The Fizz! Blog

HMRC being reasonable about Flat Rate Scheme categories

The idea of the Flat Rate Scheme for VAT is supposed to be to make record-keeping easier for businesses.  Record-keeping for most professionally-run small businesses isn't that hard anyway, so in reality the big winners from the FRS are those businesses who manage to park themselves in a business category that results in their paying over a smaller amount of the VAT they've collected from customers than HMRC would like.

This is very common, because the list of FRS categories is pretty poorly drawn up, and is full of gaps and ambiguity.  HMRC's answer over the years to this has not been to redraw the list of categories so that it's better, but to put some guidance behind it saying what categories HMRC believe should be used when the nature of a business doesn't fit the list (which in our experience is probably at least 25% of the time).  The thing is, the guidance has absolutely no legal basis at all.  HMRC haven't accepted this, and have tried to enforce back-VAT and penalties against businesses who went on the basis of the list, not the guidance - the classic example being a mechanical engineer, who chose the "other" category since mechanical engineers weren't listed.  HMRC insisted he should have used the "civil engineer" category.  They lost the case, because he explicitly is not a civil engineer, so "other" was accepted by the tribunal as being far more appropriate.

HMRC have now realised that they're losing that battle, and have now accepted that they can't go back and collect more VAT as long as your choice of category is reasonable.  What they haven't said is whether some day they might just amend the list and make it functional!

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Tax Relief at Christmas!

Our usual repost at this time last year!

You may well be planning a Christmas party for your staff - in fact, around here it seems that if you've not booked it already you might struggle to get in!  So, we thought we'd summarise the tax rules around Christmas parties and gifts for you.

If an employer provides a Christmas party that's available to all of its staff (note that this really applies to PAYE employees, as opposed to, say, freelancers), where the cost is less than £150 per head, then it can reclaim all of the VAT and deduct the entire remaining cost from its profits before working out its tax bill - effectively, if a normal VAT-registered limited company holds its party at a normal VAT-registered venue, every £100 spent on the party ends up costing the company £67.  Actually, those allowances apply to annual events, not specifically Christmas ones - so you could have, say, a summer barbecue *and* a Christmas party costing less than £150 a head in total and still reclaim all of the VAT and get tax relief on the balance.

If your company has only one employee, you, then that's cool - you can still take advantage of the concession and go out for a nice meal with a partner, and save VAT and corporation tax as long as you stay within that £150 per head allowance.

If you want to give a Christmas gift to staff, then in practice HMRC consider a relatively small item like a turkey or a fairly normal bottle of wine to be trivial, and won't try to tax the employee on the value of the gift.  Assuming there's VAT on the gift when you buy it, then once more the ultimate cost of £100 of staff gifts to a normal VAT-registered limited company employer will be £67.  Anything more valuable the employees will have to pay tax on - and you'll have to pay National Insurance too.

If you give gifts to customers, then they'll only save you tax if:

• The total value of gifts in a year to the customer is less than £50,
• The gift has a clear advert for your business on it, and
• You can't eat, drink or smoke it!

If you want to give a customer a bottle of whisky then that's still completely fine, and may well make great business sense!  It's just that for every £100 you spend on gifts like that, it costs your business the full £100 - you can't reclaim any VAT or reduce your corporation tax or income tax bill at all.

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Selling digital services to EU consumers? Big VAT changes coming

There are some changes coming up on 1 January 2015 to EU VAT rules which are going to have a big effect on quite a lot of businesses.  Specifically the changes affect UK businesses selling digital services (games, apps, printable things like sewing patterns say) to consumers (as opposed to businesses) elsewhere in the EU.  There's been a lot of doom and gloom about the changes ("this is the end of small enterprise"), and whilst some of that is just melodramatic (it isn't the end of small enterprise), the rules will have a big effect on some businesses, and we're very sympathetic to those who are hit by it.

