VAT

Low Cost Trader (LCT)

In the autumn budget, the Chancellor snuck in a change to the calculation of the Flat Rate Scheme (FRS) which means the very people it helped most are now precluded.  All businesses using the FRS will have to perform an assessment to determine whether the new rules apply or not.

We’re still waiting for HMRC to issue the ready reckoner, so in the meantime, how do you figure out if a registered business needs to amend their VAT FRS percentage?

I suggest any business or contractor using the FRS should crunch the numbers to calculate their VAT liability.

There are two rules, if your VAT inclusive expenses are less than 2% of your VAT inclusive turnover you are a LCT and have to use 16.5% when calculating VAT liability.  If that doesn’t catch you, think about the second rule: if the 2% calculation is less than £1,000 then you too are caught.

So what are VAT inclusive expenses? The first thing you need to work out is where do you pay VAT? Start by looking at your invoices, but be aware that not all invoices have VAT numbers so they’re all out too. Public travel generally doesn’t have VAT so that’s another major expense for most traders, and out too. Help is on hand though - conveniently HMRC also say you have to exclude capital expenditure, food and drink and anything to do with your vehicle. So that leaves your agents’ fees, accountancy charges, phone, and maybe rent?

The HMRC website is silent on what period is used to complete the calculation. We use a recent 12 month period. It’s made more difficult if you’re not using real time accounting, so what about the last set of accounts? What if that’s not representative of your current business? Whatever method is used, we always recommend you keep a record in the event of a challenge by HMRC. As HMRC see how many self-employed they catch moving forwards, I’m sure there will be more refinements.

 

The end of the Flat rate scheme

For years contractors and small businesses have been using the VAT flat rate scheme (FRS) to calculate the VAT to be paid to HMRC. The huge advantage was it was simple and there was an added benefit if you didn’t have much VAT to claim on purchases.

 

In the Autumn budget in Mid November 2016 the Chancellor snuck in a change to the calculation of the FRS precluding the very people it helped most.  All businesses using the FRS will have to perform an assessment as to whether the new rules apply or not. In a nutshell if you have vatable expenditure of less than 2% of gross income you can only use the FRS rate of 16.5% irrespective of the type of business.  The nice people at HMRC will have an on-line tool to help us though this isn’t available until January.  Don’t think you can include capital expenditure or one off costs. The calculation of 2% only relates to everyday costs.

 

Example

 

Contractor on the FRS using a rate of 14.5% will be paying £14.50 to HMRC for a gross invoice of £100 (£83.33 + £16.67 VAT). Assuming no vatable purchases saving of £2.17 per £100. Under the new scheme the contractor will be defined as a “limited cost trader” and will have to pay £16.50 on the same invoice to HMRC, that’s 17p you’ve just saved.

 

Of course you can transfer to the standard calculation and as long you only reclaim VAT on the applicable invoices all fine, you do know what they are don’t you?

 

 Anyone on the FRS have a couple of months to get their house in order as the new rules are due to take effect from April 2017.

Tax Penalities

It has been said there are two things we can’t avoid, death and taxes. There is now a third to add: interest and surcharges when making late submissions of returns to the taxman. The idea of the taxman charging for late returns is a fairly new concept.

“ICTA88/S203 (9) provides that interest on late paid PAYE is not deductible in computing income, profits or losses for any tax purpose. Sub-paragraph 4B of paragraph 6 of Schedule 1 Social Security Contributions and Benefits Act 1992 has the same rule for interest on late paid Class 1, Class 1A and Class 1B NIC”.

In the good old days the taxman didn’t enforce this, he was just happy to get what was due. If it was late or extremely late, they rarely imposed fines or surcharges.

Then government cut-backs started to take hold in 2008 and HMRC like all government departments had its budgets cut. Somebody had a eureka moment and came up with the idea to use the legislation and started issuing penalty notices.

I remember attending a HMRC seminar back in 2010. The tax inspector giving the presentation was up-front about the new strategy of income generation.

Since then the tax office has been cranking up its strategy. It started by issuing late fines of £100, in the early days if appealed they would often be rescinded. Today if a tax return is filed late or not paid on time, a fine is issued includes surcharges or interest and often both as a matter of course. These fines apply to both individuals and businesses and for all forms of tax.

Ignorance of the rules is not a defendable response. Look at the increase in the number of people having to complete self-assessments. Everybody needs to be vigilant, any change in circumstances should be reviewed from a tax perspective - perhaps have that phone call with the tax office.

Appealing is not always straightforward nor does it automatically have the desired effect of HMRC reversing its position.

We have had two successful appeals recently. The first was for a self-assessment fine of £1,200. The other was for Class 2 NIC demand. This was rather nasty where the debt recovery department wanted six years of payments amounting to almost £700 we negotiated a settlement of £120.

So what can you expect to pay if you’re late?

It depends on the type of tax due, but expect to pay at least 3% interest whereas if you are eligible, HMRC pays interest of 0.5% (tax free!!!)

You can also look forward to receiving penalties which vary depending on the severity; suffice to say it’s expensive.

On a separate blog there is a list of these penalties. If you’re late with any tax returns from 1 April 2010, penalties will apply to the following taxes and duties:

  • Betting and Gaming Duties
  • Capital Gains Tax
  • the Construction Industry Scheme
  • Corporation Tax
  • Environmental taxes
  • Excise Duties
  • Income Tax
  • Inheritance Tax
  • Insurance Premium Tax
  • National Insurance Contributions
  • PAYE
  • Petroleum Revenue Tax
  • Stamp Duties
  • VAT

A couple of final points, if you have a tax bill and are not in a position to pay, HMRC can be accommodating. We have assisted many clients over the years and can speak on your behalf.

Any fines or interest imposed are deemed to be non-deductible for the purposes of completing any tax return.