Tax Question Of The Week – SATR RE: Deceasced Person

I have a client with complicated affairs and who unexpectedly passed-away quite recently. As a consequence, I am unlikely to be able to arrange for the submission of his 2019/20 Self-Assessment tax return by the filing deadline of 31 January. I also have other clients for whom I will be unable to file their return for a variety of reasons. Can you please remind me of the potential penalties that would arise and any opportunities for mitigating these, particularly in the case of my deceased client?

Late Return Penalties

The potential late return penalties are structured as follows:

  • a £100 fixed penalty which arises regardless of whether any tax is actually due or unpaid at the date due
  • daily penalties of £10 per day which start to accrue after 3 months, subject to a maximum of £900
  • after 6 months of default, an additional penalty of 5% of the tax due or £300, if greater
  • if still outstanding after12 months, a further 5% or £300, whichever is greater.

In the case of my late-client, HMRC policy is not to impose late filing penalties where the taxpayer has died before the return due date. This is on the basis that HMRC “cannot show that the person on whom the notice was served has incurred any penalty because he or she died before it became due” and is explained in HMRC’s Self-Assessment Manual at paragraph SAM61270 and especially SAM99010 which covers agreeing on an extended filing deadline. HMRC should be made aware of the situation and the return then subsequently filed when possible. Remember that penalty notices are automatically generated and so it is likely that an appeal will have to be lodged quoting the above guidance.

An appeal can be made against a penalty on the basis of having a “reasonable excuse”. This is broadly defined as circumstances that prevented filing, for example, illness of the client or a close relative, or loss of business records due to theft, fire, etc. The conditions preventing filing must continue throughout the default period, i.e. the period from the due date to the actual filing date (para 23, Sch 55, FA 2009, CH61500).

HMRC do have a discretionary power to withdraw the requirement to file a return where, for example, it is issued in error, or they agree it is not required. If agreed by HMRC, any penalties related to the return in question would cease to apply.  The time limit for withdrawal of notice to make a return is 2 years from the end of the tax year concerned, i.e. by 5 April 2022 for the 19/20 return. This can be done either at the request of the taxpayer or agent or otherwise at HMRC’s own discretion (s.8B TMA 1970, SAM120115.

Provisional Tax Returns

Depending on the complexity of the return and the information currently held, it may be possible to file a provisional return which can be amended later. HMRC’s guidance is contained in SAM121190 and on page TRG14 of the Tax Return Guide SA150.

 Late payment penalties (Sch 56 FA 2009, CH150000)

Additional penalties apply in the case of late payment of tax as follows:

  • 5% of the amount of tax unpaid 30 days after the payment due date;
  • further penalties of 5% of any amounts of tax still unpaid at six months;
  • further penalties of 5% of any amounts of tax still unpaid at 12 months

Note that there is no published equivalent for late payment penalties of HMRC’s “special treatment” for late filing penalties in deceased cases outlined above– so consideration should be given to making a provisional payment on an estimated basis in the case you refer to above. However, no penalty will be chargeable if HMRC agrees there is a reasonable excuse for the failure to pay on time – see CH155550.

VAT Question of the Week – VAT Myths

Myth busting!  – 5 VAT questions and misconceptions we hear regularly in calls to the Croner Taxwise VAT team

Client is adamant that their car dealer has advised them that VAT incurred on the purchase of an electric car is recoverable in full.

❌ Myth! An electric car is no different to a car which runs on any other fuel; input tax is blocked from recovery unless the car meets one of the exception conditions detailed in VAT Notice 700/64, section 3, summarised briefly below:-

The Exceptions are for a car which:

  • is stock in trade of a motor manufacturer or dealer
  • is intended to be used primarily as a taxi, for driving instruction, or for self-drive hire
  • will be used exclusively for the purposes of the business and would not be made available for the private use of anyone

A building or a piece of land is itself opted to tax, and that option continues after the building is transferred to a new owner.

❌ Myth! It is not the land or building which is opted to tax, but the “interest in” that land or building held by the entity which has made the decision to opt to tax, and the option to tax is only binding on that entity, or a relevant associate of theirs in a VAT group situation. An ‘interest in’ property means any interest in, right over or licence to occupy property.

