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“Section 9A” tax enquiries

A notice informing you that your tax return has been selected for an enquiry isn’t the most pleasant of letters.

If you do receive such a letter, it will inform you what law the Revenue are using to allow them to legally look into your tax affairs. For example, the letter might make reference to a “Section 9A TMA 1970” which is the type of enquiry we’ll be looking at in this blog.

Section 9A enquiries must be opened by the Revenue within twelve months of your tax return being filed. Anything later than this and once their error has been pointed out, the Revenue will not be able to take the enquiry any further under Section 9A.

The initial letter that is sent to you will outline the information the Revenue are seeking. It might be the Revenue have just a few specific questions relating to a few aspects on your tax return, or it might be they are raising an enquiry into your whole tax return and are therefore wanting all of your financial documents. If the latter, and if your business is sizeable, the Revenue will arrange for an inspector to visit your business premises to review your financial records. This meeting can take place at our offices.

The Revenue will also give you a deadline for replying and it is important these deadlines are adhered to or, if you have a good reason why you cannot meet the given deadline, you explain to the inspector why you need more time.

People who are selected for a Section 9A enquiry want to know what has caused the enquiry. The Revenue do not usually give the reason. Your return might have been picked at random, however the most likely cause is that the Revenue suspect there is an error in your return. The Revenue hope their enquiries will uncover underpaid tax and so they use a variety of methods to detect potential errors on individuals’ tax returns. Some of these methods are as follows:-

1. A tax return might report earnings that appear too low to support the tax payer’s lifestyle;
2. The tax return figures – particularly the ratio of direct costs to sales – might change considerably from year to year. Normally these would stay fairly consistent;
3. The tax return figures are out of the ordinary – in terms of size, type or profit percentages – when compared to other businesses in the same industry;
4. Unusual figures in the tax return have caught the Revenue’s attention eg large “capital introduced” or repairs;
5. Filing tax returns late can also trigger an investigation.

It can be seen from the above list that in order to help avoid a Section 9A enquiry, it’s important you file accurate and complete tax returns on time. There is a box on the tax return in which you can provide additional information. Use this to explain unusual figures in the return, or if your living expenses are funded by means other than your earnings eg your partner helps pay for living expenses, or you receive tax credits or use savings.

A number of self-employed people have investigation insurance to help with the professional fees if they have an enquiry. If you are picked for an enquiry, please get in touch with us and we will be more than happy to help you through the process.

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Contractor Responsibilities

If your business is involved in construction and it engages self-employed workers, the business will likely need to register with the Revenue as a contractor. The main effect of being a contractor is tax must be deducted from non-employee construction workers, whether the labour is provided by self-employed people or limited companies. You must file monthly returns with the Revenue informing them of the payments made to subcontractors and the tax deducted, which must be paid to the Revenue along with tax and National Insurance deducted from your employees (if you have any).

Contractor requirements apply to a wide range of situations (not just construction companies) and include the following:-

• The rules apply no matter what your business’s legal structure is. Limited companies, partnerships and sole-traders are all caught by the legislation
• Organisations that spend £1 million per year over three years are “deemed” contractors and are required to register as such. This covers government departments and housing associations, for example
• Property developers must also register for contractor status. This can be over looked by builders as they might not necessarily think that renovating and selling property comes under the construction industry scheme.

There are some exceptions. Those in the following circumstances do not need to apply for contractor status:-

• building work being paid for by a charity or a trust
• work done by a business on a property that is for the business’s own use
• if the construction contract is worth less than £1,000 (excluding materials) you can call the CIS helpline to get an exemption
• jobs such as architecture and surveying, scaffolding hire (with no labour), carpet fitting and delivering materials are all exempt from the construction industry scheme’s requirements

If you have determined you should apply for contractor status, you can do this on the Revenue’s website by registering as an employer.

Any workers you engage should register as sub-contractors with the Revenue if they haven’t already done so.

Once your business is registered as a contractor, you should then “verify” your subcontractors which is done using the Revenue’s CIS online service or by calling the CIS helpline. The process checks the subcontractors have registered for CIS. You will need to provide the sub-contractors’ details such as their legal business name (or, if different, the trading name the sub-contractor provided the Revenue when they registered as a sub-contractor), their 10-digit “unique tax reference” (UTR), national insurance number and/or registered company number.

