May Tax Tips & News

Welcome to the Benedicts Tax Tips & News monthly newsletter, bringing you the latest news to keep you one step ahead of the taxman.

If you need further assistance just let us know or send us a question for our Question and Answer Section.

We’re committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.

Please contact us for advice on your own specific circumstances. We’re here to help!

Newsletter issue - May 08.

The end of year PAYE form P35 to report the total NI and tax deducted from each employee in 2007/08 has to be submitted by 19 May 2008, but this year it includes a rather confusing question in part 3 of the form. Question 6 says:

• Are you a service company? No or Yes
• If 'yes', have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Company Legislation?

The note below question 6 directs you to read Taxman's leaflet CWG2 for further information, but this is actually the wrong booklet, so you won't find the answer there! The Taxman has now apologised for the confusion and added some further explanation to his web site at:

http://www.hmrc.gov.uk/employers/2007-08-P35-Quest-6.htm

Essentially you should only answer 'yes' to the first part of question 6 if your business falls within the IR35 rules, or the new Managed Service Company rules. This will apply to a relatively small number of owner-managed businesses that supply the services of the shareholders to customers, under conditions where the worker would be treated as an employee of the customer if the owner-managed business did not exist. All other businesses should answer 'no'. If you are not certain whether question 6 applies to your business, talk it through with us before submitting your form P35 for 2007/08.

Newsletter issue - May 08.

As a small business you may face a dilemma; you are forced to limit the scale of your operations because you cannot get access to loan capital, but the bank will not provide further funds as you have no significant assets to provide as security. The Small Firms Loan Guarantee Scheme could provide a partial solution.

The Government department: BERR (former DTI) will guarantee 75% of a loan made available from one of 29 high street banks, regional development agencies and finance companies. You as the borrower have to pay a premium of 2% of the outstanding capital per year. The lender is not permitted to ask for a personal guarantee against this Government backed loan but it will ask you to pledge some of your business assets such as stock or equipment. The amount of the loan can be anything from £5,000 to £250,000. In all cases the period of the loan cannot exceed ten years.

Most businesses with a turnover of up to £5.6 million can qualify for the loan guarantee. Some industry sectors are excluded but service providers such as caterers, estate agents, hairdressers and retailers can now apply. You do not have to have a long business record to be considered for the scheme but you will be asked to provide a business plan. We can help you to write this plan and to get the best deal from the bank under this scheme.

Newsletter issue - May 08.

Free or subsidised meals provided to staff in a works canteen are tax and NI free as long as the meals are available to all staff. The company does not necessarily have to have its own canteen, but the food must normally be provided on the business premises. The local pub cannot be designated as a staff canteen just for Friday lunchtime. If some company sites have a canteen but others do not, the subsidised food will still be tax-free as long as any employee can eat in the canteen if they happen to be on site.

Sandwiches, drinks and tea and coffee are all covered by this tax exemption if the refreshments provided are on a reasonable scale. For instance free fruit and snacks would be reasonable, but free champagne would not.

Working lunches for staff or directors are not a taxable benefit as long as the employees who are not involved also have the right to free food generally. It does not matter that the directors' food is not exactly the same as the staff canteen grub, as long as it is comparable. The Taxman would take a dim view of directors sitting down to a three-course meal with wine and cigars while the staff have tinned soup and rolls.

Example
All professional staff are required to attend monthly lunch-time training sessions where free sandwiches are provided. The company's support staff do not attend the training meetings. If the company provides free sandwiches for all the staff including the support workers, the free food is not a taxable benefit. If the professional staff eat all the sandwiches and leave nothing for the admin department a tax charge will arise.

In addition, when your employees are temporarily away from their normal base the employer can reimburse the cost of a reasonable meal without incurring further tax or NI liabilities.

