Should I worry about a tax investigation? Reply

Tax Investigations can happen to anyone, around 7% are estimated to be random.

Even if your accounts and tax affairs are in totally up to date and correct investigations will take up your accountants time and incur fees.

What can you do to reduce your chances of being selected:

1. File your tax returns on time and pay what you owe – If you file late or at the last minute HMRC will think you are disorganised and as such there are more likely to be errors in the return

2. Declare all your income – HMRC get details of bank interest and other sources of income, sometimes they test them and match them to returns

3. Use an accountant – Unrepresented taxpayers are more likely to be looked at, mainly because many of them don’t know what they are doing

4. Trends – if your business doesn’t match the profile of similar business in the same sector or your results suddenly fluctuate it could raise concerns at HMRC, for example, if you suddenly request a VAT refund

According to the FSB

The average duration of a full investigation is circa 16 months whereas an aspect investigation can last between 3 – 6 months, but can take longer.

We are currently putting in place a solution for our clients with Taxwise  better to be safe than sorry, letters will be sent to our clients before Christmas

taxwise

steve@bicknells.net

Will your Flat Rate VAT bill be going up in April? Reply

omg man

The Flat Rate VAT scheme is very popular with small businesses.

The Flat Rate Scheme is designed to simplify your records of sales and purchases. It allows you to apply a fixed flat-rate percentage to your gross turnover to arrive at the VAT due.

Fixed-rate percentages vary depending on the type of business. [HMRC VAT Notice 733]

The scheme is for businesses with a turnover no more than £150,000 a year, excluding VAT.

The problem is that HMRC feel the scheme has been abused and used as a way to pay less VAT especially by businesses with virtually no costs.

A Low or Limited Cost Trader would spend less than 2% on gross turnover, or less than £1000 on the purchase of goods.

From April 2017 they will get a special 16.5% flat rate.

Here are some of the businesses likely to be affected

  • Accountancy and legal services 14.5%
  • Journalism or entertaining 12.5%
  • Computer or IT consultancy 14.5%
  • Business services not listed elsewhere 12%
  • Estate agents and property management 12%
  • Management consultancy 14%

There are lots of other VAT schemes to choose from

Standard VAT Scheme – on this scheme the VAT is based on tax points from invoices

VAT Cash Accounting Scheme – if your turnover is below £1.35m you can account for VAT on a Cash basis, this is particularly helpful if your customers pay you on slower terms than you pay your suppliers

Annual Accounting Scheme for VAT – if your turnover is below £1.35m you could join the Annual Scheme and complete one return for the year but you make either 9 interim payments or 3 quarterly interim payments

Retail VAT Schemes – These are specific schemes aimed at mainly at shops and help to overcome the issues of mixed vat rate goods

VAT Margin Scheme – The margin scheme relates to second hand goods and accounts for VAT on the margin, for example on the sale of cars

They will all produce different answers!

Now might be a good time to make comparisons.

steve@bicknells.net

HMRC raids increase by 28% in the last year! Reply

Regretful businessman in prison

In the last year HMRC have increased their raids on business premises by 28% and that’s a 53% increase over 5 years.

761 properties were raided last year!

HMRC possesses powers to raid premises with a search warrant granted by a judge or magistrate.

During August 2016 (Consultations end in October 2016) they issued 3 new consultations:

Tackling the hidden economy: Sanctions

Tackling the hidden economy: Extension of data – gathering powers to Money Service Businesses

HMRC have always been keen to seek out those who fail to register for tax, since 2011 they have been using CONNECT.

According to Accounting Web:

It uses a mathematical technique to search previously unrelated information and detect otherwise invisible ‘relationship’ networks. Using Connect, HMRC sifts through information on property transactions at the Land Registry, company ownerships, loans, bank accounts, employment history, voting and local authority rates registers and compares with self-assessment records to spot taxpayers who might be under-declaring or not declaring income.

Connect has made links between tax records and third party data from hospitals, pharmaceutical companies, insurers and even gas SAFE registrations. DVLA records and the shipping and Civil Aviation Authority registers help identify owners of cars and planes who declare income that the computer suggests cannot support such purchases.

If you have undeclared tax now would be a good time to tell HMRC.

steve@bicknells.net

Will Making Tax Digital (MTD) make life easier for you? Reply

mtd

 

One of the big areas of concern has been over the quarterly tax reporting requirements and concerns over data accuracy, as a result, the government has given exemptions for small businesses which will mean 5.4 million small businesses won’t now need to report quarterly.