At present, if you sell £20,000 of printable sewing patterns (say) online in the UK, you don't have to be VAT registered (since your sales are under £81,000) and, if you're selling to private individuals, you don't want to be VAT registered.  If someone buys and downloads one of your patterns in France, then you don't have to worry about either UK VAT or French VAT.  Even if you *are* VAT registered then you only have to worry about UK VAT, not French VAT.  Nice and simple either way.

From 1 January 2015, when that French individual buys and downloads the pattern, you're liable to collect French VAT on the sale and give it to the French VATman, regardless of your sales income generally.  That's pretty irritating.  You've really got three options:

1. Register for French VAT and do a French VAT return every three months (or however frequently French VAT returns are done).  You're obviously not going to do this, it'd be insane.
2. Use something that HMRC here have set up, MOSS - the Mini One Stop Shop.  This enables you to tell HMRC each quarter how much you've taken in sales from consumers in different EU countries, and give them the VAT to pass on to the different EU VAT authorities.  However, to do this you need to register for UK VAT, which means right away that you have to start giving 1/6th of your UK sales to HMRC each quarter!  Assuming most of your sales are to UK consumers, you're obviously not going to do this, it'd also be insane.
3. Don't sell to anyone in France, or elsewhere in the EU.

In the absence of any other solution, #3 is what you're rationally going to do, as things stand.  Which is pretty absurd - the changes weren't conceived as a way of discouraging small businesses from doing cross-border sales, but that's one of the impacts that the writers of the rules (who no doubt consider "small" to be a £50m turnover) have unwittingly created.

In the end, any sensible solution to this is going to lie with the marketplace you're selling through (Etsy or whoever).  If you're selling via a "Digital platform, store or marketplace" then they're supposed to sort out the EU VAT aspect.  However, not all marketplaces seem to be making it crystal clear whether they're going to be capable of doing this from 1st January (or whether they consider themselves a marketplace at all).  One presumes in the end that marketplaces that don't make things easy for sellers will be pushed out by marketplaces that do.  In the meantime, though, it's a big worry for anyone potentially affected.  And if you're not selling through a marketplace, you simply do have options 1 to 3 to pick from.

So, it's clearly not the end of small enterprise (it doesn't affect any UK small enterprise not selling to EU consumers, which is to say 99% - conservatively - of small enterprises), but for those who it does impact, it's a really, really big deal.  If that includes you, give it plenty of thought, and if you sell via online marketplaces, find out what they're going to do.

www.fizzhq.com

HMRC looking at Flat Rate VAT categories

The Flat Rate Scheme (FRS) was originally introduced with the idea that it would make record-keeping for VAT-registered businesses easier.  If you're keeping proper records for a business, tracking the VAT properly is really very trivial, so the stated reason for FRS was pretty pointless, and the real reason businesses generally sign up for it is that it makes the payments of VAT they make to HMRC every three months a bit lower.

Each business works out their VAT payments based on a list of categories of business with associated percentage rates.  In principle, FRS will work well for you if your costs tend to be lower than the average business in a similar category and bad for you if you've generally higher costs.  You're supposed to decide for yourself which category of business you're in, and that leads to the main problem with the scheme - the table of categories is so poorly put together and has so many yawning holes in it that countless businesses are able to say that they're not listed, and use an "Other" category with a lower percentage than HMRC would really intend.  And some businesses use a category that's wholly inappropriate, but where a poorly written description enables them to argue it's a reasonable choice.

It seems that HMRC are actually starting to look at the category choices people make, with a view to enforcing the higher percentage they believe should be applied - with penalties and interest.  In the recent case of Idess Ltd they pursued a very weak case and lost - a mechanical engineer argued that he should be "Other" and not in the "Civil and structural engineers" category, since he was neither a civil not a structural engineer, and of course he won (and didn't have to pay the extra VAT and 35% penalty that HMRC were seeking!).  But the fact that HMRC took the case to a tribunal shows that they are prepared to take the argument on at times - and there are certainly many cases where they'll have a far stronger argument than in the case of the blameless mechanical engineer!

Check what category you're using, and make sure there's nothing else in the list that HMRC could convincingly argue is more appropriate.

www.fizzhq.com

Tax Relief at Christmas!

