Reverting to the 17.5% VAT rate in Jan 2010

Reversion of the Standard Rate of VAT from 1 January 2010

The purpose of this article is to provide you with a basic understanding of the upcoming changes and most importantly cover the tax point rules and the treatment of deposits and prepayments during the change over.

Attached at the bottom is the full guidance provided from HMRC which covers the different schemes which will be relevant to your clients.

Reversion of the Standard Rate to 17.5%

Before I begin to break down some of the main points from HMRC’s document on the reversion, there is some good news for your clients who run restaurants, pubs and clubs for the 31st of December. It was officially announced that restaurants, pubs and clubs could carry on charging the lower rate until 6AM on New Year’s Day.


Handling mistakes

As the saying goes, “mistakes are part of being human...” so if one of your clients discovers a mistake it can be corrected through the normal procedures by submitting a form VAT 652 (Notice 700/45).

HMRC have stated in their Working Together release that they will be taking a “light touch” approach to errors made that relate specifically to a change of rate issue.

When to start charging
The 17.5% rate has to be charged on sales of standard rated goods and services made from the 1st of January and should be used on all invoices issued on or after this date.

Special rules

There are special rules for supplies which span the change of rate. If the goods or services are provided before the 1st of January but the invoice is raised after that date then under the change of rate rules the 15% rate of VAT can be charged. The change of rate rules are optional.

Tax point rules


The normal rules:



Basic Tax Point

The basic tax point takes place when goods are removed or made available to the recipient and the date services are performed.

Actual Tax Point
Either the date of:
a) Issue of the invoice if it is before the basic tax point or up to 14 days after the basic tax point.
b) Payment if it is before the basic tax point


Applying the tax point rules on the 1 January 2010

Where a tax point occurs before 1 January 2010 the supply (or the part of it covered by the tax point) will remain liable to VAT at 15%. Tax points occurring on or after 1 January 2010 will be liable to VAT at 17.5%.

In many cases there will be a single tax point for example the customer of a retailer enters a shop to purchase an item for which they pay cash and take away with them.

Where two or more tax points have been created for example where a deposit is received before 1 January 2010 it will be liable to 15% VAT but the VAT on the deposit can be increased to 17.5% under the special change of rate rule (see section 3 of the guidance) or if the anti-forestalling legislation applies (section 11).

If the goods are not delivered and the remaining balance of the price is not invoiced or paid for until or after 1 January 2010 then the rate of 17.5% will apply when it comes to accounting or the remaining VAT that is due.

What I need to declare on my tax return

Many people don't realise that they need to declare all income on their personal tax returns even if tax has already been stopped.

The top three items people miss are:

1. Interest on bank and savings accounts ( But not ISA accounts)
2. Pensions received
3. Salary from employment

Remember all income has to be declared on your tax return. You also add the tax alrerady paid.

Your then calculate the tax due on you total income, take off the tax already paid and this leaves you with the tax still to pay or in some cases refunded.

Don't Leave it to the Last Minute

The filing deadline for Self Assessment Tax Returns is 31st January.

Each year a huge number of people leave their tax returns right until the last minute.

But consider the disadvantages of doing this:

• You will not know you tax bill until the last minute leaving you very little time to save up to pay it.
• If you find information is missing you have all the stress of rushing to try and replace it.
• We accountants may not have enough time to work to reduce you tax bill because we don't have the time to ask you all the right questions. There's no time to ask you to go and check things.
• Because it is peak filing season many accountants will charge a premium to help you.
• HMRC help lines are busy and overstretched.

So why do people leave it to the last minute?

Do you need to file a tax return?

Many people believe if you stop being self employed and go back to employment there is no need to file a tax return. What is often overlooked is that the last bit of self employment, the bit between 6th April and starting work, still has to be reported on a tax return. So don't ignore that tax return just because you now think its all handled through PAYE.


Who needs to complete a tax return?