Data accuracy is going to be critical, are most businesses up to providing data in real time? RTI has worked for payroll but could it really work for accounting information? many businesses rely on their accountants and book keepers to get the information correct.

steve@bicknells.net

Is your Salary Sacrifice going to be taxed? Reply

Parking design

Its a busy time for Government Consultations, we have one currently underway called

It runs until 19th October 2016.
Some salary sacarifice items will be protected from any changes:
  • Workplace Childcare
  • Employer Pensions
  • Cycling to work

But everything else is up for grabs for example parking…

Parking

 

Which of your salary sacrifices are at risk?

 

steve@bicknells.net

New powers to hunt down the hidden economy Reply

Corporate criminal stealing business documents

HMRC have always been keen to seek out those who fail to register for tax, since 2011 they have been using CONNECT.

According to Accounting Web:

It uses a mathematical technique to search previously unrelated information and detect otherwise invisible ‘relationship’ networks. Using Connect, HMRC sifts through information on property transactions at the Land Registry, company ownerships, loans, bank accounts, employment history, voting and local authority rates registers and compares with self-assessment records to spot taxpayers who might be under-declaring or not declaring income.

Connect has made links between tax records and third party data from hospitals, pharmaceutical companies, insurers and even gas SAFE registrations. DVLA records and the shipping and Civil Aviation Authority registers help identify owners of cars and planes who declare income that the computer suggests cannot support such purchases.

During August 2016 (Consultations end in October 2016) they issued 3 new consultations:

 

Tackling the hidden economy: Sanctions

Tackling the hidden economy: Extension of data – gathering powers to Money Service Businesses

Failure to notify

The criteria used to assess if an activity is a hobby or a business are:

  • The size and commerciality of the activity.
  • The frequency of the activity and transactions
  • The application of business principles.
  • Whether there is a genuine profit motive.
  • The amount of time devoted to the activities.
  • The existence of arm’s-length customers (as opposed to just selling your wares to family and friends).

HMRC have some great examples to help you decided, for example

Gail is a full-time employee working for a stationery company. She pays her PAYE tax on this employment every month.

In her free time Gail makes cushions and uses most of them in her home. Occasionally she sells them to friends and work colleagues for an amount that just covers the cost of materials of £15. Sometimes she makes a loss. Any money she does make goes towards her holiday fund.

She decides to make extra cash by selling cushions on an Internet auction site and starts auctioning three or four to see how they go. They all sell for more than £50, a profit of at least £35 each.

She uses this money to buy more materials and within a month she is selling around ten cushions a week, always at a profit, and is considering setting up her own website.

Gail’s initial sales of cushions to friends are not classed as trading. It lacks commerciality and she does not set out to make a profit. The occasional sales are a by-product of her hobby. Once she begins to auction her cushions, she has moved into the realms of commerciality.

She is systematically selling her goods to make a profit. She will need to inform HMRC about her trade, and keep records of all her transactions. On the level of sales shown in the example the potential turnover of around £26,000 is well below the VAT annual threshold so Gail does not need to register for VAT.

Don’t wait for HMRC to track you down, register now and declare the tax you owe!

steve@bicknells.net

 

What are the VAT implications of converting commercial buildings to residential? Reply

foreman builder and construction worker with blueprint in indoor apartment

There are several issues to watch out for:

Transfer Of a Going Concern (TOGC)

Before you buy a commercial property you will need to find out if the current owner has opted to tax.

Supplies of land and buildings, such as freehold sales, leasing or renting, are normally exempt from VAT. This means that no VAT is payable, but the person making the supply cannot normally recover any of the VAT incurred on their own expenses.

However, you can opt to tax land. For the purposes of VAT, the term ‘land’ includes any buildings or structures permanently affixed to it. You don’t need to own the land in order to opt to tax. Once you have opted to tax all the supplies you make of your interest in the land or buildings will normally be standard rated, and you will normally be able to recover any VAT you incur in making those supplies. VAT Notice 742A

If an Option to Tax is in place the seller will charge VAT when they sell the property.

If the purchaser is not registered for VAT they get a very large VAT bill to pay, however, if they register for VAT or are registered for VAT before the sale takes place then its possible to use the TOGC rules to avoid having to pay VAT on the purchase.

