When do I have to charge VAT?

VAT is a complex area of law, and it revolves around a “person” as a legal entity and not a “business”. Generally, a “person” can be:

• an individual
• a limited company
• a partnership

If you are not VAT registered, then you cannot charge customers VAT. This earlier report discusses the question of registration.

Once registered, the VAT registration number is allocated to only one “person” and can be used by only that “person”. If you are both a self employed individual, and you are also running a limited company, the VAT number is not interchangeable. The question of registration has to be asked by each “person” and you may need (or want) to have separate VAT registrations for each separate entity.

Once a “person” is VAT registered, then ordinarily, all goods and services supplied by that “person” should carry VAT. There are very few exceptions to the VAT rule, and they are mainly relevant to any customers you have who reside outside the European Union.

So for example, if you are VAT registered and you’re a self employed individual who (a) does website design as your main trade and (b) offers guitar lessons as a sideline, then you are one and the same “person” in a legal sense. All of your business activities are “VATable” sales and all of your EU resident customers are liable to pay VAT – whether that’s for a web site or for a guitar lesson.

Conversely (for example), if you have a VAT registered company which offers management consultancy, and you also do a bit of “marketing” work as a sideline, in partnership with a friend, then the company and the partnership function as two totally separate entities. They cannot share a VAT number and any business done between the two entities should be done on a commercial basis and at “arm’s length”. The management consultancy fees from the company will charge VAT to the partnership, whereas the marketing fees from the partnership cannot.

If in doubt about who charges VAT to whom in any specific business relationship, simply establish which entity is the supplier and which entity is the customer. Which letterhead are you using to do the billing? If the position is still unclear, then it would be best to check with your accountant.

Claiming back expenses from your own Limited Company

You may be familiar with this process if you have ever been employed and had to submit an expense claim. As a director of your own limited company the process is the same, and it applies where directors and employees have used personal cash or a personal bank card to pay for a business cost.

It’s better to have all your suppliers invoice your company directly, and have the company pay them directly. If that could be done, you would never have to fill out a personal expense claim form.

Do not prepare employee expenses claims for items which the company has paid for directly from the company bank account or with the company credit card.

Keep the receipts for all of the things that you buy personally, on behalf of your business. Then once a month (or perhaps at some different interval) fill out a claim form and ask your company to reimburse you. If there is ever a records inspection by the tax office, they will want to see the claim forms with supporting receipts, and they will also check that the reimbursements on the company bank statements match the amounts claimed on the expense forms.

Motor expenses

Mileage on business journeys should be claimed at the HMRC approved rate. These have been the same since 6 Apr 2011.

• 45p per mile – first 10,000 miles per year
• 25p per mile – additional miles

No other motoring costs are to be claimed. The FPCS rates from HMRC are calculated by the AA so as to cover all the conceivable running costs of having a car! That means that you have to keep a log of all of your business journeys in your own car.

Foreign Currencies

Separate out any expense receipts which are in foreign currencies and prepare an individual claim form in each separate currency. That way the sub-totals do not end up with mixed currencies.

Non-VAT Registered Businesses

Use two forms, one form for mileage and just one form for all other business expenses. Separate the receipts by category and claim back the gross amount including VAT. Use the non-VAT form in the samples below, and just put all the figures on that.

VAT Registered Businesses

Separate your personal expense items according to whether they have VAT on them or not. VAT receipts for motor fuel belong in another separate pile. VAT on fuel can be reclaimed, but only to the extent that it is vouched for on actual VAT receipts.

Use three forms, one form for mileage and two separate forms covering expenses with VAT and expenses without VAT.  As a director/employee you are claiming back all of the gross amounts including all the VAT. The bookkeeper needs to know which items include VAT and which ones don’t. That’s why there are three different forms for a VAT registered business.

Book keeping and sample forms

If you are doing your own book keeping, use the totals at the foot of each column and post them into your software. To download a sample form (MS Excel) right click on the link and select “save as” . . .

• Mileage Claim
• Non-VAT Expenses
• VAT Expenses

Expenses in the first month or two

Normally a new business, will lead to cash expenses which you want to reclaim, before you have any funds to pay them. There are two ways to handle this dilemma.

• Wait until the business can afford to make the reimbursement.
• Introduce working capital (use a round sum) into the business, and then reimburse yourself!

