Questions & Answers

Reclaiming Vat on Mileage Claims

Q: I currently reimburse a number of my employees who use their own vehicles and pay for their own fuel the HMRC approved mileage rates of 40p and 25p per mile. My accountant has always claimed back VAT on the deemed fuel element of this rate but I have read recently that this may not now be possible? Is this the case?

A: No, this will still be possible as the HMRC have introduced new legislation which is effective from 1 January 2006 which will still enable you to reclaim the VAT on mileage claims, assuming the employee submits a valid VAT receipt in support of the claim.

This was introduced as a result of ruling made against the UK in March 2005, where the European Court ruled that the UK legislation which allowed employers to reclaim the Vat element on mileage claims submitted by employees was in breach of EU legislation for two reasons:

the purchases are actually supplied to the employees as private individuals and therefore the employers have no right to deduct because the goods are not supplied to them as taxable persons.
even if there were a right to deduct, employers as taxable persons cannot exercise that right because they do not hold a VAT invoice.

The UK government has therefore introduced secondary legislation which allows employers to recover the VAT on fuel purchased by their employees for business purposes, as long as they hold a valid VAT invoice in support of the claims that are submitted.

Gift of goods and samples to customers

Q: I am planning an exhibition evening in my shop for a number of new products I am selling. I will be inviting members of the public and clients for an open evening, and will be providing small samples of a new product I stock as a gift to everyone attending. Am I able to claim a deduction for this in my accounts, as I am aware that gifts to clients are in some cases not tax deductible?

A: Yes, you will be able to claim a deduction for the cost of these free samples and gifts, as, assuming they contain a conspicuous advertisement for your dental practice, they are treated as being for the purpose of advertising these products to members of the public and clients.

To be allowable for tax purposes, the legislation states that you must ensure that the gifts being made are not food, drink or tobacco, nor is it a token or voucher exchangeable for goods and that the cost of the gift (together with the cost of any other such gifts given to the same person in the tax year) does not exceed £50.

You must also ensure that the advertisement is on the gift itself, and not just on the wrapping.

Holiday entitlement for part time workers

Q: I employee a number of part time workers for between 10 and 20 hours per week. They all have pre-booked holidays during the Summer period which I have agreed to honour. How do I calculate their total holiday entitlement for the year?

A: Every worker – whether part-time or full-time – covered by the working time regulations 1998 is entitled to four weeks’ paid annual leave, and for part-time workers this is calculated on a pro-rata basis. For example, an employee who works three days a week is entitled to twelve days paid holiday - their normal working week multiplied by four. This is because a week’s leave should allow workers to be away from work for a week. It should be the same amount of time as the working week.

With regard to public holidays, these can be counted as part of the statutory four weeks holiday entitlement. There is no statutory right to take bank holidays off. So unless you include specific details in the employees contract of employment which states there is a right to paid time off for bank holidays, you are not obliged to pay your staff for these unless they take them as part of their annual leave entitlement.

Employing students over the summer vacation period

Q: During the summer holidays we will need to employ some temporary staff to cover the extra working hours of our business. Someone has suggested we employ students, as they do not have to pay tax. Is this right, and if so how do we do it?

A: If you employ students in the recognised vacation periods of summer, winter and easter, then they can be paid without deduction of tax, provided they meet certain conditions. In order for you to do this each student must sign a form P38S which you can obtain from the Inland Revenue. Provided that the students will not earn more than £5,035 in the tax year then they can be paid without deduction of PAYE. However, you will still have to pay both employers and employees National Insurance if the earnings for each employee exceed £97 per week.

Reducing Payments on Account in July

Q: I have now received the demand from the Inland Revenue for my tax payments on account due at the end of July. My accountant advised me of my tax bill for the end of July sometime ago but suggested that I could reduce the payment as business was really poor in the following 05/06 tax year and I do not have enough money to make this payment. What are the ramifications if I do not pay, and is there any possibility that I can reduce the amount that is due?

A: Payments on account represent 50% of the individual’s net tax liability for the previous year. All individuals are liable to make these payments unless their net tax liability is less than £500 or more than 80% of the tax due was deducted at source.

Given that your income and subsequent tax liability for the 2005/06 tax year is likely to be significantly less than the previous year which the payments on account are based on, you can claim to reduce these payments. The amount that you reduce these too should reflect your estimation of your tax liability for the 2005/06 tax year.

However, if it is later found that you have overestimated the fall in your income, and consequently reduce the payments on account by to much, you will be liable to pay interest on the difference between the amounts paid as payments on account and the amount due. Equally, if you have underestimated the fall, you will be due a refund and will receive an interest supplement.

VAT on cessation of trade

Q: I am considering stopping my VAT registered business at the end of this month and returning to employment later in the year. I plan to keep the small amount of stock and some equipment that I can use in my new employment. Will I have to pay any VAT on these?

A: You have not mentioned the value of the stock and equipment you intend to keep, but if the VAT on their market value exceeds £1,000, then you will need to account for all of this to HMRC (HM Revenue & Customs). If below £1,000, then you will not have to pay over any VAT. It will be sensible to keep a list of the stock and its value, together with an estimate of the value of the equipment in case this is queried by HMRC at some stage. Ideally you should obtain a written valuation from a second hand supplier of the equipment, but if this is difficult to achieve, you could check advertisements for the sale of similar second hand goods to estimate their current market value.

Advantages of filing VAT forms online

Q; I spoke to the VAT office recently and they suggested that there is substantial benefits of filing my quarterly VAT returns online. Is this true and what are they?

A: Yes, the eVAT system has substantial benefits for small business like yours. As with all other online filing systems, one of the main advantages is that the process is simple and very user friendly, with the added advantage that you will not need to file any more paper VAT returns by post. With the eVAT system you actually get an on-screen acknowledgement and a unique reference number, so that you know that the HMRC have received your details. Other advantages of the system include email alerts to keep you up-to-date on developments that affect your business, and the ability to request an amendment to a VAT registration online.

Also, if you pay your VAT bill by Direct Debit you will also receive 7 calendar days from the standard due date for your return to reach us. It will be a further three working days before we collect payment from your bank account. Generally anyone with a UK VAT Registration number will be able to pay by Direct Debit. This is 10 day extension will create be a substantial cash flow benefit to your small business. To register for the scheme you should speak to your accountant.

Limited Liability Partnerships - What are they?

Q: I am thinking of going into business with two friends and one of them has said that a Limited Liability Partnership would be a good idea. What are they and do you think it is beneficial for us to operate as one?

A: Limited Liability Partnerships (LLPs) are a hybrid of partnerships and limited companies. Briefly, the liability of the partners is limited to the amount they have invested into the company. Under normal partnership rules there can well be further liabilities if the business becomes insolvent. However, the profits of the partnership are subject to the Income Tax system, which not be as advantageous if the profits were taxed under Corporation Tax Rules. Generally speaking firms of accountants who wish to limit their professional negligence exposure use LLPs, as limited companies cannot become auditors. For most businesses a company limited by shares is generally the best entity to trade through when friends enter into business together. However, you must always seek professional advice before committing yourself to any business venture so please ensure you speak to your accountant before proceeding.

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By TaxAssist Direct Ltd. Both answers and advice are offered strictly on the basis that no legal liability is created thereby. Personal circumstances may vary and TaxAssist Direct Ltd advises that individuals seek personal professional advice in all situations.