For Professional Contractors and Freelancers who supply services toa client outside the UK, accounting for VAT varies according to thetype of service that you are supplying.
The rules for who accounts for the VAT; either the supplier or the consumer can be somewhat confusing.
To ensure that you are accounting correctly, see our Tax Tip Week 15 - VAT on the supply of Cross-Border Services.
ContractorCalculator
recently published an article "Contractors' guide to VAT" which is a
great guide to VAT if you are running your own business as a
Professional Contractor or Freelancer. If you are VAT registered its a
great quick read on VAT and gives you all the basic details.
For further details on VAT you can also use our "Guide to running a Microbusiness" which is available for download from our Business Library - Tools and Documents for registered users ( registration is free ).
In the guide sections 5.13 to 5.15 cover VAT in depth over a total of 27 pages.
VAT is an important topic for Professional Contractors and
Freelancers as it is one way that a Limited Company business owner
really gains over anyone using an Umbrella Service who will never see
the benefits of being VAT registered.
In the Pre-Budget Report Alistair Darling announced that the standard rate of VAT would be cut from 17.5% to 15%.
To keep in line with this decrease there are also changes to the Flat Rate Scheme business categories.
All rate changes are effective from Monday 1st December 2008 on standard rated goods.
Standard Accounting for VAT
If you currently account for VAT at the date of invoice then 15%
output VAT will need to be applied from 1st December. Any input VAT
will be reclaimed at 15% which it should have been invoiced at after
1st December(you should contact the supplier if the rate is incorrect).
To calculate the rate of VAT from a gross amount take the fraction 3/23.
Cash Accounting Scheme
On the cash accounting scheme you do not pay your output VAT to HMRC
until your client has paid you. From 1st December 2008 you should
charge 15% output VAT on all sales. However, any output tax invoiced
pre December will still need to be declared at 17.5% on your VAT return
regardless of when it is paid.
The Flat Rate Scheme
The following information is generally aimed at the IT freelance and
contracting industry, however the rates that apply to each business
sector can be found on our website.
You will need to log in or register if you are not already, go to
'Business Library', 'Tax Tools and Documents' and download the pdf 'VAT
changes and the standard rate'. See Annex E page 43.
The business category computer IT consultancy & data processing flat rate is 11.5%.
The business category business services not listed flat rate is 9.5%.
You may notice in the tables that some rates remain unchanged.
Cash based turnover method on FR scheme
If you account for your VAT under the flat rate scheme using this
method; where you do not pay the output VAT to HMRC until you have been
paid, any pre December output VAT that is later paid must be declared
at the original rate that it was invoiced.
Payment on account regime
If you use the payment on account scheme and make monthly payments,
nothing will change. However, if you expect your future VAT liability
to decrease more than 20% you can write to HMRC and apply to have your
payments reduced.
Fuel Scale Charges
Please note that fuel scale charges have also been changed. You can find the full listing on our website.
You will need to log in or register if you are not already, go to
'Business Library', 'Tax Tools and Documents' and download the pdf 'VAT
changes and the standard rate'. Pages 40-42.
Errors and Corrections
If you make an error charging the wrong rate of VAT you should
rectify the error by issuing a VAT only credit note not more than 45
days after 1st December.
The credit note must contain :
* The identifying number and date of issue of the credit note
* Your name, address and VAT registration number
* Your customer's name and address
* The identifying number and date of the VAT invoice
* A description of the services or goods being supplied
* The amount of VAT being credited.
HMRC have stated that they will be operating a 'light touch' in
terms of errors made in the first VAT return after the changes come
into effect.
Errors should be declared accordingly to HMRC through the normal voluntary disclosure process.
If you are buying or selling a business you need to consider your VAT exposure.
If you buy a business as a going concern, in other words if youcontinue with the existing trade in place of the seller, you do nothave to pay VAT on the transfer of the trading assets.
But beware. The reason you do not need to pay VAT is that thetransfer of a business is considered to be outside the scope of VAT. Ifthe seller is advised to adopt a broad brush approach and just chargeVAT because he cannot decide if a bona fide sale as a going concernapplies, you may be denied recovery of the VAT added!
It is therefore important to clarify whether the sale is a sale as a going concern or not.
Purchasing property
Further complications can arise if you purchase a business propertywhich has an existing option to tax applied. This means that all incomegenerated by the property is a standard rated output. It also meansthat a seller may be required to add VAT to the sale price.
However the seller can avoid this VAT add-on if one of two specific circumstances apply:
* If the new owner makes an election to opt to tax their interestin the same property. This election must be made before ownership istransferred.