In most cases the decision to opt to tax is driven by the wish to recover input tax incurred in relation to the building, but can also be a requirement for the purchaser of a building opted to tax by the seller, to acquire it “VAT free” as part of the transfer of a business as a going concern.

To illustrate this point: if the landlord of a building has opted to tax, that option does not flow through to the tenants. If the tenant is subletting, and wants the rent they receive to be taxable income, they will need to notify HMRC of their own option.

Detailed information on Opting to Tax Land and Buildings is provided by HMRC in VAT Notice 742A

The conditions required to be met when transferring property as part of a transfer of a going concern are covered in section 2.3 of VAT Notice 700/9.

Exempt and outside-the-scope supplies of goods and services do not form part of taxable turnover for VAT registration or Making Tax Digital threshold purposes, but zero rated supplies of goods or services do (including exports).

✔ Correct! Taxable Turnover includes supplies of goods and services at the standard, reduced and zero rate of VAT. Exempt supplies are not taxable supplies.

Examples of outside-the-scope supplies are:-

  • Business to business services supplied to customers outside the UK which under the place of supply of service rules are supplied where the customer belongs (See VAT Notice 741A),
  • Supplies of goods which never come into the UK, e.g. goods purchased from a supplier with stock held outside the UK and delivered direct to a customer’s premises outside the UK.

Both the above are examples of “supplies which would be taxable if made in the UK” but as the supplies are not made in the UK, they do not count as taxable turnover in the UK.

Exempt and zero rated supplies are both included when calculating the gross turnover on which VAT is to be declared on the Flat Rate Scheme (FRS). Outside-the-scope supplies of goods and services are not.

✔ Correct! It is a common misconception that exempt supplies in particular are excluded from the FRS turnover calculation. This often catches out FRS users with property letting income.

Information on supplies to be included/excluded from FRS Turnover is provided in the Flat Rate Scheme VAT Notice 733 Sections 6.2 and 6.3.

Expense recharges are disbursements.

❌ Myth! When a consultant or any other kind of businesses recharges the costs it has itself incurred in the course of providing its services to its customers, that recharge is not a disbursement.

As per HMRC guidance on disbursements in section 25 of Notice 700: The VAT Guide, a disbursement is the result of acting as a disclosed agent between your customer and a third party to facilitate a supply of goods or services between those parties, and the supply made must be used by your customer – not by you!  There are eight conditions which need to be met for a payment made to a third party on behalf of your client to be treated as a disbursement:-

  • you acted as the agent of your client when you paid the third party
  • your client actually received and used the goods or services provided by the third party (this condition usually prevents the agent’s own travelling and subsistence expenses, phone bills, postage, and other costs being treated as disbursements for VAT purposes)
  • your client was responsible for paying the third party (examples include estate duty and Stamp Duty payable by your client on a contract to be made by the client)
  • your client authorised you to make the payment on their behalf
  • your client knew that the goods or services you paid for would be provided by a third party
  • your outlay will be separately itemised when you invoice your client
  • you recover only the exact amount which you paid to the third party
  • the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account

Recharges of a business’s own travel, subsistence or other costs are not disbursements – the customer is not using the transport, eating the meal or doing the miles in the case of a mileage rate. The recharge is correctly treated as further consideration for the goods or services supplied. In the case of a consultant, the fee for the job is in effect a daily rate for the job plus costs.

 

HR Expert: Keeping in contact on Maternity Leave

Q- My client runs a small business and has an employee that is about to go off for a year on maternity leave and want to know if they are allowed to contact the employee during her leave. Are there any rules on this? 

A- Business owners can often feel uneasy at the prospect of communicating with staff during a period of leave, however, my client should understand that keeping in contact with an employee on maternity leave is perfectly acceptable and widely encouraged.

Read More

What Does a VAT Invoice Need to Include?

