Working from home if you are a sole trader

The perfect work life balance is the ultimate goal for most of the working population. For many, the expectation of an instant response to emails and messages, comes the reality that your working day rarely finishes when you step through your front door.

However, many business owners are using these advances in technology to their advantage. Your business can now run smoothly, wherever you are. If you are using cloud software, you can send emails, raise invoices and check your bank balance from the comfort of your sofa, with a cup of tea in hand.

So, if you are not renting an office, what expenses can you include on your tax return? Well, that depends on your situation.

One option would be to use simplified expenses set out by HMRC. This means you don’t have to work out the proportion of personal and business use for your home:

 

Hours of business use per month Flat rate per month
25 to 50 £10
51 to 100 £18
101 and more £26

However, if you feel that these amounts are falling far short of reality, then an alternative would be to claim a portion of the costs you have actually incurred in running your home.

Should HMRC ever come knocking at your door, you need to be able to prove that you have used a reasonable method of dividing your household bills better business and personal use.

If you would like Courts Accountants to assist you in the area, please do not hesitate to contact a member of the team on 01280 875 250 for further information.

Special VAT rules when selling goods online?

A VAT-registered UK supplier should charge UK VAT on all UK sales and sales to unregistered entities and individuals in other EU states. However, if a UK supplier exceeds the distance selling threshold for another EU state, they will be required to register for and account for VAT in that state instead of applying UK VAT. Sales to a VAT-registered customer in another state should be zero rated, supported by evidence of the customer’s VAT registration and shipping of the goods from the UK – the customer will account for acquisition tax in their own member state.

Goods sent outside the EU should be zero rated, evidence of exports required to support zero rating.

An EU supplier selling to individuals in the UK should account for output VAT in its own country. However, if the EU supplier exceeds the UK distance selling threshold (currently £70,000), they will be required to register in the UK and account for output tax here.

An EU supplier selling to a VAT-registered UK entity should zero rate the supply, with the customer accounting for acquisition tax.

When the supplier is based outside the E.U, and has no business establishment in the E.U  but sell goods stored in the UK to UK consumers then they are required to register here as an overseas seller, there is a nil threshold for registration in these circumstances.

Delivery charges and packaging

Charges for postage and normal functional packaging follow the overall liability of the supply, e.g. zero-rated for children’s clothing and standard-rated for adults’ clothing.  If the supply contains goods subject to differing rates of VAT an appropriate apportionment of the postage and packaging charge will be required.

Gift-wrapping is a separate supply of services, and is always standard rated.

Tax on Christmas parties?

The Christmas party will come under the business entertainment rules.  If the party is for employees only, then input tax on the costs of the party can be recovered, subject to the normal partial exemption rules, even if it is more expensive than normal.  If the directors attend the party with the other staff then the input tax on the costs is still recoverable.  However, if the directors are the shareholders in the company and have a separate party for themselves then VAT on that would not be recoverable as there would be no business purpose.  HMRC’s rationale for this is that the owners of the business receive the profits of the business and don’t need the reward or motivation of a party.  If guests who are not employees attend the party then the input tax will need to be apportioned between employees and non-employees, as input tax recovery for entertaining non-employees is blocked.

Input tax is claimable on gifts whether they are for employees or clients. There is no need to account for output tax on the cost of the goods given as gifts, as long as the total VAT exclusive cost of business gifts to the same person in any 12-month period does not exceed £50.  If the gifts are going to be more lavish than normal this year, then the client will first need to check that none will exceed the £50 limit.  They also need to take care if, for example, new customers received a gift of goods at the time of signing up to their contract which when combined with the Christmas gift bring the cost to more than £50.  If the total value of gifts to any one person within the 12 months period does exceed £50 then your client should account for output tax on the cost value of all the gifts given to that person.

