Next Section: Payroll & HR >

• H M Revenue and Customs (click to expand)

  • It is necessary to notify HM Revenue and Customs of the existence of your new business by completing forms CT41G (companies) and CWF1 (sole traders/partnerships). The form notifies the Inland Revenue of your accounting date, your accountant, and also enables a PAYE (Pay As You Earn Scheme) to be set up, which is a requirement if you are to be an employer.
    
    There is no deadline for filing the form but notification must be made to the Inland Revenue by the following dates:
    
    Sole traders/partners - 5 October following the year of assessment in which you commence trade
    
    Companies  - within the first twelve months of commencing to trade or the  accounts date whichever is the earlier.
     

• Inland Revenue NI Contributions Office (click to expand)

  • Depending on the level of profit, sole traders and partners have a liability to Class 2 NIC, and these are payable either quarterly or monthly by direct debit. Class 2 contributions are at a weekly level of £2.30 (where annual earnings are £4,825 or more for 2008-09) and £2.40 for 2009-10 and the necessary form to collect Class 2 contributions should be completed at the same time as the form CWF1.
    
    It should be noted that there is £100 penalty if you do not register to pay Class 2 NICs within three months of starting your business.
     

• Value Added Tax (click to expand)

  • VAT is a tax on consumer expenditure and is ultimately paid by the final customer. Most business transactions involve the supply of goods or services and VAT is payable if they are made:
    
    a) in the United Kingdom;
    b) by a taxable person;
    c) in the course or furtherance of business and are not specifically exempted or zero-rated.
    
    VAT is collected by H M Revenue and Customs and is normally payable quarterly.

    You need to consider if it is beneficial to be VAT registered from the outset. If you are registering for VAT, form VAT 1 needs completing, and if you are a partnership, form VAT 2 needs to be completed giving details of all the partners.

     
  • Registration (click to expand)
    • There are two different types of registration - compulsory and voluntary:
      
      Compulsory
      A person who makes taxable sales becomes liable to be registered if:
      
      i) At the end of any month, the value of his taxable sales in the previous year has exceeded the registration limit which is currently £67,000.
      
      ii) At any time, there are reasonable grounds for believing that the value of his taxable
      sales in the next 30 days will exceed the £67,000 limit.
      
      iii) If, where a business carried on by a taxable person is transferred as a going concern,
      the taxable sales for the twelve months prior to the transfer exceed £67,000.
      
      In the most common situation, i.e. (i) above, the person must notify HM Revenue and Customs within 30 days of the end of the month in which the value of the taxable sales first exceeded £67,000. If, for example, the value of the taxable sales first exceeded £67,000 in the twelve months to 31 March, then HM Revenue and Customs must be notified by 30 April and VAT registration would commence on 1 May.
      
      
      Voluntary
      In certain circumstances, it is possible to register on a voluntary basis for VAT even though the value of taxable sales may never exceed £67,000. This is normally only beneficial where the majority of supplies are being made to customers who are themselves VAT registered, e.g. it would not be beneficial for a domestic painter with taxable sales of £30,000 to be registered, whereas it would be beneficial for a commercial or industrial painter with the same level of supplies.
      
      The other situation in which a voluntary registration might be beneficial is where the sales are all zero-rated and no VAT is charged on the transaction. All VAT suffered by the trader on expenses can be reclaimed from H M Revenue and Customs.
      
      In summary, the advantages and disadvantages of a voluntary registration are as follows:
      
      Advantages
      
      - enables VAT suffered on business expenses to be reclaimed;
      
      - a VAT number can give the impression that a business is larger than it actually is
      which sometimes can increase the possibility of obtaining work.
      
      Disadvantages
      
      - the requirement to prepare VAT returns on a quarterly basis and to submit them within
      one month of the quarter end - is the amount of work involved worth it for the amount of
      VAT that can be reclaimed?
      
      - HM Revenue and Customs will visit the business about every five years to ensure that
      VAT is being properly accounted for.
       
  • Taxable Persons and Supplies (click to expand)
    • Taxable Persons
      
      It should always be remembered that it is a person that is registered for VAT and not a business. If a person has two separate different businesses, both with taxable sales of £40,000, then that person will be required to be registered for VAT and account for VAT at the appropriate rate on the total sales of £80,000.
      
      It is possible to mitigate the effect of VAT by having one of the businesses operated by a limited company or by a partnership with a relative, but professional advice needs to be taken since HM Revenue and Customs have the power to still treat the two businesses as one if strict criteria are not met.
      
      Taxable Supplies (Sales)
      
      Taxable supplies are all sales made by a business either to a third party or to the trader himself (goods for own use) which are not exempt supplies. Taxable supplies therefore include zero-rated supplies.
      
