Archive for January, 2020

When assets can become a tax liability

Thursday, January 30th, 2020

There are certain assets that may be carried on your balance sheet at values higher than their market value or past their sell by date. If so, and if these amounts are written-off against your profits, you will pay less tax.

Three possibilities are sketched out below:

Stock

Businesses that accumulate stocks of goods do so in the expectation that the stock items will either be sold on at a profit or processed in some way and then sold at a profit. But, of course, this oversimplifies the conversion process.

However cautious or effective you are at manging your stock levels it is likely that from time to time you may be left with obsolete stock that will never be sold. The cost of these goods, rather than being charged to purchases in your profit statement, will boost the value of stock on your balance sheet.

Action: Sell the obsolete items in a sale or scrap them. In both cases write off any loss against your profits – and save tax – and free up valuable storage space for more productive activity.

Trade debtors

Ask your bookkeeper to provide you with a detailed list of customers that are never likely to pay-up and consider writing off the amounts owed as bad debts. Again, amounts written-off specific debts will reduce your tax.

There may also be an opportunity to reclaim any VAT you may have paid to HMRC on the debts written-off unless you are using one of the VAT special schemes that incorporates calculations made on a cash basis.

Equipment

It is worth reviewing your fixed assets register to consider old plant or other equipment that may no longer take a productive part in your business. As with our suggestions regarding stock above, selling or scrapping these assets may produce a tax loss; although the tax consequences are more difficult to judge.

For example, if the original cost of the redundant item was fully written-off for tax purposes when the assets was first purchased – 100% allowances have been available for some time now – then any funds realised would actually increase your tax bill. Only when the tax written-down value of the asset is higher than the scrap value will a reduction in tax be achieved.

If you are in the run-down to your business trading year end we recommend that you take a hard look at these and other issues in order to undertake a thorough review of your business trading and financial position. Please call our office if you would like our help to do this.

Last week in the EU

Wednesday, January 29th, 2020

At the end of this week, 31 January, the UK is leaving the EU. In actuality, we are entering the “transition” period during which we will need to negotiate our ongoing terms of trade with the EU. This transition period is due to end 31 December 2020.

In the meantime, back at the coal-face, what do we need to change in order to import, export or travel to the EU from 1 February?

Most of the government missives are based on the outcome of a No-Deal Brexit. This outcome is still a real possibility unless our negotiating team reach a formal trade deal with the EU block before the end of the transition period, 31 December 2020.

Accordingly, we have summarised below the published instructions from the gov.uk website. They are:

For exporters to the EU

  1. Make sure you have an EORI number that starts with GB.
  2. Check that your importer has an EU EORI number.
  3. Decide who will make the export declarations.
  4. Decide if you want to export your goods using transit.
  5. Check the rate of duty and tax for your goods.
  6. Check what you need to do for the type of goods you export.
  7. Find out how VAT changes will affect you.
  8. Decide who will transport your goods outside the UK.

For importers from the EU

  1. Make sure you have an EORI number that starts with GB.
  2. Decide who will make the import declarations.
  3. Apply to use the transitional simplified procedures.
  4. Set up a duty deferment account if you import regularly.
  5. Check the rate of tax and duty you will need to pay.
  6. Check what you need to do for the type of goods you import.

For firms transporting goods out of the EU by road

  1. Apply for operators licences and permits
  2. Make sure drivers are eligible to drive abroad.
  3. Check rules for the goods you are transporting.
  4. Make sure your driver has the right export documents.
  5. Find out what vehicle documents your driver needs to carry.
  6. Check local road rules.

Full details of all these issues can be found on the gov.uk website at https://www.gov.uk/transition

VAT – how this can affect your cash-flow

Monday, January 27th, 2020

Paying VAT should never reduce your business profits as you are acting as an unpaid tax collector for HMRC: the VAT added to your sales (less any VAT paid on your purchases) is simply collected from your customers (less amounts paid to suppliers) and the difference paid to HMRC.

But if my customers are registered for VAT can’t they claim this VAT back?

And therefore, isn’t this whole process a waste of time?

A good point, but eventually, supplies will be made to someone who is not VAT registered and at that point any VAT paid is a tax charge.