Over the course of the financial year movements in capital introduced and capital withdrawn accumulate and may be shown in the annual accounts as a loan from the director to the company. Take care, because capital movements can sometimes work the other way. If you take too much capital out of the company, the loan is the other way around and there can be adverse tax consequences.

Recharging Costs to customers

Company’s do not claim from customers, they invoice.

Company’s are not reimbursed by customers, the customer pays the bill. Your company has a receipt in the bank account.

Reserve the expressions claim and reimburse for activities that occur between you (or your staff) and your company.

If your company recharges costs to a customer it is done on an invoice. The amounts recharged are usually liable to VAT. See the Disbursement or Expense report for more details of what may and may not be liable to VAT.

In a legal sense transactions between you and your company, and transactions between your company and your customers are entirely different obligations.

The terminology matters. This is one of the few situations where all accountants, bookkeepers and VAT officers need you to understand this concept fully.

Staff claim and staff are reimbursed.

Company’s do not claim from customers, they invoice.

Company’s are not reimbursed by customers, they have a receipt.

The mechanics of processing an expenses claim

It’s your business, and it’s up to you how you run it. We are just the accountants that do the bookkeeping, the VAT returns, the year end accounts and tax returns. We do not run your internal systems for you. Ordinarily we expect you and your staff to prepare your claims on a regular basis, not once per year, and definitely not one week before the Companies House accounts deadline. This is how we do it at Proactive, our staff can submit one claim per month, which is due in by the last day of the month and is then paid by the 14th of the following month. If they miss a month end deadline then they have to wait a further month for any claim to be accepted and reimbursed.

Your claims are subject to the approval of one of your internal staff who will scrutinise them with care. If approved, one of your internal staff will then implement a reimbursement, normally by bank transfer. Do not wait for the next VAT quarter to end, do not wait for Proactive to check things, it’s not our job to micro manage what you do. However, we do require copies of all personal expenses claims handled within your business. If our checks identify areas of concern we will discuss the problem and the remedies which are open to you.

Finally, if you are the only person in your business, you still have to follow this process. Imagine you are wearing two hats! And do this task with some rigour. Later, when your business is big and successful you will thank us for putting The Senior Manager Test on this web site.

Company Dissolution

Once you have decided that a company is no longer needed, it can easily be dissolved. You must first ensure that the accounts and corporation tax return for the final period of trading have been submitted and that any tax liability has been paid.

If there is a tax repayment for the final year, you will want to have received that before you close the bank account and dissolve the company. If a company still has money in a bank account on the date of dissolution, you will forfeit that money and it is sent to the government’s Solicitor General. It is a nightmare to get a company reinstated and then recover money from the Solicitor General. So we recommend that you complete your finances first and only then, dissolve your company.

Do not close the company bank account until your tax affairs are settled!

Do close the company bank account before the dissolution form goes in!

If Proactive has prepared the accounts and tax return for the final period of trading then we will be in position to work on the dissolution for you. This normally involves a fee which might be waived in the simplest of cases.

If you want to do this yourself and have an account with Companies House then you can start the process here:

https://guidedfiling.companieshouse.gov.uk/start?t=DS01

The procedure has to allow for legal notices to be published in the London Gazette over a 3 month period. It normally takes around 4 months to have a company dissolved. Once the process has been started, no more forms should be sent to Companies House for this particular company, none whatsoever. If that happens, the dissolution process will be cancelled. You will need to start the whole thing again!

If you need further advice, please contact us.

Dealing with bad debts

Any business with a bad debt will naturally try to take steps to try to recover it. However, eventually you have to take a view on these things and perhaps write it off. If you go about this the right way you can claim bad debt relief and your tax bill may be reduced. And, if you’re VAT registered you can also claim back the VAT.

Go about it the wrong way and there is a risk that you will lose out even more. I’ve seen that happen and I’ve seen the VAT office recover VAT which was reclaimed in good faith, but which was reclaimed incorrectly.

Firstly, be commercial! Make an effort to recover the debt. Send reminders to the client, or to the administrator or to the receiver. Be persistent. If after 6 months you are getting nowhere, then you can consider bad debt relief. No tax relief will be allowed until 6 months after the invoice date.

Assuming that writing off the debt is your only option, you then have to generate a document (a copy of the original invoice will do) and mark it “Bad Debt”. This “expense” is then shown in your books as though you had bought something. It is not a negative invoice, nor is it a credit note, it is simply an expense and there is a special “bad debt” category for this type of expense.

