This will be done by limiting the recovery of UK taxes to a defined 10-year period
and providing an option for a simplified composite rate of tax in certain
circumstances. Normally, HMRC would be able to consider tax, interest and
penalties for up to 20 years. The main part of the deal is that UK investors will be
urged to come clean to HMRC about their tax affairs. If they do, they will be given
the ‘favourable’ terms detailed above. If they don’t, then Liechtenstein will close
their accounts, although Liechtenstein will not be handing over bank details
to HMRC.
HMRC consider that approximately 5,000 British investors own bank accounts in
Liechtenstein and estimates of the funds on which there could be unpaid tax,
could be up to £3bn, so it will be interesting to see how successful this deal is
for HMRC.
Until now, one of the key conditions to obtaining the relief has been that the
agricultural property was located in the United Kingdom, the Channel Islands or
the Isle of Man. This is now extended to include qualifying property anywhere in
the European Economic Area (EEA). This comprises all the EU countries plus
Norway, Iceland and Liechtenstein.
Going forward this means that an individual owning agricultural land in, for
example, France could now qualify for APR on the value of that land in their estate
at death or pick up the relief if they were to transfer the land into a trust in their
lifetime and possibly avoid or mitigate their IHT liability accordingly.
The relief also applies retrospectively because the UK government has been forced
to remove the discrimination which existed in favour of UK land. This means that
there may now be an opportunity to make a claim for repayment of tax.
If IHT was paid on property in the EEA after 23 April 2003 and the property would
have met the conditions to qualify for APR then the tax paid can be recovered by
making a claim to HMRC. Normally a tax repayment has to be made within six
years which would now be impossible for tax paid early in 2003. HMRC are
required to allow claims to be made by 21 April 2010 where they would
otherwise be out of time.
Lifetime gifts
It is not just IHT which might be repayable. The gift of land and property from one
individual to another during lifetime is usually chargeable to capital gains tax
(CGT) unless gift relief is available. In most cases this is only available on trading
assets but where a gift of land or property qualifies for APR, the gain can be
deferred for CGT purposes. If for example an individual had gifted agricultural
land in Eire to their children in 2005, the individual may have paid CGT on the
gain. A gain is essentially the difference between the market value of the land at
the date of the gift and any allowable capital expenditure. A claim could now be
made to defer the gain until the children dispose of the land and that would give
the parent a repayment of CGT now.
Please contact us to review your family’s IHT and CGT position if you consider
this may be beneficial to you.
The staff party
This is not classed as business entertainment as long as it is exclusively for
employees and their partners. This means from the business perspective the
costs are deductible for income tax (IT) or corporation tax (CT) and any VAT
element is recoverable.
Be careful of situations where the business incurs costs for a mixed event for the
benefit of staff and customers or suppliers, as the entertaining portion may be
disallowed for IT and CT and part of the VAT may be non recoverable. In cases
where clear records cannot distinguish between staff and others there is a risk of
the whole amount being disallowed!
For the staff there is no taxable benefit of being provided with parties or events
over the course of a tax year, provided that the overall cost to the employer does
not exceed £150 (VAT inclusive) per attendee, in the tax year. Where there is an
event which trips over this limit then a taxable benefit does arise.
A thank you gift
Gifts to staff are also normally a fully deductible cost for the business and VAT is
recoverable. It is non-staff gifts which are usually restricted in form and amount to
retain tax deductions.
HMRC generally allow an employer to give minor gifts to their employees without
having to report this as a perk of the employee’s job through the benefits system;
for example, some flowers when an employee gets married. This may even apply
where all employees receive a gift (for example chocolate), provided it is trivial and
not something which can be turned into or used as money. In circumstances where
an employer does need to report gifts, which are not trivial, a form P11D is used.
Using form P11D will mean that the employees will end up paying tax on the value
of the gift. This may not be the best way of dealing with this issue as the tax charge
may leave a nasty taste (unlike the chocolate!)
