MAH, Chartered Accountants

Category: Sectors

  • VAT and financial services

    VAT and financial services:

    Are you losing out on VAT?

    VAT and financial services is a very tricky area and this video presentation gives a brief overview:

    https://www.youtube.com/watch?v=IaYzGej4p0c

    The main points covered are:

    1) VAT and financial services exemptions under VAT Act 1994 Schedule 9 Group 5 (eg money, loans, securities, advising collective investment scheme)

    If a firm is making exempt sales, then it doesn’t have to pay any VAT on income to HMRC, however it also cannot reclaim VAT on its expenses.

    2) Standard rated items, mainly looking investment management/advisory. If  a firm is providing advice or is using its discretion to manage investments or funds and isn’t merely executing transactions according to clients’ instructions, then these services are taxable at 20%. Either the client has to pay an extra 20%, of the firm has to take a hit of 20% on its fees.

    This may be avoided by carefully structuring the services with an SPV so that the investment manager has an interest in the trading profits of the fund, as a principal. Therefore, its share of profits would be exempt.

    If the investment manager is an external entity providing services as an agent, then even if its consideration is contingent eg 20% of trading profit if hurdles met etc, then they would still be subject to VAT

    3) The place of supply rules need to be checked. If the client is located outside of the UK, then the sales may be outside the scope of VAT. In this case, no VAT is due on sales and the firm may be able to reclaim VAT on its expenses if the sales would normally have been subject to VAT if supplied in the UK.

    Contact us

    This is a brief summary. VAT and financial services is a very complex area and we can discuss your circumstances and look at your contracts, as well as the legislation and VAT cases to design a VAT strategy. Please contact us for a free, no obligation consultation to discuss your requirements. Our base at Liverpool Street is within easy reach of the City, Canary Wharf or Mayfair or we could also visit you at your offices.

  • FCA audit

    FCA audit

    FCA audit:

    Do you need an FCA audit?

    Under the Companies Act 2006 (or as applied to LLPs) a business will normally need an audit if it is fairly large and exceeds 2 out of the 3 size limits of a small firm:

    • assets > £3.26m (£5.1m from 1/1/16)
    • turnover > £6.5m (£10.2m from 1/1/16)
    • employees > 50

    However, an FCA registered firm which is an MiFID investment firm is likely to require an FCA audit even if it would otherwise be a small firm (see notes below)*.

    FCA registered

    “FCA registered” refers to financial firms registered and authorised by the Financial Conduct Authority which is one of the successor bodies to the Financial Services Authority (FSA).

    FCA registered firms come under intense scrutiny and so it is vital that they only engage auditors with the skills and resources to ensure that their financial affairs are in order. This is also mentioned in the FCA handbook:

    [quote style=”boxed”]SUP 3.4.2R: Before a firm, to which SUP 3.3.2 R applies, appoints an auditor, it must take reasonable steps to ensure that the auditor has the required skill, resources and experience to perform his functions under the regulatory system[/quote]

    How we can help

    We have experience of auditing FCA registered firms and use all of our skills, resources and experience to ensure that the audit goes smoothly. Some of the key aspects of our work specific to an FCA audit are:

    1. checking your FCA permissions and capital requirements in detail;
    2. obtaining a full understanding of your business and systems;
    3. understanding your key risks and the controls to mitigate them;
    4. recalculating fees/commissions/brokerage;
    5. reconciling open positions, trading balances and fund/managed accounts to 3rd party reports;
    6. checking if you have held client assets or money;
    7. investigating any regulatory breaches;
    8. working fast and efficiently to meet your audit deadline;
    9. submitting client asset reports to the FCA upon completion

    Expertise

    Despite our small size we are highly skilled auditors. For example, we were invited to respond to the FRC’s new draft standard about FCA client asset audits. In fact, we were the only firm to participate not ranked in the Top 10 audit firms:

    MAH response to FRC consulation

    Are you paying too much for your audit?