The VAT invoice is probably the most important document for VAT purposes. In order to be a valid VAT invoice it must show all of the following information as listed in SI 1995/2518 reg 14: SI 1995/2518, Reg. 14
• A sequential identifying invoice number;
• The date of the supply;
• The date when this VAT invoice is being issued;
• The supplier’s name and address and the supplier’s VAT registration number;
• The name and address of the person to whom the goods or services are supplied;
• A description sufficient to identify the goods or services being supplied;
• The quantity of goods or the extent of services supplied, the rate of VAT
applicable and the amount that is being charged, which is net of VAT;
• The total amount being charged, net of VAT;
• The rate of any discount offered;
• The total amount of tax chargeable, expressed in sterling;
• The unit price;
• Reference to margin scheme if appropriate;
• Where the person supplied is liable to pay the VAT, a relevant reference to that effect (eg reverse charge or acquisition).
Where a VAT invoice is required, the trader has an obligation to issue the tax invoice within 30 days after the tax point.

Simplified Invoices:
From 1 January 2013, in any case where the consideration for a supply does not exceed £250, the VAT invoice that a registered person is required to provide need contain only the following particulars:
• The name, address and registration number of the supplier.
• The time of the supply.
• A description sufficient to identify the goods or services supplied.
• The total amount payable including VAT.
• For each rate of VAT chargeable, the gross amount payable including VAT,
and the VAT rate applicable. SI 1995/2518, Reg. 16A

Tax Question of the Week: Deemed Domicile and Remittance Basis

Q- Pilar came to the UK when she began working here in autumn 2002. She was born with Spanish domicile and intends to retire to Barcelona where she grew up. When she moved to the UK, she continued to keep a modest amount of savings in a deposit account in Spain. As she has sufficient income from her work in the UK, she doesn’t normally draw on the offshore bank account. Now that it is time to prepare a Self-Assessment Tax Return for 2017/18, the question has arisen of how the taxing of the offshore interest has been affected by the rule to deem people to have UK domicile being extended to Income Tax and Capital Gains Tax.

 

A- Pilar will be deemed to be UK domiciled for the year 2017/18 because she has been UK resident for 15 of the 20 years immediately preceding it. This means that she is not able to make a claim to use the remittance basis in 2017/18. However, it is worth noting that this deeming rule, which can be found in the Income Tax Act 2007 at section 835BA is not the end of applying the remittance basis to offshore income and gains in all circumstances. Read More

HR Expert: Wrongly Classed as Self-Employed

Q- My client has heard several stories in the news about ‘workers’ being owed compensation after being wrongly classed as ‘self-employed’. How can they be sure they have got the employment status of their own staff correct? 

A- Understanding employment status can be tricky at times, particularly for those who work in the gig economy. In light of recent cases, my client is advised to review their business practices to ensure they are acting in accordance with the law.

To determine the employment status of their staff myclient will need to carry out the appropriate employment status test. This will confirm which of the three employment categories individuals fall into employee, worker or self-employed. These categories determine what employment rights individuals are entitled to, such as annual leave and statutory sick pay. Read More

VAT Question – I Run a Shop and a Colleague has Mentioned the ‘VAT Retail Scheme’ o me, Could You Explain What This is Please?

VAT retail schemes were introduced because it was recognised that many businesses dealing directly with the public and making supplies at different rates of VAT would be unable to keep records of every sale in order to calculate the VAT due in the normal way. The retail schemes are therefore methods for arriving at the value of taxable retail supplies and determining what proportion of those sales are taxable at different rates of VAT.

HMRC Notice 727 provides useful detail on Retail Schemes.

At its very simplest, a Retail Scheme will take as its starting point the cash in the till, which perhaps has been adjusted for one or two items as per the specific Retail Scheme. This cash will be divided up into the different types of sales.

For example, it will be split between standard-rated, reduced rated and zero-rated sales and maybe, in very extreme cases, exempt sales as well. The split is an apportionment which is fixed according to the Retail Scheme rules. Hence, it is only an approximation of the VAT due on sales but, nonetheless, HMRC accepts this approximation as correct VAT for the period. This VAT is then entered onto the VAT return in the normal way.
The use of a Retail Scheme is wholly at HMRC’s discretion. HMRC can refuse to allow the use of a Scheme if:
1. the use of the Scheme does not give a just and reasonable result;
2. if it is necessary to do so for the protection of the revenue; or
3. if it is reasonable to expect the retailer to account for VAT in the normal way.