Where food is provided to staff in any of the above circumstances the cost is tax deductible for the employer and any VAT charged on prepared food, such as sandwiches can be reclaimed. What you must avoid is any element of entertaining being wrapped up with the provision of the food. Meals provided to customers or potential customers will almost always be classed as entertaining, so the cost cannot be deducted for tax purposes, and the VAT cannot be recovered.

Newsletter issue - May 08.

You must have a valid VAT invoice in order to reclaim VAT charged on the goods or services you buy. When dealing with a new supplier check that their invoice includes all of the following details:

• The suppliers name, address and VAT registration number
• The name and address of the person to whom the goods are supplied (this will be your business)
• A unique identification number (see below for new rules)
• Date of issue
• Time of supply of the goods or services (this may be the same as the date of issue)
• A description of the goods or services supplied
• For each description of goods or services:
  • The unit price (see below for exceptions)
  • The rate of VAT charged
  • The amount payable excluding VAT
• The total amount payable for the whole invoice excluding VAT
• Rate of any discount available
• Total amount of VAT charged

VAT invoices must generally be in pounds sterling, but where you have received an invoice expressed in a foreign currency, as long as the sterling equivalent is shown for the total payable and the total VAT due, the invoice will be a valid VAT invoice. The wording on the invoice does not have to be in English, but if you get a VAT inspection you will have to produce a translation of the invoice into English if the VAT officer asks for one.

There are two relatively recent changes to the VAT invoice rules you should check for your own business:

Unit price
Since 2004 a VAT invoice must include the unit price of any 'countable' goods or services. So if you charge by the hour you need to show your hourly rate. However, if it is not the usual practice in your business sector to show this information you don't have to, as long as your customer doesn't demand it.

Unique identification number
From October 2007 each of your VAT invoices must have a unique and sequential number. If you restart your invoice numbering each year this could lead to identically numbered invoices in different years. You can use separate invoice sequences for different customers as long as each sequence of invoices is separate and unique. You can also use customer prefixes on the invoices, as long as no two customers have the same prefix.

Newsletter issue - May 08.

Q. I'm about to pay a significant initial franchise fee. Will I be able to deduct any of that cost from my earnings for my first year of trading?

A. It depends on exactly what the initial franchise fee represents. It may include elements for staff training, stationery, operating manuals, stock, which can be generally deducted from your trading income. However, a large part of the fee may represent know-how or goodwill attached to the franchise brand. This is a capital cost, which may be written off gradually against your profits if you trade as a company. The franchisor should provide you with an itemised breakdown of the initial fee, which we can help you analyse into deductible and non-deductible elements.

Q. Can the sole director of his own company be paid £5 per night when away on business without producing receipts to cover expenses incurred?

A. The £5 per night limit is for personal incidental expenses such as laundry costs and telephone calls, which are rarely supported by receipts. As long as the company does not pay more than £5 per night on average per business trip, the full amount paid will be tax free. However, if the company pays in excess of £5 per night, the total is taxable. Any amount paid or reimbursed by the company for actual personal expenses, such as laundry bills, must be deducted from the £5 nightly limit.

Q. We pay our employees a mileage allowance for business journeys in line with the Taxman's recommended rates. Can we reclaim any VAT in respect of those payments?

A. You can reclaim the VAT but only on the proportion of the mileage allowance that relates to fuel. The mileage rate of 40p per mile has a large element of reimbursement for the vehicle's other running costs. You need to use as a reference point the HMRC advisory fuel only rates which vary according to the size of the car, and are reissued several times a year. For example, if the vehicle has a 1500cc petrol engine and you reimburse the driver for 1000 miles, the value of the fuel used is 13p per mile: £130. The VAT element is 7/47 x £130 = £19.36. However, the employee must supply you with fuel receipts totalling at least £130 to allow you to reclaim the VAT shown on those receipts.

Benedicts Accountants are based in London, offering local business owners and individuals a wide range of services.

All clients are entitled to fixed fees, work delivered on time and unlimited phone support. Visit our website jbenedict.co.uk for more information.