Here's a repeat from this time last year...

You may well be planning a Christmas party for your staff - in fact, around here it seems that if you've not booked it already you might struggle to get in!  So, we thought we'd summarise the tax rules around Christmas parties and gifts for you.

If an employer provides a Christmas party that's available to all of its staff (note that this really applies to PAYE employees, as opposed to, say, freelancers), where the cost is less than £150 per head, then it can reclaim all of the VAT and deduct the entire remaining cost from its profits before working out its tax bill - effectively, if a normal VAT-registered limited company holds its party at a normal VAT-registered venue, every £100 spent on the party ends up costing the company £67.  Actually, those allowances apply to annual events, not specifically Christmas ones - so you could have, say, a summer barbecue *and* a Christmas party costing less than £150 a head in total and still reclaim all of the VAT and get tax relief on the balance.

If your company has only one employee, you, then that's cool - you can still take advantage of the concession and go out for a nice meal with a partner, and save VAT and corporation tax as long as you stay within that £150 per head allowance.

If you want to give a Christmas gift to staff, then in practice HMRC consider a relatively small item like a turkey or a fairly normal bottle of wine to be trivial, and won't try to tax the employee on the value of the gift.  Assuming there's VAT on the gift when you buy it, then once more the ultimate cost of £100 of staff gifts to a normal VAT-registered limited company employer will be £67.  Anything more valuable the employees will have to pay tax on - and you'll have to pay National Insurance too.

If you give gifts to customers, then they'll only save you tax if:

• The total value of gifts in a year to the customer is less than £50,
• The gift has a clear advert for your business on it, and
• You can't eat, drink or smoke it!

If you want to give a customer a bottle of whisky then that's still completely fine, and may well make great business sense!  It's just that for every £100 you spend on gifts like that, it costs your business the full £100 - you can't reclaim any VAT or reduce your corporation tax or income tax bill at all.

www.fizzhq.com

This kind of HMRC campaign really shouldn't be necessary

"HMRC has launched its latest campaign, aimed at VAT-registered traders who have one or more overdue VAT returns. The VAT Outstanding Returns campaign offers the opportunity to bring their affairs up to date."

The thing is, if HMRC were staffed appropriately, they'd just be able to take action against non-submitters as they went along, and then there wouldn't be so many overdue returns.  The rules are clear, HMRC know precisely which businesses are in arrears and what returns they're supposed to have submitted, and sanctions are available - there just isn't the workforce to chase it up properly.  If there were, I would speculate that the extra staff would more than pay for themselves.

www.fizzhq.com

Tax relief at Christmas!

Since you may well be planning a Christmas party for your staff - in fact, around here it seems that if you've not booked it already you might struggle to get in!  So, we thought we'd summarise the tax rules around Christmas parties and gifts for you.

If an employer provides a Christmas party that's available to all of its staff (note that this really applies to PAYE employees, as opposed to, say, freelancers), where the cost is less than £150 per head, then it can reclaim all of the VAT and deduct the entire remaining cost from its profits before working out its tax bill - effectively, if a normal VAT-registered limited company holds its party at a normal VAT-registered venue, every £100 spent on the party ends up costing the company £67.  Actually, those allowances apply to annual events, not specifically Christmas ones - so you could have, say, a summer barbecue *and* a Christmas party costing less than £150 a head in total and still reclaim all of the VAT and get tax relief on the balance.

If you want to give a Christmas gift to staff, then in practice HMRC consider a relatively small item like a turkey or a fairly normal bottle of wine to be trivial, and won't try to tax the employee on the value of the gift.  Assuming there's VAT on the gift when you buy it, then once more the ultimate cost of £100 of staff gifts to a normal VAT-registered limited company employer will be £67.  Anything more valuable the employees will have to pay tax on - and you'll have to pay National Insurance too.

If you give gifts to customers, then they'll only save you tax if:

• The total value of gifts in a year to the customer is less than £50,
• The gift has a clear advert for your business on it, and
• You can't eat, drink or smoke it!