    Some firms may ratchet up their prices as soon as they hear “FCA”, however we prepare our quotes on a fair basis and will normally be able to offer very competitive prices.

    *Detailed notes about the audit exemptions for MiFID firms

    Under s.478b(i) of the Companies Act 2006 MiFID investment firms are not exempt from an audit, even if they would otherwise be small companies.

    s.539 explains that an “MiFID investment firm” means an investment firm within the meaning of Article 4.1.1 of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, other than—
    (a) a company to which that Directive does not apply by virtue of Article 2 of that Directive,
    (b) a company which is an exempt investment firm within the meaning of regulation 4A(3) of the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2007, and
    (c) any other company which fulfils all the requirements set out in regulation 4C(3) of those Regulations;

    We can review your situation to check if your firm meets any of the exemptions under Articles 2 and 3 of Directive 2004/39/EC. If it doesn’t, Title II of Directive 2004/39/EC is likely to apply under 4A(3) of FSMA 2000 (MiFID) 2007. This means that your firm could be an MiFID investment firm which doesn’t appear to meet any of the exemptions in s.539 (a,b,c) , and therefore, required to have an audit.

    Want to find out more?

    Please contact us for a free, no obligation consultation to discuss your requirements.

  • Startup equity, dilution and cap table

    Startup equity, dilution and cap table

    If you’re raising funding or startup equity you need to work out how many shares to issue to investors. The easiest way is probably to work out the % holdings after the share issue and work backwards.

    For example, if there are 2 co-founders with 100 shares each who are raising £100k and the investor will get 10%, you might think that the investor will get 20 shares (10% of 200 total shares), however this would give them 9% as there would be 220 shares in issue.

    The investor would need to receive 22 shares, as this would give them 22/222=10%. This would also dilute the co-founders down to 100/222=45% each.

    Take a look at our template for a share capital table and play around with the figures to see how it works:

    Share capital table

    Share options / option pool

    We’ve also included an option pool for share options to be granted to key staff or even advisors. Share options are contracts which specify that the option holder can purchase shares at a specified price if certain conditions are met, for example 1 tranche of options could vest every quarter, whilst another tranche only vests if performance conditions are met.

    Need help?

    Please get in touch if you need any help with any of the following:

    – getting your house in order prior to receiving investment

    – calculating number of shares to be issued to investors or option pool

    – preparing board minutes, shareholder resolutions, investor offer letters and Companies House forms for share issues

    – tax advice for EMI share options or SEIS/EIS tax relief for investors.

    However, we highly recommend using a lawyer to draft or check the shareholders agreement or subscription document to ensure that co-founders’ rights are protected as much as possible.

  • VAT on Bitcoins

    VAT on Bitcoins

    see here for latest HMRC guidance on Bitcoins.

    http://www.hmrc.gov.uk/briefs/vat/brief0914.htm

    The post below was written before their guidance was published:

     

     

    VAT on Bitcoins

    Download the full report here

    There has been a lot of uncertainty regarding the treatment of VAT on Bitcoins and other cryptographic currencies. This uncertainty has led to a VAT risk as individuals and businesses are not sure of what their VAT liability, if any, could be from being involved in transactions with Bitcoins and cryptographic currencies.

    This report sets out to explore the various VAT issues surrounding the Bitcoin ecosystem, apart from whether or not Bitcoins could be classified as “money” or “currency” for VAT purposes, as this is still a work-in-progress.

    We have not identified any significant differences between the different crypto coins for VAT purposes.

    Are Bitcoins face-value vouchers or something else?

    HMRC appears to have classified Bitcoins “face-value vouchers” which may be single purpose.

    There may not appear to be any basis for this as demonstrated in the full report.

    However, Bitcoins could still be classed as digital commodities (software) or non-face value vouchers, in which case VAT would still be chargeable. This is unless an exemption can be found for them.

    Bitcoins do not appear to be Electronic Money as defined by EU Electronic Money Directive Directive 2009/110/EC.

