Newsletter June 2012

This month we have included articles that cover: the advantages of the VAT Flat Rate Scheme for smaller businesses, the qualifying conditions for Furnished Holiday Let property tax benefits, the tax position of Equitable Life compensation payments and a reminder from HMRC about bogus emails.

Our next newsletter will be published 7 July 2012.

VAT Flat Rate scheme

The VAT Flat Rate scheme provides smaller businesses with a number of options that can often create real cash savings. Benefits include:

  • Simplified administration, quicker to produce returns
  • Depending on the market sector your business operates within, you may be able to reduce your overall VAT payments.

To qualify, your annual turnover must not exceed £150,000, excluding VAT. Once you are in the scheme you are not required to leave until your annual turnover exceeds £230,000.

If you register for this scheme you still add VAT to your sales in the usual way. Instead of calculating the amount you need to pay to HMRC as the difference between your output VAT (the VAT you add to your sales) and your input VAT (the VAT added to the goods or services you buy), you simply calculate the total of your sales including VAT and multiply this figure by the flat rate percentage. Income for these purposes, your flat rate turnover, includes:

  • VAT inclusive sales at standard rate, zero rate and reduced rate supplies.
  • Sales of exempt supplies such as rent or lottery commission.
  • Sales of capital expenditure goods – unless you have previously reclaimed VAT when the goods were purchased, in which case you have to pay VAT at the standard rate and not the flat rate.
  • Sales to other EU countries.
  • Sales of second hand goods. If you have a lot of turnover in this category you may be better off using a margin scheme.

Obviously, the higher the flat rate percentage, the less beneficial the scheme will be in reducing your overall VAT payments.

Flat rate percentages vary between 4% and 14.5%.

For example a business repairing personal or household goods would save £2,000 per year in the following scenario:

  1. Flat rate that applies 10%.
  2. Turnover £100,000.
  3. Turnover including VAT £120,000.
  4. Purchases of parts and services £30,000, VAT input tax added £6,000.
  5. Annual VAT bill without applying Flat Rate Scheme, £14,000 (£20,000 - £6,000).
  6. Annual VAT bill applying Flat Rate Scheme, £12,000 (£120,000 x 10%)

Additionally you can reclaim the input tax charged on capital assets bought where the total single invoice value (including VAT) is £2,000 or more.

As a bonus, in the year following the registration of your business for VAT, you can deduct 1% from the flat rate percentage. So in our example, if a full year's discount was available, the savings in year one would actually be £3,200. (£14,000 less £120,000 x 9%).

(Please note: This 1% reduction in the flat rate would not apply to businesses who had been VAT registered for more than a year when they join the Flat Rate Scheme.)

The scheme does not suit businesses that have a high proportion of zero rated sales or that have high levels of input tax reclaimable on purchases of goods and services. And it may not be possible to produce real cash savings if your business falls into one of the higher flat rate percentages.

You have to make a formal application to join the scheme and it is well worth crunching the numbers to see if you would benefit. As always we would be happy to do this for you.

Furnished Holiday Lets

Does your holiday home qualify as a Furnished Holiday Let (FHL) property? And if it does, what are the tax advantages?

Does your property qualify?

From April 2012 the following conditions apply:

  1. The property must be situated in the UK or EEA.
  2. The property must be available for commercial letting as holiday accommodation for at least 210 days per annum.
  3. The property must be let on a commercial basis for at least 105 days per annum.
  4. The property must not be let for periods of longer term letting. Accordingly, for 7 months of the year the property must not be in the same occupation for more than 31 consecutive days and must not exceed more than 155 days in a tax year.
  5. Periods of longer term letting do not count towards 3 above.

The periods to which you need to apply these tests are:

  1. For a continuing let, the tax year.
  2. For a new let, assuming that property did not qualify as a FHL in the previous year, apply tests to first twelve months of letting.
  3. When letting ceases apply tests to last twelve months of letting.

There are complex rules that allow you to average the occupancy figures where you have more than one property in your FHL business. All of your UK FHL properties form a single trade for tax purposes. Any EEA properties form a separate trade. So you cannot average UK and EEA numbers. This averaging process can be useful where you have one or more properties that do not qualify and others that more than qualify for FHL status.

If you pass the test in 3 above for one year but fail it for the next 1 or 2 years, then you may be able to elect for those years to be treated as qualifying.

What are the tax advantages?

As your FHL business is considered to be a trade you will be able to avail yourself of the following reliefs that would not be available to non-FHL property letting businesses.

  1. You can claim capital allowances on the purchase of furniture, white goods and other qualifying expenditure.
  2. You may qualify for certain Capital Gains Tax reliefs including Entrepreneurs' Relief, Business Asset Rollover Relief and relief for gifts and similar transactions.
  3. FHL profits count as earnings for UK pension relief.

Beware of losses though, as these can only be carried forward against future FHL profits.

If you would like to see if your property holding(s) qualify for these important tax advantages, please contact us and we will help you work through the necessary calculations.

Equitable Life tax bonus

If you are due, or have already received, compensation in respect of the Government's maladministration of Equitable Life pensions and policies you may be interested in the tax position of these payments.

  1. There is no need to declare receipts to HMRC as they are not subject to Income Tax, Capital Gains Tax or Corporation Tax.
  2. Payments under the scheme will not affect recipients' eligibility for working or child tax credits.
  3. For social security and social care purposes the payments will be classed as income (if linked to retirement annuities), or capital if linked to any other policies.
  4. Payments to the estates of deceased policy holders will not be subject to Inheritance Tax.

Any interest received in addition to the compensation or rebated premiums will be taxable regardless of whether it has been taxed at source or not.

For a full run-down on the compensation scheme you can view FAQs at http://equitablelifepaymentscheme.independent.gov.uk/index.htm

More bogus emails to ignore.

HMRC has issued a press release warning taxpayers about possible fake or "phishing" emails sent out by fraudsters. Apparently there is usually a significant increase in this activity in the lead up to the 31 July tax credits renewal deadline.

HMRC do not contact taxpayers by email about their tax affairs.

They have requested that you forward any suspicious emails to phishing@hmrc.gsi and then delete the email from your PC.

Tax Diary June/July 2012

1 June 2012 - Due date for Corporation Tax due for the year ended 31 August 2011.

19 June 2012 - PAYE and NIC deductions due for month ended 5 June 2012. (If you pay your tax electronically the due date is 22 June 2012.)

19 June 2012 - Filing deadline for the CIS300 monthly return for the month ended 5 June 2012.

19 June 2012 - CIS tax deducted for the month ended 5 June 2012 is payable by today.

1 July 2012 - Due date for corporation tax due for the year ended 30 September 2011.

6 July 2012 - Complete and submit forms P11D return of benefits and expenses and P11D(b) return of Class 1A NICs.

6 July 2012 - Deadline for submitting form 42 (reporting of transactions in employment related securities).

19 July 2012 - Pay Class 1A NICs (by the 22 July 2012 if paid electronically).

19 July 2012 - PAYE and NIC deductions due for month ended 5 July 2012. (If you pay your tax electronically the due date is 22 July 2012.)

19 July 2012 - Filing deadline for the CIS300 monthly return for the month ended 5 July 2012.

19 July 2012 - CIS tax deducted for the month ended 5 July 2012 is payable by today.

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