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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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Autumn Statement 2014

George Osborne gave his annual “Autumn Statement” to Parliament on 3 December 2014. What does it mean for the “man on the street”?

Overall it was a generally positive statement, with a lot of the provisions being in favour for small businesses and basic rate tax payers.

However, there was some potentially bad news for sub-contractors who use umbrella companies that are not complying with Revenue rules. Some unscrupulous umbrella companies use loopholes to avoid tax, and the government are looking to bring regulations into the 2015 Budget to counteract this problem.

The tax free personal allowance will be increasing by £500 to £10,500 from April 2015. This means you will not pay any tax on the first £10,500 of your earnings. Earnings above that incur 20% tax and you’ll start paying higher rate tax of 40% if your earnings hit £42,285

The statement promises improvements to the CIS system which it says will reduce the administrative burdens on construction businesses. Details are to be published “shortly” though no time-frame has been given.

New stamp duty rules came in on 4 December 2014 making the charges a lot fairer. Homes under £125,000 are exempt from stamp duty. For residential properties costing more than £125,000, stamp duty is only paid on the excess rather than the whole cost. (The rules will be different in Scotland.) The new rates of stamp duty are:-

Purchase price of property New rates paid on the part of the property price within each tax band
£0 – £125,000 0%
£125,001 – £250,000 2%
£250,001 – £925,000 5%
£925,001 – £1,500,000 10%
£1,500,001 and over 12%

So if you buy a home for £300,000, you will pay £5,000 stamp duty calculated as follows:-
 The first £125,000 is taxed at 0%
 The next £125,000 is taxed at 2%, which works out at £2,500 tax
 The last £50,000 falls in the 5% bracket which works out at £2,500 tax

Should maths not be your favourite subject, the Revenue have an online Stamp Duty Land Tax calculator The Treasury believe that 98% of people buying residential property will save money on stamp duty; those spending more than £950,000 or so will be paying more, so you might want to hold off buying that ten bedroom mansion in the country you’ve had your eye on.

If you employ an apprentice, the government are abolishing employer National Insurance for apprentices aged under 25 on wages up to the upper earnings limit (currently £805 per week) as a means to make apprentices more affordable and to encourage more businesses to hire them.

Savers will be happy to know the ISA allowance is rising to £15,240 from April 2015.

One of the more bizarre announcements results in family holidays abroad becoming ever so slightly cheaper: Children under the age of 12 will become exempt from tax on economy flights from 1 May 2015. The age limit increases to under 16s from 1 March 2016. The average saving is £13 for a child to fly to Europe and £71 on a flight to the US. Whether that’s enough of a saving to get everyone rushing to remains to be seen.

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National Insurance: some common questions for the self-employed

Why am I paying two lots of National Insurance?
When going self-employed, it might appear that National Insurance is being paid twice.

National Insurance is grouped into different classes, and self-employed people pay Class 2 and Class 4. (In case you’re wondering what happened to Classes 1 and 3, Class 1 is for employees and Class 3 is for voluntary contributions if there are gaps in your record: more on this later.) Class 2 is a flat £2.75 a week and Class 4 is 9% of your profits over £7,956 and up to £41,865; anything above that attracts 2% Class 4 National Insurance. These rates, like all other rates quoted in this blog, are based on the rates for the 2014/15 tax year.

Have I got to pay National Insurance if I’m self-employed?
If you’re earning above certain amounts – yes. If you earn more than £5,885 a year you have to pay Class 2, and if you earn more than £7,956 you have to pay Class 4.

You don’t pay National Insurance if you’re aged under 16 or over the state pension age – currently 65.

If you earn less than £5,885 per year, you can apply for a “small earnings exception” and not pay any Class 2. However, paying Class 2 is the cheapest way of keeping your National Insurance record up to date and ensuring you’re entitled to state pension and other benefits. You are entitled to full benefits if you’ve paid Class 2 for a certain number of years, called “qualifying years”, as follows:

• men born before 6 April 1945 need 44 qualifying years
• men born on or after 6 April 1945 need 30 qualifying years
• women born before 6 April 1950 need 39 qualifying years
• women born on or after 6 April 1950 need 30 qualifying years

Do I still have to pay National Insurance if I have a private pension?

