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12-12-2018
VAT on property service charges

A new Revenue and Customs Brief (6-2018) entitled VAT exemption for all domestic service charges has recently been published by HMRC. The brief explains changes to the Extra Statutory Concession (ESC) 3.18 VAT: exemption for all domestic service charges may be applied. The ESC was introduced in February 1994 to enable the same VAT treatment on mandatory service charges to a freehold occupant as to a leaseholder or tenant living on the same common estate.

In the Brief, HMRC identified a number of scenarios where ESC 3.18 has been applied incorrectly. This in part followed a decision by the Upper Tribunal that confirmed if a landlord is contractually obliged to provide services to the occupant of a property, and uses a property management company or similar, to provide these services, the property management company cannot use the concession. This means that the concession does not apply to management fees charged by a management company, accordingly, their fees will be taxable at the standard rate of VAT.

HMRC is reminding all property management companies, and companies supplying similar goods and services in similar situations, who have not correctly applied ESC 3.18, that since 1 November 2018, they must correctly account for VAT. VAT information sheet 07/18 provides further guidance on this subject. Property management companies must ensure that the right amount of VAT incurred on costs and overheads is recovered.

Planning note

Residents affected by these changes could see an increase in their service charges of between say 10% to 20%. The actual amounts involved will depend on the VAT status of individual managing companies. Management companies taking care of small developments should not be affected.

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12-12-2018
Are you ready for VAT filing changes April 2019?

The introduction of Making Tax Digital (MTD) for VAT is fast approaching.

From April 2019, some 1 million businesses with a turnover above the VAT threshold (currently £85,000) will have to keep their records digitally (for VAT purposes only), and provide their VAT return information to HMRC through MTD compatible software. The deadlines for sending VAT returns and making payments are not changing.

Businesses with a taxable turnover below the VAT threshold can also opt to use MTD for VAT if they so wish. Businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until 'at least' 2020.

HMRC launched a private beta pilot of MTD for VAT in April 2018 and the pilot is now open to most VAT registered businesses and their agents. It is important that businesses are aware of these upcoming changes, and are preparing for the fast approaching deadline and considering whether it would be beneficial to join the MTD pilot.

HMRC has also deferred the introduction of MTD for VAT for a small minority (circa 3.5%) of businesses that have more complex requirements until 1 October 2019. This includes trusts, ‘not for profit’ organisations that are not set up as a company, VAT divisions, VAT groups and those required to make payments on account and annual accounting scheme users.

Planning note

HMRC has also agreed to give businesses until 31 March 2020 to make sure there are digital links between software products. This means that during the first year of MTD for VAT, businesses who use more than one software programme to keep their VAT records and prepare and file returns, will not be required to have digital links between those software programmes. From March 2020, bridging or MTD-compatible software will be required so that this information can be digitally sent to HMRC with no manual intervention.

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12-12-2018
Is your income approaching £100,000?

For high earning taxpayers, the personal allowance is gradually reduced by £1 for every £2 of adjusted net income that exceeds £100,000 irrespective of age. Adjusted net income is total taxable income before any personal allowances, less certain tax reliefs such as trading losses and certain charitable donations and pension contributions.

This means that for the current tax year, an adjusted net income between £100,000 and £123,700 creates an effective marginal rate of tax of around 60% for tax payers. Taxpayers whose income sits within this band, should consider if planning opportunities are available to them to avoid this personal allowance trap. This can include giving gifts to charity, increasing pension contributions, and participating in certain investment schemes. These strategies also apply to higher rate and additional rate taxpayers looking to reduce their tax bills.

Planning note

For example, a higher rate or additional rate taxpayer who wants to reduce their tax bill for the last tax year, could decide to make a gift to charity in the current tax year and then elect to carry back the contribution to 2017-18. A request to carry back the donation, must be made before or at the same time as the 2017-18 Self-Assessment return is completed. The deadline for filing a paper tax return has now passed, but the online deadline of 31 January 2019 means that for taxpayers who have not yet filed their 2017-18 return, there is still time to act.

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12-12-2018
Qualifying for VAT special schemes

There are three main special VAT schemes available to small businesses. These are the flat rate scheme, the annual accounting scheme, and the cash accounting scheme. The turnover levels for joining and leaving these schemes vary.

The flat rate scheme is open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT. However, businesses that are already using the scheme can continue to do so until their turnover threshold exceeds £230,000 when they must leave the scheme. The purpose of this VAT scheme, is to simplify the way a business accounts for VAT and so reduce the cost of complying with their VAT obligations. With the scheme you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business. Before using the scheme, it is important to check if it will be beneficial for your business.

