VAT Avoid the common pitfalls

Transcription

1 ISSUE 11 ON THE RIGHT TRACK AGRICULTURAL SERVICES FROM DYKE YAXLEY VAT Avoid the common pitfalls Employed? Real time information (RTI) Making the best of solar power

2 WELCOME EMPLOYED? WELCOME Hello and welcome to the latest issue of On the Right Track and as I sat at home last week, expecting to enjoy my short break, I pondered how many of our farmers would be enjoying the rain we were getting. Admittedly, it was not enough to make everyone happy, and certainly enough to make a number unhappy, including my daughter on her school holidays! In all seriousness, water will become key as we go forward this year, I am still trying to work out if we are in drought or not, at least there is no hosepipe ban at the moment, but supply could be critical if no significant rainfall is forthcoming. Employed? A RECENT CASE CONCERNED THE STATUS OF H, A SOLE DIRECTOR AND SHAREHOLDER OF A COMPANY SUPPLYING ENGINEERING SERVICES, WHO DID WORK FOR JCB. The Judge found that H was a member of a team which consisted of employees and contractors; just because they were part of a team did not mean that they all had to have the same employment status. Looking at the relationship between H and JCB the Judge noted the following, which indicated H was NOT an employee:- Contracts could be terminated before they were due to end with little or no notice and no payment in lieu. H had flexibility in hours (unlike the employees). H could continue working when the factory shut down for holidays. If the company s computers failed H had to go home unpaid. This case is helpful when considering the role of self-employed contractors on farms. When coming to arrangements with contractors be sure that they are not a sham. Risk has to be accepted on both sides. If the contractor is guaranteed work and thereby payment, then the relationship will be regarded as employment. If the workers are held to be employees, then HMRC can ask the employer for back payment of Tax and National Insurance over the past 6 years which can be very expensive. MARK GRIFFITHS If you want help to review the employment status of your workers before HMRC make enquiries, please contact us. From a farming point of view, we have the announcement of the proposed changes to the Single Payment Scheme. Everything is still in the air and much to play for, but any changes to the structure of a farming business will require serious consideration over the next few years. The obvious highlight in the last few months was the Budget. One that I could not get terribly excited about when I heard it, this was largely due to the pre-announcement of much of the policies and it is only now we are seeing the negatives come to the fore. The Chancellor aimed to give a little bit to everyone and undoubtedly upset many. The freezing and future removal of the age allowance coming as a shock to many and from a personal point, VAT on my pasties is not welcome! There were tax cuts for big businesses, but very little of this will filter down to the average farming enterprise so probably not a Budget for most of our clients, then again we are two Budgets away from an election, so time still to pull some rabbits out of the hat. As with previous years, we will again be at the Minsterley Show on Saturday 18 August and look forward to seeing as many of you as possible. There will be refreshments available and a chair for any tired legs and with any luck nice weather to compliment a wonderful show. Mark Griffiths

3 REAL TIME INFORMATION (RTI) Real Time Information (RTI) RTI IS HM REVENUE & CUSTOMS NEW REPORTING SYSTEM FOR PAYE SCHEMES. Instead of making one return each year at the end of the tax year (5 April), information will be reported to HM Revenue & Customs (HMRC) at the time of processing the payroll either weekly, monthly or whenever you process a payroll. The information will be transmitted to HMRC using the internet via the Government Gateway. From April 2013 all employers will be required to make RTI returns. From April 2013 all employers will become subject to RTI but there will be a transitional period of six months during which HMRC bring them into RTI. By October 2013 it is planned all employers will be subject to RTI and making RTI returns. One major change you will notice with RTI is it will no longer be required to electronically file P45 s or P46 s when you take on a new worker or electronically file a P45 when someone leaves. It is important that you continue to file P45 and P46 forms electronically until the introduction of RTI because HMRC are now starting to impose penalties for P45 s and P46 s submitted on paper. If you would like any more information on RTI or anything else to do with Payroll please contact us. BUSINESS BORROWING GET IT RIGHT THIS quote COMES FROM HMRC S BUSINESS INCOME MANUAL. Understanding this allows a business owner to fund expenditure outside the business, with a business loan and retain the benefit of tax relief on the interest paid. For example helping a child fund a deposit for a house. A gift of 30,000 could be funded by extending the business overdraft to withdraw money from the business (other partners willing in a partnership situation). Care needs to be taken to ensure that capital accounts do not become overdrawn in which case the availability of relief for the interest will be restricted. Practical considerations include:- Proprietors of businesses are entitled to withdraw their capital from the business, even though substitute funding then has to be provided by interest bearing loans. The availability of bank funding. This cannot be overlooked in the current climate. Some banks are using requests for additional funds as excuses to re-structure business finance arrangements. This usually results in increased arrangement fees and a less attractive interest rate over the whole lending proposition rather than just the new borrowing. Cashflow considerations for making the capital repayments. Also what needs to be considered is the overall cost of the loan. The longer the repayment period the greater the interest cost. If you have any cash savings then the low rate of return means that utilising these savings is more cash efficient than taking on additional borrowings. A similar approach can be used where the business concerned involves renting out a property rather than a trade.

