What are the tax issues and advantages of a Home Office? 20

Home Office

Working from home is a popular option for business owners and employees. Assuming you need to create office space you could either convert an existing room, loft, or garage or build a new structure in the garden.

VAT

  1. Estimate the amount of Business & Personal Use – you can only reclaim VAT on the Business Use proportion – you might have 100% business use if you were building an office in the garden. HMRC’s published and internal guidance states,
    “Where a domestic room or rooms is put to business use, you may agree to an apportionment using an objective test to the extent to which the room is put to business use” (HMRC Manual V1-13, Section 14, para 14.7, and VAT Notice 700, Section 33,)
  2. The invoice should be in Business Name
  3. You can reclaim 100% VAT on Office Equipment used entirely for business purposes (if you reclaim VAT you need to charge VAT if you sell the equipment)
  4. If you then sell your home to a buyer who wants to use the premises as part of their dwelling you don’t charge any VAT as it will be exempt

Capital Allowances

Capital Allowances are not given on land and building but you could claim for integral features, assets and equipment. Sole Traders and Partners can exclude a proportion for private use.

Benefit In Kind

Directors and Employees who have personal use of the assets will incur tax as it will be a benefit in kind. So it might be better to keep business assets for business use only to avoid this tax. Here is my blog comparing Directors Loans to Use of Assets https://stevejbicknell.com/2012/04/14/directors-loan-vs-private-use-of-company-assets/

Expenses

You can claim a proportion (based on the number of rooms and hours of business use) of your household expenses

  • Mortgage interest or rent
  • Council tax
  • Water rates
  • Repairs and maintenance
  • Building and contents insurance
  • Electricity
  • Gas, oil or other heating costs
  • Cleaning
  • Telephone (based on usage)
  • Broadband

You can draw up a home rental agreement to reclaim these costs, or claim expenses, or if the use is minimal you might find it easier to claim £4 per week as suggested by HMRC.

Here are some examples http://www.hmrc.gov.uk/manuals/bimmanual/bim47825.htm

Capital Gains Tax

Your principle private residence is exempt from capital gains but your home office won’t be if its exclusively used for business, but it will only be a small proportion of the property value and as such any gain will probably be covered by your annual allowance £11,100 (2016/17) if you are a sole trader or partner, if not your company could have a small amount of capital gains tax to pay if a gain is made.

If you are a sole trader or partner and there is a private use element to your home office then the office will be exempt.

Other Issues to consider

Planning Use -You might wish to apply for a Certificate of Lawfulness (Proposed)

for a change of use, for example if you wanted to use a single room in a dwelling house as an office. https://www.planningportal.co.uk/info/200130/common_projects/120/what_to_do_next/3 

Insurance – you will need to inform your home insurance company that you now have a home office

Business Rateshttp://www.businesslink.gov.uk/bdotg/action/detail?itemId=1086066821&r.l1=1073858808&r.l2=1073859221&r.l3=1086066759&r.s=sc&type=RESOURCES

steve@bicknells.net

How do I calculate the VAT on a Sales Promotion? 5

VAT  Sale

Now Christmas is over the shops are full of sales promotions, discounts, double counts, 50% off but how much VAT should be charged? And what type of business promotion would be best for your business?

Here are some to consider:

Discounts

Provided you aren’t connected to the person you are selling to, VAT is only payable on the discounted price. If you offer a retrospective discount or volume discount a credit note can be issued when the target is achieved.

Buy one get one free

Sounds simple but needs to be handled carefully as for VAT purposes the default assumption would be that one item is at full price and the other item is a gift, the gift would be subject to VAT (if it’s over £50 in value).  So for accounting and VAT purposes you should sell both items at 50% of their value.

Money-Off Coupons

These work in similar way to Discounts but in some cases the retailer will be able to recover the value of the Coupon from their supplier.