 

• self employed people (including members of a partnership)
• company directors (except not for profit organisations)
• ministers of religion (any faith)
• people who get rent or income from land and property in the UK (but if you are an employee and this income is less than £2,500 a year a tax return may not be necessary)
• people who have other untaxed income and the tax due on it cannot be collected though a PAYE tax code
• people with taxable foreign income, even if they are not normally resident in the UK (this includes non-resident landlords)
• employees and pensioners with more complex tax affairs - see below

 

Remember, if you have any income that is not taxed at source, like rents or freelance earnings, you may need to complete a tax return.

 

Employees and pensioners with complex tax affairs

 You need to fill in a tax return if you:

• have an annual income of £100,000 or more
• have annual income from savings or investments of £10,000 or more (before tax)
• claim against tax for expenses or professional subscriptions of £2,500 or more
• have untaxed income of £2,500 or more (although some pensioners may be able to pay the tax on this through their PAYE tax code)
• owe tax at the end of the year that cannot be collected through a change to your PAYE tax code for the following year

 

 

Those bits of paper are really important

It is sometimes difficult for me to persuade clients the importance of keeping copies of P60's, P45's and letters from their employers, especially about redundancy payments.


I have had a couple of recent cases that emphasis the problem:
The first is a story of a redundancy payment, P45 and a final bonus were not clear and missing information meant it was not clear what the figure on the P45 was made up of as the client had not retained payslips. The result was we didn’t get the tax return right. HMRC picked this up and launched an investigation where they found the client negligent in submitting an incorrect tax return.

My second is a client being chased for a late 2008 tax return. The client was annoyed that they should be asked to complete a return as they argued they were all PAYE. This is a common mistake as the client’s affairs were complex. There were two private pensions being received, state pension and change of job and they were well into the 40% tax bracket. The client was also missing many P60’s. Once we had obtained all the information they actually had a fairly substantial tax bill because the employer was using a BR tax code which would not collect any 40% tax.

So my advice is to keep all your payslips for a couple of years. Make sure you get and keep copies of P45’s ( them for you get if you leave a job) the P60 ( the form you get each April when you are in a job or are in receipt of a pension) the P11D ( the form you get each April to June) from your employer if you have a company car, medical insurance or other benefit from your employer.


These forms are important.

Beware the Bank's Add Ons

I have recently had a number of new clients who have gone to the bank and have signed up not only for a business bank account (which is good) but additional add on services.

For example a recent new client of mine has been paying a certain bank monthly, for the past 18 months, for a business document support service that he has never used, doesn't need or even understand.

A few hours later another new client informed me he had signed a 3 year deal with his bank for a credit card machine. Now he does use the machine and finds it a great asset to his business but I could have referred him to suppliers giving far better deals and on a much shorter contract.

It all got me thinking of all those monthly payments I have seen to banks for 'support' services which when I query with the transactions with my client they say they have no idea what it for.

So my advice is open a bank account with a bank but the talk to your TaxAssist Accountant to find out the best deals around for other services and check with them if you actually need such services.

PAYE – Issues for Employers and Employees.

Employers

If you employ staff, you have obligations to the Inland Revenue. If you ignore these obligations, penalties and interest will soon be added to your employment costs! Most penalties arise if you either: miss certain statutory deadlines for remitting tax and national insurance you have deducted from your employees, or are late submitting returns to the Inland Revenue. Unfortunately ignorance is not bliss - make a late payment or forget to send off a particular return and you will be penalised

Employee Benefits.

If you provide employees with benefits, for example company cars and health insurance; be sure to watch out for the following:

• Identification is difficult – sometimes seemingly unrelated expenditure can be classified as a benefit, for example excessive staff entertaining.
• Benefits attract their own national insurance charge which has to be paid by employers in July each year.
• Benefits have to be declared to the Revenue on specific returns which must be submitted on time to avoid penalties.

Employers – other points of interest.
Small businesses are able to pay their deductions quarterly rather than monthly - this can help with cash flow especially for new ventures.

Employers have to make their own national insurance contributions based on salary levels. This is added to tax and employees national insurance deductions when paid to the Inland Revenue each month/quarter.