4 VAT - AVOID THE COMMON PITFALLS VAT Avoid the common pitfalls MAKING A MISTAKE IN YOUR VAT RETURN CAN PROVE COSTLY. NOT ONLY CAN IT LEAD TO ERRORS IN THE AMOUNT OF VAT THAT IS PAID OR RECLAIMED, BUT PENALTIES MAY BE CHARGED UNLESS REASONABLE CARE WAS TAKEN WHEN COMPLETING THE RETURN. Errors often occur where VAT is reclaimed for items where recovery is not allowed. In particular, problems often arise where goods are used for both business and private purposes, for example in relation to cars and motoring expenditure, business entertainment or where a business is partially exempt. Business and private use In many small businesses, assets are often used for both business and private purposes. However, it is important to remember that VAT can only be reclaimed in relation to business expenditure. FURNISHED HOLIDAY LETTINGS ARE A BUSINESS (As anyone who manages such an enterprise will know) Where expenditure has mixed business and non-business use, the expenditure should be apportioned and only the business element reclaimed. For example, if a laptop is purchased which is used 80% for business and 20% for non-business use, only 80% of the associated input tax is reclaimable. If input tax is initially claimed in full, such as on stock, and that stock is later appropriated for private use, there is a deemed supply on which output tax must be accounted for. Cars and fuel VAT relating to cars and fuel is another problematic area. Input tax cannot be reclaimed on the purchase of most cars. Where a car is leased and used for both business and private use, input tax recovery is normally restricted to 50%. Where fuel is provided for cars used both privately and for business, output tax (to reflect private use) is charged by reference to a scale charge unless records are kept which are sufficient to demonstrate that fuel has been provided only for business journeys. The VAT fuel scale rates are available on the HMRC website: ( Input tax on fuel is recoverable. Business entertainment Generally you cannot reclaim VAT on business entertainment expenses. Input tax on business entertainment can only be reclaimed where the entertainment is provided to either employees or overseas customers. In the case of the latter, an associated output tax charge may also arise. In practice, this rule means that input tax incurred on the annual staff Christmas party can be recovered, while charges associated with taking clients to the races cannot. Problems often arise where business entertainment has been misclassified as marketing or advertising and subsequently overlooked. Partial exemption Where a business makes taxable and exempt supplies, the partial exemption rules apply. Broadly, the business can only recover input tax related to taxable supplies, unless the input tax related to exempt supplies is below a de minimis limit. The partial exemption rules are complex and partially exempt businesses should ensure that the correct amount of input tax is recovered. We often come across mistakes and misconceptions which in most cases could have been avoided. Please contact us for more information and advice on minimising VAT errors. No farming newsletter is complete without some mention of IHT. We want to tell you about a good news case in respect of furnished holiday lettings. The case is called Pawson. The background is that Mrs Pawson had a holiday house on the Suffolk coast that was let out to relations as well as to members of the public as furnished holiday lettings. HMRC s contention was that the administration of a furnished holiday letting was not sufficient activity to be considered to be a business and therefore business property relief (BPR) for inheritance tax (IHT) was not available. Even if it was sufficient enough to be a business they went on to contend it was an investment business and so still did not qualify. The furnished holiday lettings had been let for the required number of days each year to qualify for furnished holiday lettings treatment for income tax purposes. The figures had been reported on Mrs Pawson s tax return. HMRC argued that because some of the lettings had been to family members at a reduced rate this detracted from the recognition of it as a business. The first Tier Tribunal found for Mrs Pawson s executors. They held it was a business and that taking into account the level of activity required to run holiday accommodation it could not be an investment business. Therefore relief was available.

