Raising invoices when VAT registration is pending

April 14, 2014

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Tax, Uncategorized, VAT

Can you raise an invoice before you have your VAT number?

Sometime it is necessary to raise sales invoices between registering VAT and the VAT number being sent out to you by HMRC. This leads to the problem of how you charge VAT when you don’t have a valid VAT number.

There is a solution but it’s a bit messy …

HMRC have some guidance on the matter here.

In short though you need to raise an invoice with your prices inflated by 20%, then say to your client that you will re-invoice the same amount with VAT on it once your number has come through.

So an example:

You have sold £100 worth of services to your client. Once VAT registered you would be charging £100 + £20 of VAT = £120.

Before the code arrives

Raise an invoice to your client for £120. Do not mention VAT at all on the invoice. It’s as if you are not registered for VAT and have sold £120 worth of services.

Tell your client in a covering email or in person that your VAT registration is pending and that you will raise an invoice for £120 that includes VAT as soon as you get your VAT number.

After the code arrives

Edit the earlier £120 invoice so that it includes your VAT number and is now for £100 + £20 VAT = £120 (ie. a normal invoice for a VAT registered business). Send this invoice to your client.

So it’s not totally straightforward but if you need the cash now it is better than waiting for your registration to come through.

Submission and payment dates for Corporation Tax

December 27, 2013

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Company Administration, Corporation Tax, Tax

Working from Home Expenses

December 19, 2013

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Expenses, Tax

Most Small Business owners and Contractors spend a fair amount of time working from home. In this post we explain the costs you can put through your Limited Company when doing this. Be warned the answers are generally disappointing.

Scale Rate of £4 a week

For Limited Company employees (such as Company Directors) HMRC allows you to claim a modest tax deductible expense for the costs incurred from working at home. This rate is currently £4 per week (ie. £208 per year).

This is the most common expense but there are some other considerations:

Buying Office Furniture through the Company

If you buy some equipment for your office that is moveable and clearly identifiable as property of the Company (as opposed to property of you) then you can buy the equipment through your Limited Company. An example would be a desk or a filing cabinet for your office.

What you can’t charge to the Company is home improvements. If you convert a garage to an office you couldn’t put these costs through your company. If you did so you would be saying the office/garage is now an asset of the Company.

You can see clearly how this doesn’t really make any sense. If you sold your house, it would mean you would be trying to sell an asset you don’t own (because your company owns it) or if the company went bankrupt it’s creditors would have a right to take ownership of your office/garage. So keep such purchases to simple moveable items. If you were to start renting an office from a third party and would move these items into it then it’s probably fair to assume they are reasonable business assets.

Marginal Cost Claims

If you can prove to HMRC that you have suffered additional costs as a result from working at home then these extra costs may also be claimed. Of course these claims only apply to costs incurred only as a result of working from home.

In practice proving costs like heating or electricity have increased due to working from home can be very difficult. You would have to prepare analysis showing the Kwh usage has increased before and after working from home. In most cases this is just not practical or worthwhile.

Leasing a room out to your company

One final option is officially having a room in your house dedicated as an office during working hours and leasing out the room to the company. This would have to be done officially with a signed lease agreement and could breach the terms of your rental contract or mortgage terms.

You would have to pay a personal tax on the money you charge for leasing out the room to the company. However you can allocate a portion of your home costs to the room you lease out and claim those as expenses in this case. There is a special formula in place to calculate this cost (Water bills + Electricity + Gas + Council tax + Rent/Mortgage interest + Home Insurance) / Number of rooms in house.

A final theoretical side effect is If you own the house and then choose to sell it having rented out a room to a company could impact your right to the normal Capital Gains tax relief.

We would not recommend this option as it’s too fraught with issues though we are aware that Contractors sometimes do this so wanted to explain it as an option.

This option is unusual and generally it’s just not worth it for the risks outlined.

