It would be difficult to write a newsletter this month without talking about the Pre Budget Report. In our newsletter this month we have included a few practical tips for accommodating the reduction in the VAT standard rate to 15% on 1 December 2008, a note of the VAT consequences for house builders who rent out property, changes to capital allowances for cars, a reminder of the increased late filing penalties for companies and a commentary on the National Minimum Wage as it affects directors of small companies.
First of all though, it is the festive season so here are some practical tips of Christmas gifts parties
Christmas Gifts and Parties
Even though research suggests that the credit crunch is forcing a considerable number of businesses to cancel their Christmas party this year, the majority of small businesses will still go ahead with their annual festive bash. One reason to go ahead with the celebration is that, providing certain criteria are met, the company Christmas party can be exempt from tax. However, there are some fiddly rules to get your head around, which is not helped by the fact that the tax man and the VAT man don't seem to agree!
Lets explain what is allowable for tax purposes:-
• Assume that you would like to give a Christmas gift to your customers or to one of your employees. • The taxman will allow you to give a business gift worth up to £50 to any one person in any one year. The rules are:
1. The gift has to be given freely
2. It has to be a business gift. It cannot be food or drink. It can't be vouchers that could be exchanged for food, drink or "goods". So Marks & Spencer vouchers are out as well.
3. It also has to carry an advertisement for your business
Be careful about gifts that cost more than £50. In this case the taxman will disallow the whole amount, not just the amount over £50!
• The taxman will allow you to spend up to £150 per employee on a Christmas party. In fact it can be two or more functions during the year. For instance you might spend some on a Christmas party and some on a summer barbecue.
• If your employees' husbands or wives go to the party as well, that is also okay for income tax purposes. But the VAT Man will count it as entertainment and will not allow you to claim the VAT. You will have to split the bill according to how many people are employees and how many are guests.
• The VAT man does not have a limit on how much you can spend and claim back VAT on at a Christmas party. But he may argue that the party includes an element of personal enjoyment - in which case he may disallow VAT on half the cost. We suggest that you claim all of the VAT relevant to your employees and then let the VAT man challenge it if he feels mean enough!
A LITTLE WARNING - If you go just 1p over the £150 limit the whole lot will be disallowed!
So does it really matter?
What happens if you decide to go ahead and give your customer a bottle of alcohol? The taxman will disallow the expenditure. So if the gift costs £10 it really will cost you £10.
However, if the gift is allowable and costs £10 you can get the VAT back which will save you £1.49. Because the gift is now allowable for tax you may save as much as 40% of the net cost. This means saving another £3.40. So the £10 gift ends up costing you just £5.11. Think how much further this allows you to stretch your budget.
VAT 15% - practical guidelines
The Chancellor announced a reduction in the standard rate of VAT to 15% from 1 December 2008. This reduction will be effective for a fixed period of 13 months. From the 1 January 2010 the rate will revert to 17.5%.
For VAT registered traders this creates a number of practical issues, some of which are highlighted in this article.
1. All sales on or after 1 December 2008 should be charged plus 15% VAT.
2. Zero rated, reduced rate and exempt sales or supplies are unchanged.
3. Retail businesses should use the new 15% rate on all takings received on or after 1 December 2008 - except, if a customer took delivery before 1 December, in which case you should apply the 17.5% rate.
4. If you supply goods to other VAT registered customers and need to issue tax invoices, you should add on 15% VAT to all invoices dated 1 December or later - except where you provided the goods or services more than 14 days before you issue the VAT invoice. For example, if you issue a VAT invoice on 1 December for goods or services provided before 18 November 2008, or you were paid before 1 December. In these cases, your sale takes place before 1 December and you must use the old rate of 17.5%. Note if you received part payment before 1 December, use the old rate for the part payment.
5. Under the normal rules all invoices issued and all payments received before 1 December 2008 are subject to VAT at the old rate, 17.5%. There are also optional rules that you can adopt. See section 3 of the HMRC publication recommended at the end of this article for more information on these special rules.
6. If you want to work out the 15% VAT charged in a VAT inclusive amount, multiply by the fraction 3/23.
7. If you have point of sale tills etc that produce a VAT inclusive receipt you may need to contact your supplier to ensure the VAT rate applied is changed for sales after 1 December.
8. If you want to reduce your current (pre 1 December) sales price to reflect the reduction in VAT to 15%, multiply your old price by 115/117.5, this is equal to 46/47.