The above needs to be done in good time time before you pay the subcontractors. This is because you must usually deduct tax from the labour element of the sub-contractor’s pay, as follows:-

• For registered sub-contractors – ie those you’ve been able to verify – 20% tax is deducted
• Some sub-contractors (particularly limited companies working for you) might have “gross status”. This means you pay them gross and so deduct 0% tax. You must still pay them via CIS even if they have gross status
• For workers you have not been able to verify, you must deduct 30% tax. This situation might arise for newly self-employed workers who haven’t yet registered as self-employed or as a sub-contractor.
Tax is only deducted from the labour being charged

You must keep your CIS records for at least three years after the end of the tax year to which they relate. You can be fined up to £3,000 if you cannot produce CIS records if the Revenue request them.

If you would like any guidance in respect of your CIS requirements, please do not hesitate to contact us.

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What is a P800?

If you’ve paid the wrong amount of tax in any of the last few tax years, HM Revenue and Customs may send you a “P800 calculation”. Why might this happen? And what should you do if you receive one?

Who might receive a P800?
The Revenue use what is called a “tax code” to instruct pension companies and employers to deduct a certain amount of tax off pension and wages payments. The tax code is based on the Revenue’s estimate of your taxable income and expenses for the year, and what your tax free personal allowance should be. In some circumstances, the “tax code” is wrong, usually because the Revenue were unaware of all your financial circumstances when they calculated it. For example, you may have started to receive a new type of income in the year, or ceased receiving some income. You may have P11D benefits (like health insurance or a company car) or job expenses (like mileage, uniform cleaning or subscriptions) which haven’t been properly taken into account.

Once the Revenue receive corrected information relating to a tax year, they will recalculate the tax owing and send you their workings by way of a P800, stating how much tax is over or underpaid.

What should you do if you receive a P800?

There is no need to worry if you do receive a P800. It doesn’t mean you’ve done anything wrong and the Revenue won’t take any underpaid tax out of your bank account – certainly not without your permission.

Check the calculation is correct. Compare the figures on the P800 to your P60s ( the end of year tax summaries given you by your employer/pension company), bank statements and DWP letters. State pension per the Revenue’s calculations will be based on what you were due to receive during the tax year, rather than what you did receive (the payments are slightly behind). To calculate what you should have been paid, take one of the pension receipts in the tax year and – assuming you’re paid every four weeks – multiply it by thirteen, not by twelve, as there are thirteen payments during the year.

You might receive several years’ P800s all at the same time. If this is the case, bear in mind that the tax under or overpaid will be carried forward and combined with each successive year until a grand total is arrived at in the most recent tax year.

How do I pay or claim back the tax owing?
If you are in the fortunate circumstance of being owed tax, the Revenue will send you a cheque refund within two weeks of the P800. The Revenue may pay the money directly into your bank account if you have previously given them your bank details.

If you owe less than £3,000 in tax, the Revenue will normally arrange to collect any underpayment by adjusting your tax code, so you’ll pay back the underpaid tax through your salary or pension over several months. You’ll notice a decrease in the net amount you receive. If this happens, you don’t need to take any action as the Revenue and your employer/pension company will deal with the underpaid tax.

If you owe more than £3,000, the Revenue will write to you with instructions as to how to pay. They will normally expect the outstanding tax to be settled in one payment, however if this will cause financial hardship, give the Revenue a call and explain your situation. They may agree to let you pay in instalments.

We hope you have found this blog useful. Professional guidance should be obtained before relying on the above general advice as individual circumstances vary.

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Capital Allowances: Cars and Private Use

In a previous blog post, we looked at the basics of capital allowances: what they are and how they are typically calculated. But what happens to capital allowances on cars? And how are capital allowances affected when there is personal use of an asset?

How are capital allowances calculated on cars?
There is a unique system for claiming capital allowances on cars.

If you are using the mileage basis to claim car expenses (ie 45p per business mile), you cannot claim capital allowances as the 45p is deemed to include the cost of the car.

The amount of capital allowances you can claim is determined by the CO2 emissions. From April 2013, the allowances are as follows:

For new cars with CO2 emissions of 95g/km or less, 100% of the cost can be claimed

For CO2 emissions of 130g/km or less, you claim 18% on a reducing basis. (The reducing bais method is illustrated in the previous blog post about capital allowances)

For CO2 emissions higher than 130g/km, you claim 8% on a reducing basis.