Will I be eligible for State Pension and Benefits if paying myself minimum salary?

November 14, 2013

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Income Tax, Tax

This article was written during November 2013 and rules may have changed if you are reading this later. The thresholds mentioned will change slightly each year. You can see the current thresholds here – http://www.hmrc.gov.uk/rates/nic.htm

The Short Answer

Yes – as long as you are taking a salary of more than £5,668 per year you will get your National Insurance ‘stamps’ and eligibility for state benefits including the state pension.

The Question

If you are taking a minimum salary of £640 per month (for the 2013/14 tax year) you will not be paying any National Insurance. This leads some people to wonder whether they will remain entitled for the benefits that National Insurance bring.

Historically people have referred to this as getting their national insurance ‘stamps’.

What are the benefits?

The benefits that getting your National Insurance stamp bring includes:

Basic state pension
State second pension
Jobseeker’s Allowance – though not the ‘contribution based’ scheme.
Employment and Support Allowance
Maternity Allowance
Bereavement Benefits

How do I get ‘stamps’?

To be eligible for the above benefits you need to be earning a salary (not dividends or rental income but a salary) higher than what HMRC calls the Lower Earning Limit. In the 2013/14 tax year that was £109 per week (or £5,668 per year).

What’s strange and causes the confusion is that although this is the level where you start to generate the benefits the level where you actually start having to pay National Insurance Contributions is the ‘Primary Threshold’. In the 2013/14 tax year that was £146 per week (or £7,592 per year).

Most Ltd company owners set their salary just below the Primary Threshold so that they can minimise their tax, whilst still being eligible for benefits.

A note about state pensions

We would very strongly recommend that you make separate provisions for your retirement beyond the state pension. The finances of these schemes are a mess and it’s highly unlikely they will exist in their current form in twenty or so years.

References

You can find out much more about state benefits here – https://www.gov.uk/browse/benefits

What is an EC Sales List?

October 27, 2013

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Tax, VAT

If you are VAT registered and supply goods or services to another VAT registered business in a different EU country then you must report these supplies to HMRC in the form of an EC Sales List.

In this list you need to give information of the supplies you have made to them. If the value is over £35,000 per month then this needs to be completed each month. Otherwise an EC Sales List is only needed every three months. You need to provide

The VAT number of the customer you provided goods/services to (you must collect this!)
The country or countries you have supplied too
the Value of each of these goods or services provided in pound sterling (the total should match Box 8 in your VAT return, if it covers the same period)

Why do you need to fill one out?

HMRC want this information because firstly they want to build up statistics about how many, and which goods are traded between EU countries.

More importantly they will pass on the relevant information to the tax authorities of the countries you have supplied too who use it to check if your suppliers have been handling VAT correctly. If you receive goods from another EU country the reverse process happens where they fill out a sales list which gets passed on to HMRC.

Tips

Always collect the VAT number of your European business customers before you invoice them
Make the EC Sales List periods cover the same periods as your normal VAT returns. This will keep everything a lot simpler.
Make sure your EC Sales List match Box 8 of your VAT returns (HMRC will be doing that check!). Box 8 is your declaration of sales excluding VAT to EC Member States

Guide to Everyday Business Expenses

October 27, 2013

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Expenses, Must Reads, Tax

Introduction

This guide aims to provide a single resource for clients of Caprica Online Accountants to understand which expenses are tax deductible. The list is far from all-inclusive but does contain the everyday expenses.

Receipts should be kept to support all expense claims. In all cases expenses should be reasonable. HMRC will not accept a £20 claim for lunch everyday!

24 Month Rule (Contractors Only)

The 24-month rule dictates where your normal place of work is. If you have been travelling regularly (ie most days every week) to the same client location for 24 months then that location is deemed to be your normal place of work and you will no longer be able to claim expenses for meals at this location or for travel to this location.

This also applies if you have multiple clients in the same vicinity. For example if you have been working at Canary Wharf but for multiple clients for 24 months the rule will still apply.

