What's New
- Churchill Tax
Paye – Controlling Persons Test Scrapped
Extra PAYE burden
The planned introduction of special rules for taxing individuals who can exert control over a business have been scrapped. This would have meant that, for example, PAYE would have been enforced on company managers who provided their services on a freelance basis.
IR35 is enough
HMRC says the changes in the way it monitors IR35 will be sufficient without special rules for self-employed “controlling persons”. This is good news, but it hints at tougher IR35 rules to come when the new tax year starts in April. Watch this space!
Conclusion
The special rules which would have forced businesses to deduct PAYE tax and NI from fees paid to freelance managers etc. will not now be imposed. Instead, HMRC will tighten its policing of current and new IR35 rules, probably from April.
- Churchill Tax
Stamp Duty Land Tax – SDLT Avoidance Schemes Limit Removed
DOTAS extented. Since November 1 more Stamp Duty Land Tax (SDLT) saving and avoidance schemes have come within HMRC’s Disclosure of Tax Avoidance Schemes (DOTAS) system. This requires those who create, promote or sell schemes, for most types of tax, to notify the details to HMRC. It then decides whether or not the scheme requires a DOTAS reference, known as a Scheme Reference Number (SRN). This is very important for individuals or companies using them.
Your tax return
Where you or your company uses an SDLT tax scheme, check whether it has an SRN with the person or company that suggested or sold it to you. If it has you must report this on your tax return or Form AAG4 (SDLT) for the year, or years in which you obtain a tax advantage from it. A penalty of at least £100 applies if you don’t.
Conclusion
From November 1 2012 DOTAS reporting limits for SDLT schemes have been removed. This means all schemes designed to limit or avoid SDLT must be reported on your tax return or Form AAG4. If you don’t, then penalties starting at £100 can apply.
- Churchill Tax
VAT – When To Charge VAT On Supplies Made By Another Business
It can be convenient to charge your customer for goods or services supplied by other businesses as part of your overall supply on a single invoice. But as a recent case showed this can lumber you with an extra VAT bill. Why?
Who’s the supplier?
Deciding on how much VAT to charge a customer is often not as straightforward as you might think. For example, where you incorporate goods or services supplied by another business as part of your sale should you or the other business be responsible for accounting for the VAT?
Principal or agent?
The answer depends on whether you’re the VAT principal or agent. Where your role is agent, i.e. acting as a conduit for supplies made by another business, you only need to account for VAT on the amount you charge for supplies you make, while the other business accounts for the VAT on theirs.
TRAP:
If HMRC believes you’re making a supply as principal rather than as an agent it expects you to account for VAT on the full amount due from the customer, not just your supply etc. This was precisely the situation Secret Hotels2 Ltd (SH) found itself in which ultimately led to a court showdown with HMRC.
Booking agency
SH advertised rooms on behalf of hotels etc., but didn’t provide any accommodation itself. It considered that it was acting as an agent for the hotels. It even took the trouble to inform its customers in its terms of business that it “acts as Booking Agents on behalf of all hotels, apartments and villas featured on this website and your contract will be made with those accommodation providers”. But the court ruled that it was making supplies of accommodation as principal.
The disclosure factor
While UK law says a business is an agent for VAT purposes, where it discloses to customers full details of third party supplies included in its bill, EU law overrides this. It says that by incorporating another business’s supplies under its own banner it is the VAT principal.
Words are not enough
Although SH had clearly stated it was only an agent, in practice it both purchased accommodation from hotels and sold it on to customers using its own name. SH’s documentation and practice was that of a principal not an agent.
When might this rule apply?
The judgment in the SH case can apply in less obvious situations, such as where you recharge disbursements or include third party supplies as part of yours. For example, a building contractor might supply subsidiary services, e.g. sub-contractors using its name, but this means it’s acting as principal and so liable to account for VAT on the all supplies made by itself and its sub-contractors.
TIP:
If you intend to act as an agent for a supply, ensure that contracts etc. with suppliers state this and show the ultimate customer’s name. If you’re going to charge your customer for sourcing third party goods or services show these separately on your invoice from supplies made by the supplying business.
Conclusion
Unless conditions are met, you must account for VAT on the value of another business’s supply which you incorporate in your own, e.g. that of a sub-contractor. Contracts, invoices and other paperwork with the supplier and customer must show that you’re buying and selling as an agent.
- Churchill Tax
Investigations – Rental Property Owners Under Attack
You’ve read worrying reports about checks being made by HMRC’s Property Income Task Force. While you own a rental property, it’s only made losses to date and so you haven’t declared it. Can HMRC penalise you?
New task forces
Over the last two years HMRC has launched over 30 task forces whose aim is to discover tax evasion in specific market sectors. In a style reminiscent of good-cop-bad-cop TV shows these task forces are empowered to offer sweeteners to encourage evaders to come clean before they collar them. These take the form of lower penalties than would be dished out if they catch the evaders before they own up. Interestingly, no such incentive is offered by those investigating the property rental sector.