How do you account for personal usage on capital allowances?
If you use an asset for both business and personal use, you should reduce the capital allowance claimed by the proproption of private use. So, for example, if you buy a van for £10,000 you would be able to claim £10,000 Annual Investment Allowance (“AIA”). But let’s say you use the van 20% of the time for private use. 20% of £10,000 is £2,000 so you would reduce the AIA by £2,000 and claim £8,000.

Bear in mind that as with many areas of tax, capital allowances are a complex area and so professional advice should be sought to determine the correct tax treatment of assets purchased applicable to your business. Additionally, rates and regulations are subject to frequent change.

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Capital Allowances: The Basics

What are capital allowances?
Capital allowances are how businesses claim tax relief on capital expenditure. This raises another question: what is capital expenditure?

Business expenditure can be split into two categories: revenue expenditure and capital expenditure. Revenue expenses refer to the day-to-day running costs of a business, whereas capital expenses relate to assets that will be used by the business in its trade. This is a broad description as no legal definition exists of the two terms. For those in the building trade, the purchase of vans and expensive tools are frequent examples of capital expenditure. (Cheap tools like saws, spanners and replacement parts like blades are a category of revenue expenditure known as “repairs and renewals”)

Capital allowances are calculated using various methods, depending on the asset purchased and the amount of expenditure. The following is a general guide to typical purchases of assets – there are of course always exceptions.

Annual Investment Allowance (“AIA”)
The Annual Investment Allowance allows you to claim the whole cost of up to £500,000 spent on assets classified as “plant and machinery” each year. (The AIA limit is set to decrease to £25,000 from 1 January 2016) “Plant and machinery” in this context covers a wide range of expenses which for the typical sub-contractor would include tools and equipment, vans (but not cars) and computers.

When you sell an asset for which AIA has been claimed, let your accountant know as this will need to be shown on your tax return.

Writing Down Allowances
If you spend more than the AIA limit, you can normally claim writing down allowances which is 18% on a “reducing basis”. This means you claim 18% of the cost in the first year, 18% on the remaining cost in the following year, then 18% on the remaining cost in the year after that and so on. Here is an example:

Cost of assets not qualifying for AIA: £50,000
18% capital allowances (“CAs”) claimed in 2013/14 £9,000
Remaining cost (known as Tax Written Down Value or “TWDV”) £41,000
18% CAs claimed in 2014/15 (£41,000 x 18%) £7,380
Tax written down value £33,620
18% CAs claimed in 2015/16 (£33,620 x 18%) £6,052
Tax written down value £27,568

If you buy further assets that are above the limit for annual investment allowances, you add them to the Tax Written Down Value and calculate capital allowances on the combined new total.

When you sell assets, the proceeds are deducted from the Tax Written Down Value and you calculate capital allowances as per normal on the new total.

In a subsequent blog post, we will look at capital allowances on cars and how you calculate capital allowances on assets used partly for private use.

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When VAT gets complicated: partial exemption and foreign customers

What is partial exemption?
Some businesses provide both VATable supplies (at standard, reduced or zero rated VAT) and exempt supplies. This means that VAT on the expenses relating to VATable supplies can be claimed back, but the input VAT relating to the exempt supplies cannot be recovered. This is relatively straight forward for “directly attributable expenses” – that is expenses that are solely for either VATable or exempt supplies. But what about expenses, known as residual expenses, which would relate to both? Overheads like office costs would relate to both, and it would not be fair to claim all the input VAT but it also would not be fair to claim none of it. The sensible solution would be to claim a proportion of the residual input VAT – but how would that proportion be calculated?

This is where partial exemption comes in. The proportion of residual input tax to be claimed is based on the percentage of taxable supplies in the quarter out of the total supplies for that quarter.

You can claim the input VAT relating to exempt supplies (whether directly attributable or residual) if the total value of your exempt input tax is not more than:

 £625 per month on average; and
 half of your total input tax in the quarter.

This is known as the “de minimus” test.