The annual accounting scheme is also aimed at smaller businesses. It can either be combined with the flat rate scheme or used by a business, which uses standard VAT accounting. Businesses that use the scheme are only required to file one VAT return at the end of each year. The scheme is open to businesses with a taxable turnover up to £1.35 million. Businesses can then continue to use the scheme until their turnover exceeds £1.6 million.

Another popular small business scheme is the cash accounting scheme. A business can enter this scheme provided the estimated VAT taxable turnover for the next VAT year is not more than £1.35 million. It can continue to use the scheme until the VAT taxable turnover exceeds £1.6 million. Under standard VAT accounting, VAT is payable on sales whether or not the customer has paid and can lead to a need to claim bad debt relief. Under this scheme VAT does not need to be paid over until the customer has paid. If the customer does not pay, then any VAT due does not need to be paid to HMRC.

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12-12-2018
When is lettings relief available?

In general, there is no Capital Gains Tax (CGT) on a property which has been used as the main family residence. This relief from CGT is commonly known as 'private residence relief'. However, where all or part of the home has been rented out, the entitlement to relief may be affected. Home owners that let all or part of their house may not benefit from the full private residence relief but can benefit from lettings relief. 

The maximum amount of letting relief due is the lower of:

  • £40,000
  • the amount of Private Residence Relief due
  • the amount of gain you've made on the let part of the property

The letting exemption can be a valuable exemption but is only available on a property that has been a taxpayers main residence.

Worked example:

  • You used 60% of your house as your home and let out the other 40%.
  • You sell the property, making a gain of £60,000.
  • You're entitled to Private Residence Relief of £36,000 on the part used as your home (60% of the £60,000 gain).
  • The remaining gain on the part of your home that's been let is £24,000.

The maximum Letting Relief due is £24,000 as this is the lower of:

  • £40,000
  • £36,000 (the Private Residence Relief due)
  • £24,000 (the gain on the part of the property that's been let)

There's no Capital Gains Tax to pay - the gain of £60,000 is covered by the £36,000 Private Residence Relief and the £24,000 Letting Relief. Remember that the letting exemption can be a valuable exemption but is only available on a property that has been a taxpayer’s main residence. It is not available on a 'buy to let' or other investment property in which a taxpayer never lived.

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12-12-2018
How the £1,000 trading allowance works

There is a £1,000 tax allowances for miscellaneous trading income that has been available to taxpayers since April 2017. This is known as the trading allowance. The income raised from these kinds of ventures is usually supplemental to a taxpayer’s main income, but this is not always the case.

The exemption from tax applies to taxpayers who have trading income of up to £1,000 from:

  • self-employment
  • casual services, for example, babysitting or gardening
  • hiring personal equipment, for example, power tools.

Where this £1,000 allowance covers all the individual’s relevant income (before expenses), the income is tax-free and does not have to be declared to HMRC.

You must tell HMRC if you have:

  • gross trading income over £1,000
  • other gross income over £1,000 up to £2,500
  • other income over £2,500

Taxpayers with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses.

There is also a separate £1,000 allowance for miscellaneous income from property. For example, for renting a driveway. This is known as the property allowance.

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11-12-2018
Citizens’ rights in the event of a no deal Brexit

The government has published a policy paper on what might happen to EU citizens in the UK and UK nationals in the EU, in the event of a “no deal” Brexit.

The government has confirmed that those EU citizens and their family members who are resident in the UK by 29 March 2019 will have their rights protected, i.e. they will be able to stay and will continue to be able to work, study and access benefits and services in the UK on the same basis as they do now.

To achieve this, the UK will continue to run the EU Settlement Scheme for those who are resident in the UK by 29 March 2019 in a “no deal’” scenario. However, there would be some necessary changes to the scheme:

  • As there would be no agreed transition period, this guarantee would only apply to EU citizens who are resident in the UK by 29 March 2019, i.e. there is no guarantee of a right to live and work in the UK being given for those EU citizens for arrive in the UK on or after 30 March 2019
  • EU citizens would only have until 31 December 2020 to apply for a status under the EU Settlement Scheme, i.e. there would be no six-month “grace period” beyond this
  • EU citizens would have the right to challenge a refusal of status under the EU Settlement Scheme by way of administrative review and judicial review, in line with the remedies generally available to non-EEA nationals refused leave to remain in the UK. There would be no preliminary reference procedure to the Court of Justice of the European Union, as it would not have any jurisdiction in the UK.

