How should you deal with the VAT Increase effective from 4th January

The standard VAT rate changes from 17.5% to 20% on 4 January, but the reduced rate (5%) and zero rate are unchanged.

Broadly if you raise a sales invoice on or after 4 January 2011 you should use the new (20%) rate of VAT. When dealing with suppliers invoices you should be guided by the date and therefore the VAT rate they have used.

If you use one of the special schemes for small businesses, there are special rules to consider.

Flat rate scheme : the rates will be increasing and you should check the new rate for your particular industry.

Cash accounting : remember that the invoice date normally sets the VAT rate not the date payment is received.

For most businesses using accounting software, the key is to make the appropriate change and be very careful to date entries correctly.

There are various anti-avoidance provisions to stop people abusing the change but as long as you are invoicing your customers normally, you are not likely to fall foul of these. If you are thinking of trying to encourage customers to pay up front to get the lower VAT rate, speak to us or you accountant to make sure your proposal works.

There is a helpsheet on our website covering the basic principles and how to make changes within Sage accounting software www.hjssolutions.co.uk

The government have changed the rules for pension contributions again, do you know what is happening?

You will have heard that the before the election the previous government was intending to limit the tax relief given on pension contributions for higher income taxpayers. The new government said it was going to review these rules as they thought they were too complex. The new rules were announced in mid October and apply from 2011/12.

The basic remains rule is that your personal pension contributions cannot exceed your £3,600 or your earnings, whichever is higher. For this purpose earnings are salary, bonus etc or profits from your own business.

There is then an ‘annual allowance’ which looks at the total contributions made by employee and employer – this limit is being reduced to £50,000. If you and your employer make contributions above this amount, you (personally) will be charged tax (at 20%, 40% or 50% depending on your income) on the excess. If you are a member of a defined benefit scheme HMRC look at the increase in the value of your accrued benefits to assess this £50,000 – this can be distorted if you are promoted and your salary increases significantly.

The lifetime allowance has also been reduced to £1.5m. If your ‘pension pot’ exceeds this amount when you start to take the benefits you will have to pay tax on the excess. This will be at 25% if you are taking income (the income is then taxable as you receive it) and 55% if you take a lump sum (no further tax).

Someone from HM Revenue & Customs has turned up on my office doorstep threatening ‘distraint’ for tax they say is unpaid. What does this mean?

Distraint is a process by which HMRC are able to take possession of and if necessary sell at auction goods to recover unpaid tax – it does not require a court order or judgement. To use this process the person visiting must be an HMRC officer, they cannot send a private bailiff. The normal process is that HMRC officer inspects and then lists the items which he intends to seize. Having done so he will want the taxpayer to agree to ‘walking possession’ whereby the goods are not removed and the taxpayer has time to make payment of the tax due, agree arrangements for the payment of the tax due or show that the tax is not actually due.

Your initial decision is whether to let the HMRC officer enter your premises – without a warrant he cannot break in. If it would show that you have nothing of value it may be worthwhile allowing this. However if you have valuable assets and the tax is not actually due, you may want to refuse entry while you take advice from your accountants and try to get HMRC records to show the corrected amount due, which may require the submission of outstanding returns. It is important that it is made very clear to the HMRC officer where assets are not owned by the taxpayer owing the debt.

Distraint is a serious process and it is important that you take immediate advice on your situation, particularly as the price obtained by HMRC if your goods are actually sold will usually be significantly less than the value you put on them.

What information do you really need to keep for the taxman?

HM Revenue and Customs advise that you should keep your personal tax and financial paperwork (non-business) for at least 22 months from the end of the tax year. This would mean keeping the papers for the 2008/9 tax year until at least 31 January 2011. If you submit your Tax Return late you need to keep the supporting papers for 15 months from the submission of the Return.

Having seen the problems caused by not having the necessary papers available, I would keep some papers for rather longer. These would include :

• Any details on the purchase of assets you still own, whether this is a property, shares, valuable picture/cars/boats etc.
• Invoices supporting major work on such assets, house improvements etc
• Details of any significant gifts made (over £3,000) for at least seven years
• Details of any significant gifts or bequests received for perhaps six/seven years
• Annual valuations of pensions, life assurance etc – this is a good chance to review how these are performing as well

Do you provide a pool car for your employees?

The tax treatment of company cars is such that it is often very beneficial to argue that a car is a ‘pool car’. This generally means that no individual employee is taxed on a benefit in kind for the car. However, if you want this treatment it is vital that you meet the conditions for this treatment, two important of these are that it is not ordinarily used by one employee and that it is not normally kept at or near the residence of an employee. Even if you meet these rules and treat the car as a pool car, it is still almost impossible for a normal business (not a taxi/car hire/driving school/car sales business) to reclaim the VAT on a car (as opposed to a van) – the VAT conditions are based around the car not being ‘available’ for private use, a very strict test.

Will your business qualify for the NIC holiday, and how much would it be worth?

Despite being announced in the budget, full details of the scheme were only published on Friday 30^th August.

If you started a new business on or after 22 June 2010 or plan to do so before 5 September 2013 you should qualify for this holiday if you start your business outside Greater London, the South East and the East. There are rules about what qualifies as a new business and to stop you taking a few months off and then restarting in business. There are also special rules for some types of business (particularly farming). When considering location you look at the Principal Place of Business and regions are defined by local authority areas – as an example Hampshire is excluded but Dorset qualifies.

The scheme gives you twelve months exemption from Employers Class 1 National Insurance Contributions on the first ten employees taken on provided they start within the first twelve months of the new business. Employers NIC is currently charged at 12.8% of earnings over £110 per week. There is a cap on the NIC holiday of £5,000 per employee, so it could be worth £50,000. As an example, if you take on an employee earning £30,000 you will save £3,100 over the first year, while for an employee on £20,000, this saving is £1,800.

