UK Tax Questions Answered by Shrewsbury Accountant No.17

Here is our Christmas tranche of UK Tax Questions Answered. Each question is from a Tax blog readers which will relevant and of interest to you

1. Long-johns V Pantyhose
2. Late Filing Penalties
3. Child-care paid by Employer
4. VAT Refund
5. VAT on Discounts
6. Two companies to avoid VAT

Long-johns V Pantyhose

Question:

I’m in a building partnership that specialises in roofing. As you can imagine, with the wind factor, it can get pretty cold up there; so my partner and I wear thick ladies tights as insulation. My bookkeeper has now told me that I can’t claim a tax deduction for the tights as they can be worn as everyday clothing, is she correct?

Answer:

Yes she is if you make a narrow interpretation of the rules. All is not lost however, as in a recent case a tax inspector accepted that Long-johns are not considered to be everyday clothing and given the nature of your work, they would be allowed as a business expense.

Late Filing Penalties

Question:

I’m a building sub-contractor and haven’t filed a tax return for several years and had several penalties, which I didn’t pay. I decided recently to get my house in order and telephoned HMRC and was told that the late- filing penalties have been cancelled and that I haven’t been issued a Tax Return for 2014/15. I don’t wish to look a gift horse in the mouth, do I keep quiet and if so, can they come back at me?

Answer:

Yes they can and as your self-employment is continuing; when they do you could be in serious bother, but by ‘fessing-up’, you may well get an unexpected windfall. This is because as a sub-contractor in the Construction Industry, the payments you’ve received will be after deduction of 20% tax under the CIS scheme. In my experience, most sub-contractors receive a refund, once their tax-free personal allowance and expenses are taken into consideration. So get those Tax Returns submitted ASAP.

Child-care paid by Employer

Question:

I’ve just changed jobs and my new employer is willing to pay my £3,500 p.a. child-care costs. My Question is, are there any tax implications to this arrangement as I understand only part of the payment is tax-free?

Answer:

Yes, there are. The legislation defines the exempt limit as £55 x number of qualifying weeks in the year (a qualifying week is one in which care is provided). It is therefore unlikely that you’ll qualify for the maximum £2,860 p.a. The excess will be reported by your employer on form P11D with Class 1A NICs paid and you will be taxed on the excess by adjustment of your PAYE code.

VAT Refund

Question:

Two and a half years ago, due to illness, I didn’t file a couple of VAT Returns and merely paid the estimate demanded by HMRC/VAT. Recently, whilst checking on an old invoice I realized that the 2 estimates I paid, were higher than my actually liability by approximately £2,500. Is there anything I can do 2½ years later?

Answer: The first thing you need to do is to immediately submit the 2 outstanding VAT Returns. In theory the overpaid amount will be refunded, however there may be a problem because you’ve left it so long. In a recent VAT Tribunal case, The ‘Holloways’: an indie rock band from north London were refused a £4k refund because they filed 2 VAT Returns 4 years late and the VAT office may well use this as a precedent to refuse your claim.

VAT on Discounts

Question:

I run a small company that supplies pubs with chemicals and cleaning products and when I raise an invoice, I include a settlement discount and charge the customer VAT on the discounted amount, whether or not they take the discount. A friend recently told me that the VAT position had changed, but I can’t find any information on this, can you help?

Answer:

Until April 5th 2015, HMRC allowed suppliers to account for VAT on the discounted price offered, however because of an EU directive (the Principal VAT Directive), HMRC now require VAT to be accounted for on the consideration actually received. So you may well have accounted for too little VAT on a number of invoices issued after April 5th which should be corrected on your next VAT Return. For more guidance I suggest you visit:

Two companies to avoid VAT

Question:

I have my own limited company that provides drain services (similar to Dyno-Rod but much smaller) to a variety of firms in Shropshire and am therefore VAT registered. I am increasingly being approached by private customers for my services, but they don’t want to pay the VAT. To solve the problem I thought I’d form a second company for the private work and not register it for VAT; do you see any issues with the Vat man if I do this?

Answer:

Yes I most certainly do. As both companies will be undertaking the same type of work, this will almost certainly be considered artificial separation for the purposes of VAT avoidance. If there is no commercial reason for the split other than to avoid having to charge VAT to some customers, then the VAT authorities will come down on you like a ton of bricks and it could prove very costly.

If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.

Merry Christmas & A happy New Year

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