The government is also calling upon the EU and the other EU Member States to take the same steps to reassure UK nationals in the EU, that they can stay in the country where they currently live and have their rights protected.

Finally, the UK is seeking citizens’ rights agreements with the EFTA states (Iceland, Liechtenstein, Norway and Switzerland) to protect the rights of citizens. In the event of “no deal” with the EU, the UK would still pursue agreements with the EFTA states to ensure that EFTA nationals and their dependants resident in the UK, and UK nationals and their dependants living or working in one of the EFTA states, by 29 March 2019 will have their rights protected.

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05-12-2018
Could you claim expenses and an early tax refund?

HMRC is reminding employees that they may be able to claim a tax rebate if they have incurred certain expenses related to their employment. HMRC’s press release on the matter specifically identifies workers including nurses, hairdressers, construction workers and those in retail and food that have to dip into their own pockets to pay for work-related expenses like car mileage, replacing or repairing small tools, or maintaining branded uniforms. A claim can be made online now with the tax relief being paid by Christmas.

It is possible to claim for the cost of repairing or replacing small tools you need to do your job as an employee (for example, scissors or an electric drill), cleaning, repairing or replacing specialist clothing (for example, a uniform or safety boots), business mileage, travel and overnight expenses and professional fees. An employee cannot claim relief on the initial cost of buying small tools or clothing for work.

A claim for valid purchases can be made against receipts or as a 'flat rate deduction'. The flat rate deductions are set amounts that HMRC has agreed are typically spent each year by employees in different occupations. The flat rate deductions range from a basic set amount of £60 and can go as high as £140 for certain listed occupations. This means that basic rate taxpayers can claim back a minimum flat rate of £12 (20% x £60) and higher rate taxpayers £24 (40% x £60) per year. Claims can usually be backdated for 4 years.

Financial Secretary to the Treasury, Mel Stride MP, said:

'We know what a difference tax relief can make to hard-working customers, especially at this time of year. HMRC is keen to make sure customers get all the relief they’re entitled to by using their online service. Tax relief isn’t available for all employment expenses so the online Check If You Can Claim tool is very helpful – then if your claim is approved, your full tax relief will be paid directly into your bank account.'

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05-12-2018
X-factor VAT bonus

The Chancellor, Philip Hammond has announced that the government will waive the VAT equivalent on the sales of this year’s X-Factor Christmas Charity single. All proceeds from the sale of the single are going to two children’s charities; Together for Short Lives and Shooting Star Chase Children’s Hospice.

Both charities provide support for children with life-limiting illnesses and their families. The donation will be the equivalent of the sum of the VAT receipts collected on sales of the single the winner of the reality show.

The Chancellor commented that:

'Sales from this year’s X Factor charity single will help children with life-limiting diseases and their families. We will donate the VAT paid on the sales, ensuring more people can benefit from this crucial funding. The single goes a huge way in raising awareness of valuable causes and the charities behind them and that’s why the government has supported the X factor Christmas single with donations worth more than £300,000 over the last eight years. From the whole government, we wish everyone in the final the best of luck.'

The government has previously waived the VAT on previous X-Factor singles as well as for the 2016 Jo Cox Foundation single, 2015 Save the Children single, 2011’s Military Wives Choir single and the 2010 Haiti earthquake appeal single.

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05-12-2018
Employing someone to work in your home

When you employ someone to work in your home, it is your responsibility to ensure you meet the employee's rights and deduct the correct amount of tax from their salary. This can include employees such as a nanny, housekeeper, gardener or carer. The rules are different if the person is self-employed or paid through an agency.

If you employ anyone they must:

  • have an employment contract
  • be given payslips
  • work no more than the maximum hours allowed per week
  • be paid at least the National Minimum Wage.

The domestic employee is also entitled to employee rights such as statutory maternity pay, statutory sick pay, paid holiday, redundancy pay and a workplace pension once they meet the standard eligibility requirements. An employee must also have minimum notice periods if their employment is to end. Note, that these rules apply even if the domestic employee works on a part-time basis although some payments depend on earnings or may be adjusted pro-rata. It is also your responsibility to register as an employee, check any employees are allowed to work in the UK and to have employer’s liability insurance. 

Planning notes

There are special rules for au pairs because they are not usually considered to be workers or employees. They are not entitled to the National Minimum Wage or paid holidays. Au pairs are treated as a member of the family they live with and receive 'pocket money' instead of salary. However, they may be liable to Income Tax and National Insurance if the amount of ‘pocket money’ they receive is high enough.

If you are considering the employment of domestic staff and would like assistance with meeting your payroll and minimum wage obligations, please call.

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