Alternatively the employer can pay the tax on the gift using a PAYE settlement
agreement. Do get in touch if you would like to know more about this area.
Special rules for sales of goods that span the change in rate
However, there are optional change of rate rules that you may be interested
in applying. You can apply the rules selectively to different customers.
So, for example, if you issue a VAT invoice after 1 January 2010, for goods you
provided, or services that you completed before 1 January 2010, you can, if you
wish, apply the 15% rate.
You can decide to apply these rules even after you have issued a VAT invoice
showing 17.5% VAT. If you do, you must issue a special credit note giving credit
for the extra 2.5% VAT, within 45 days of the rate change (i.e. by 14 February
2010). You should not cancel the original invoice.
Example
One computer is delivered to a VAT registered business customer and one to a
non business customer on 22 December 2009 when the VAT rate is 15%. The
business customer is fully taxable. On 2 January 2010 the VAT invoices in respect
of the two sales will be issued. What rate of VAT applies?
Under the normal taxpoint rules, 17.5% VAT is due as the invoice was issued
after the increase in the rate and within 14 days of the supply of the computer.
However, under the special rules you may decide to charge the 15% standard
rate of VAT which was in effect when the computer was delivered. This will reduce
the amount of VAT you are liable to account for on the sale.
Your VAT registered customer is able to recover the VAT charged in full so the
use of the special rules will not save them any tax. In this situation it may be easier
just to charge the full 17.5%. However for the non business consumer they will
probably be expecting to only be charged 15% VAT so you have the facility to
apply only 15% and keep them happy.
Supplies of services that are in progress on 1 January 2010
It will also happen that a service commences before 1 January 2010 and is still in
progress after that date. The normal rule is that where an invoice is issued or a
payment received after 1 January 2010 VAT is due at 17.5% even if part of the
supply was undertaken before that date. However, special rules also apply here
both in relation to continuous supplies of services (such as leasing of equipment)
and to single supplies of services (such as a lawyer preparing a will), carried out
over a period of time. Please contact us for more information if this affects you.
Payments in advance of 1 January 2010
Where payment is received before 1 January 2010 for goods and services also
supplied before that date then the old 15% charge clearly applies. However where
goods or services are not supplied until on or after that date then special anti
avoidance rules may apply to prevent artificial VAT savings and obtaining advice
is recommended.
However, if HMRC can show that the dividends are unlawful from a company law
perspective at the time of payment, then they could argue that the money extracted
was not a dividend but a loan. Some companies are clearly at risk where currently
they are not creating the same level of profits as in recent years and yet continue
to extract regular dividends.
For many owner managers, this would leave the company with a corporation tax
bill of 25% of the amount taken as well as a taxable benefit for the individual for
the use of the monies and Class 1A NIC for the employer.
In a recent case, the taxpayers entered into a particular corporate structure which,
if it worked, mitigated the corporation tax bill greatly. HMRC said that this structure
did not work. However, the companies involved did not have enough money to pay
this additional corporation tax, that HMRC thought was due.
HMRC then looked back in time and saw that the owners had extracted a lot of the
profit over the years as dividends. So HMRC attempted to use company law to
make the owners repay the dividends, as they had been paid unlawfully… which
would then have left the companies involved with money to pay the corporation tax.
HMRC won the first two rounds of this case and although they have now lost the
latest round, it just goes to show how important it is for companies to ensure they
have enough reserves at the time dividends are paid.
HMRC are clearly interested in this area, so if you have any concerns, please do
not hesitate to get in touch.
Disclaimer - for information of users: This newsletter is published for the information of clients.
It provides only an overview of the regulations in force at the date of publication,and no action
should be taken without consulting the detailed legislation or seeking professional advice.
Therefore no responsibility for loss occasioned by any person acting or refraining from action
as a result of the material contained in this newsletter can be accepted by the authors or the firm.