5 MAKING THE BEST OF SOLAR POWER Making the best of solar power SO YOU HAVE YOUR PHOTO VOLTAIC (PV) PANELS INSTALLED, YOU ARE REGISTERED TO RECEIVE THE FEED IN TARIFF AND YOUR METER SHOWS HOW MUCH POWER IS BEING GENERATED. Unless you have a supply meter the assumption is that you will only use half of what is generated. It is on this basis that you will be paid for the electricity supplied typically at 3p/unit. The art to maximising benefit from the PV System is to exactly match your power demands to the electricity generated. This may require a re-think in your power usage. In the domestic situation; use household appliances during the day rather than overnight when no electricity is generated. Try to avoid spikes of power demand e.g. kettle on, cooker on and washing machine running all at once. In the farm situation you need to review your daily schedule so use of electrical motors is programmed to periods when electricity is likely to be generated e.g. rolling corn in the middle of the day rather than at either end of the day. Build up ice banks, and program hot water systems to run during the day. Careful analysis and costings of electricity usage will mean that greater benefits can be derived from the investment in PV than if no changes are made. MAKING A GREEN PURCHASE? If you re considering buying new equipment for your business, find out whether it is energy or water efficient. If it is, you could benefit from the Enhanced Capital Allowances scheme, which offers a 100% deduction for the cost in the year of purchase. Check the list on to see if your purchase qualifies. CAP Reform Update ON 1 JANUARY 2014, THE EU COMMISSION PROPOSES TO REPLACE THE EXISTING SINGLE PAYMENT SCHEME WITH WHAT IT REFERS TO AS THE BASIC PAYMENT SCHEME. DISCUSSIONS WITHIN THE COMMISSION AND FROM A NUMBER OF INTERESTED PARTIES IS ON-GOING AND MANY BELIEVE THAT THE START DATE COULD WELL SLIP TO 2015 BEFORE THE NEGOTIATIONS ARE COMPLETE AND NO CLEAR UNDERSTANDING OF THE ACTUAL SCHEME IS LIKELY TO BE AVAILABLE UNTIL LATE At the moment all existing entitlement will expire on 31 December 2013 (or 2014 if it slips). These will then be replaced by a multilayered scheme with a number of proposed requirements: - In order to enter the scheme, it is proposed that the claimant must have made a claim in There is a suggestion that this right to activate the claim in 2014 will be transferrable to another active farmer, but only once, which poses a problem for partnerships that wish to split. The claimant must be seen to be an Active Farmer and this is defined as one where the claimant s Basic Payment is at least 5% of the total receipts from non-agricultural activities. Non-farming activities have yet to be defined so it is difficult to see at the moment how this will impact on our farming clients. The land on which a claim is to be made must be at the farmer s disposal. This will remove the old ability to have one person claiming the SPS and another person the ELS/HLS; so where appropriate, provisions in contract farming and other arrangements need to be sufficient to ensure control of the land is retained by the claimant. It is proposed that Greening will form 30% of the Basic Payment and the following measures are currently being suggested: Farmers with more than 3 hectares of arable land will need to grow three different crops. No one crop accounting for more than 70% and 5% being the minimum cropped area. Permanent pasture to be maintained on a farm rather than national basis. 7% of the arable land to be retained for environmental measures. Based on current proposals, land currently used for existing ELS measures would not be eligible for this requirement. The last measure may prove to be the hardest issue to manage for livestock and dairy farmers in this area. It should be remembered that these are all proposals and may or may not be retained in the final legislation. Unfortunately, it is a case of wait and see and where businesses are looking at changing their business structure, to get advice from their advisors before committing to any changes.

6 BUDGET SUMMARY CONTACTS Budget Summary Income Tax Increase in the personal allowance to 8,105 (2011/12: 7,475), offset by a reduction in the basic rate tax band to 34,370 (2011/12: 35,000) so as not to benefit higher rate tax payers. Age related personal allowances to be frozen from 6 April 2012 and will no longer be available to those turning 65 after 6 April The content of this newsletter is for general information only. It should not be relied on and action should not be taken without appropriate professional advice. Individual Savings Accounts limit increased to 11,280 and a maximum of 5,640 in a cash only ISA. Restriction on reliefs available to individuals for charitable giving and pension contributions to 50,000 or 25% of income, whichever is the lower. Capital Taxes Capital Gains Tax annual exempt allowance rises to 10,600 (2011/12: 10,100). Inheritance Tax nil rate band frozen at 325,000 until 5 April Reduction in the IHT rate to 36% where 10% or more of the net estate is left to Charity. Business Tax Reduction in the main rate of corporation tax to 24% (2011/12: 26%). Reduction in the annual investment allowance (AIA) from 100,000 to 25,000 per annum. Small unincorporated businesses with a turnover less than 77,000 from April 2013 will be able to elect to prepare their accounts on a cash accounting basis. National Insurance Increase in the employees earnings threshold from 110 per week to 144. Increase in the rate of Class 1 and Class 4 NIC by 1%. Value Added Tax Increase in the registration threshold from 70,000 to 77,000. Amendment to the rules on alterations to listed buildings. My car is 100% business use Not so says HMRC The taxpayer in a recent case claimed VAT in relation to the purchase of a motor vehicle and claimed this vehicle was solely for the purpose of his business. HMRC argued that it was not enough for the taxpayer to purchase it with the intent of using it entirely for business; for VAT purposes the car must not be available for private use. This means there has to be a specific insurance or contractual restriction to prevent private use. VAT can be reclaimed if the vehicle is a tool of the trade e.g. for car hire business, driving school or taxi firm. In addition to the above circumstances a genuine pool car that is not linked to any particular employee and not kept overnight at the home of an employee can also qualify for input VAT reclaims. Mark Griffiths mark.griffiths@dykeyaxley.co.uk HEAD OF AGRICULTURE Lynda Lee lynda.lee@dykeyaxley.co.uk AGRICULTURE MANAGER Martyn Bramwell martyn.bramwell@dykeyaxley.co.uk TAX MANAGER Les Cox les.cox@dykeyaxley.co.uk TAX PLANNING 1 Brassey Road Old Potts Way, Shrewsbury Shropshire SY3 7FA Telephone Fax info@dykeyaxley.co.uk DX19717 Shrewsbury