What if I haven’t paid enough National Insurance?
If you suspect you don’t have enough qualifying years, you can first check with the Revenue by calling or writing to them, or completing a form online on their website

The statement will tell you how many years you are missing (if any) and how much in voluntary contributions it will cost to fill in the gaps.

I’ve heard how you pay Class 2 is changing – is that right?
To make the system more simple (and sensible), the Government is changing the way Class 2 National Insurance is paid. At the moment, Class 2 is invoiced by the Revenue and paid to them in a separate system from the rest of your tax. You may currently be paying the Class 2 on a monthly or six monthly basis. Class 4 National Insurance is paid at the same time as income tax in January (and sometimes July) each year. From the tax year starting in April 2015, most people will be able to pay their Class 2 liabilities along with the rest of their tax and Class 4 National Insurance.

This may mean that it will no longer be possible to pay Class 2 if your earnings are below the small earnings exception limit, resulting in low-earners having to pay the more expensive voluntary rates to keep their National Insurance record up-to-date. Watch this space for more details as they become available.

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How can sub-contractors get “gross status”?

If you’re a subcontractor, you are no doubt accustomed to having 20% tax deducted off your earnings, part of which you can normally have refunded when your tax return is filed. Many prefer this system as it means they don’t have to save up to pay tax bills like other self-employed people do.

However, your business may grow to a size where your expenses are considerable and losing 20% of your income (most of which will be refunded to you) can cause significant cashflow problems. Additionally, reporting CIS suffered to the Revenue can add an extra administrative burden. If this is the case, you might like to apply to the Revenue for “gross status” which means contractors will not deduct any tax from you. You will literally be paid by your customers gross. Gross status can be requested if the following conditions are met:-

1. Your tax and National Insurance have been paid on time in the past (if you’re not up to date, don’t despair. Once you clear your debt with the Revenue, you can apply for gross status after paying tax etc on time for a while)
2. Your business does construction work (or provides labour for it) in the UK
3. You have and use a bank account for your business
4. Your annual sales (exclusive of VAT) must be over a certain limit:-
– A sole-trader sales must be at least £30,000;
– For partnerships and limited companies, the sales must be at least £30,000 for each partner/director or at least £200,000 for the whole partnership/company;
– There is an additional allowance for limited companies: if the company is controlled by 5 people or fewer, you must have annual sales of at least £30,000 for each of them. So if your company has two shareholders, your annual sales must be at least £60,000 to apply for gross status.

Do bear in mind that if you are granted gross status, you will need to pay tax on your profits so you should budget for this.

You can apply for gross status online
or by phoning the CIS helpline. If you would like some advice as to whether you’re eligible for gross status and if it would benefit you, please feel free to contact us.

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How Many 2012 Self Assessment Tax Returns Were Submitted?

HMRC stated that a total of 9.61 million self assessment tax returns were submitted on time before the 31st January 2013 deadline. On the 1st February HMRC released the record figures. The 9.61 million was a combination of online and paper based submissions up until the 31st January.

There were 10.34 million people required to file a 2012 self assessment return, with a total of just under 93% doing so. As a result, this was HMRC highest ever.

Originally there was around 10.6 million required to a file a 2012 self assessment but HMRC had to cancel 300,000 returns due to people no longer being in self assessment.

HMRC also gave a brief break down of totals and dates of submissions –

• 7.93 million were sent online
• 1.68 million were sent on paper
• 31st January 2013 – Total returns submitted were 578,000
• 31st January 2013 – Busiest hour was between 4pm and 5pm when 46,000 were submitted
• Christmas day – Total returns submitted were 1,548
• Boxing day – Total returns submitted were 4,658
• New Years Eve – Total returns submitted were 27,161
• Boxing day – Total returns submitted were 12,077

To read the full article on the HMRC website please click here.

If you are one of the remaining people that still have their tax return outstanding we urge you to make contact with us as soon as possible to discuss your affairs. HMRC have the same penalty regime in force as last year and unfortunately you will be subject to a £100 fine. This fine will soon be going up to £10 a day so it is vital you get in contact with us as soon as possible.
If you are unsure on any of the above, please get in contact with one of our team today so that we are able to liaise with HMRC on your behalf.

Source: HMRC

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2012 Self Assessment Tax Return Deadline

The deadline for your 2012 Tax Return is 31st January 2013 if submitted electronically. Had you opted to file a paper based return you could have submitted these up until 31st October 2012. Failure to submit your Return by these dates will incur a minimum £100 penalty.