The main conditions are:

  • the assets must be sold as part of the transfer of a ‘business’ as a ‘going concern’
  • the assets are to be used by the purchaser with the intention of carrying on the same kind of ‘business’ as the seller (but not necessarily identical) – for example commercial property rental
  • where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer
  • in respect of land which would be standard rated if it were supplied, the purchaser must notify HMRC that he has opted to tax the land by the relevant date, and must notify the seller that their option has not been disapplied by the same date

The TOGC rules are compulsory. You cannot choose to ‘opt out’. So, it is very important that you establish from the outset whether the business property is being sold as a TOGC. Incorrect treatment could result in corrective action by HMRC which may attract a penalty and or interest.

Problem areas:

  1. Gap in trading – for TOGC to apply there must be no significant gap in trading between the sale and purchase
  2. VAT registration – If the vendor is VAT registered, there can only be a VAT-free TOGC if the purchaser is registered at or before the transfer

TOGC Intended for Residential Use

Schedule 10 para 6 VATA 1994 Notice 742A para 3.4

Your option to tax will not apply if you supply a building or part of a building that is not designed or adapted as a dwelling (or number of dwellings) or for a relevant residential purpose but you receive a certificate (VAT1614D) from the recipient of your supply (by the time described in paragraph 3.4.3 and paragraph 3.4.4) certifying that it is intended for use as a dwelling or number of dwellings or solely for a relevant residential purpose. This can apply where the building, or relevant part, is either intended for such use:

  • without conversion work being undertaken
  • after conversion

Conversion of Commercial to Residential for Sale – Zero Rating

VAT notice 708 (Schedule 8 Group 5 item 1 VATA 1994)

5.5.1 What ‘person converting’ means

You are a ‘person converting’ a building if, in relation to that building, you are acting as, or have, at any point in the past, acted as:

  • a developer – you physically converted, or commissioned another person to physically convert, a building (in whole or in part) that you own or have an interest in
  • a contractor or subcontractor – you provided construction services to the developer or another contractor for the conversion of the building, sub-contracting work as necessary

5.5.6 TOGC of converted developments of dwellings, relevant residential buildings

A person acquiring a residential development that has been subject to a qualifying conversion as part of a TOGC inherits ‘person converting’ status and is capable of making a zero rated first major interest grant in that building or part of it as long as:

a) a zero rated grant has not already been made of the converted building or relevant part by a previous owner (not including the grant that gives rise to the TOGC)

b) the person acquiring the building as a TOGC would suffer an unfair VAT disadvantage if its first major interest grants were treated as exempt (for example, a developer restructures its business. This entails the transfer (as a TOGC) of its entire property portfolio of newly constructed or converted qualifying buildings to an associated company, which will make first major interest grants. If these were treated as exempt, the transferee might become liable to repay input tax recovered by the original owner on development costs under the Capital Goods Scheme or partial exemption “claw back” provisions and would incur input tax restrictions on selling fees that would not be suffered by businesses in similar circumstances – we would consider this to be an unfair disadvantage)

c) that person would not obtain an unfair VAT advantage by being in a position to make zero rated supplies (for example, by recovering input tax on a refurbishment of an existing building)

A recent case suggests the rules even apply to Houses of Multiple Occupancy (HMO’s) and that HMO’s can also be Zero Rated

https://www.gov.uk/government/publications/vat-notice-708-buildings-and-construction/vat-notice-708-buildings-and-construction#zero-rating-the-sale-of-or-long-lease-in-non-residential-buildings-converted-to-residential-use

The case is Capital Focus Limited v HMRC TC05193 Appeal number TC/2015/04891.

Capital Focus purchased Tintern House in Banbury, Oxfordshire in August 1994, it was a commercial building and they intended to create one large residential building so they started work and reclaimed the VAT, however, they changed their mind and decided to create an HMO instead.

HMRC allowed the £45,000 input tax claim on the basis that it would be supply of a non-residential building converted to residential use and therefore zero-rated under Item 1(b), Group 5 of schedule 8 to the Value Added Tax Act 1994 (“VATA”)
On 22 April 2015 HMRC wrote to the Company stating that, because it had been converted for multiple occupancy, the sale of Tintern House
was not a zero-rated but an exempt supply and any input tax incurred that was directly attributable to it was not recoverable.
HMRC lost the case, here is the result..
VAT Zero HMO

Reduced Rate VAT for Conversion from Commercial to Residential

The rules are in VAT Notice 708

Using the reduced rate of 5% is useful for Residential property (exempt from VAT) but is also useful for commercial buildings where there is no option to tax in place.