9. Do you have to pass on the reduction in VAT to your customers? The answer is no - its up to you.
10. If your VAT return period does not begin on 1 December, you will have to account for VAT in the quarter which straddles this date accommodating both rates of VAT. If you use software to produce your VAT returns your supplier should be able to advise you on this.
11. Make sure that you follow your accounts software supplier's instructions, or give us a call if you need help regarding the change in VAT rate.
12. If you operate a cash accounting scheme you will continue to pay VAT based on receipts from customers. If the amount you receive after 1 December 2008 is payment of an invoice including VAT at 17.5% (pre 1 December 2008) or 15% (post 30 November 2008) you must include the appropriate amount in your output tax calculation. Most accounts software programs that accommodate cash accounting will do this automatically.
13. If you are registered to use the flat rate scheme there are new percentage rates you should apply from 1 December 2008. The new rates are published on pages 43 and 44 of the HMRC guide highlighted in the paragraph that follows.
HM Revenue & Customs have published a comprehensive guide to the VAT change.
You can download it at: http://www.hmrc.gov.uk/pbr2008/vat-guide-det.pdf. It is quite a large PDF document!
House builders renting property
Many building firms are now holding completed residential property which is proving difficult to sell in the current property market. One solution is to rent out this property for a short period in the expectation that property prices will recover.
Ordinarily most of the VAT paid on construction costs is recoverable. Unfortunately rents received from the letting of residential property are an exempt supply for VAT purposes. Accordingly a builder who both constructs and lets residential property is considered to be a "Partially Exempt" trader. Potentially a proportion of the VAT recovered on the construction work may have to be paid back!
The builder may have to:
• adjust the VAT recovered on his submitted VAT returns
• restrict the VAT to be recovered on current and future VAT returns
• or do both
Fortunately there is an escape route! If the amount of input tax which can be attributed to the exempt rental income is below a defined "de minimis" amount, no adjustment to past or future returns is required - VAT input tax can be recovered in full.
Provided the exempt input tax is below:
• £625 per month, on average, up to £7,500 per year; and
• is not more than half of total input tax ,
then the exempt input tax is de minimis and recoverable in full.
If you are a house builder, and considering the rental of residential building stock, do contact us at an early stage so we can help you through the partial exemption calculations which are tedious and complex.
Changes to Capital Allowances for Cars
The Pre-Budget Report has clarified the future tax relief available on the purchase of cars and motorcycles.
Cars purchased by companies from 1 April 2009 (and by unincorporated business from 6 April 2009) will attract tax relief depending on the vehicle's CO2 emissions:
- Up to 110g/km - 100% allowance in year of purchase
- Up to 160g/km - 20% deduction per year
- Over 160g/km - 10% deduction per year
Under this system it will take longer to achieve full tax relief for the cost of a car, particularly for the higher polluting vehicles. When a post March 09 car is sold the balance of the unclaimed cost remains in the pool of business equipment to be deducted at the normal rate of 10% or 20%. So full tax relief is not given even though the car is no longer owned.
Currently, on the disposal of a car that cost over £12,000 the unrelieved purchase cost is claimed as a balancing allowance. Cars that are acquired before 1 April 09 will continue to attract a balancing allowance on sale for a transitional period of five years. After 31 March 2014 all pre-April 09 cars will be added into the relevant pool for business assets. Therefore, if looking at purchasing this type of car, it could be advantageous to purchase before April.
Cars used by partnerships and sole-traders will attract tax relief at the same rates as for company owned cars. However, a balancing allowance will still be available on sale where the car has been used privately by the business owner. So ensuring some private usage may be beneficial.
From April 2009 all motorcycles purchased by businesses will qualify for the Annual Investment Allowance, which will normally give 100% deduction in the year of purchase.
Company late filing penalties increasing from 1 February 2009
Small limited companies are required to file a copy of their accounts each year with Companies House. If you file even one day past the filing deadline you will be penalised. The new late filing penalties which will be levied from 1 February 2009 are increasing dramatically!