Cash-Back

The purchaser pays the full price and gets cash back. Often the manufacturer gives the cash back rather than the retailer, so the retailer accounts for VAT on the full price. The manufacturer pays the Cash Back to purchaser. The Manufacturer can then reduce their output tax for the Cash Back.

Gift Vouchers and Face Value Vouchers

There is no VAT on purchased gift vouchers as they are treated as cash equivalents, its only when they are used to purchase items that VAT needs to be accounted for.

It’s also common for Gift Vouchers to be lost and never used, which is great for the retailers.

If the voucher is sold for more than its cash equivalent then part of the value will be vatable.

Reward Cards

There are several ways to handle these let’s assume the points operator pays the retailer the value of the points, the operator will then reclaim input tax. Alternatives could follow the Discount rules or Voucher rules.

steve@bicknells.net

When should you charge VAT on inter company recharges? 1

3D Vat button block cube text

The answer depends on whether you have made a Taxable Supply or not.

A vatable inter company charge would be where one company buys business services and goods from suppliers and shares them with another related company so for example the invoice might say:

Recharge from Company A to Company B

10% Insurance

5% Rent/Rates

8% Motor/Travel

12% Office Salaries (but check notes below on employment)

As long as the charges have a logical and reasonable basis for them then these costs can be recharged plus VAT (even if the original item such as insurance wasn’t originally vatable)

However, the following are not Taxable supplies for VAT:

Common Directors – Notice 700/34 (May 2012)

An individual may act as a director of a number of companies. For convenience one company may pay all the director’s fees and then recover appropriate proportions from the others.

The individual’s services, such as attending meetings or approving expenditure, are supplied by the individual to the companies of which they are a director. The services are supplied directly to the relevant businesses by the individual and not from one company to another. Therefore there is no supply between the companies and so no VAT is due on the share of money recovered from each company.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&id=HMCE_CL_000871&propertyType=document#P87_8714

Joint Employment – Notice 700/34 (May 2012)

Where staff are jointly employed there is no supply for VAT purposes between the joint employers. Staff are jointly employed if their contracts of employment or letters of appointment make it clear that they have more than one employer. The contract must expressly specify who the employers are for example ‘Company A, Company B and Company C’, or ‘Company A and its subsidiaries’.

Paying a Bill on behalf of an associated business

This is basically an inter company loan which will be repayable in full, its not a taxable supply.

Why does this matter?

An article in Tips and Advice  – VAT issue 11October 2012 reported that HMRC have applied penalties of up to 30% of the error where incorrect treatment has been applied.

So it is very important to get the VAT treatment correct.

Alternatively you might consider forming a VAT Group so that you don’t need to charge VAT on inter company charges but this isn’t always a practical solution as it means changing the VAT registration and doing a single return for all companies/businesses in the VAT group.

steve@bicknells.net

Will I be taxed on Christmas gifts recieved at work? Reply

Christmas Gifts

It’s Christmas and even though times are tough, you could still get a gift from your employer or client or supplier, will it come with a tax bill attached?

The answer depends on the value.

HMRC Helpsheet 207 – Non-taxable payments or benefits for employees

The Helpsheet says, certain gifts from third parties are non-taxable if all these conditions are satisfied:

• the gift consists of goods or a voucher or token only capable of being used to obtain goods, and

• the person making the gift is not your employer or a person connected with your employer, and

• the gift is not made either in recognition of the performance of particular services in the course of your employment or in anticipation of particular services which are to be performed, and

• the gift has not been directly or indirectly procured by your employer or by a person connected with your employer, and

• the gift cost the donor £250 or less, and

• the total cost of all gifts made by the same donor to you, or to members of your family or household, during the tax year is £250 or less.

http://www.hmrc.gov.uk/helpsheets/hs207.pdf

An employer may provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas. All of these gifts can be treated as trivial benefits. . For an employer with a large number of employees the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned. If a benefit is trivial it should not be included in a PSA (EIM21861).

http://www.hmrc.gov.uk/manuals/eimanual/EIM21863.htm

Will the employer or supplier or client have to account for VAT?