Adding to this, daily penalties have been introduced since the 2011 tax year. If for whatever reason, you have missed the deadline, please get in contact with ourselves as soon as possible so that we can advise you the best way forward to bring your outstanding returns up to date.

Just to reiterate the fine regime is set out below.

Day one – Individuals will be charged an initial penalty of £100, even if they have no tax to pay or have already paid all the tax owed
Over three months late – Individuals will be charged an automatic daily penalty of £10 per day, up to a maximum of £900
Over six months late – Individuals will be charged further penalties, which are the greater of 5% of the tax due or £300
Over 12 months late – Individuals will be charged yet more penalties, which are the greater of 5% of the tax due or £300. In serious cases people face a higher penalty of up to 100% of the tax due.

If you require further assistance or need more information on these fines please get in contact with one our team by calling 020 8424 8464.

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My 2011 Tax Return is Still Outstanding

According to HMRC, there are still currently over half a million self assessment tax returns outstanding. Are you one of them? Unfortunately you would have obtained a recent notice from HMRC stating that you currently have fines totalling £1,200, not forgetting the £100 late fee for non submission after the 31st January 2012 deadline.

As some of you will know this fine regime will also continue into the 2012 tax year and you must ensure that you file your return before the 31st January 2013 deadline. If you do not file your 2012 return by this time next year, you too, can be subject to fines totalling £1,300.

According to HMRC the number of outstanding returns has halved in 2012 meaning that there were still 518,000 people being issued returns.

If you require additional information on the new fine system and if you are subject to a fine personally please call us on 020 8424 8464.

There are, of course, certain grounds for appeal. If you feel you would like to appeal your £1,200 fine please contact us as we can advise where necessary.

HMRC’s Director General for Personal Tax, Stephen Banyard recently quoted “We want the returns, not the penalties. But despite several reminders, nearly six per cent of people have not sent in their 2010/11 tax returns…”

To read the full article on the HMRC website please click here.

If you are unsure on either of the above, please get in contact with one of our team today so that we are able to liaise with HMRC on your behalf.

Source: HMRC
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Are you an Electrician? HMRC may be after you!

HMRC have recently issued a press release in order to make electricians up and down the country aware of their focus chasing any unpaid taxes by this sector.

Have you declared the correct amount of tax to the taxman? Has your current tax return been filed?

HMRC have started the “Electrician Tax Safe” plan which will enable electricians to pay the tax they owe with lower penalties as a consequence. This is part of an ongoing campaign which saw plumbers the subject of the previous and on going campaign to bring their affairs up to date too.

If you are an electrician you can expect to receive one of the 50,000 letters they will be sending out and we urge you to act quickly and bring your affairs up to date before the opportunity expires. You have until the 15th May 2012 to notify HMRC.

To read the full article on the HMRC website please click here.

If you are unsure on either of the above, then get in contact with one of our team today so that we are able to liaise with HMRC on your behalf.

Source: HMRC

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The Importance of Keeping your Payslips / Monthly Statements / Year End Summary

As a self employed individual you may or may not be aware of your responsibilities to keep up to date and accurate records. It is your responsibility to keep all the payslips and certificates from different contactors for whom you may have worked during the year.

At the year end (05 April) it is your responsibility to file a self assessment tax return either manually or electronically (manual returns can only be submitted up until the 31st October). Keeping your payslips / statements / certificates makes the process a lot easier.

Despite what others say, obtaining captured data from HMRC is not as easy as it sounds. They are under no obligation to issue out the data despite a written request. There argument being that it is the responsibility of all self employed people to keep their own records.

In a recent reply from HMRC Newry; “…as you are aware your client has a legal obligation to keep adequate records to enable the completion of the SA Return and whilst we want to help subcontractors who have a genuine need for information ultimately it is the subcontractor’s responsibility to ensure records are kept to enable the completion of the SA Return.”

We urge all subcontractors to keep hold of their payslips / statements / certificates so that they can complete their self assessment tax return correctly, ensuring they declare the correct gross and tax amounts.

By keeping hold of your payslips / statements this enables you to complete your self assessment tax return whenever you require before the deadline for each year.

If you require further information on this then please contact us on 020 8424 8464.

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