Month: June 2021

Changing a company accounting date

Posted on by Rana Zubair

There are special rules which limit the ability to change your company’s year end date. A company’s year end date is also known as its ‘accounting reference date’ and is historically set by reference to the date the company was incorporated. Under certain circumstances it is possible to make a change to the year end and for some businesses this can have trading and / or tax benefits.

As a general rule, you can only change the year end for the current or previous financial year. Making a change to a year end date will also change the deadline for filing accounts (except during a new company’s first financial year).

There is no limit to the amount of times you can shorten a year end date but you can only extend the period to a maximum of 18 months once in every five years. The financial year can be extended more often under limited circumstances, for example, when the company has been placed in administration.

A request for a change to an accounting reference date can be made online (preferred and quickest option) using the Companies House online service or by using a postal version of the Change your company accounting reference date (AA01) form. No change can be made to a period for which accounts are overdue.

There is no overriding reason for using one date over another but there are a number of factors to take into account. The most common year end dates are 31 December (to coincide with the end of the calendar year) or 31 March (to coincide with the end of the tax year).

Source: Companies House Wed, 09 Jun 2021 00:00:00 +0100

Bed and breakfast – the same day rule

Posted on by Rana Zubair

Historically, the term bed and breakfasting (sale and repurchase) of shares referred to transactions where shares were sold and then bought back the next morning. This used to have Capital Gains Tax (CGT) benefits by crystallising a gain or a loss but is no longer tax effective over such a short period. The change to the rule occurred in 1998 when new legislation introduced special share matching rules. Under these rules there are limitations including a 30-day waiting period before the shares can be repurchased again.

However, it is possible, under certain circumstances, to use a modified bed and breakfasting type of arrangement to sell an asset only to buy it back again a short time later. A gain could be created to use the annual exempt amount, or a non-resident may bed and breakfast their chargeable assets to establish a higher base cost before they enter the UK tax regime.

Proper advice should be taken before undertaking such transactions to ensure that all tax aspects have been considered. For example, for any bed and breakfast transaction to be effective, there must be a genuine transfer of beneficial ownership of the asset and the share matching rules must be met.

Source: HM Revenue & Customs Wed, 09 Jun 2021 00:00:00 +0100

Who can use the VAT retail schemes?

Posted on by Rana Zubair

VAT retail schemes are a special set of schemes used by retail businesses to account for VAT.  The schemes are used by businesses that sell a significant amount of low value and/or small quantity items to the public with different VAT liabilities.

The use of the schemes can save businesses a significant amount of time in calculating the amount of VAT due to HMRC. In many circumstances, it would be extremely difficult for these businesses to account for VAT using standard VAT accounting. By using the VAT retail scheme, retailers can calculate VAT due to HMRC at the standard, reduced and zero rates of VAT as a proportion of sales. Usually this is done on a day-by-day basis.

There are 3 standard VAT retail schemes:

  • Point of Sale Scheme
  • Apportionment Scheme
  • Direct Calculation Scheme

There is also the option of using a bespoke scheme. The use of a bespoke scheme is obligatory for retailers with a turnover excluding VAT of £130 million or more. The decision as to which retail scheme is to be used is usually driven by a combination of looking at the scheme that provides the best result for the business in question combined with the cost of using the scheme, with the important caveat that HMRC consider that the chosen scheme is fair and reasonable.

HMRC’s guidance on the 3 standard schemes and the bespoke scheme has recently been updated to include information about changes to the treatment of vouchers.

Source: HM Revenue & Customs Wed, 09 Jun 2021 00:00:00 +0100

Pre-trading expenditure

Posted on by Rana Zubair

There are special tax reliefs for pre-trading expenses that are incurred before a business starts trading. These could include expenses that are required to help a business prepare for trading such as buying stock and equipment, renting premises, taking out insurance and initial advertising expenditure. 

A deduction may be allowed where the following conditions are met: 

  • The expenditure is incurred within a period of seven years before the date the trade, profession or vocation commenced, and
  • the expenditure is not otherwise allowable as a deduction in computing the profits of the trade, profession or vocation but would have been so allowable if incurred after the trade had commenced.

To be allowable, the pre-trading expenditure must be incurred wholly and exclusively for the purposes of the relief. This means that no relief would be allowed where pre-trading expenses would not have been tax deductible if they had been incurred when the business was trading.

The business should keep accurate records relating to pre-trading expenditure to demonstrate that the expenses qualify.

Qualifying pre-trading expenditure is treated as incurred on the day on which the trade, profession or vocation is first carried on. 

Capital expenditure does not qualify for this relief but there are other special provisions for capital allowances. 

Source: HM Revenue & Customs Wed, 02 Jun 2021 00:00:00 +0100

Cash basis for landlords

Posted on by Rana Zubair

The cash basis scheme helps sole traders and other unincorporated businesses benefit from a simpler way of managing their financial affairs. Landlords can use the cash basis when recording income and expenditure i.e., recording the flow of money from and to the business.

The scheme is not open to limited companies and limited liability partnerships. The entry threshold for the cash basis scheme is £150,000 and you can stay in the scheme until your business turnover reaches £300,000.

Unlike other taxpayers that need to opt-in to use the scheme, the legislation assumes that landlords will use the cash basis as the default method of calculation. A landlord can still elect to opt out of the scheme in which case they can continue to use generally accepted accounting practice (GAAP) to calculate their taxable profits. Landlords are also required to continue using GAAP if their rental receipts are more than the £300,000 scheme threshold.

HMRC’s property income manual lists the following criteria of when the cash basis is not available to a property business. 