The new fines for private companies are:
• Not more than 1 month - £150 (presently £100)
• More than 1 month but not more than 3 months - £375 (presently £100)
• More than 3 months but not more than 6 months - £750 (presently £250)
• More than 6 months - £1,500 (presently £500 between 6 to 12 months, £1,000 over one year)
The new fines for public companies are:
• Not more than 1 month - £750 (presently £500)
• More than 1 month but not more than 3 months - £1,500 (presently £500)
• More than 3 months but not more than 6 months - £3,000 (presently £1,000)
• More than 6 months - £7,500 (presently £2,000 between 6 to 12 months, £5,000 over one year)
Additionally if you were late filing in the previous year (and the previous financial year had begun on or after 6 April 2008) the above fines are doubled.
The new fines also apply to flat management and dormant companies.
The message is clear. If you are responsible for the management of a limited company make sure you give yourself plenty of time to prepare and file accounts on time.
Companies with accounting periods beginning on or after the 6 April 2008 should note the following changes to the filing deadlines with Companies House.
1. Private companies and LLPs - the delivery deadline has been reduced by one month from 10 to 9 months.
2. Public companies - the delivery deadline has been reduced by one month from 7 to 6 months.
Consequential changes include:
• Full calendar months for filing periods have been introduced. Where the accounting period ends on a month end date the accounts filing period will end on a month end date. (Except for the first accounting period)
• Qualifying companies can still file abbreviated accounts.
If you are using Mazuma's Purpleforce service then your accounts will be ready in plenty of time to meet the submission deadlines. Make sure you get your information in to us promptly so that we can deal with any year end queries as soon as possible!
Directors and the National Minimum Wage
There are many directors of small companies that are effectively paid at rates lower than the National Minimum Wage (NMW). This is perfectly legal as long as the director concerned does not have a contract of employment. As soon as a contract of employment is signed the NMW must be applied.
This choice, to be a contracted employee or not, also affects a director's eligibility for Working Tax Credit (WTC).
• If you are a director with no contract of employment you will not qualify for WTC unless your partner works the required number of hours each week.
• If you do have a contract of employment and pay yourself at least NMW for hours worked, you should qualify for WTC.
For ease of reference the current rates of National Minimum Wage are published below.
The rates from 1 October 2008 are:
• Adults (which means people aged 22 and over), £5.73 an hour
• Workers aged 18-21, £4.77 an hour - the 'development rate'
• Young people (those older than school leaving age and younger than 18; you're under school leaving age until the end of summer term of the school year in which you turn 16), £3.53 an hour
• Apprentices under the age of 19 are not entitled to the National Minimum Wage. Apprentices who are 19 or over and in the first 12 months of their apprenticeship are not entitled to the National Minimum Wage.
Christmas at Mazuma
This year we will not be sending Christmas cards out to our clients. In a bid to go green and give something back we will be making a donation to charity of the equivalent value instead. We are sure that our clients won't mind!
Please note that Mazuma's offices will be closed from 24th December 2008 and will re open on 5th January 2009. If you have a VAT return that is due by the end of December please ensure you get your information to us by Friday 12th December at the latest to ensure that we have enough time to process your return.
We wish everyone the happiest Seasons Greetings and a prosperous New Year. We'd like to thank all of our clients for their custom in 2008 and we look forward to working with you in 2009.
Tax Diary December 2008/January 2009
1 December 2008 - Due date for corporation tax payable for the year ended 28 February 2008.
19 December 2008 - PAYE and NIC deductions due for month ended 5 December 2008. (If you pay your tax electronically the due date is 22 December 2008)
19 December 2008 - Filing deadline for the CIS300 monthly return for the month ended 5 December 2008
19 December 2008 - CIS tax deducted for the month ended 5 December 2008 is payable by today.
1 January 2009 - Due date for corporation tax payable for the year ended 31 March 2008.
19 January 2009 - PAYE and NIC deductions due for month ended 5 January 2009. (If you pay your tax electronically the due date is 22 January 2009)
19 January 2009 - Filing deadline for the CIS300 monthly return for the month ended 5 January 2009
19 January 2009 - CIS tax deducted for the month ended 5 January 2009 is payable by today.
31 January 2009 - Last day for electronic filing of Self Assessment returns for 2008
31 January 2009 - Due date for payment of any balance of self assessment liability for the tax year ending 5 April 2008, plus any payment on account due for the tax year ending 5 April 2009.
DISCLAIMER - PLEASE NOTE: The ideas shared with you in this email are intended to inform rather than advise. Individual taxpayers circumstances do vary and if you feel that tax strategies we have outlined may be beneficial it is very 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.