The 24-month rule is forward looking. This means it applies as soon as it is expected that you will be at the same location for 24 months, whether firmly contracted or reasonably expected. For example if you have been working at a location for 18 months though a change to a project means that it will take a further 7 months to complete then you should cease making expense claims for meals and travel costs immediately.

Accommodation

Reasonable costs for hotel accommodation can be claimed as an expense when working away from home.

Christmas Party

Expenses for an annual Christmas party may be claimed up to a limit of £150.

Clothing

No clothing may be claimed for it could form part of an ‘every day’ wardrobe whether or not you would choose to wear it in a personal capacity. For example a business suit may not be claimed whereas protective clothing for use during work only could be claimed.

IT & Office Equipment

IT & office equipment may be deducted from profit (through capital allowances) to the extent that they are used for business purposes. If, for example, a laptop is used only 50% for work purposes then only 50% of the cost may be claimed.

Meal Allowance

Flat rate claims (eg £5 a day) are not permitted without special approval by HMRC. When working at a remote site or when staying away from home overnight claims can be made for that actual meal costs.

Training

Training costs relevant to the performance of your duties may be claimed.

Travel

Travel costs to and from a temporary place of work (see 24-month rule above) are allowable expenses:

Mileage rates are 45p per mile for the first 10,000 miles and 25p per mile thereafter. If you are driving a passenger you may claim a further 5p per mile (rates correct for 2011/12 tax year). Records detailing location travelled to and miles travelled must be kept for each claim. This cost assumes that you personally own your car (as opposed to the company owning it). If you want to know more about buying a car through your company please get in touch.
Parking, congestion charge and public transport costs can also be claimed with a valid receipt.
Parking fines or speeding fines may not be claimed.

Use of Home as Office

A flat rate fee of £4 per week may be claimed by home workers for use of the home for work purposes.

If it can be proven that marginal costs, that is the additional home costs suffered due to working from home, are more than £3 per week then the marginal cost may be claimed.

The burden of proof for such a claim is high and we would only suggest that these costs be claimed if the potential tax saving is significant.

Company cars vs the use of a personal car

October 27, 2013

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Expenses, Must Reads, Tax

Small business owners and Contractors that need to use a car for their business are faced with two options:

1. Charging their company for use of their personal car
2. Buying a company car

Below we outline the tax implications of each option.

The Short Answer

Company Cars incur disproportionally large amounts of income tax, whereas the HMRC approved mileage rate of 45p per mile for use of your own car is pretty generous. We recommend sticking to the mileage rate.

Use of your own car for business

Travel costs in a private vehicle to or from a temporary place of work are seen as an allowable expense by HMRC and they allow private vehicles to charge their company a flat rate based on the number of miles travelled.

The rates are:

– First 10,000 miles in a tax year at 45p per mile
– Any miles over 10,000 in a tax year at 25p per mile

So if you drive 12,000 miles between 6 April 2013 and 5 April 2014 (the tax year) you charge your company an expense claim of £4,500 (first 10,000 miles at 45 per mile) + £500 (the final 2,000 miles at 25p per mile) = £5,000.

Other car costs?

The rate of 45p per mile is normally far more than the actual fuel cost of travelling. This is because the mileage rate is deemed to include the extra costs of a car such as insurance, road tax and depreciation. As such no other costs related to the car can be charged to the company.

Information About Record Keeping

If you want to charge your company for mileage travelled you don’t have to keep petrol receipts but you must keep a log of all business trips including the distance and mileage travelled.

We’ve prepared a spreadsheet you can use to keep track of this here.

You’ll also need to enter the expense claims into your Xero account through the normal [Expense Claim] functionality, so if you prefer you can record the trip details in the description there. Like this:

Company Car

Alternatively your company can buy a new car and make this available for your use.