A: The property business is run by a company, limited liability partnership (LLP), trustees or a corporate firm (a partnership with at least one non-individual member).

B: Receipts that would be brought into account under the cash basis for the tax year exceed £150,000. This amount must be proportionally reduced if the property business is only carried out for part of the tax year.

C: If the property business is being carried on jointly with a spouse or civil partner, the same basis must be used by both individuals, unless they make a declaration under S837/ITA 2007 that they are beneficially entitled to the income in unequal shares.

D: Business premises renovation allowance has been claimed, and a balancing event in the tax year gives rise to a balancing adjustment.

E: An election is made to use GAAP because the person believes that traditional accounting is more appropriate. The election must be made within one year of the filing date for that tax year.

Source: HM Revenue & Customs Wed, 02 Jun 2021 00:00:00 +0100

What is distance selling for VAT purposes?

Posted on by Rana Zubair

Distance selling is the term used to describe supplies of delivered goods from one EU Member State to a customer in another member state who is not registered for VAT. 

The recipients of most distance sales will be private individuals, but they can also include small, unregistered businesses, businesses making only exempt supplies, charities and public bodies.

Following the Brexit terms, distance selling can still occur on the movement of goods between the EU and Northern Ireland. Under the terms of the agreement there can be distance selling for VAT purposes when a business supplies and delivers goods to a customer who is not registered for VAT from:

  • an EU country to Northern Ireland
  • Northern Ireland to an EU country
  • one EU country to another EU country

The UK distance selling threshold is £70,000 per calendar year. If the value of a supplier’s distance sales into Northern Ireland is under this level, then VAT should be charged at the rate that applies in the seller's home country. If the value of the distance sales goes over the threshold the supplier must register for UK VAT and start accounting for UK VAT. They may also apply for a voluntary registration if their sales are under £70,000 in the calendar year.

The distance selling rules are intended to combat distortion of trade and unfair competition by transferring the place of supply to the Member State in which the customer receives the goods.

Source: HM Revenue & Customs Wed, 02 Jun 2021 00:00:00 +0100

Tax when you sell an asset

Posted on by Rana Zubair

There are special rules that must be followed when you sell an asset on which capital allowances have been claimed. Capital allowances is the term used to describe the tax relief businesses can claim on certain capital expenditure and thereby reduce the amount of taxable profits.

The sales value is usually the sales price. If you gave the asset away, stopped using the asset or sold it for less than it was worth then the market value should be used.

If you originally claimed 100% tax relief on the item, the business is required to add back the difference to their taxable profits. This is known as a balancing charge. A balancing charge is effectively a way of ensuring that a business does not claim more tax relief than they were entitled to on the purchase of a business asset. The balancing charge works in the opposite way to a capital allowance and increases the amount of profit on which tax is due.

If you originally used writing down allowances, you may have a balancing allowance or a balancing charge.

There are special rules for dealing with any balancing charges or balancing allowances where a business ceases to trade.

Source: HM Revenue & Customs Wed, 02 Jun 2021 00:00:00 +0100

The 7-year rule

Posted on by Rana Zubair

Most gifts made during a person’s lifetime are not subject to Inheritance Tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'.  These gifts or transfers achieve their potential of becoming exempt if the taxpayer survives for more than 7-years after making the gift. If the taxpayer dies within 3-years of making the gift, then the Inheritance Tax position is as if the gift was made on death. A tapered relief is available if death occurs between 3 and 7 years after the gift is made.

The rules surrounding PETs have resulted in many people wanting to make gifts long before they die. The problem in practice is that they do not want to give up control over the assets concerned.

The effective rates of tax on the excess over the nil rate band are:

  • 0 to 3 years before death            40%
  • 3 to 4 years before death            32%
  • 4 to 5 years before death            24%
  • 5 to 6 years before death            16%
  • 6 to 7 years before death              8%
  • 7 or more years before death        0%

These tapered rates cannot reduce the tax due on a lifetime chargeable transfer below the amount chargeable when the transfer was made and so are of no benefit to a transfer within the nil rate band.

We would strongly recommend that you keep a list of any PETs that you make. It is also important to keep a record of any exemptions that are used as well as details of any regular gifts made from surplus income.

Source: HM Revenue & Customs Wed, 02 Jun 2021 00:00:00 +0100

Temporary trade credit insurance scheme to end

Posted on by Rana Zubair

Trade credit insurance is a contract bought by suppliers to make sure they get paid even if their customers default and cannot pay the bills. This gives businesses the confidence to trade with one another.

Early in the pandemic, the government introduced a temporary Trade Credit Reinsurance scheme, which was agreed following extensive discussions with the insurance sector. This scheme ensured that the vast majority of Trade Credit Insurance coverage was maintained throughout the pandemic with the government providing financial guarantees.

The government and the Association of British Insurers (ABI) have now confirmed that the scheme will end on 30 June 2021 as planned.

The scheme has directly benefitted over half a million businesses, providing certainty to firms across the UK and safeguarding jobs. It protected more than £575 billion of business turnover by providing approximately £210 billion in cover.

Insurers working under the temporary scheme have confirmed to government that the scheme is no longer required and that they wish to revert to full underwriting control. The government and participating insurers will continue to work together to ensure there is a smooth transition to the private sector resuming its normal role of providing cover.

Once the scheme has ceased, the government will conduct a review of the Trade Credit Insurance market to ensure continued support for businesses in future.

Source: Department for Business, Energy & Industrial Strategy Wed, 02 Jun 2021 00:00:00 +0100
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