Do I charge VAT to foreign customers?
This is quite a complex area. The rules are different depending on whether you’re selling goods or services, whether the customer is in the EU or the rest of the world and whether the customer is VAT registered or not. The following is a general guide- there are special rules and exceptions:-

Sale of goods to another EU VAT registered business: zero-rated if the goods are in fact sent out of the UK to another EU country, you have evidence of removal proving the goods have been dispatched to another country, you dispatch the goods and obtain evidence of removal within 3 months and you state the customer’s VAT number – including the two letter country code – on the sales invoice.

Sale of goods to an organisation/person in the EU not VAT registered: charge VAT as you normally would if the customer was in the UK.

Sale of goods to an organisation/person outside of the EU: zero-rated providing you have evidence the goods were exported

Sale of services to a business customer in the EU: the “reverse charge” mechanism is used, which essentially means the customer accounts for the VAT in their own country. You do not have any sales VAT to account for on your VAT return. You should state on the sales invoices that the invoice is subject to reverse along with the amount of VAT to be accounted for by your customer.

Sale of services to a non-business customer in the EU: charge VAT as you normally would if the customer was in the UK.

Sale of services to a customer outside of the EU: outside the scope for VAT. No VAT is charged and the sale does not appear on the VAT return at all.

Professional guidance should be sought if you have customers abroad. There may be requirements to register for VAT in your customer’s country, additional returns may be required (such as EC sales lists) and there are exceptions to the above rules for certain types of supplies.

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Tax Investigation

Forewarned is forearmed. By preparing in advance, you can vastly reduce the stress and impact if/when you are picked for a tax investigation. Here are some tips:-

– File accurate tax, VAT and payroll returns on time, and pay tax owing within the specified time frame. Flaunting the rules and the suggestion of haphazard accounting records will attract the attention of the Revenue.

– Get tax investigation insurance. Depending on the size of your business, accountancy fees for a full investigation can run into the hundreds or even thousands of pounds.

– Use the white box note on your tax return. If your figures have changed a lot since last year, your profits are different from the industry average or your living expenses are funded by other means (e.g. spouse’s earnings or an inheritance), disclosing this in the white box note may give the Revenue all the information they need and so prevent a tax investigation.

– Keep good records, and keep them for at least five years after the filing deadline. As of 2015, this means you should have your papers going back to at least the 2008/09 tax year. VAT records should be kept for six years.

– Use a good accountant. Innocently claiming expenses you’re not entitled to can still result in receiving a penalty. We can advise you on what can and can’t be claimed against your tax bill, so if doubt, just ask.

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Why File Your Tax Return Early?

As the 6th April rolls around, filing your tax return might not jump to the top of your to do list. But it could well be worth giving it more attention.

If you’re a sub-contractor and normally due a refund, there’s the obvious benefit of receiving your tax refund as early as possible which couldn’t hurt summer holiday plans. If you pay tax, knowing what you’re due to pay in January 2016 will help you plan your cash flow. If your tax bill in 2014/15 is going to be less than the previous year, you might well be able to reduce the payment on account in July 2015 (assuming you’re due to pay one).

Leaving tax returns until later in the year will mean your memory won’t be so fresh (potentially resulting in mistakes on your tax return) and you could lose receipts, missing out on tax relief.

Once a tax return is filed, the Revenue normally only have a year to open an enquiry into it. (They have longer if they have reason to suspect it is wrong) Therefore, filing early means this date passes sooner reducing the risk of an enquiry which can be time consuming and costly.

Receivers of child tax benefit ought to complete the tax return by 31st July so the child benefit form can be completed accurately ensuring the correct amount of benefit is received. If you’re overpaid child benefit, the government will either reduce your child tax benefit payments or demand payment. Either event can be difficult to cope with financially.

Whatever your circumstances, getting your tax return filed and out of the way now is one less thing to worry about for the rest of the year.

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Essentials of VAT: Part 2

In this second part of a two-part blog, we look at some more aspects of VAT registration.

What information should I put on a VAT invoice?
There is quite a lot of information that must be disclosed on a VAT invoice. The Revenue’s list is as follows which applies to invoices issued to UK customers. You might find some requirements are not applicable:-
 a sequential number based on one or more series which uniquely identifies the document (this basically means an invoice number)
 the time of the supply (ie the date the goods or services were supplied)
 the date of issue of the document (where different to the time of supply)
 the name, address and VAT registration number of the supplier
 the name and address of the person to whom the goods or services are supplied
 a description sufficient to identify the goods or services supplied
 for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency
 the gross total amount payable, excluding VAT, expressed in any currency
 the rate of any cash discount offered
 the total amount of VAT chargeable, expressed in £ sterling
 the unit price
 the reason for any zero rate of exemption.