The expression “ Value Added” is just that; if you add value to a bought-in item or service, by subjecting it to a manufacturing or other process that adds value to this cost before it is sold, then the increase in the value you have added is subject to VAT. At some point in the supply chain, these goods or services will be sold to someone who cannot reclaim the VAT charged to them and HMRC will retain the VAT charged and paid to them by the last supplier in the chain.

But what if I must pay VAT before my customers have paid me?

This is an undesirable outcome, and for smaller businesses there is a remedy. You can register for the Cash Accounting Scheme (CAS). If you qualify for the CAS, instead of paying HMRC the VAT added to your sales (less VAT invoiced by suppliers), you instead pay HMRC the net VAT collected during each reporting period.

In this way, the CAS will protect your cash flow. Under current rules, the CAS is only available to businesses whose annual turnover is below £1.35m.

The CAS will not usually benefit traders who operate on a cash basis – retailers for example – or traders who are efficient at collecting amounts invoiced from customers. If you want to see if the CAS may be available and beneficial for your company, please call so that we can organise a review for you.

Is your home a tax-free zone?

Tuesday, January 21st, 2020

In most cases, if you have lived in your home during the entire period of your ownership of a property, then when you sell that property you should pay no capital gains tax (CGT) on any profit you make on the sale. You can claim the Private Residence Relief (PRR) to exempt any profits made.

The situation is very different if you have periods of time – during your ownership of a property – when you let out all or part of the property.

The current rules up to 5 April 2020

If you let your entire property for a period or periods of time this gap or gaps in your residence will potentially push a proportion of the profit you make when you sell the property into charge for CGT purposes.

However, under the current rules, up to £40,000 (£80,000 for a couple) of lettings relief can be claimed to reduce or eliminate this charge – whether or not you share occupancy of your home with your tenant.

Additionally, the last 18 months of your ownership are disregarded and treated as exempt from any CGT charge.

These current, additional reliefs will usually exempt any potential CGT charge occasioned by short periods of letting.

Two important changes are about to impact these additional from reliefs from April 2020.

Changes from 6 April 2020

From this date, you will only qualify for letting relief if during the period your home is let you are in shared accommodation with your tenant. In other words, letting relief is becoming a lodger’s relief.

Homeowners who do not reside in their property during periods when their property is let will not be able to claim lettings relief for the period that occurs after 5 April 2020.

Additionally, the 18 months exempt period at the end of your ownership is being reduced to 9 months from the same date, 6 April 2020.

Homeowners should take both of these changes into account when letting their home from April this year.

How much tax will you need to pay if affected?

If you presently let your home, or have let the property in past years, and you want clarity about any risk of paying tax when you sell the property, please call and we will help you assess this risk.

VAT – leaving the Flat Rate Scheme

Friday, January 17th, 2020

The VAT Flat Rate Scheme (FRS) does simplify the calculation of VAT returns, but there are certain circumstances when you may no longer use the FRS.

You will need to leave if your turnover on the anniversary of joining was more than £230,000 including VAT in the last twelve months or if you expect your total income in the next thirty days to be more than £230,000 (including VAT).

You may also decide that you should leave the FRS if you are classified as a “limited cost trader”. This is defined by HMRC as:

You are classed as a ‘limited cost business’ if your goods cost less than either:

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

This means you pay a higher rate of 16.5%.

If you are obliged to use a rate of 16.5% – if your circumstances reveal that you are a limited cost trader – there is no real benefit in using the FRS apart from the simplicity of the reporting.

Traders who use the FRS can make a cash profit if the rate they use – based on their business classification – is one of the lower rates. The FRS rates currently range from 4% to 16.5%. The profit arises because the amount that they are required to pay under the FRS is less than the VAT added to their sales less any VAT included in purchases of goods or services.

If you do benefit in this way you may be reluctant to leave the FRS. Unfortunately, ignoring the turnover exit limits or the limited cost trader regulations is not to be recommended. HMRC are empowered to enforce these rules and charge penalties for non-compliance.

We recommend a periodic review of the VAT scheme that you use to ensure that you are still meeting the requirements to stay in the scheme. It is also advisable to check out any other schemes that you might qualify to join and see what benefits they might offer.

Please call if you would like to discuss your options.

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