Like any other expense, it goes through the books, leads to a reduced profit, and in turn to a reduced tax bill. And if there was VAT on the original document, then there is VAT relief on the corresponding bad debt. Treat it as you would any other expense from a VAT registered supplier.

Just be sure to try 6 times over 6 months to recover the debt. At the point where you write it off as a bad debt you must inform the client that you consider this to be a bad debt and, accordingly, you are claiming bad debt relief. That way, the tax man and the VAT man will be content that you have followed the rules.

Employed and self employed at the same time

Will I pay tax twice?

In this article self employment means just that. A person is self employed if they run their business for themselves and takes personal responsibility for its success or failure. A self employed person can also be sued, and risks losing everything they own.

Self employment does not mean running a limited company which offers freelance services and which has limited liability protection, for example “send in the bailiffs to seize this pen and this laptop, sell them at auction and see what you get”. In a legal sense a freelancer running a limited company is special type of employee.

So, if you’re both employed and self employed at the same time, this is what you need to know.  For tax purposes, all of your income in a single tax year is lumped together and the tax calculation is a single exercise. Nobody should have to pay tax twice.

However, with National Insurance Contributions, the system is peculiar and there is often a risk of paying too much.

Having said that, both the Revenue and the Contributions Agency have been know to make mistakes, lots of mistakes. So it’s worthwhile having an accountant check the position.

If you are one of those people who dips in and out of employment, and in and out of self employment, then it’s worthwhile keeping very close tabs on start dates and end dates with your different engagements, and records of all income and expenses. When you have a major project (and are working under PAYE) it does not mean that your self employment ceases. The best thing is to keep your status as self employed until such time as you know that there is not going to be any more self employed work.

That saves you from having to register and de-register as self employed on a regular basis. It also means that in lean times, any loss you make on the self employed business can be set against your PAYE income. So if you still spend money on prospecting, phone calls and advertising (in the course of your self employment) your losses can sometimes result in a repayment of PAYE taxes.

Should I register for VAT?

VAT is a tax on the end consumer. It is not normally a tax on the businesses through which the VAT passes. In effect, a VAT registered business becomes an unpaid tax collector for the government. End consumers are normally households and shoppers, but any businesses which are not VAT registered and which cannot reclaim any VAT are also end consumers.

There are three main categories of business in the UK . . .

  1. The small businesses who would rather not register for VAT and thus steer clear of its complexity.
  2. The small businesses who voluntarily register for VAT, for one of two reasons (see below).
  3. The businesses who are compelled to VAT register, because their turnover exceeds the threshold.

There are also a few more rules which allow people like freelance doctors and freelance teachers, in the right circumstances, to exceed the VAT threshold and to not have to become VAT registered. However, once you pass the current threshold (see below) you either have to register, or you have to apply to HMRC for exemption from registering (for doctors and teachers).

The VAT registration threshold became

• £79,000 on 1 Apr 2013
• £81,000 on 1 Apr 2014
• £82,000 on 1 Apr 2015
• £83,000 on 1 Apr 2016
• £85,000 on 1 Apr 2017

The standard rate of VAT has been 20% since 4 Jan 2011.

The default position

When you start a business in the UK, the default position is that you are not registered for VAT and you must not charge VAT on your sales. In the case of most new start up businesses, we recommend that they stay this way unless any of the following apply:

  1. Your new business is clearly going to be a big mainstream business with annual sales above the VAT threshold. If your sales are going to be heading that way within a few weeks or months of starting, you might as well have your business VAT registered from the outset.
  2. You want your customers to think that you’re bigger than you really are. I know that if one of my UK suppliers sends me a bill, and the bill does not mention VAT, then my supplier is a small business with annual sales of less than the threshold. In spite of the added administration, some businesses will register for VAT voluntarily so that they look like a bigger mainstream business.
  3. You have lots of expenses which suffer VAT, and you’d really like to be able to reclaim those amounts. There are two sides to this argument. Yes, if you are VAT registered, you can reclaim relevant VAT, but you will also have to add VAT onto all of your sales and charge it to your customers. That won’t bother your customers if they are also VAT registered businesses, but if your customers are end users then they will suddenly see your bill shoot up by the VAT rate. If you feel compelled, you can register voluntarily and then reclaim VAT on your costs.
  4. Your sales creep up to the threshold over time. It’s up to you to keep tabs on your sales as there is a penalty for failing to VAT register on time if you hit the threshold. The whole system of registration hinges on sometime as imprecise as your “expectation”. And, you have to allow for fluctuations in sales over the year.