Conversions into single household dwellings

A qualifying conversion includes the conversion of:

  • a property that has never been lived in, such as an office block or a barn
  • a multiple occupancy building such as a bedsit block
  • living accommodation which is not self-contained, such as a pub containing staff accommodation that is not self-contained
  • any dwelling which had previously been adapted in its entirety to another use, such as to offices or a dental practice

It does not include:

  • the creation of living accommodation that is not a ‘single household dwelling’, such as most ‘granny’ annexes or additional bedrooms at a care home, and
  • the renovation or alteration of living accommodation that had been used for other purposes without the premises being adapted, such as a flat above a shop that has been used for storage. If the living accommodation has not been lived in for two years or more, the reduced rate explained in section 8 may apply

Conversions into multiple occupancy dwellings

A qualifying conversion includes the conversion into a multiple occupancy dwelling of:

  • a single household dwelling
  • a building used for a relevant residential purpose, such as a care home, and
  • a property that has never been lived in

It does not include, for example, the creation of additional bedrooms at a dwelling consisting of bed-sits.

Conversions into premises intended for use for a relevant residential purpose

A qualifying conversion includes the conversion of:

  • a single household dwelling
  • a multiple occupancy dwelling, and
  • a property that has never been lived in

into premises that will be used solely for a relevant residential purpose.

It does not include:

  • the remodelling of an existing ‘relevant residential purpose’ building, such as a care home, and
  • any conversion where a new qualifying residential ‘home’ or ‘institution’ is not created in its entirety, such as the conversion of outbuildings into additional bedrooms for an existing care home

What services can I reduced-rate?

Other than installing goods that are not building materials, you can reduced-rate any works of repair, maintenance (such as redecoration), or improvement (such as the construction of an extension or the installation of double glazing) carried out to the fabric of the building.

You can also reduced-rate works within the immediate site of the premises being converted that are in connection with the:

  • means of providing water, power, heat or access
  • means of providing drainage or security, or
  • provision of means of waste disposal

All other services are standard-rated. For example, you must standard-rate:

  • the installation of goods that are not building materials, such as carpets and fitted bedroom furniture
  • the erection and dismantling of scaffolding
  • the hire of goods
  • landscaping
  • the provision of professional services, such as those provided by architects, surveyors, consultants and supervisors

 

steve@bicknells.net

How do you share property ownership income between spouses? Reply

OUR NEW HOME

Just focusing on income tax, HMRC assume that when you buy a property/investment property its owned 50/50 between husband and wife or civil partners living together, this set out in the Income tax Act s 836.  However, this rule will not apply in any of the following instances:

  • the income is from furnished holiday lettings;
  • there is actually a partnership in which case the income is divided according to the terms of the partnership agreement;
  • both husband and wife, or both civil partners, have signed a declaration stating their beneficial interests in both the property and the income arising from it.

When you make a declaration it must apply equally to ownership and income and a couple must be married or civil partners, you can’t be separated or divorced or joint tenants.

Form 17 is used to make the declaration
You can use this form to declare a beneficial interest if you hold property jointly and:
• you actually own the property in unequal shares, and
• you are entitled to the income arising in proportion to those shares, and
• you want to be taxed on that basis.

Form 17 must be submitted with in 60 days of completion, in addition a Declaration of Trust is likely to be required.

If there is a change, even a minor change, after submitting the Form 17 it will be invalid and revert to 50/50.

If the property is held in a single name it may be possible to use a declaration of trust to confirm joint beneficial interest.

Income Tax and Capital Gains Tax will be be based on the beneficial interest in the property, so if one spouse is a higher rate tax payer and the other a lower rate tax payer changing the proportion of ownership could have a significant tax advantage.

There is no default ownership for unmarried property owners.

Property owners may also need to agree the split with their mortgage lender.

For more detailed guidance read this advice from HMRC https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem9000

steve@bicknells.net

 

Theatre tax relief – does your production qualify? Reply

Actor Giving Speech Shakespeare Open Air Theater Shakespeare Performance.

Finance Act 2014 introduced a new regime for the taxation of Theatrical Production Companies (TPCs) that claim a new relief for the theatre industry: Theatre Tax Relief (TTR).