If you want to give a customer a bottle of whisky then that's still completely fine, and may well make great business sense!  It's just that for every £100 you spend on gifts like that, it costs your business the full £100 - you can't reclaim any VAT or reduce your corporation tax or income tax bill at all.

www.fizzhq.com

The problem with the VAT Flat Rate Scheme

When the Flat Rate Scheme (FRS) for VAT was introduced, it was intended to make completing accurate VAT returns easier for small businesses.  Rather than a) adding up all the VAT that they'd received from customers, b) adding up all the VAT that they'd paid out to suppliers and then c) paying over the difference to HMRC, they could just add up their gross income from customers and then pay over a fixed percentage of that income to HMRC, the percentage being dependent upon their industry sector.

The idea is that the percentages for each business sector should pretty much reflect how small businesses in those sectors typically operate.  In industries (say management consulting) where businesses have minimal VATable costs, their VAT payments tend to be quite high, and so the FRS gives them a high percentage.  In businesses with greater VATable costs (say a shop), VAT payments tend to be low, and so the FRS gives them a lower percentage.

That sounds fair enough in theory, but in practice there's only one real reason why some businesses sign up to the scheme, and that's to pay over less VAT to HMRC each quarter.  There's a big problem with the table of percentages, which is that it's really poorly put together.  It's pretty likely that there will be two categories which seem appropriate, and very likely that there are none.  It's often the case that sloppy drafting means that a rate that's plainly intended for one type of business can be used by another.  Plus, since many pretty common types of business are omitted entirely, they can choose the "Other" category where that really gives a lower percentage than is really appropriate for their business model.

No blame should be attached to businesses that go for as low a percentage as is realistic, of course - they'd be mad not to.  This thread shows an accountant who's been able to claim (somewhat implausibly, to my mind) that he's not really an accountant, and he appears to have persuaded HMRC to agree.  The problem lies with the conception and execution of the scheme itself.  Keeping accurate records under the traditional system is no big deal - you've got to track your costs in the end, in order to get your year-end accounts done - and, apart from anything else, to know how much money you're making.  So the scheme wasn't really needed.  But what makes it worse is that hopeless table of rates.

www.fizzhq.com

VAT Flat Rate Scheme and bank interest

Counter-intuitively and controversially, since the introduction of the VAT Flat Rate Scheme (FRS), HMRC had insisted that any bank interest earned by a business must be included as part of its income.  Therefore, a business registered under the FRS effectively had to pay over VAT on its bank interest, even though bank interest is not generally VATable.

Following a recent case, they've changed their guidance.  They now accept that interest doesn't have to be included in the income of a business when working out its FRS liability.

We've yet to see any guidance from HMRC on whether previously declared VAT on interest can now be recovered.  It's unlikely that any business is massively out of pocket - especially with interest rates so low right now - but it might be worth considering a reclaim if you have been affected.

www.fizzhq.com

 

Fuel-only mileage rates change

Taxman-approved fuel-only mileage rates changed on 1 December.  These are the rates that HMRC are happy for employers to use a) to reimburse staff for fuel used for company business that they've paid for and put in company cars, or b) reclaim from staff the cost of company fuel they've used for their own private motoring.  But they're also the rates that businesses can use to reclaim VAT on some of the mileage allowances paid to employees and directors.

Employers can pay a mileage allowance of up to 40p a mile, tax-free, when employees use their own car for business.  That hasn't changed, it remains 40p.

You can’t reclaim VAT on all of the 40p, but you can reclaim VAT on the part that represents fuel, as long as you retain VAT receipts covering the cost.  As fuel costs have increased so sharply, the approved rates - the part of the 40p that the taxman is happy to accept as representing the cost of fuel - have just been increased once more.  The new list of rates is here:

http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm

The new rates are to be applied from 1 December.  If you're VAT registered, not on the flat-rate scheme, and failing to reclaim VAT on your mileage costs at all, you should start.  You can even reclaim some of the VAT you've missed out on in the past - get in touch with us to find out how.

www.fizzhq.com