In all probability you will have to VAT register as you reach the threshold. Basically, if your monthly sales are getting near 7,000 that’s the time to ask us for more advice. Don’t wait until your monthly sales exceed 7,000 consistently, because then it’s too late.

Issuing more shares

Diluting your shareholding?

There may be good reasons for issuing more shares in your UK limited company, but you may unwittingly be running the risk of a capital gains tax bill. Read on . . .

The typical situation is a small company headed by Fred Flintstone and Barney Rubble who each own 50 Ordinary shares. Fred and Barney then decide to admit Mr Stone as a third director to Dinosaur Ltd and want to give him a small share of the company. The aim is to split the shares in a 40:40:20 ratio. There are two ways to do this:

  • The simplest thing would be for Fred and Barney to sell or transfer 10 shares each.
  • Or, Dinosaur Ltd could issue a further 25 Ordinary shares from the unissued share capital.

In either case the desired ratio of 40:40:20 is achieved, and in either case a potential gain arises in the hands of Fred and Barney. This happens whether or not money (or other consideration) changes hands. The gain arises, because Fred and Barney have given up a chargeable asset. Whichever way you look at it, they have surrendered 10% each of Dinosaur Ltd to Mr Stone.

The capital gains tax calculation depends on many factors, particularly in the case of small, close companies (and you should take professional advice)! In it’s simplest form, look at it this way . . .

Let’s say that Dinosaur Ltd is worth £1M. That was the value of the company on the balance sheet when last year’s accounts were done. Let’s also assume that the year end was yesterday and that the accounts were completed this morning, and so that figure is a valid current market value. Let’s also assume that Mr Stone paid nothing for the shares and was given them only on account of his important status.

Fred put in £50 on day one of the company and has just given away shares which originally cost him just £10. Because Dinosaur Ltd is now worth £1M he has made a disposal to the value of £100,000. His capital gain is £99,990 and he has and annual exemption of (say) £9,990. That leaves £90,000 chargeable to tax at the prevailing rate.

  • In 2009/10 the CGT rate is 18%
  • So 90,000 x 18% = 16,200

Amazing isn’t it? Fred has to pay a tax bill of £16,200 even though he received nothing but Mr Stone’s important status in exchange for a 10% share of Dinosaur Ltd. Ditto Barney! There are narrow, specialised rules which may allow some form of tax relief from that gain. However, does this story have implications for any share transactions you are considering? If your proposed arrangement means that your percentage holding in a company is going to change then you should seek professional advice.

And even if your holding is going up, there are implications for (a) your next share transaction and for (b) whoever has a diluted share in the company as a result.

Lettings Accounts Checklist

We prepare individual summaries for each rental property. In the case of multiple properties the figures are combined for inclusion on a self assessment tax return. Please therefore prepare a separate set of records for each of your rental properties.

Where you have a mortgage on a property it is crucial that we have accurate details. All UK lenders issue a 5 April certificate or a 5 April mortgage statement precisely for the reason that your accountant will ask you for one. They know that these figures are required for self assessment.

If this information cannot be obtained, then we cannot prepare your lettings accounts and we cannot prepare your self assessment tax return. It’s as simple as that, no ifs, no buts, in the past we have lost clients over this issue, and that’s fine by us. You need a lender who is going to help you keep onside with tax law. If you’re not happy with your lender, complain to them, and then (if you have to) refer them to the Financial Ombudsman.

Please follow this guide carefully and let us have the information and the documentation detailed below. For self assessment purposes the tax year started on 6 April (more than one year ago) and ended on the 5 April which has recently passed.

Bank/Finance House items

• A copy of a loan interest paid certificate for the whole tax year.
• If the lender cannot provide a certificate, please let us a copy of a detailed analysis from your lender showing actual loan repayments made, stating clearly how much represents a repayment of capital and how much is a payment of interest.

Income items

Records of all rents received. That could be any one of the following:

• Copies of all rental invoices issued.
• Copies of all statements from your lettings agent.
• Other records which clearly show all monies received.

Expense items

Any combination of the following:

• All supplier invoices addressed to you as a landlord.
• Copies of all statements from your lettings agent.
• Other receipts and expense vouchers which support your other rental outgoings.
• Where documents are not available please let us have a note of the nature of the expense and the amounts paid. This should apply only in exceptional cases where (for example) the tenant has left and has taken the council tax bill, and you have had to pay some later instalments of council tax yourself.

