Should you be paying VAT to HMRC when your customers have not paid you?

There are provisions which allow you to reclaim the VAT you have paid to HMRC if your customer has not paid you within six months of the due date of the invoice. It is always sensible to keep your list of debtors under review to identify these items and reduce the amount you pay to HMRC in a later VAT period accordingly. Of course you have to pay over the VAT again later on when the customer pays you

There are a couple of warnings to be aware of as : you must document the write off for VAT purposes and must not have factored the debt.

The other side of these rules are that you need to remember that if you have not paid a supplier six months after the due date of an invoice, you must adjust your next VAT Return for the VAT you have not paid to the supplier. Again you reclaim when you actually pay. It is easy to overlook this and very easy for a VAT Officer to find this type of error on an inspection

If you are a small business (with a turnover of less than £1,350,000) you can join the cash accounting scheme where you deal your VAT according to when your customers pay you or when you pay your suppliers. If you invoice your customers and have to wait for them to pay you, this can be much better for your business cashflow. You do need to be careful that you deal with any changes in the VAT rate (as in January) properly, but otherwise the scheme is easy to operate.

Did you receive your tax return last month and whats changed?

The basics are the same as last year :

- if you fill in the paper form you must return the complete return by 31 October 2011

- if you complete and submit an ‘on-line’ form you must submit this by 31 January 2012

Again as usual, if you are completing a paper form check early on that you have the right pages for your employments, self-employments, capital gains etc. It will take a few days to get these through if you have to telephone HM Revenue & Customs for them (the number is on page two of the Return).

If you are completing on-line and using the HMRC service for the first time, make sure you request and activate your access codes well in advance of the deadline. Again it take a week or more to get these through if you do not have them.

If you are using an accountant it is likely that they will use commercial software to prepare and submit your Tax Return avoiding some of these problems.

The big change this year is that if you are due to submit a Tax Return and this is submitted late you will be charged a penalty of £100 even if you have paid all your tax or are due a refund. If you are more than three months late a further penalty of £10 per day will be charged for the next 90 days. If you are struggling to obtain part of the information you should consider submitting the Return with an estimate – just make sure you tick box 20 and provide the accurate information as soon as you can.

If you are unable to meet the filing deadline and think you may have a ‘reasonable excuse’ you may be able to get the penalty cancelled. Relying on this should always be a last resort and if you think you need help with your Tax Return, it is vital to arrange this early and not leave it until just before the filing deadline.

Could your business claim Research & Development Tax Credits?

R&D Tax Credits are an ‘incentive’ through the Corporation Tax system to encourage companies to undertake Research and Development. There are two schemes :

Under the large company scheme (companies with over 500 employees) where the company gets a tax deduction for 130% of the costs (so an extra 30% of tax relief).

Under the SME scheme (companies with under 500 employees) where the company gets a tax deduction for 175% of the costs. Under the SME scheme, the company (if loss-making) may be able to get a cash refund of 24% of the costs (there are other restrictions on this cash refund as well).

The key rules are that the company must spend at least £10,000 on R&D. An R&D project must seek to achieve and advance in science or technology and directly contribute to this through the resolution of scientific or technological uncertainty. This does not have to be something completely new, but can be an appreciable improvement to an existing process, material, product or service. It must however be an increase in overall knowledge not just the companies own knowledge.

The key costs which can be claimed under the scheme are staff costs, sub-contract costs, direct material costs, fuel and power costs.

This is a complex area, but there will definitely be cases where companies may have activities which potentially fall within the definitions of R&D but they do not consider the possibility of a claim. In some cases, their accountants may not have been given or perhaps asked for sufficient detailed knowledge of the company’s activities – they do not therefore highlight the opportunity either. If you do any development work on products, software, production processes, you should always discuss this with your accountant to see if a claim is possible.

When will you get your state pension?

As I am sure you are aware, historically men could take their state pension from age 65 and women from age 60. From April 2010 a process began to increase the age or women from 60 to 65. This change means that women born between April 1950 and April 1955 would retire later than they expected between May 2010 and April 2020.

The new proposals are that women born between April 1953 and December 1953 will have their State Pension delayed by up to a further 16 months. Men and women born between December 1953 and April 1954 will also have their State Pension delayed further. There are then future changes to increase the state pension age to 67 and then 68.

You can check for your actual State Pension age (based on your date of birth) at

http://pensions.direct.gov.uk/en/state-pension-age-calculator/home.asp

and see the new proposals in detail at

http://www.direct.gov.uk/en/Nl1/Newsroom/SpendingReview/DG_192159

Building Contractors and Developers failing to submit CIS Returns. What to do to avoid problems?

There are two different problems here. Firstly, contractors within the construction industry must submit monthly returns of their payments to and income tax deductions from sub-contractors. Secondly, sub-contractors may benefit from ‘gross status’ whereby the have no tax deducted from payments made to them.

For the contractor filing returns, it is vital that the monthly returns are filed on time (e.g. for return to 5 February by 19 February). If the return is late there is a penalty due which starts at £100 for each return which is late. Under current rules this increases by £100 each month until the return is 12 months late making a penalty of potentially £1,200 for each late return! New rules come in from November 2011 which changes the rules but, penalties can still be significant. There are further penalties if the tax which has been deducted is not paid over on time.

There are three things a contractor can do to avoid or minimse these penalties : (1) make sure they have processes in place to ensure that the Returns are filed on time and tax paid over when due and (2) if either a return or payment is made late due to unforeseen circumstances or events outside the contractors control, make sure that an prompt appeal is made that there was a ‘reasonable excuse’ for the delay. (3) if the new rules give a lower penalty, you can ask HMRC to apply these early.

For the sub-contractor with ‘gross status’ it is important that all the sub-contractors tax returns are submitted on time and all tax payments made on time. If the sub-contractor fails to do this they can lose this status and would then have 20% income tax deducted from all payments made to them by the contractors for whom they work – a very negative impact on their cashflow. This is a very wide field and includes a company’s Corporation Tax obligations, PAYE/CIS obligations and if a partnership/sole trade the individuals own Self Assessment Tax Returns. Some occasional minor delays can be overlooked, but it is dangerous to rely on this. Again if there are unforeseen circumstances behind the late payment or return, an appeal can be made on the grounds of ‘reasonable excuse’.

If you are a contractor or sub-contractor in the position where returns or payments are late and you think you have reasonable excuse, it is important to properly present your case to HM Revenue & Customs (or on appeal to the Tax Tribunal). The way the facts are presented can be important to whether the penalty is withdrawn or you keep your gross payment status.

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).