The cost of the car will be spread across

However owning a company car through the company means then HMRC will calculate ‘ a ‘benefit charge’ on the use of the vehicle.
Rather than being based on number of miles travelled, the government uses a number of different factors such as the cost of the car and the co2 emissions of the vehicle. You are also liable for an increased income tax and National insurance charge.

For this reason we have found that in nearly all cases for contractors, it is not beneficial to purchase a company car and it is tax efficient to use a personal car and then claim mileage from the company.

Basic Guide to VAT

February 18, 2013

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Tax, VAT

The mechanics of VAT under the standard VAT scheme

VAT on Sales

If you are VAT registered and selling VATable goods or services (most are) then you must add 20% VAT onto all your sales invoices. At the end of your VAT quarter (3 month period) you then have to hand over the total amount of VAT you have collected on your sales to HMRC.

On your sales invoices you must detail the exact amount of VAT being charged and also reference your VAT number.

VAT on Purchases

If you are VAT registered you are able to reclaim the VAT that you pay over to your suppliers through your quarterly VAT return.

To find out how much VAT you normally pay you can check your invoices and receipts. If there is any VAT to be reclaimed then the invoice will detail the amount you paid.

If you don’t have a valid VAT receipt then you can’t reclaim the VAT.

Do you need to register for VAT?

Most businesses must register for VAT if their total sales over the last twelve months exceed £77,000 (threshold as of February 2013).

If you are selling a product or service that is VAT exempt then these sales do not contribute to the £77,000. Most businesses do not sell exempt goods and services, generally the ones that do are providing what the government considers to be a social good, such as healthcare, public trasport, books and basic food. Financial services are also exempt.

Should you register for VAT even if you are below the threshold?

Just because you have sales of less than £77,000 doesn’t mean you can’t register. It may be advantageous for you to register. In order to decide you need to think about your sales and purchases.

If you are making sales to businesses rather than individuals then it’s likely that those businesses will be VAT registered and won’t mind if you charge them an extra 20% for VAT as they can just reclaim it back from HMRC. Whereas individuals who are not VAT registered won’t be able to claim back the VAT so won’t like the extra 20% charge at all.

The advantage of registering is that it means you can reclaim the VAT you hand over on your purchases. Unless your expenses are limited to public transport or international imports it’s likely you hand over some VAT from time to time.

So in short you will probably benefit from being registered for VAT if your customers are VAT registered themselves.

Different VAT schemes

Above we described the standard VAT scheme there are some variations that you might want to consider:

VAT Cash Accounting – Here you pay over the VAT in line with actual cash payments rather than invoices raised. In the standard scheme if you raise a sales invoice but haven’t been paid for it yet you must still hand over 20% to HMRC. Under cash accounting you only pay over what you have been paid yourself.

VAT Flat Rate Scheme – Under the Flat Rate Scheme you hand over a fixed percentage of your sales to HMRC but cannot claim any expenses (unless you buy some equipment costing more than £2,000). This tends to be extremely advantageous for businesses with very few outgoings, such as contractors. Read more about the Flat Rate Scheme here.

Basic Guide to Income Tax

February 12, 2013

2 Comments

Income Tax, Tax

This is a very basic guide to income tax written for those with no prior knowledge. Unfortunately real life is not so simple. there are many many ‘if this then this’ type situations in tax law so please consult an expert who knows about your full situation rather than relying solely on this information.

Thresholds and rates in this post are based on the 2013/14 tax year.

What is taxed as part of income tax?

Salary from employment
Profits of a trade carried out as a self-employed person (ie outside of a ltd company)
Pension income*
Bank interest*
Share dividends*
Rental income (from a buy to let, for example)*

* Considered ‘Investment Income’ which does not incur any National Insurance charges

Income tax rates

The following tax rates apply to those earning less than £100,000 per annum. If you are earning more, congratulations, then search google for ‘Personal Allowance over £100,000’.