If you are unsure about any of these points please feel free to call us.

Agreement at an end

If you have received an email from us with a link to this report, then these notes set out a number of things to be considered as our agreement comes to an end. Some of them, but perhaps not all of them, may apply in your case.

Business Affairs

Companies House, the Tax Office and the VAT Office will be notified that Proactive is no longer acting for the business. If we perform the role of company secretary for your company, then the company secretary has resigned today having already submitted the appropriate form to Companies House.

If your registered office is located at one of our premises, we shall continue to handle mail for a period of 21 days. After that time, any mail we receive addressed to your company will be marked “gone away” and will be returned to the sender.

If your business is VAT registered, then the VAT office needs to know where to send future correspondence, and needs to know where the records of your business are to be kept.

If your business has a payroll account (a PAYE scheme) with the Tax Office, then you will need to arrange to carry out the payroll work yourself or to appoint a bureau to do it for you. Payrolls are now subject to Real Time reporting (RTI) and you need to take steps promptly to ensure that the month end reports are correctly filed. There are penalties for late filing.

All Cases – Business and Personal Affairs

Please ask your new accountants to notify the Tax Office that they are now acting. As soon as the new accountants approach Proactive we will let them have all of the “professional etiquette” information they require. It is customary for the new accountants immediately to take on responsibility for all work. No further work will be undertaken by Proactive.

Protocol

Approximately two weeks after sending out the relevant email, we will archive our records. Digital records on DropBox will then no longer be accessible. They will be kept safely (elsewhere) until the end of the sixth tax year following the most recent set of accounts. It is our policy to destroy all records after that six year period has elapsed.

Please take a back up of your records now. After a period of 21 days has elapsed we will charge an admin fee if you or your new accountants require us to access old records. In the case of multiple files denoted by our reference numbers (one per director and one per company or rental property, etc) multiple admin fees are charged as set out on our prices page. Under the “professional etiquette” rules we will provide one new accountant with all relevant information without charge. In the event that we have completed the “professional etiquette” process with your new accountant, and we are then approached at a later date by a second (or a subsequent) accountant asking for the same information, admin fees will be charged. It happens!

A Paperless System

The File Naming Convention

Proactive operates a paperless system and that means we need a strict file naming convention. Every file name is unique and the various collections of numbers each serve a different purpose.

1234567890 622700 20120405 20121031 1700
tax return
Client reference number Document code Tax year or
Trading year
Creation date and time
Narrative

We have over one million documents; and by using this system we can (normally) find any document within a few seconds. A number of our clients have asked for more details and so here’s a basic summary:

Every client has a 10 digit reference number.

Every document type has a 6 digit number code.

All dates are shown as 8 digits, in scientific notation – yyyymmdd.

If a document has more than one date, generally the first date is the tax year or the trading year, and the second date is the date the document was created. Occasionally, the rules are adjusted, and extra numbers may appear for a variety of reasons. It’s the first 10 digits that link the file to a client, and the next 6 that tell us what the document is about. At the end of the file name a short narrative is usually added to make things clearer. That might be your narrative for files you placed in DropBox, or our narrative if we are the originator of the document.

    • 100XXX – correspondence
    • 200XXX – bank
    • 300XXX – bookkeeping and related VAT
    • 422XXX – accounts – self employed
    • 444XXX – accounts – partnership
    • 488XXX – accounts – limited company
    • 500XXX – One off activities
    • 622XXX – tax matters – personal
    • 644XXX – tax matters – partnership
    • 655XXX – other VAT matters
    • 666XXX – Companies House
    • 677XXX – PAYE
    • 688XXX – tax matters – corporate

On DropBox you may see lots of documents with recognisable file extentions like PDF and XLS. We also have some specialist files which work with our accounts and tax software. Anything with a TCS or VTR extention will not work without the right software and may be corrupted if handled incorrectly.

DropBox Folders

When working with DropBox we ask that clients add records to the pending folder for the relevant year. When we work on them we move them into a separate workspace and then afterwards we file them in the processed folder for that year. Reports that we generate (a set of accounts, or a self assessment tax return, etc) are added to the reports folder. Occasionally, documents with an enduring relevance (like a share history) are stored in a PN (permanent notes) folder.

We are trying to strike a balance and fine tune the system, so that both humans and computers can cope with the demands and complexities that accounting involves.