You do not have to account for VAT on business gifts made to the same person so long as the total cost of all the gifts does not exceed £50, excluding VAT, in any 12-month period. To check this it is acceptable for you to adopt any 12-month period that includes the day on which the gift is made.

But where the following apply:

  • the total cost of business gifts given to the same person in any 12-month period exceeds £50
  • you were entitled to claim the VAT on the purchase as input tax

you must normally account for output tax on the total cost value of all the gifts. How to work out the cost is explained in Notice 700, ‘The VAT Guide’.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&propertyType=document&columns=1&id=HMCE_CL_000091#P32_2034

steve@bicknells.net

How to claim VAT back using Fuel Advisory Rates Reply

Mileage for the current tax year can be reclaimed at a maximum  of 45p per mile for the first 10000 miles then 25p after that

http://www.hmrc.gov.uk/rates/travel.htm

Most people are already using these rates, but a large number of businesses don’t reclaim the VAT on the Fuel element – see VAT Notice 700/64

8.7 My employees are paid a mileage allowance, how do I work out my input tax?

You work out your input tax by multiplying the fuel element of the mileage allowance by the VAT fraction. You can do this for all fuel bought

The allowance paid to employees must be based upon mileage actually done.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&id=HMCE_CL_000090&propertyType=document#P159_17774

 

Company cars: advisory fuel rates
The rates below apply from 1 December 2011.

Engine size

Petrol

LPG

1400cc or smaller 15p 10p
1401cc to 2000cc 18p 12p
Bigger than 2000cc 26p 18p

Engine size

Diesel

1600cc or smaller 12p
1601cc to 2000cc 15p
Bigger than 2000cc 18p

So this is how to work out the claim:

1000 business miles = 1000 x 45p = £450

On which VAT (assuming a 2000cc (bigger) Diesel) 1000 miles x 18p divided by 1.2 x 20% VAT = £30 VAT to reclaim

For large businesses there could be a lot of VAT to reclaim

steve@bicknells.net

 

A quick guide to VAT on Sandwiches, Takeaway Food, Cakes and Pasties 14

Most takeaway and sandwich shops are not part of the big chains like Greg’s, McDonalds or Subway, they are just small businesses doing their best to comply with complicated and confusing VAT rules, here is a quick summary to help those businesses account for their sales. Basically by using keeping 3 separate receipt books it will make it easier for their accountants to calculate the VAT, rather than a single takings book which almost inevitably means making estimates of the split between zero rates and vatable.

 

 

The rules are in HMRC Notice 709/1

So what changed in the Budget 2012

Food is subject to VAT once it is heated to “above air-ambient temperature”, and meant to be eaten in or near the shop or restaurant. So “takeaway food” is already subject to VAT, while most hot food sold by bakers and supermarkets is exempt as it has been heated to improve its appearance (ie it could equally be enjoyed cold); or it will be eaten at home.The aim of the change is therefore to “clarify the definition of ‘hot takeaway food’ to confirm that all food (with the exception of freshly baked bread) that is above ambient temperature when provided to the customer is standard [VAT]-rated”.

http://www.guardian.co.uk/lifeandstyle/2012/mar/28/pasty-tax-pie-budget

VAT can be very complicated as highlighted in the case of Jaffa Cakes – Cakes or Biscuits?

The leading case on the borderline is that concerning Jaffa cakes: United Biscuits(LON/91/0160). Customs and Excise had accepted since the start of VAT that Jaffa cakes were zero-rated as cakes, but always had misgivings about whether this was correct. Following a review, the department reversed its view of the liability. Jaffa cakes were then ruled to be biscuits partly covered in chocolate and standard-rated: United Biscuits (as McVities, one of the largest manufacturers of Jaffa cakes) appealed against this decision. The Tribunal listed the factors it considered in coming to a decision as follows.