If a business makes both retail and non-retail sales, then the non-retail sales must be excluded from the Scheme and dealt with separately. The sales to registered businesses are also to be excluded. However, occasional sales are allowed to be dealt with under the Scheme. An example of such an occasional sale might be a garage which sells petrol to many customers including some of those customers who may be VAT registered. All such sales would be allowed to be dealt with under a Retail Scheme.

Feel free to get in touch if you have any queries.

VAT Question – When Can I De-Register for VAT?

Once a business is registered for VAT, it is not always the case that it will remain registered for VAT.

In certain situations a business may be required to deregister or may voluntarily deregister. Examples of compulsory deregistration would be:
• Sale of business;
• Changing status – for example, a business might change from a sole trader to
a limited company.
• Ceasing to make taxable supplies – a business may cease trading or may switch from making taxable supplies to making exempt supplies.
Voluntary de-registration is available where a business is expected to make taxable supplies in the next 12 months of less than £83,000.

When deregistering, VAT must be accounted for on the final VAT return of any assets forming part of the business assets which are on hand at the last day of registration as if they were supplied in the course or furtherance of the business unless:

a. the business is transferred as a going concern to another taxable person;
b. the taxable person has died, become bankrupt or incapacitated and the business is carried on by another person; or
c. the VAT on the deemed supply would not be more than £1,000.
This charge on deregistration is known as a deemed supply.
The following are excluded from the charge to VAT on deregistration:
• Goods bought from unregistered businesses.
• Motor cars (except qualifying cars on which input tax has been claimed).
• Goods used wholly for business entertainment.
• Goods that have been directly attributed to an exempt business activity.
• Goods not bought for business purposes.

There will not be any output tax due on assets held where the trader did not recover input tax on their purchase.

The valuation of the deemed supply on de-registration will normally be based on the cost of purchasing identical goods.

Please get in touch if you have a VAT question.

Vat Question Of The Week – Christmas Hampers

My client is VAT registered and they manufacture and retail confectionary. This year in the run-up to Christmas they are selling luxury hampers online. The hamper will contain a small candle, chocolates made by the client, a Christmas pudding, a chocolate recipe book, luxury drinking chocolate powder and a jar of cranberry sauce. This will be presented in a wicker basket which costs the client £4. The VAT liability for the majority of the items in the hamper is zero-rated; does that mean my client can zero rate the sales? What is the liability if the client adds a delivery charge?

When you supply a minor standard rated item with a zero-rated food item, you can treat this as a single supply of a zero-rated item where the standard rated item:

  • Is not charged at a separate price,
  • Costs you no more than 20% of the total cost of the supply, and
  • Costs you no more than £1 (excluding VAT).

This is not the case in my client’s scenario. There are a number of standard-rated items which cost more than £1. These are not minor items and therefore you would not be able to use the treatment above, see VAT Notice 701/14 sec 6.1.

The liability of the wicker basket will also need to be considered. This is more than just packaging to simply contain, protect and promote the items. The basket could be used again by the consumer. Christmas packaging is usually more elaborate than regular packaging but that doesn’t stop the supply of this basket being a supply in its own right.

The supply of the hamper will be a mixed supply, rather than a single zero-rated supply. The fact that the majority of the goods are zero-rated does not mean the standard rated items are disregarded.  Your client will need to attribute the appropriate rate of VAT to each item and then use a fair and reasonable method to apportion the output tax between the liabilities which are as follows:

Zero-Rated

  • Christmas pudding
  • Recipe Book
  • Drinking Chocolate
  • Cranberry Sauce

Standard-Rated

  • Candle
  • Confectionary
  • Wicker Basket

Examples of apportionment methods are set out in Notice 700 section 32.

If my client is going to be charging for delivery then this charge will need to be apportioned between standard and zero-rated in the same ratio as the contents.

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