to November's Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
If you need further assistance just let us know or you can send us a question for our Question and Answer Corner.
We are committed to ensuring all our clients don't pay a penny more in tax than is necessary.
Please contact us for advice in your own specific circumstances. We're here to help
Beware of Verbal Tax Advice
Tax is complex! It is not always clear which particular tax, or what rate of tax applies to a transaction. The Taxman realises that businesses often have tax questions that need urgent answers, so he has set up a range of telephone help lines that each deal with specific areas of tax, such as VAT or the construction industry scheme.
Unfortunately these telephone help lines do not always give the correct answer. You may rely on a verbal assurance from a telephone helpline, but later get inspected by a Tax Officer who takes a different view of the situation and raises a penalty for the incorrect tax treatment. This does happen, and two recent cases have shown it is the taxpayer that suffers where there is a disagreement between the helpline advice and the Tax Inspector.
Case 1: In the first case Corkteck Ltd exported soft drinks to Poland through a third person: Sintra SA. The VAT help line told Corkteck that the exported drinks would be zero-rated for VAT. However, the VAT Inspector decided the drinks should have been standard rated as Sintra SA was not registered for VAT within the EU.
Case2: In the second case Acrylux Ltd hired out a private residential property for various functions, some of which lasted several days. The VAT helpline told Acrylux that the hire of the property would be exempt from VAT as it was not a commercial property. However, the VAT inspector said the hire of the property was similar to short-term holiday lettings and VAT should be charged at the standard rate.
In both cases the taxpayer could not prove exactly what facts had been presented to the helpline, or exactly what the helpline had given as its advice. If the advice had been requested in writing the outcome for the taxpayer may have been different. If you have a tax question, please ask us before reaching for the HMRC help lines. If you act on advice that later proves to be incorrect, you could pay a high penalty!
Tips and Service Charge Changes
From 1 October 2009 tips, gratuities, and services charges cannot form part of the national minimum wage of your staff who receive those payments. This applies even if the service charge is a compulsory part of the customer's bill. The Tax Office has reissued leaflet E24: Tips, Gratuities, Service Charges and Troncs to explain this point clearly.
If tips are paid directly to your staff by the customers, those employees should declare the amounts they receive in tips to the Taxman on their personal tax returns, but you don't have to worry about the tax situation. Where the tip is paid to you as the employer, perhaps as an additional amount on the credit card bill, and you decide how to distribute the total tips pool (known as the tronc), among your staff, you must deduct both PAYE and NICs at the relevant rate for each employee.
Where someone else manages the tronc, perhaps the manager who is not the employer, that manager must deduct PAYE but not NICs from the payments of tips to staff. Please talk to us if you uncertain about how to handle tips paid to your staff.
What to do When a Customer Goes Bust
In these troubled times the failure of one business can have a knock-on effect on its suppliers. If one of your customers goes down you need to quantify the bad debts created by that failure as soon as possible.
Say your accounting year end is 30 June 2009, and one of your customers fails in October 2009 leaving the sales invoices it received in April, May and June all unpaid. Where it is clear that you will not receive payment from the liquidators or administrative receivers of that business for those sales invoices, you can include the bad debt built up between April and June 2009 in your accounts to 30 June 2009. This applies as long as your June 2009 accounts have not been finalised by the time you receive confirmation of the bad debt. Any sales made to this customer between July and October 2009 will need to be written off in your accounts to 30 June 2010.
This is a clear example of business failure, but bad debts can also arise where your customer is still trading. Before we finalise your accounts to submit them to the Tax Office or to Companies House, we need you to undertake a thorough check of all your sales debts. Where you can identify specific debts that are unlikely to be paid, and you have made every effort to recover the money due, those amounts need to be written off in your accounts. This will reduce your taxable profits, and avoid you paying tax on money you are very unlikely to receive.
VAT on bad debts can only be reclaimed six months after the due date for payment for the invoice. You must also pay over the VAT due to the VAT man before it can be reclaimed. If you use the cash accounting scheme for VAT you automatically get relief for unpaid sales debts, as you do not account for the VAT due until the sales invoice is paid. Any business with a turnover of under £1.35 million can join the cash accounting scheme.