Buying your own shares

For example: A client is a director and shareholder of a civil engineering company.  He would like to retire from the business and hand over to his son who is currently a minority shareholder.  His son does not have the cash to buy his father’s shares directly, however, the company is cash rich.  Is it possible to use the cash in the company?  What are the tax consequences?

In this situation where the company has sufficient cash, it would be appropriate to consider the rules for purchase of own shares.  The Companies Act 2006 provides authority for a company to buy back its own shares, subject to various conditions.  Such a purchase would normally be classified as a distribution for an individual shareholder however provided specific conditions are fulfilled, certain payments on the redemption or repurchase by a company of its own shares will not be treated as distributions for individuals.  Most buybacks will, therefore, result in an income tax charge arising on the distribution, and to the extent that the proceeds exceed the repayment of share capital an income tax charge will arise at the shareholder’s marginal dividend rate.

Where relevant conditions are met, the company purchase of own shares would not be considered an income distribution and capital treatment would apply.  Therefore, the client would be realising a capital disposal and potentially be able to take advantage of a claim to entrepreneur’s relief and as such reduce the tax charge to 10%.

Capital treatment can only apply to unquoted trading companies (or unquoted holding companies of trading groups).  The buy-back must also be for the benefit of the trade and it must not be for the avoidance of tax.  The ‘benefit of a trade’ requirement can be particularly subjective and HMRC have offered guidance on this point.  A shareholder looking to exit a business may fall within the definition of ‘for the benefit of the trade’.

There are further conditions to be met and all of these conditions must be met for capital treatment to apply.

The first condition is that the individual selling his shares must be UK resident in the tax year of the buyback.

The shareholder must also have held his shares for five years prior to the buy back.  If the shares were received from a spouse or civil partner the length in ownership is the aggregate.  This period is reduced to three years if the shares were acquired by will or intestacy.

The purchase of the shares must substantially reduce the seller’s interest in the company.  An interest is taken to be substantially reduced if it is not more than 75% of the seller’s interest prior to the transaction taking place.

Immediately after the transaction, the seller must not be connected with the company making the purchase.  A person is connected with the company where they, together with their associates, hold 30% or more of the issued ordinary share or loan capital, including 30% of the voting rights or rights to assets on a winding up.

Where all of the above conditions are satisfied, the receipt is not an income distribution.  Instead, the price paid by the company for the shares will be the proceeds for capital gains tax purposes.  Should entrepreneur’s relief apply, the gain will be taxed at the reduced rate of 10%.

Increased living wage!

From 6 November 2017, the voluntary UK living wage has increased from £8.45 to £8.75 per hour. The London living wage has increased from £9.75 to £10.20 per hour; the first time minimum wage has topped £10 an hour. The rates apply to all workers aged over 18.

On the first Monday in November each year, the voluntary living wage is increased. This provides a pay rise for over 150,000 workers, however, not everyone will have to increase their staffs’ pay.

The living wage is a voluntary scheme ran by the Living Wage Foundation. The campaign group sets minimum rates of pay based on the “real cost of living” calculated using factors such as the price of travel, accommodation and household goods. There are separate rates depending on whether the individual works in London or not, to take in to account the higher cost of living in the capital.

There are currently around 3,600 organisations who have joined the scheme, including many large employers such as Heathrow Airport, Google and IKEA. Due to the voluntary nature of the scheme, employers have up to six months to start paying the higher rates, with workers receiving the increased hourly pay rate by the following May at the latest.

The annual November increases to the voluntary living wage do not affect the statutory minimum wage rates. The National Living Wage, the minimum rate for workers aged 25 and over, remains at £7.50 per hour and the National Minimum Wage rates also remain unchanged. This discrepancy means a 25-year-old worker will receive £2.70 more per hour if they work for a living wage employer.

The government will continue to review and update the statutory minimum wage rates each year, following recommendations from the Low Pay Commission. All increases will now take place each April, with the first consolidated increase set to apply from April 2018.