      The major categories of exempt supplies are:
      
      - Land (but not buildings)
      - Insurance
      - Postal services
      - Betting, gaming and lotteries
      - Finance
      - Education
      - Health and welfare
      
      It is important that at the outset of a business, a trader establishes the VAT status of any sales being made to avoid mistakes. e.g. the services of a physiotherapist are exempt, whilst the services of an acupuncturist are standard rated.
       
  • Tax Rates (click to expand)
    • There are three rates of VAT:
      
      15%
      
      5% - for certain supplies of fuel and power
      
      0% (Zero-rated) - the four main areas of zero-rated goods are:
      
      a) Food and agriculture (but excluding pet food and most catering);
      b) Printed matter, including books and newspaper;
      c) Young childrens clothing and footwear;
      d) Passenger transport (but excluding hire cars, taxis and parking).
      
      Any VAT charged by the business, whether at 15% or 5% is known as output VAT
      and the total charged or collected in the VAT quarter is payable to Customs & Excise.
       
  • Input VAT (click to expand)
    • Input VAT is the VAT that you are charged on your business purchases and expenses (the other persons output VAT) and is normally recoverable in full by a trader who only makes standard rated or zero-rated supplies. Businesses that make some exempt supplies (known as partially exempt businesses) have different recovery rules. The total input VAT suffered in the quarter is deducted from the output VAT charged or collected and the difference is either the amount of VAT due to H M Revenue and Customs or the amount repayable by HM Revenue and Customs.
      
      The majority of input VAT is recoverable but there are special rules for:
      
      - cars;
      - petrol supplied for private useage;
      - business entertaining;
      - goods sold under a VAT second-hand scheme.
      
      To reclaim VAT you have been charged as input VAT, you must hold valid evidence, which normally means a valid VAT invoice from a registered trader showing his VAT number and the amount of VAT charged.
       
  • Special Events (click to expand)
    • VAT was originally described as a simple tax but has gradually become more and more complicated over the last twenty years with changes to the operation of VAT every year.
      
      It is not always possible to calculate each quarter’s VAT liability by merely deducting input VAT incurred from 3/23 of the sales income and professional advice needs to be taken in the following situations:
      
      - Importing and Exporting - either within or outside the European Union;
      - Partial Exemption, i.e. where a business makes some exempt supplies, all the input VAT
      incurred is not necessarily recoverable;
      - Retail Schemes, i.e. where both zero rated and standard rated supplies are made
      which cannot be separately identified at the point of sale;
      - Land and Property;
      - Cash Accounting;
      - Self-supplies;
      - Second-hand schemes for motor cars, used boats, antiques, horses and ponies and others.
      - Flat Rate schemes
       
  • Penalties (click to expand)
    • The impact of penalties has been considerably reduced since the early 1990’s and the possibility of any business suffering a serious misdeclaration penalty for an innocent error on their VAT returns is low.
      
      The two most important penalties still in existence which every business should be aware of are:
      
      a) Late registration penalty for not registering for VAT at the correct time. The penalty is based on a percentage of the VAT due between the date of registration and the date that the person was required to be registered and the percentage increases dependent upon the lateness of the registration. The penalty is in addition to the VAT that is due.
      
      b) Default surcharge for traders that are persistently late in either submitting VAT returns and/or making payment of the liability due. The penalty is based on a percentage of the VAT due and is on a sliding scale.
       
  • VAT Checklist (click to expand)
    • Registration
      
      (a) Should the business be registered?
      (b) Is basis of registration correct?
      (c) Are details on registration certificate correct?
      (d) Do procedures exist for notifying HM Revenue and Customs of relevant changes?
      (e) Review position at regular intervals.
      
      
      Preparation of returns
      
      (a) Has return been received? If not, then obtain duplicate from VAT Office.
      (b) Review sources of information.
      (c) Prepare draft return.
      (d) Check for accuracy and completeness.
      (e) Make payment (if outputs exceed inputs)
      
      
      Input Tax
      
      (a) Do any restrictions on input tax exist?
           - If “Yes”, does an agreed method exist?
           - Does this method maximise input tax?
      (b) Are invoice additions and calculations checked?
      (c) Is input tax claimed at the earliest tax point?
      (d) Are all claims properly supported?
           - Ensure all supporting invoices kept.
      
      
      Output Tax
      
      (a) Are all income heads reflected for VAT accounting?
      (b) Are all potential sources of notional supplies considered?
      (c) Are all potential sources of income (asset sales, etc.) covered by VAT accounting system?
      (d) Is VAT captured at the correct tax point?
      (e) Is VAT correctly applied where appropriate?

To arrange your free initial consultation click HERE or call us on 0845 330 3200.