    The ideal scenario would be if Bitcoins were classified as “money” or “currency” as these are exempt. Although VATA 1994 doesn’t define money, the EU Sixth Directive does make mention of legal tender. However, this is something which we are exploring in case there is any legal precedent to allow Bitcoins to fall within the exemptions.

    If there’s VAT on Bitcoins, how should people deal with VAT

    If merchants accept Bitcoins as payment for goods and services, then they would need to account for VAT on their services as normal. The amount is likely to be the market value of Bitcoins as at the tax point.

    However, it may be possible for merchants to avoid VAT on Bitcoins when exchanging for legal tender, as they would be used as consideration for a VAT exempt item (money).

    Miners, investor/traders and exchanges selling Bitcoins may need to account for VAT at 20% if they are supplying taxable supplies in the course of business. This will need to be looked at on a case by case basis, and there are 6 key tests.

    Donations received in Bitcoins may be able to avoid attracting VAT if they are freely given without expectation of goods or services in return, and not in the course of business.

    Is there VAT on Bitcoins if customers are located overseas?

    Bitcoins are likely to be classified as electronically supplied services in the absence of any exemptions and the special place of supply rules would apply for a UK supplier:

    business customer overseas: supply occurs in their country and not subject to UK VAT.
    consumer in EU: supply occurs in UK and subject to VAT
    consumer outside EU: supply occurs outside EU and not subject to VAT.

    Download the full report here

  • IR35

    IR35

    What is IR35

    IR35 ensures that contractors who are effectively “shadow employees” pay tax like normal employees.

    There is legislation for substance over legal form of a relationship between a contractor (or freelancer or locum) and client. Some contractors use limited companies to invoice “clients”, but the overall facts suggest they are actually employees and are “inside of IR35”.

    The basic questions to ask are:

    – do you see yourself as an employee of the company or are you genuinely in business on your own?

    – would you be subject to the same rules and control as employees?

    Key factors in particular are:

    • Substitution
    • Right of control
    • Mutuality of obligation

    Take the test! http://www.hmrc.gov.uk/ir35/guidance.pdf

    This doesn’t cover all the aspects, and there are a lot of factors to consider.

    What if IR35 applies?

    If IR35 applies, the consequences are that:

    • Income in form of deemed payment under Sch E
    • S.336 expenses can be claimed for travel, subsistence, PII, benefits in kind (& E’ers NI) etc
    • An additional 5% of turnover can be claimed as expenses
    • Deduct salaries + E’ees NI + E’ers NI paid in yr
    • The income left over will be subject to income tax and national insurance at the same rates as normal employees, ie 20/40% tax and 12/2% NI
    • E’ers NI also has to be paid 13.8% by contractor (client doesn’t pay)

    Factors suggesting IR35

    • No Substitution 
      • Worker cannot delegate or substitute without client’s consent
      • One person companies, unless evidence to contrary
    • Lack of control
      • Worker engaged for period, not specific tasks
      • Client can move worker to other tasks
      • Client directs, supervises and quality controls work
    • Mutuality of obligation
    • Engager obliged to pay a wage/remuneration
    • Worker obliged to provide own work or skill
    • Notice period irrespective of breach could be an indicator

    Potential indicators of employment:

    • work on the client’s premises
    • use the client’s equipment
    • work standard hours
    • be paid at an hourly rate or use of timesheets, no fee retention for performance
    • be subject to a right of control & take direct orders
    • Part and parcel of organisation
    • No financial risk, client obliged to give work, worker has to accept work given
    • Notice period to terminate, not at end of project
    • Right to receive e’ee benefits: sick pay, holiday, staff canteen, Xmas party

    Contract should reflect reality

    The actual working practices are the most important factor. So if the written contract does not reflect these, it will be ignored. HMRC have been known to interview both the contractor and the client to verify the working practices.

    Contract terms should be consistent, eg use company & supplier, not alternate with agency and contractor. HMRC may also have previously made a Status ruling at the client.

    Need help?

    MAH are well versed in the key issues surrounding IR35 and can advise contractors, freelancers and locums on how to proceed. Get in touch!