Claiming VAT on a barn conversion

The DIY scheme is a means by which a person is able to recover the VAT incurred on the construction of a new dwelling for occupation by themselves or their family.  This occupation can be a main residence or as a second home.  This was not always HMRC’s policy but has been since 2010 following the decision in the VAT tribunal of Mrs Irene Susan Jennings.  The change in policy was confirmed in Brief 29/2010, published at the time.

The documentation and guidance on the DIY scheme for conversions are Form VAT431C and the accompanying notes.  It is important to note the three-month time limit; this is counted from practical completion of the building and is strictly applied by HMRC.

If on the other hand, the intention is for the property to be a holiday let rather than for their own use, then this would be a business purpose and the DIY scheme is not appropriate.  In this situation, the client would be entitled to register for VAT to recover the VAT incurred as input tax and would be required to account for output tax on the lets.

NEW Important HMRC changes

HM Revenue & Customs issued an updated Notice 741A: Place of Supply of Services on the 1st November 2017.

The Notice has been updated with reference to changes to the ‘use and enjoyment’ provisions for telecommunication services provided to non-business customers (B-C).

For business to business (B-B) supplies the rules are unchanged.  The place of supply is where the customer belongs, subject to the use and enjoyment provisions. For B-C supplies the use and enjoyment provisions have been removed.  The use and enjoyment provisions apply where under the general rule the place of supply would be in the UK but the service is actually consumed to some extent outside the EU, or where the place of supply would be outside the EU but the service is consumed in the UK.

B-C rules up to 31 October 2017

Previously, B2C supplies of telecoms to UK residents in the UK were subject to UK VAT; however, if a UK resident used telecoms services outside the EU which were under a contract with a UK provider, those services were outside the scope of UK VAT because the use and enjoyment were outside the EU.

Those telecoms services used in the UK by a visitor from outside the EU were also subject to UK VAT – examples of these services are the use of a hotel phone or a payphone. However, telecoms services used in the UK were ignored if they were part of an established telephone contract, supplied to a non-EU temporary visitor and HMRC were satisfied these conditions were not subject to any abuse.

The change from 1 November 2017

 Supplies of B-C telecoms services by UK suppliers to UK residents are now subject to UK VAT irrespective of where those services are used.

Those supplies to visitors from countries outside the EU are outside the scope and no longer subject to UK VAT.

For UK suppliers of telecoms services, this should simplify their VAT accounting, although they do still need to consider where businesses use their services and apply an apportionment where the customer is using the service both in the UK and outside the EU.

IMPORTANT CASE DECISIONS IN THE WORLD OF VAT

Shields and Sons Partnership (C-262/16)

This case was supported by Croner Taxwise’s Fee Protection and concerns the agricultural flat rate scheme (AFRS). HMRC compared the taxpayer’s AFRS income (4%) with ‘normal’ VAT accounting and withdrew the taxpayer from the scheme because they considered it to be too beneficial. The First Tier Tribunal held that HMRC had the power to do so, but the Upper Tribunal referred the matter to the European Court of Justice (ECJ). The ECJ held that a Member State may not withdraw use of the AFRS on those grounds. A Member State must define in advance the categories of farmers that are to be excluded from the AFRS so that individual farmers are able to decide whether they are, or are likely to be, excluded from the AFRS.

The English Bridge Union Limited (C-90/16)

The ECJ has held that they do not consider the game of duplicate bridge to fall within the VAT exemption for a sporting activity. The English Bridge Union had put forward their argument that it was a sport for VAT purposes as it promoted physical and mental well-being. The ECJ decided that for an activity to be a sport it must have a significant physical element which the card game did not have.

Praesto Consulting [2017] UKUT 395 (TCC)

This case concerned recovery of VAT incurred on litigation costs. Praesto had paid legal fees in relation to civil proceedings brought against its director by his former employer, CSP, which was also a competitor. Praesto claimed input tax on the fees charged by the solicitor in defending the director. HMRC refused the claim on the grounds that the solicitor’s services were supplied to the director and not the company. The First-tier Tribunal allowed the taxpayer’s appeal. The Upper Tribunal took a different view and concluded that there was no direct or immediate link between the company and the solicitor and that the legal fees were incurred on proceedings brought against the director in his personal capacity.

