This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!!

Margin Scheme

Q: I am a second-hand car dealer who is now approaching the threshold for VAT registration. A friend of mine who also deals in second-hand goods, albeit art and antiques, has informed me that there may be a VAT scheme which I can use to minimise my liability and administration costs. Could you please advise me if such a scheme exists and explain the mechanics behind it?

A: The VAT margin scheme works by enabling traders who deal in second-hand goods to account for VAT only on the difference between the price paid for an item and the price at which you sell it – the margin. You will not be able to reclaim any input VAT when the goods are purchased and will only pay over to HMRC VAT on the difference between the purchase and selling price. You won’t pay any VAT if you don’t make a profit on a deal and if you use the margin scheme, you can still use normal VAT accounting for other items that you sell. You can also reclaim VAT on business expenses such as overheads.

You can only use the margin scheme for a vehicle that has at some point actually been driven on the road for business or pleasure – HM Revenue & Customs (HMRC) doesn’t consider a vehicle to be second-hand just because it’s been registered, has delivery mileage and has been bought and re-sold.

You can only use the margin scheme for a vehicle that has at some point actually been driven on the road for business or pleasure – HM Revenue & Customs (HMRC) doesn’t consider a vehicle to be second-hand just because it’s been registered, has delivery mileage and has been bought and re-sold.
 
    Your purchase price is everything which you had to pay for the vehicle. You must not reduce the margin by deducting any cost to you of bringing the vehicle to sale such as repairs, refurbishment, accessories or your business overheads.  Your selling price is everything which you are to receive for the vehicle, whether from the buyer or a third party. It includes incidental charges such as for an MOT and accessories fitted prior to the sale.

You can only use the margin scheme for a vehicle that has at some point actually been driven on the road for business or pleasure – HM Revenue & Customs (HMRC) doesn’t consider a vehicle to be second-hand just because it’s been registered, has delivery mileage and has been bought and re-sold.
 
 You should be aware that it is still your gross sales, rather than just the total of the ‘margins’ which makes up your VAT turnover for registration purposes.

 Capital Allowances – Integral Features

Q: My company is currently in the process of constructing a new business premises. I am aware that the old industrial building allowances have gradually been phased out. Is there any immediate tax relief we can get on the construction of the building?

A: It is correct to say that industrial building allowances are being phased out and will be completely withdrawn from April 2011. However expenditure on the provision or replacement of integral features can qualify for capital allowances. Assets which are classed as integral features are an electrical system, a cold water system, a space or water heating system, a powered system of ventilation, air cooling or air purification including floors or ceilings in such a system, a lift, an escalator or moving walkway and external solar shading.

Integral features qualify for an annual writing down allowance of 10%. This rate is thought more appropriate as the integral features usually have a longer useful economic life than other plant and machinery. Despite the lower writing down allowance the expenditure can be claimed under the annual investment allowance so the expenditure could be claimed in full up to the annual investment threshold of £100,000. This may be more advantageous when other assets purchased qualify for the main writing down allowance of 20%.

Overseas property

Q: I own a property in Spain and I have been told that I have to declare the income from this property on my UK tax return, is this correct?

A: If you live and pay tax in the UK then you must declare rental income from overseas rental properties on the foreign pages of your tax return.  The profit from the overseas lettings can be worked out in exactly the same way as for a UK property; however if you make a loss from the rental then this cannot be offset against profits from UK rental properties. Another thing to consider is that if you live and pay tax in the UK then if you sell the property and make a gain this will be subject to UK Capital Gains Tax.

If you do make profits or a capital gain then you may find that there is a foreign tax charge.  If this is the case then you will usually get some relief on your UK tax return for this, so that you do not end up paying tax twice.

The above assumes that the taxpayer lives and pays tax in the UK. However if you are not originally from the UK, or spend less than half of the year here then the tax situation can change.  The residency status of an individual is a complex area of legislation and if you have any queries concerning your liability to tax on overseas rental properties please take personal advice.

Distance selling

Q: My VAT registered business is selling goods by mail order and I have just dispatched some goods to an individual in France who is not VAT registered. Should I be charging VAT on these goods?

A: When you sell to non VAT registered individuals in EU countries this is known as distance selling and the sale is treated as if it has taken place in the UK.  Therefore you must charge VAT at the applicable UK VAT rate and enter the details in Box 1 and Box 6 of your return as normal. 

If however the level of your sales to any one EU country exceeds a certain limit then you must register for VAT in that country.  This limit is known as the distance selling threshold.  Each EU country sets its own threshold which can be between €35,000andr €100,000 per year (or the country’s currency equivalent if not using Euro’s).  Once a UK business registers for VAT in an EU country then all the sales made to individuals there will be subject to the VAT rate applicable in that country instead of the UK.  

VAT – online registration

Q: I have been registered for VAT for a number of years and still do my VAT returns manually and send them in. Can I continue to do this or do I have to do it online.

A: If your annual turnover is over £100,000 you should have been filing your returns online from 1 April 2010 and paying any VAT electronically. If your annual turnover is below £100,000 the deadline to go online is 1 April 2012. If you should have been filing online from 1 April 2010, HMRC will start issuing penalties to businesses who fail to submit their return online after 31 March 2011. If a return for a period ending after that date is not filed electronically, an automatic penalty will be charged. This will be between £100 and £400 depending on your annual turnover.

The VAT online service system is fairly straight forward and has additional advantages which include setting up an email reminder service to advise when your next online VAT Return is due. Another benefit as you are required to make payments electronically either through Direct Debit, internet banking, telephone banking, is that you receive a further seven extra calendar (in addition to the usual one month deadline) to file your return and for the payment to reach the HMRC bank account.

What is a Dormant Company?

Q: I am intending to temporarily stop trading through my limited company and return to employment for personal reasons. I have been told that I can leave my company dormant for this period and return to it at a later date. Could you please explain to me what a dormant company is?

A: Companies House and    HMRC  both have differing definitions of what they class as a dormant company.

Companies House define a dormant company as a company which has no significant accounting transactions during it accounting period. A significant accounting transaction is one which it should enter in its accounting records. If a company has been dormant since the end of its last accounting period there is no need to submit full accounts. A dormant set of accounts can be submitted which do not have to contain a profit and loss account or a directors report. An annual return does still have to be filed yearly while the company is dormant.

HMRC consider a company to be dormant when it is not active, i.e. they are not trading. If no sales are made by a company HMRC will consider them dormant for tax purposes. A dormant company is not required to make a tax return. This exemption is gained by writing to HMRC informing them of the date on which the company stopped trading. In return HMRC will issue a final notice to file (if appropriate) and will not issue another notice until they are informed in writing that the company is once again trading.

How to Register a Partnership?

Q: My business partner and I have decided to carry on trade as a partnership. What are the formalities in registering ourselves and the partnership with the tax authorities?

A: When you become self employed you should register with HMRC. You can register either online, by telephone or by post. Details on how to register online or by telephone are on the HMRC website, www.hmrc.gov.uk.

If registering by post, HMRC have issued new forms from 25 October 2010 to use for partners and partnerships.

Form SA400 should be completed on behalf of the partnership by the nominated partner and will enable HMRC to issue the partnership with a unique taxpayer reference (UTR) number. This number should be quoted on the partnership self assessment tax return. Form SA401 should be completed by each partner and will enable HMRC to issue them with a UTR, if they do not already have one. This form will also register the partners for class 2 national insurance contributions.

If you need assistance on registering with HMRC or starting a business please contact us.

Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.