Welcome to our April newsletter. This month we are taking a look at flat rate VAT, service companies, car benefits and giving to charity.
Don't forget that on 6th April the 2009/10 tax year started so if you have a self assesment return to do, make sure you get your information in to us as soon as possible so that we can get your tax return finished and submitted online well before the deadline starts approaching!
Traps in the VAT Flat Rate Scheme
The Taxman likes to encourage small businesses to join the flat rate VAT scheme. This scheme simplifies your VAT return as you apply the relevant flat percentage applicable for your trade sector to all your total business income each quarter, (including the VAT charged), and pay the resulting amount as VAT to the Taxman as VAT. You don't have to worry about reclaiming VAT charged on purchases.
However, the flat rate VAT scheme does not suit all small businesses. The flat rate must be applied to all business income, including interest received from business bank accounts, rents, and sales of assets where VAT was not reclaimed, such as cars or property. This means you effectively pay VAT on the gross receipts of sales on which you have not collected any VAT.
If you are a sole-trader the flat rate should be applied to any letting income you receive in your sole name, as lettings are regarded as a business for VAT purposes. Lettings undertaken as a partnership, perhaps jointly with your spouse, are not counted as part of your sole-trader business income. When you sell a let property the flat rate should be applied to the total proceeds. You can withdraw from the flat rate scheme before you sell a high value item such as a property, but you have to stay out of the scheme for at least 12 months.
Remember the flat rates for most business sectors changed on 1 December 2008, when the standard rate of VAT was reduced to 15%, so check you are using the correct flat rate for your sector.
The Service Company Question
It's time for employers to complete the annual form P35, and this year section 6 of part 3 is causing confusion once again. This asks two questions which require yes or no answers:
- Are you a Service Company?
- If "yes", have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?
Guidance on how to answer these questions is found on page 18 of the leaflet E10 (2009): Finishing the Tax year up to 5 April 2009. A service company in this context can also be a partnership or LLP, if it has employees. If the business has no employees it will not be completing a form P35.
The introduction the guidance to section 6 says:
The first question narrows those employers who need to consider whether the second question applies.
This is a helpful statement as it leads you to believe that if your business is not a Managed Service Company (MSC) and is not affected by IR35 you can answer "no" to both the first and second questions. However, the detailed guidance to question 1 indicates that you should answer "yes" to question 1 if the owners of the business perform any services in person for the customers of the business, and the income from that work forms at least half the total business income. Services are generally anything that is not the provision of goods.
It is clear that you should only answer "yes" to question 2 if the IR35 or MSC rules do apply to your business, all other businesses should answer "no". However, a "yes" to question 1 and "no" to question 2 may give the Taxman cause for concern as it will not be what he is expecting.
We believe the Taxman wants businesses that are not subject to IR35 or the MSC legislation to answer "no" to both questions 1 and 2 in section 6 of part 3 to the P35 form for 2008/09. If you are concerned that IR35 could apply to your business please contact us.
If you use the Mazuma Purpleforce or Platinumforce service then we will complete your P35 for you. If you have been sent one please forward it to us as soon as possible, the deadline for filing them is 19th May 2009.
Car Benefit Changes from 6th April
Company cars still used by company directors, sales representatives, car dealership staff, and certain disabled workers. All of these employees will be affected by changes concerning car benefits coming into effect from 6 April 2009.
- Form P46(car). Whenever an employee has a new company car the employer has to complete a form P46(car) with the details of the new vehicle and submit to their Tax Office at the end of the quarter. From 6 April 2009 the employer only has to complete a form P46(car) when an employee is provided with a car for the first time, or gives up the company car completely. Where the company car is replaced by another car the change will not be reported during the tax year, as those changes will be picked up on the annual form P11D.
- Motor-dealerships often allow their staff to drive cars for demonstration purposes, and take those cars home. Each member of staff may have use of many different demonstration cars during one tax year, which would mean numerous forms P46(car) being completed to report each car. To ease this administration nightmare the major dealerships have come to local arrangements with their Tax Offices to provide details of an "average car" provided to their employees. These local arrangements are now being standardised across the country from 6 April 2009. Ask us if you need more detail about these new rules for motor-dealerships.
- Disabled employees. An employer may provide a severely disabled employee with a specially adapted car to allow that person to get to work. Where that car is also used for private journeys, other than ordinary commuting to and from work, there is a taxable benefit. This benefit in kind charge is reduced where the employee needs to use an automatic transmission car rather than a manual due to their disability. The CO2 emissions of the equivalent manual car (which will usually be lower) are used in the benefit in kind calculations. From 6 April 2009 the list price of the equivalent manual car will also be used in the benefit in kind computations. To ensure the employee has the correct car benefit included in his PAYE code for 2009/10 he must tell his Tax Office that this particular rule for disabled employees applies, and let the Taxman know what the cost of a manual equivalent car is.