The legislation provides specific rules for relief on theatrical productions, including touring productions, in addition to setting out how the taxable profits and losses of those productions shall be calculated.

Tax treatment

For tax purposes only, the legislation:

  • deems that each production is a separate theatrical trade with a start and end date separate to that of the company
  • describes what expenditure is eligible for additional tax relief and circumstances where there are exceptions to the normal rules for income and expenditure, and
  • restricts the use of losses associated with that separate theatrical trade in certain circumstances.

Theatre Tax Relief (TTR)

TTR is available to TPCs engaged in the making of:

  • theatrical production (TTR40020)
  • for live performance to paying members of the general public or provided for educational purposes (TTR40030), and
  • at least 25% of the core expenditure (TTR50010) is incurred on goods or services provided from within the European Economic Area (EEA) (TTR50050).

Those TPCs that are entitled to TTR can claim:

  • an additional deduction in computing their taxable profits (TTR55010), and
  • where that additional deduction results in a loss, to surrender losses for a Theatre Tax Credit (TTC) (TTR55100): a payable tax credit due to the TPC.

Theatre Tax Credit rates

The TTC rates are:

  • 25% for touring productions, and
  • 20% for all other qualifying productions.

Both the additional deduction and the Theatre Tax Credit are calculated on the basis of core expenditure up to a maximum of 80% of the total core expenditure by the TPC.  Core expenditure is that expenditure directly incurred in producing the production and closing the production.

According to The Stage ..

Productions only qualify if they are live performances to paying members of the public, and aim to make a profit.

Productions performed in schools are the only exception to this, and are still eligible for the tax relief as they are for “educational purposes”.

Tax relief can be claimed on performances that are live streamed as part of schemes such as NT Live, as long as the company’s main aim is to stage live performances for paying, present audiences.

Likewise, performances that are recorded are also eligible as long as the recording is not the aim of the production’s overall run.

Circus productions are only eligible if they are “scripted”, “dramatic” and the performers “play a role”, rather than being simply “a display of athleticism, skill or strength”.

Other art forms that are eligible include ballet, contemporary ballet which incorporates classical ballet, and other dance performances that are “dramatic productions”.

HMRC has a specialist unit, the Creative Industries Unit, to deal with claims to Theatre Tax Relief (TTR) and the other creative industries tax reliefs (for example, film and video games).

The unit can be contacted by email at creative.industries@hmrc.gsi.gov.uk or by telephone on 03000  510191.  Alternatively, the unit can be written to using the following correspondence address:

The Creative Industries Unit
Manchester Incentives & Reliefs Team
Local Compliance S0717
PO Box 3900
GLASGOW
G70 6AA

steve@bicknells.net

Hooray! we have now paid our tax – Tax Freedom Day was 2nd June 2016 Reply

tax free icon, red round glossy metallic button, web and mobile app design illustration

According to the Adam Smith Institute

Taxpayers worked 154 days this year to pay their taxes, four days longer than 2015

  • Tax Freedom day falls four days later than it did in 2015
  • Brits work 154 days of the year solely to pay taxes; every day from 1st January to 2nd June
  • Tax receipts projected to be 42.27% of net national income this year
  • Government needs to cut spending and keep tax reform a priority
  • Adam Smith Institute calling on government to raise National Insurance Threshold to help lowest paid in society

This is first time in 15 years that Tax Freedom Day has moved into June!

Whilst net national income has increased by £34.6bn from 2015, government has actually gobbled up £35.4bn more in taxes, meaning the government has actually left Britons £1bn worse off than last year, a reminder that tax reform must remain a priority.

Director of the Adam Smith Institute, Dr Eamonn Butler, said:

“The Treasury hates Tax Freedom Day because they don’t want us to know how much tax we really pay. They conceal the tax burden with stealth taxes that we don’t even realise we’re paying.

“But it’s shocking that the government takes over two-fifths of the country’s earnings – and then borrows more. We work longer for the government than mediaeval serfs had to work for their Lords!

“It is absurd that people on the minimum wage are liable for National Insurance Contributions, which raise their cost to employers and make it harder to move from benefits into work. The poor are also worst hit by regressive taxes like excise duties on what they buy.”

Tax Freedom Day is designed to reveal to the public how much they really pay out in taxes, which Britain’s lengthy tax code can often obscure. ASI calculations include direct taxes like income tax and national insurance, as well as indirect taxes like VAT and corporation tax.

steve@bicknells.net