£0 – £9,440	0%
£9,440 – £42,475	20%
£42,475 – £100,000	40%

As an example let’s say someone is earning a profit as a self-employed person of £20,000 and receives a rental income of £10,000 per year, so a total of £30,000. They would incur tax as follows:

The first £9,440 taxed at 0% = £0
£9,440 to £30,000 at 20% = £4,112
Total = £4,112

National Insurance when self-employed

Class 4 NICs

If you are self-employed in addition to income tax you must pay Class 4 National Insurance Contributions. The 2012/13 rates for these are:

£0 – £7,755	0%
£7,775 – £41,450	9%
£41,450 +	2%

So going back to our example. The self employed person earning a profit of £20,000 will have to pay:

The first £7,775 at 0% = £0
£7,776 to £20,000 at 9% = £2,444.80
Total = £12,224

Note that the rental income does not incur any national insurance.

Class 2 NICs

The self-employed must also pay Class 2 NICs. These are much cheaper at a flat rate of £2.70 per week.

National insurance when in full time employment

The full time employed pay Class 1 National Insurance. This will always be deducted from their salary via PAYE. So we won’t discuss it any further here.

Company dividends (they’re different)

We’ve previously written a very detailed guide to dividends for limited companies, which may help. In short though dividends have their own tax rates:

£0 – £42,475 (total earnings)	0%
£42,475 – £100,000 (total earnings)	25%

Two things to bear in mind are:

Add up all your earnings and then the dividends last. If you earn £40,000 from other sources and then earn £10,000 of dividends the first £2,475 will be at 0% (taking you up to £42,475) and then the remaining £7,525 will be taxed at 25%.
The dividend tax credit distorts the thresholds above. Read our dividend tax credit guide to learn more.

Income tax payments deadlines and tax return deadlines

The income tax year runs from 6 April to 5 April. So the most recent at the time of writing is 6 April 2012 to 5 April 2013 (known as 2012/13). Payment is then due in the following January (ie. 31 January 2014)

The deadline for submitting your income tax return (an SA100 in HMRC’s language) is due on the same date.

Payments on Account

You may also have to make Payments on Account, which are advance payments for the next tax year.

So when you come to pay your first (2012/13) tax bill on 31 January 2014 you will have to pay an extra 50% to cover the 2013/14 tax year and then the remaining 50% on 31 July 2014, all based on the assumption that next year’s tax bill will be the same as this year’s.

So this means the first time you pay income tax you will probably have to pay 150% of your tax bill!

How to claim back VAT on invoices from the EU

October 31, 2012

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Tax, VAT

As politicians like to remind us something like 50% of foreign UK trade is with the EU. So there is a good chance your small business buys goods or services from the EU.

If you are VAT registered in the UK you should always be able to reclaim VAT on these purchases. This can happen in one of two ways:

By providing your VAT number to the supplier so that they can raise a zero VAT invoice via the Reverse Charge scheme.
By subsequently reclaiming the VAT you were charged via the VAT EU Refunds scheme.

We’re focusing on the second here, which is what happens if you have paid for an invoice already and the supplier charged VAT at the relevant country of origin rate.

You cannot claim this VAT back via your standard quarterly return. Instead you must use a specific HMRC service that you have to register for using your HMRC Online gateway. If you’re already registered for VAT it will be easy to locate the link, it looks like this:

It will take a few weeks once you have enrolled for HMRC to send you a service activation code.

Then you are good to make a claim. You should bear in mind that there are minimum claims:

400 euro if your claim covers a period of more than three months but less than a year; and
50 euro if your claim covers a whole year or the remainder of a year (ie where your claim covers the whole period between the end of your last claim and the end of the year)

From there it’s just a case of following the instructions and making your claim.

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How Caprica Online Accountants can help

Online Accountants | Xero Accountants At Caprica Online Accountants provide all the VAT advice our clients need as part of our great fixed fee online accounting packages.

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