Giving to Charity Tax Efficiently
It's the London Marathon this month and thousands of people will be running to raise money for their favourite charities. Most of this money will come from individuals, but how should a company give to charity?
The most tax efficient way for individuals to make charitable gifts is under the gift aid scheme. All the individual has to do is declare to the charity that they pay enough UK tax to cover the basic rate tax deemed to be deducted from the gift. The charity can then reclaim this tax. For a gift of £80 the individual must pay at least £20 in UK tax.
A company cannot make donations whereby the charity reclaims the tax, but it can receive tax relief for the gross value of the charitable gift it makes. The donation is deducted from the company's total profits before corporation tax is calculated, so the company receives tax relief at its highest marginal tax rate. This gift is treated as a non-trading charge against profits, which cannot increase a trading loss, or be carried over to another accounting period. The company must be making profits in the year it makes the donation to get tax relief for the gift. There are restrictions on the tax relief if the company or a connected person receives benefit back from the charity, with particular rules for companies that are controlled by charities.
Whether it is more tax efficient to give as an individual or through your own company depends on your relative marginal tax rates. A small company currently pays tax at 21%, but could have a marginal rate of 29.75% for profits over £300,000. Individuals pay income tax at 20%, and tax relief at this level is built into the gift-aid scheme. Higher rate taxpayers who pay tax at 40% can reclaim the additional 20% tax relief on their donations through their annual tax return.
However, if you need to take the funds out of your company first in order to get the funds personally to make the gift you will also have to consider the tax to pay in taking the funds out of the company. In this situation the calculations get more complex depending on your tax rate and whether you extract funds as dividend or salary and whether a loss is created by the gift. Therefore, please talk to us if considering a large donation using funds presently in your company.
Question and Answer Corner
Q. I formed my own IT contracting company in 1987, which made good profits. In 2006 that company bought the assets of several small record labels which were making a loss. In May 2008 I gave up IT contracting and my company has concentrated on this since then. The new business will probably make a loss in 2009. Can I set that loss back against the profits made by the combined new business and IT businesses in 2008?
A. Yes you can. As both trades were active in 2008; the IT consultancy and the new business, there is no restriction on the amount of the new business loss you carry back from 2009 to set against the profits made in 2008.
Q. In 2005 I retired from my architectural practice and sold my share of the business to the remaining partners. I invested the proceeds in Enterprise Investment Scheme shares (EIS), which I am about to sell, so I understand the gain from 2005 will now be taxed. Are there any reliefs I can claim to reduce that gain?
A. If the gain you made on selling your share in the architectural practice in 2005 would have qualified for entrepreneur's relief, which is possible if you were a partner for at least a year, you can claim entrepreneurs relief on that 2005 gain when becomes taxable in 2009. Entrepreneur's relief actually came into effect from 6 April 2008, but we pretend it was in place in 2005 for this test.
Q. A member of my staff has had a serious operation and will be away on sick leave for some weeks. If I send her flowers from the company will this be taxable as a benefit in kind?
A. The Taxman is usually fine with small gifts like flowers or chocolates to valued members of staff. They are classified as trivial benefits and are not taxable. If you were to send her a cash gift, or a gift voucher that would be taxable.
Tax Diary April/May 2009
1 April 2009 - Due date for corporation tax due for the year ended 30 June 2008.
19 April 2009 - PAYE and NIC deductions due for month ended 5 April 2009. (If you pay your tax electronically the due date is 22 April 2009)
19 April 2009 - Filing deadline for the CIS300 monthly return for the month ended 5 April 2009.
19 April 2009 - CIS tax deducted for the month ended 5 April 2009 is payable by today.
1 May 2009 - Due date for corporation tax due for the year ended 31 July 2008.
19 May 2009 - PAYE and NIC deductions due for month ended 5 May 2009. (If you pay your tax electronically the due date is 22 May 2009)
19 May 2009 - Filing deadline for the CIS300 monthly return for the month ended 5 May 2009.
19 May 2009 - CIS tax deducted for the month ended 5 May 2009 is payable by today.
19 May 2009 - The payroll forms P35 and P14s must be filed by this date - employers late in filing these forms may receive a penalty.
31 May 2009 - Ensure all employees have been given their P60s
DISCLAIMER - PLEASE NOTE: The ideas shared with you in this newsletter are intended to inform rather than advise. Taxpayers circumstances do vary and if you feel that tax strategies we have outlined may be beneficial it is important that you contact us before implementation. If you do or do not take action as a result of reading this newsletter, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.