Good informants
We think the lack of incentive is due to HMRC’s confidence that it has good information on defaulters. It’s long had powers that require letting agents to report details of those who they let property for. Since 2011 it’s had stronger data gathering rights and can, under threat of a £300 fine, ask almost anyone, e.g. a tenant, to provide information it believes might lead it to a tax evader.
Target area
The property rental task force is concentrating on landlords in East Anglia, London, Leeds, York, Leicester, Nottingham, Lincoln, Durham and Sunderland, but the odds are this will be expanded over the course of 2013. If, like many buy-to-let landlords, you make losses, do you need to come forward to avoid trouble with the Taxman?
Declaration requirements
If you’re required to complete and submit a self-assessment (SA) tax return for any reason, then you must declare your rental income and expenses in the property section whether or not you make a loss. However, where you aren’t required to submit an SA return, the position is different.
EXAMPLE:
A couple own a rental property jointly which has only made losses to date. One spouse is a taxpayer and so must report the rental income to HMRC, but the other is not. There’s no requirement for the non-taxpaying owner to report details of income or expenditure and they can’t be penalised for not doing so. Having said that, there are circumstances in which it’s advisable to report the figures, even on loss making properties.
Small losses
Where your income is fully taxed at source, you aren’t required to submit a tax return. But say you own a rental property that, according to your workings, makes a small loss each year. Without a return form HMRC can’t verify or challenge your workings. That might sound like a good thing, but imagine a few years down the line the property makes a profit; you declare this but knock off the previous losses. The Taxman can now challenge these. At best this might mean having to dig out old records, at worst he might find an error which turns a previous loss into a profit on which you’ll now have to pay tax, interest and possibly penalties.
TIP:
Unless you’re 100% sure of your figures, we advise you to register for SA even where you make losses. This gives you some protection from an investigation as HMRC only has one year from the normal SA return filing date to challenge your figures. Note. In the circumstances we’ve described, HMRC will be reluctant to put you into the SA system, but you can insist.
Conclusion
You don’t need to declare a rental business that makes only losses, and HMRC can’t penalise you. But if you already submit a self-assessment (SA) tax return, you must include the figures. However, unless you’re 100% sure of your figures, it’s a good idea to register for SA as this shortens HMRC’s investigation window.
- Churchill Tax
Redundancy – Paying Off An Employee Safely
One of our subscribers is facing a bill for £5,000 in extra tax and NI as a result of not checking the small print in his own employment contracts. What caused this trouble and how could it have been avoided?
Redundancy pay
It’s fairly well known that where you pay an employee redundancy pay, the first £30,000 is tax-free. And, regardless of the amount, a payment of this type isn’t liable to employees’ or employers’ NI. But the rules regarding other employment termination payments can be more tricky.
A go-now payment
Depending on the redundant employee’s role in your company, you might want them to leave as soon as possible to avoid the risk of them stealing sensitive data or even sabotaging your business. However, if they’ve been employed by you for more than one month they’ll be entitled to a statutory notice period. You must pay them for this even where they don’t work it. Our subscriber’s problems stemmed from this situation.
Standard contract
When our subscriber’s manufacturing business started a decade ago employment contracts for the small workforce were drawn up with the help of an employment specialist. All workers at that time were director/shareholders and so, to avoid potential conflict in future if one of them decided to leave, a clause was included giving the company the right to ask them to go immediately in exchange for a payment in lieu of notice.
TRAP
This type of clause means the payment counts as employment income, i.e. earnings, rather than a payment relating to the termination of employment. Tax plus employees’ and employers’ NI will be payable.
The right clause for the job
Unfortunately, our subscriber took a one-size-fits-all approach to employment contracts. As the business took on more workers it used the same contract wording as that for the director/shareholders. So when it made three workers redundant, and asked them to leave before their notice was up as they were being disruptive, the payments relating to this period were liable to tax and NI.
Part of the redundancy
Our subscriber wrongly assumed the payments in lieu of notice now counted as part of the redundancy pay covered by the tax and NI exemptions and made no deductions for these. Consequently, HMRC is now demanding the tax and NI due. It says that the business was in error so it must pay rather than the former employees. Our subscriber could appeal, but we don’t think there’s much chance of success.
TRAP 1
If you’re unsure whether a payment connected to the termination of employment is liable to tax and NI, obtain advance clearance from HMRC.
TRAP 2
Check and, if necessary, amend your employment contracts so that they avoid the trap above. This can save you NI on payments in lieu of notice. For example, if you paid off an employee who was entitled to three months’ notice and who had a monthly salary of £3,500, this would save employers’ NI of £1,449 (£3,500 x 3 x 13.8%).
Conclusion
Payments in lieu of notice are usually tax and NI-free. But where the employment contract says you can pay off an employee without them working their notice period, this will make the payment liable to both NI and tax. Consider whether existing contracts need a pay-off option, and remove it if they don’t.