The Queen’s Club Ltd [2017] UKFTT 700 (TC)

The Appellant is a renowned sports club. It refurbished an area used for catering in one of its clubhouses and sought to recover the VAT incurred. However, HMRC regarded the costs as attributable to both its exempt membership fees and its taxable catering income, meaning that the input tax would only be recoverable in part. The First Tier Tribunal concluded that there was no direct and immediate link between the restaurant and the decision of players to become members or to renew their membership. It considered that members were attracted only to the playing activities when they applied to join. The taxpayer’s appeal was allowed.

The Ice Rink Company Ltd & Anor [2017] UKFTT 698 (TC)

The issue in this case was whether supplies of admission to an ice skating rink and the hire of children’s ice-skates where sold as a package were single or multiple supplies. The First Tier Tribunal concluded that on the facts of this particular case the hire of skates and admission to an ice rink were two separate supplies for VAT purposes. The Appellants were therefore entitled to zero rate the amounts received for the hire of children’s skates.

Renting a house whilst away? Important info!

To give a bit of background the rent-a-room relief enables an individual to exempt, for the 2016/17 tax year, rental receipts up to £7,500 from income tax.  These rent-a-room gross receipts include not only rent but also services. The legislation gives examples of these services being meals, cleaning and laundry. Although you might be able to argue more, as long as it’s relevant.   Therefore you may include receipts under this scheme for not only the rent for the two weeks but also additional charges for linen or extra cleaning.

According to the legislation (ITTOIA 2005 s786 (1)) rent a room receipts are defined as, the use of furnished accommodation, in a residence, in the UK.  In addition, the residence has to be the individual’s only or main residence for some or all of the period. It doesn’t specify that they have to be living there at the same time as the lodgers.  As such if your client is renting out their main UK home, which we assume would already be furnished then these conditions would be covered.

However, would the whole home be covered? ITTOIA s2005 s787 specifies the meaning of residence as a building, or part of a building, occupied or intended to be occupied as a separate residence.  As such the legislation seems to indicate that it does not need to be just a room you are renting in order to take advantage of the rent a room reliefs, the lodgers could have the full run of the house.

NEWS UPDATES – TAX

Research & Development

HMRC has put together a collection of guidance on R&D which can be found here. It includes HMRC’s explanation of how R&D is defined, guidance on the different reliefs which can be claimed and a series of videos intended to give an overview of the subject.

Land Transaction Tax

The Welsh government has published rates and bands for the new Land Transaction Tax which replaces Stamp Duty Land Tax with effect from 1 April 2018 and which is claimed to be the first new Welsh tax for almost 800 years. It is intended that the slightly higher starting threshold of £150,000 will mean the average first time buyer will have no tax liability. Buyers of residential property costing up to £400,000 will pay the same or less tax than under SDLT. Full details can be found here.

Group Relief 

HMRC has published draft legislation and explanatory notes in connection with simplified arrangements for claims and surrenders of carried-forward losses. The documents can be found here.

Trading Income Allowance

The Association of Tax Technicians has pointed out that an existing sole trader who starts a new micro-business is unlikely to be able to benefit from the new £1,000 trading income exemption. On the other hand, an individual who is an employee or who trades in partnership will be able to carry on the same micro-business and qualify for the exemption in full which discriminates against the sole trader.

Credit Card Payments

HMRC has reminded taxpayers that they will no longer accept payments made by personal credit cards from 13 January 2018. Readers are also reminded that the Post Office payment facility is withdrawn from 15 December 2017.

Resolving Tax Disputes

HMRC has replaced the guidance on how they use their Litigation and Settlement Strategy (LSS) framework and on their code of governance for resolving tax disputes.