There is press coverage about taxpayers being hit with tax bills of £1,500. Why this happened and will you be affected?

Employees (rather than the self-employed) pay their tax through the PAYE system where employers deduct tax from their monthly or weekly pay, based on a ‘PAYE Code’ provided by HM Revenue & Customs (HMRC). The same system applies for pensioners receiving private or company pensions.

For all but the very simplest of cases the system relies on making estimates of benefits, pension contributions, other income when setting the PAYE Code. The position should then be checked and amended to reflect the actual figures after the end of the tax year (5 April). Because of an upgrade to the HMRC computer system last autumn, the figures are only now being checked for some 2007/8 cases and for most 2008/9 cases. Also the new computer is identifying errors not highlighted by the old system.

The people most likely to be affected are those with multiple jobs/pensions or with benefits in kind (e.g. company car/van or medical insurance), who have changed jobs or have had gaps in employment, pensioners with incomes between £20,000 and £30,000. Taxpayers who submit a Tax Return each year should not be directly affected by these as submitting the Return should ensure any errors get identified each year anyway.

If you receive a refund, be pleased but do check why it has arisen – HMRC do make mistakes (as we see here) and you do not want to be asked to refund this later.

If you receive a notice that you owe tax, it is likely to be collected through your salary from April 2011 to March 2012. If more than £2,000 is due you may be asked to pay immediately. First you should check the figures or get someone to do this for you. The notes sent with the calculation will help you do this, but you could ask an accountant to help, your employer may be willing to do so and for low earners and pensioners there are Advice services who can help (Tax Help for Older People; Tax Aid; Citizen’s Advice). If the tax relates to 2008/9 or earlier, you believe that HMRC had all the information they needed to get things right and it was ‘reasonable’ for you to believe your tax affairs were in order you can ask them not to collect the tax. Also if asked to pay now (because more than £2,000 is due) you can ask for a ‘payment arrangement’ where you pay off over a number of months. If you do nothing you will either see the change to your pay in April next year or get demands to pay the tax.

If HMRC delaying repaying overpaid VAT to you, are you due interest on the payment?

You will not be due interest on the repayment when it is made, but there are rules meaning that if HMRC take more than 30 days to make the repayment you may be entitled to a fixed Repayment Supplement of 5% of the refund. However, in calculating the 30 day period you have to exclude the time taken to raise and answer ‘reasonable enquiries’ into the Return. Therefore there are two things to bear in mind: firstly try and deal with any questions promptly (and accurately), it will speed up your repayment; secondly, if HMRC appear to have taken more than 30 days take professional advice about whether you should be getting the Repayment Supplement.

PAYE late payment penalties and the new regime

From April 2010 a new set of penalties came in for PAYE and NIC payments by employers. HM Revenue and Customs have recently sent out the first batch of warning notices to employers who were late paying their PAYE for April 2010 (month ending 5 May). If you continue to pay late you could incur a penalty of up to 4% of the amount you pay late depending how many times you are late during the tax year. If you pay more than six months late you could incur a further 5% penalty.

We currently understand that the penalties will not be issued automatically by the HMRC computer during the year but after 6 April 2011, HM Revenue and Customs will undertake a manual review of late payments and issue penalties manually on a risk-assessed basis. Although we have heard comments that the penalties will be applied ‘gently’ to begin with, we do not know how this will be applied in practice.

To minimise the risk of penalties you should:

• Pay your PAYE/NIC on time if at all possible
• If you are struggling to pay agree a formal Payment Plan with HMRC, if you keep to this the penalty will not arise
• If you are notified of a late payment and believe you have a ‘reasonable excuse’ for the late payment, appeal against the notice or penalty as soon as possible. This can remove or reduce the amount of the penalty

Starting a new business? Will you benefit from the National Insurance Holiday

HM Revenue and Customs have only announced limited details of the scheme but if you start a new business outside the London, East and South East regions in the three years from 23 June 2010 you should be entitled to a twelve month ‘holiday’ from Employers National Insurance contributions (currently at 12.8%) on your first ten employees. The amount of this is capped at £5,000 per employee. It could therefore be worth £50,000 to a new business.

We do not have full details of the scheme but the initial guidance issued by HMRC (http://www.hmrc.gov.uk/budget2010/nics-hol-qa-7076.htm) suggests that there will be rules to prevent abuse and these will restrict what constitutes a ‘new business’, who will qualify as an ‘employee’, which types of business will not qualify for the scheme (coal, agriculture, fisheries, agencies providing staff have all been mentioned).

The latest information we have is that the scheme should formally begin on 6 September 2010 (but new businesses commencing on or after 23 June will qualify from 6 September 2010).

If you are thinking of setting up a new business, you should be careful how much this holiday influences your decision. If your proposal and business plan show a viable business anyway, this could be a pleasant ‘bonus’ to help you early on. However, if your business plan shows that things are marginal, you should be careful allowing this to tip the balance, particularly whilst the detailed rules have not been announced.

Do you need to send PAYE Returns to HMRC on a monthly basis as a small business?

Small employers have the option to elect to pay their PAYE/NIC to HM Revenue & Customs on a quarterly basis and if they elect to do so they are also able to submit a quarterly return of the amounts due. In order to qualify for this arrangement you must have a monthly PAYE/NIC payment of less that £1,500. The actual rules say that you must have a ‘reasonable expectation’ that the average monthly amount will be less than £1,500. I would normally recommend that employers take advantage of this arrangement where eligible because it reduces the returns and payments due and therefore the number of times you risk a penalty by submitting a return or making a payment late.