There are extra rules if you’re using the margin rate scheme (sometimes used by traders of second-hand goods).

What does being registered for VAT involve?
VAT registered businesses must prepare a form called a “VAT return” and file it online with the Revenue every three months. (There are some circumstances in which VAT returns are filed more or less frequently.)

The VAT on sales is called “output VAT” and the VAT paid on expenses is called “input VAT.” The amount of output VAT and input VAT is stated on the VAT return and the difference is paid over to the Revenue. You must also disclose your total income and expenses on the VAT return, along with any sales or purchases to or from the EU.

VAT registered businesses are required by law to keep good financial records and they must be kept for six years. “Financial records” covers anything and everything to do with your business finances. Typical items would be bank statements, invoices, paying in books, bookkeeping records, VAT return calculations and annual accounts. The Revenue’s definition of business records is wide so if in doubt whether to keep paperwork or not, either keep it or ask your accountant for advice. The business records will be needed to prove the VAT return figures in the event of a Revenue enquiry (and there’s a financial penalty for failing to keep records) so it’s well within your interest to ensure adequate records are being kept.

What’s the difference between zero rated VAT and exempt VAT?
This may seem confusing to have two descriptions for essentially doing the same thing – selling goods or services without charging any VAT. However, the distinction is important.

If zero rated VAT is charged, this means VAT on the expenses (“input” VAT) relating to that sale can be claimed back from the Revenue. If a sale is exempt from VAT, the input VAT on the related expenses cannot be recovered.

This means that for businesses operating predominantly in the zero-rated VAT market – such as new build residential properties – it could be worth the administrative burden of registering voluntarily for VAT in order to recover the input VAT on the expenses. If you think this apply to you, we would be happy to advise you further.

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Introduction to VAT: Part 1

What is VAT?
“Value Added Tax,” or VAT as it is more commonly known, is a sales tax added to most goods and services sold across the European Union (“EU“). It is paid by the customer to the seller, who then forwards the tax onto the government.

Who has to charge VAT?
You only have to register with the Revenue for and charge VAT if your sales exceed the annual “registration threshold”. This is a limit set by the government and increases normally each year. It is currently £81,000. If at any point your VATable sales in the previous twelve months exceed the registration threshold, you must register for VAT: you must keep checking whether you’ve reached this threshold throughout the year, it doesn’t just apply at the year end. You also must register if you expect your sales to exceed the registration threshold within the next 30 days.

It is possible to voluntarily register for VAT if your sales are less than £81,000. In order to register for VAT, you must be providing goods/services that would attract VAT should you be registered.

How much is VAT?
The standard, normal rate of VAT is 20%. Some goods and services attract VAT at the lower rate of 5% (such as some conversions of properties into residential accommodation), some will have 0% VAT (such as new build residential homes) and some will be exempt from VAT altogether.

To work out the VAT to charge to a customer, let’s say you wish to charge £1,000 for goods/services before adding VAT. This is known as the net amount. The VAT is 20% of the net amount ie £1,000 x 20% = £200. You then add £200 VAT to the price and charge your customer £1,200.

What about VAT on my expenses?
VAT registered businesses can claim relief for the VAT they pay on their business expenses that relate to their VATable sales. You can claim back the VAT on almost all business expenses relating to VATable sales providing you have a receipt that proves there is VAT on the expense, and if it is addressed to someone, it is addressed to your business. Examples of expenses you can claim VAT on are materials, repairs, tools and equipment, the purchase of vans, stationery, advertising, telephone and rent and utilities of your business premises. You can even claim the VAT on the fuel proportion of mileage (the exact amount depends on the size of the engine). You cannot claim VAT back on a few items such as client/customer entertaining or the purchase of cars.

How do I work out how much VAT is in an expense?
Assuming the expense is included at 20%, a quick way is to divide the total expense by six. So if you buy something for £60, £60  6 = £10. The VAT element is therefore £10.

In Part two of the blog, we will look at some more issues including what information to state on your sales invoices, the difference between zero rated and exempt VAT and what you will be required to do if you register for VAT.

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