* If the new owner is buying the property to convert to dwellings.
In both cases there are prescribed forms to fill in and file. You can find these and full information on the HMRC website.
We seem to be coming to a break point in a long, sustained period ofgrowth in the UK. It's as if someone had pushed a button and notched upthe incline on the running machine - all of a sudden more effort isrequired to sustain forward momentum. We need to get financially fitter!
Part of this fitness regime needs to be a fresh look at the tax andVAT strategies that are available to slow down payments to the taxman.
It's beyond the scope of this article to give detailed advice, aseach business will have different needs. What we have done is outlinein general terms some of the strategies that are available - if we havenot reviewed your tax affairs recently please contact your PersonalAccountant to discuss things further.
VAT
The legislation that sets out the way in which you calculate theVAT to pay each quarter offers a number of opportunities to ease cashflow.
* Cash Accounting - if your VATable turnover is under £1.35mand you are not using cash accounting, now would be a good time toswitch. A few companies will not benefit, especially if you are paidfor the goods or services you sell at point of sale, a retailer forinstance. If you sell goods on credit and you are usually owed morethan you owe (to suppliers etc) cash accounting would probably reduceat least the first payment you make when you join the scheme.Essentially you only pay VAT when it is collected from customers.Outputs and inputs are based on monies received and paid, rather thanamounts invoiced.
* Flat rate scheme - another of the special schemes offeredto small businesses is the flat rate scheme. If your turnover is under£150,000 and you have small amounts of input tax to reclaim each month,this scheme may save you cash flow. Each business sector suffers adifferent rate of VAT so the only way to see if this scheme would bebeneficial is to crunch the numbers.
Even if you don't qualify for a special scheme, don't forget toclaim bad debt relief. Any debt that is over 6 months old qualifies asa bad debt and you can reclaim the output tax you will have paid.(Note: the flip side also applies. If you have invoices unpaid fromyour suppliers more than 6 months old, you should repay any input taxyou have claimed!)
It is also worth filing your VAT return online now as this will give you an extra 3 days to pay.
Making losses, or less profit
One of the more obvious effects of recession is a downward trend inprofit creation, and if your business is badly affected, making losses.The notes that follow set out a few ideas for capitalising on the taxplanning opportunities this affords.
1. Self assessment payments on account - if your currentyears profit is likely to be lower than the previous year, you may beable to elect to reduce the payments on account for the current year.The claim should be based on realistic trading results.
2. Losses - if your business is currently making losses itmay be possible to carry these losses back to previous years, when youmay have paid significant tax. Any tax overpaid as a result can bereclaimed.
3. Change of accounting date - in some circumstances it maybe beneficial to either extend or reduce a company's accounting periodend to make use of a fall off in profitability. There are limitationsto this type of planning so careful consideration of the facts isrequired.
Need more time to pay
Generally speaking if you are late paying your tax or VAT, interestand in some cases penalties will be applied. If you can justify thereasons for you inability to pay it is usually advisable to contactHMRC and agree a payment timetable that your cash flow can afford.Burying your head in the sand is not a useful strategy!
If your business is starting to feel the pinch, pressure on profitsand cash flow, please seek the advice of your Personal Accountant. Asmentioned at the beginning of this article each business is unique andthere are a number of strategies we have not had the space to showcasein this article. Please call if you need help.
Overdrawn directors' loan accounts
If you are a director it is illegal for you to borrow money fromyour company. Ironically there are no fines payable if you break thisparticular aspect of company law! However there are a number of taxconsequences, two of which are outlined below.
Benefits in kind
If a director's loan is overdrawn (you owe the company money) youwill be deemed to benefit from this arrangement and suffer a benefit inkind charge as a result. This charge can be avoided if you allow thecompany to charge you interest on the overdrawn position. This will ofcourse increase the amount you owe if simply charged to your loanaccount and will potentially increase the company's taxable profits.
Corporation tax
If the overdrawn position continues for more than 9 months after theend of a relevant accounting period your company's corporation tax billwill be increased. For instance if the company year end was 31 December2007 and at that time the overdrawn director's loan amounted to£20,000, and this amount was still outstanding at 1 October 2008, youwould have to pay over an extra £5,000 in corporation tax at that laterdate. This section 419 liability could be reclaimed if the loan wassubsequently repaid - but there would be a considerable delay.
With the current economic slow down it is inevitable that some businesses cash flow will take the impact.