New Chance to Claim Benefits
If your income has dropped in the current tax year, perhaps because your business has made a loss, or your company can't afford to pay you a salary, you could be eligible to claim tax credits or other state benefits. The Tax Office is actively encouraging people to check whether they would be eligible to claim working or child tax credits, and has included an interactive questionnaire on its website to help you decide, see: www.hmrc.gov.uk/taxcredits/start/who-qualifies/overview/quick-questionnaire.htm
The questionnaire does not cover complex claims such as where a member of the family has a severe disability, but it will cover most situations. Remember a claim for tax credits is based on your family's total income, so you need details of your partner's or spouse's income as well as your own.
If you are aged 60 or over, you may be eligible to claim pension credit from the Department of Work and Pensions (not the Tax Office). You don't have to be retired to claim pension credit, just aged 60 or more. Like tax credits your claim is based on your income as a couple, not just your income alone. If you have savings of over £10,000 these are also taken into account. This savings threshold was £6,000 until 2 November 2009, which excluded a lot of people from qualifying for this benefit.
If you find you are eligible for pension credit or tax credits, you should check whether you could receive help to pay council tax or housing benefit. Claims for both of these benefits now ignore any income received by the family as child benefit.
Question and Answer Corner
Q. I run a mixed arable and dairy farm in my own name, and my wife operates a holiday lettings business from two of the farm cottages. The VAT man has said that we should treat both businesses as one and charge VAT on the holiday lettings. He has also sent us a bill for past VAT due of £10,000. What should we do?
A. Holiday lettings should be subject to VAT at the standard rate if the total turnover of the business is higher than the compulsory VAT threshold (currently £68,000). The VATman wants to combine the turnover of the farm, with your wife's holiday lettings business to reach this threshold. This can only be done if he can show that the two businesses are bound together on an economic, financial and organisational basis. Also the two businesses can only be treated as one business for VAT purposes from a current date, not some date in the past. You should appeal against the VAT bill of £10,000 and discuss with us how the businesses can be shown to be independent in the future. For instance the farm could charge the holiday business a small rent for the cottages used for letting.
Q. I am currently employed but I plan to start an internet-based business in my spare time, which will take about 18 months to break even. I will continue with my current position until the new internet business is making good profits. What is the best way to structure the new business so I can take full advantage of any losses it makes it the first two years?
A. If you run the new business in your own name as a sole trader, any losses made in its first four years will be available to set against your employment income. This applies as long as the Taxman does not see you as an 'inactive' trader, in which case the use of the losses against your other income will be restricted. To show the Taxman you are not an 'inactive' trader, you must work an average of at least 10 hours per week on the new business, and make a note of the hours you work. You should also draw up a business plan to prove the business is run on a commercial basis with a view to making a profit in the future.
Q. About ten years ago I acquired all the various versions of the domain names relevant to the trading name used by my business. These domain names have always been held in my own name, although the business is now run through a company. I have just had an offer for the company and one of the domain names, which values the domain name at £3 million. How will the Taxman tax the profit on the sale of the domain name: as income profits or a capital gain?
A. If we assume the full £3 million represents the profit on the sale of the domain name, as the original cost was probably very small, the difference in the tax payable under an income or capital treatment will be approximately £660,000 (£3 million x 22%). This is because gains are currently taxed at 18%, and an income profit would be taxed at your highest personal income tax rate of 40%.
Your intention when acquiring the domain names was to secure the trading name of your business, not to sell on those domain names at a profit. You were holding the domain names as an investment, not as stock to be traded. The profit on the sale of the domain name should be treated just like the sale of any other investment; as a capital gain. Report the sale on the capital gains tax pages of your tax return, and provide as much information as possible about the original cost and sale value in the blank space on those tax return pages. You may be able to claim entrepreneurs' relief on up to £1 million of the gain, if the sale of the domain name is associated with the sale of your company. The rules for this tax relief are complex, so please discuss the details of the deal with us first.
Key Tax Dates for November 2009
2 - Last day for car change notifications in the quarter to 5 October - Use P46 Car
5 - PAYE/NIC and CIS deductions due for month to 5/11/2009
The information contained in this newsletter is of a general nature and no assurance of accuracy can be given. It is not a substitute for specific professional advice in your own circumstances. 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 consequence of the material can be accepted by the authors or the firm.