  • The product’s name was a minor consideration.
  • Ingredients:Cake can be made of widely differing ingredients, but Jaffa cakes were made of an egg, flour, and sugar mixture which was aerated on cooking and was the same as a traditional sponge cake. It was a thin batter rather than the thicker dough expected for a biscuit texture.
  • Cake would be expected to be soft and friable; biscuit would be expected to be crisp and able to be snapped. Jaffa cakes had the texture of sponge cake.
  • Size: Jaffa cakes were in size more like biscuits than cakes.
  • Packaging: Jaffa cakes were sold in packages more similar to biscuits than cakes.
  • Marketing: Jaffa cakes were generally displayed for sale with biscuits rather than cakes.
  • On going stale, a Jaffa cake goes hard like a cake rather than soft like a biscuit.
  • Jaffa cakes are presented as a snack, eaten with the fingers, whereas a cake may be more often expected to be eaten with a fork. They also appeal to children, who could eat one in a few mouthfuls rather like a sweet.
  • The sponge part of a Jaffa cake is a substantial part of the product in terms of bulk and texture when eaten.

Taking all these factors into account, Jaffa cakes had characteristics of both cakes and biscuits, but the tribunal thought they had enough characteristics of cakes to be accepted as such, and they were therefore zero-rated.

http://www.hmrc.gov.uk/manuals/vfoodmanual/vfood6260.htm

Surely there must be a way to simplify the rules?

steve@bicknells.net

Plan out the Key Dates for your Business Reply

There are so many things to remember when you have a company, accounting dates, vat dates, paye dates, corporation tax, self assessment dates, the list seems endless. The only way to keep on top of the dates is to put them in your diary.

I found this link http://www.businesslink.gov.uk/bdotg/action/keydates

Business Link can generate all your key dates, the results look like this

July 2012

05/07/12 Ensure agreement is reached with HM Revenue & Customs re Class 1B voluntary settlement.
Find out more: National Insurance: an introduction
PAYE and NICs
06/07/12 Ensure copies of P9D/P11D are with employees. PAYE and NICs
Submit P11D(b), P9D and P11D forms to HM Revenue & Customs.  
Report shares/securities information to HM Revenue & Customs.
Form 42 is provided by HM Revenue & Customs for this purpose.
Find out more: Share schemes – Opens in a new window
 
22/07/12 Pay PAYE, NICs, student loan deductions and deductions for payments to subcontractors for the month up to the 5th of this month electronically.
Find out more: PAYE for employers: the basics
PAYE and NICs
Pay Class 1A NICs shown to be due by your form P11D(b), electronically.  
31/07/12 If you need to make a Self Assessment payment on account, this is the date for your second payment.
You won’t have to make payments on account if your tax bill for the previous year was less than £1000, or if more than 80 per cent of your income tax for the previous year was deducted at source.
Find out more: Tax return deadlines and penalties
Self assessment

You can then print the list and pin on the wall or fridge and pop the dates in your diary.

Brilliant!

It could save you a fortune in late filing penalties

steve@bicknells.net

 

How cash accounting can improve your cashflow Reply

Cash Accounting is a VAT scheme and it will improve your cashflow if your customers pay more slowly than you pay your suppliers and other costs. For example if your clients pay on 60 to 90 day terms and you pay suppliers on 30 days then VAT Cash Accounting should work in your favour. When you use Cash Accounting you pay VAT based on money received and money paid (so you exclude customers who havent paid).

You can use the Cash Accounting Scheme if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million.

Once you start to use cash accounting, you can continue to do so until your VAT taxable turnover reaches £1.6 million.

You can use Cash Accounting with other VAT Schemes, for example the Flat Rate Scheme.

You do not need to complete an application form or advise HM Revenue & Customs (HMRC) to start using the Cash Accounting Scheme.

You can start using the Cash Accounting Scheme at the beginning of any VAT period if you are already registered for VAT

Why pay VAT before you need to?

steve@bicknells.net