So what will happen if you don't have the funds to pay the VAT man on time?
First and foremost, ensure that your VAT return is submitted on time, failure to do so will prompt HMRC to raise an assessment. Penaltiesare not incurred for a first assessment, but if you are assessed andpay less than your return should be it could cause problems in thefuture, especially as the new penalties regime for errors would apply.
The best route is honesty, don't bury your head in the sand and hope it will go away.
If you cannot make the payment or only a part payment, phone the localHMRC debt management centre, you should be able to get the number fromphoning their "national advice service helpline" on 0845 010 9000.
Explain your situation clearly and calculate a date when you will beable to make a payment. For first time defaults they are likely to beunderstanding, especially if your cash flow crisis is a short termproblem. Follow up your conversation in writing and retain proof ofpostage.
When a payment deadline is missed (regardless of whether you havebeen in contact) HMRC will automatically issue you with a "surchargeliability notice". The first one will not have any surchargesapplied (if your company turnover is less than £150,000 per annum) butany subsequent ones that are made within 12 months of the first onewill. Each time you default you enter into a new 12 month defaultsystem, so if you default within the 12 months the percentage ratesincrease.
2nd default 2% of the VAT outstanding within 12 months
3rd default 5% of the VAT outstanding within 12 months from above
4th default 10% of the VAT outstanding within 12 months from above
5th default 15% of the VAT outstanding within 12 months from above
If, where the 2% and 5% surcharges are less than £400 when thepercentage is charged on the amount of VAT outstanding, no surchargewill be levied but HMRC will record this and enter you into their 12month default system. Each band of surcharges re-starts the 12 monthperiod in which, if you default, it will move to the higher band.
If you think that your cash flow crisis will be long lived, considertaking out a personal loan. The interest rates that you could securemay be lower than the penalty surcharges.
If you are not already, change over to the cash accounting scheme;this means you don't have to pay over sales tax until you have receivedit. Consider a flat rate scheme; if your purchases are minimal it maybe a better option for you.
For VAT purposes income from sales in a charity shop are zero rated.If a smaller charity has shop sales under the present VAT registrationlimit, presently £67,000, it may consider the hassle of voluntaryregistration to be unnecessary.
This may not necessarily be the best course of action.
Presumably the charity will be paying rent for the use of the shop. Itis likely that the landlord will have opted to add VAT to the rentcharged. If so the charity will presently be absorbing this VAT as partof its costs.
The solution may be for the charity trustees to register on a voluntary basis, for VAT.
If this is done there will be no VAT to pay on the shop sales, asstated before these are zero rated; however it would now be possible torecover input tax charged to the charity for overheads specificallyrelated to the shop trade. This could include VAT on rent and otherdirect overheads, telephone etc.
One final tip for charities who pay VAT on their rents. If yourcharity is paying rents for a building, or part of a building which isused solely for charitable purposes (other than as an office or shop)the supply from the landlord may be exempt from VAT. Even if yourlandlord is required by other VAT rules to charge VAT on rents thiswould be the case. If you have been overcharged as a result you couldask your landlord, if justified, to send you a VAT credit backdatedthree years!
This article will be of interest if you sell or buy services or goods in an overseas market.
In many situations if you are a UK based supplier (i.e. the companyproviding services to say EU customers, but delivering the services inthe UK, you could take on the task of obtaining UK VAT refunds forthose customers. This may offer you a competitive advantage?
Your business can only reclaim input tax on its VAT return if theexpenditure was incurred in the country in which it is VAT registered.For example, a UK company can only reclaim input tax on expenditurerelevant to other UK businesses. Overseas VAT is reclaimed as follows:
" countries within the EC - VAT can be reclaimed by submitting aclaim to the country in which the expenditure was incurred - this isknown as an 8th Directive claim
" countries outside the EC - many non-EC countries have their ownsystem of indirect taxes e.g. Australia has a tax called GST (Goods andServices Taxes). In many cases, a reciprocal arrangement will be inplace with the UK (Australia included) whereby claims can be madebetween the two countries in exactly the same way as 8th Directiveclaims. This procedure is known as a 13th Directive claim.
For example if your UK business incurred GST on a business trip toAustralia (not a trip to watch an Ashes cricket series!) you couldsubmit a claim to the Australian authorities to recover this tax.Equally, an Australian business registered for GST could submit a claimto the UK to recover any relevant VAT paid in the UK.
You can find further information from the HMRC website.
If you do trade overseas, are an existing client and would like todiscuss any of these issues in more detail please call your PersonalAccountant.