The new rules will be effective in respect of profits arising on or after 1 April 2015.
1st Rule
The first rule is designed to address arrangements which avoid a UK permanent establishment (PE) and comes into effect if a person is carrying on activity in the UK in connection with supplies of goods and services by a non-UK resident company to customers in the UK, provided that the detailed conditions are met.
This only applies where the UK person and foreign company are not small or medium-sized enterprises (SMEs).:
Maximum number of staff
And less than one of the following limits: Annual turnover
Balance sheet total
Small Enterprise
50
€10 million
€10 million
Medium Enterprise
250
€50 million
€43 million
There will also be an exemption based on the level of the foreign company’s (or a connected company’s) total sales revenues from all supplies of goods and services to UK customers not exceeding £10 million for a twelve month accounting period.
2nd Rule
The second rule will apply to certain arrangements which lack economic substance involving entities with an existing UK taxable presence. The primary function is to counteract arrangements that exploit tax differentials and will apply where the detailed conditions, including those on an “effective tax mismatch outcome” are met.
This only applies where the two parties to the arrangements are not SMEs (the SME test will apply to the group).
For more details, please look at the pdfs at the link above, or get in touch with us if you need advice.
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.
You can get a tax deduction for pre trading expenses incurred upto 7 years before your business started trading.
Pre-trading
Under CTA2009 s.61, if a company incurs expenses for the purposes of a trade before (but not more than 7 years before) the date on which the company starts to carry on the trade and a deduction would be allowed for them if they were incurred on the start date, then the expenses are treated as if they were incurred on the start date (and therefore a deduction is allowed for them).
Pre-incorporation
Note that CTA2009 s.61 mentioned above relates to pre trading expenses incurred by the company. If a company doesn’t yet exist, how can it buy goods or services?
There could be a risk that this legislation technically may not apply to pre-incorporation expenditure, as this has been incurred by a person who is intending to incorporate.
However, a pre-incorporation contract could potentially be used which states that the founder/director will be acquiring fixed assets and incurring expenses on behalf of a new company yet to be incorporated, not on behalf of themselves.
This would then need to have been ratified after incorporation, in accordance with Companies Act 2006 s.51 “A contract that purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.“ (this legislation normally applies to contracts with external parties, but should be relevant to this context).
When does “Trading” start?
Just in case you’re interested in the details behind commencement of trading or tax periods:
Under CTA2009 s.9 (1) an accounting period of a company begins when the company comes within the charge to corporation tax.
S.9(2) also mentions a company is treated as coming within the charge to corporation tax when it starts to carry on business.
Therefore, if a startup has not started to carry on its business by the end of its accounting year, it would not have come within the charge to corporation tax, and therefore there would not be any accounting period for corporation tax purposes.
BIM70505 provides guidance that the House of Lords judgements in Ransom v Higgs [1974] 50TC1 stress the active nature of trading – the need to be providing goods or services, to be trading with someone.
The courts have distinguished between preparing to commence business and actually commencing business. As a general rule a trade cannot commence until the trader:
– is in a position to provide those goods or services which it is, or will be, his or her trade to provide, and
– does so, or offers to do so, by way of trade.
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.
Residential property can be a lucrative business, but profits or gains will be subject to tax. In this post we discuss some of the property tax planning options, including using limited companies or LLPs, trading vs investment property, capital gains tax and entrepreneurs relief. Please download the full report on residential property tax planning for full details.
Trading stock vs Investment property tax planning
Residential property can be purchased for different motives and this will impact upon the property tax planning:
to be resold in the short term at a profit (trading stock)
for capital appreciation whilst generating rental income (investment property)
When trading stock is sold, it will generate trading profits which are taxable as business income. A trading business will also be eligible for additional tax reliefs such as Entrepreneur’s Relief and Substantial Shareholding Exemption to minimise tax.
An investment property, however, will generate capital gains or losses which are taxed differently, and many of the reliefs available to trading businesses are not available to investment businesses.
For properties held individually, higher or additional rate taxpayers will pay a much lower rate of 28% on capital gains from investment properties compared to 40% or 45% on profits from trading stock.
Limited company vs Individual property ownership
The tax liability will depend on whether owners are basic, higher or additional rate taxpayers. The example in the table below shows the tax payable on a gain/profit of £80,500 for a higher rate taxpayer:
Total tax paid using:
Investment property (£)
Trading stock (£)
Ltd co. & all profits retained
14,600
16,100
Ltd co. & all profits distributed
31,075
32,200
Individual purchaser
19,488
29,845
This clearly shows that for both investment properties and trading stock, a limited company would save tax if profits are kept within the business or are re-invested. This is because a company only pays tax at 20%.
However, if the company were to pay out the profits as dividends, there would be another level of tax. So if the intention is to extract significant profits on a regular basis, it may better to hold the properties individually. This is especially the case for investment properties as individuals can also benefit from capital gains tax allowances and CGT tax rates are lower than income tax for higher/additional rate taxpayers.
If multiple properties are purchased, multiple limited companies could also be used to contain risk if any 1 property runs into difficulties with mortgage repayments. Although lenders may demand cross or personal guarantees.
A director could also give a startup loan to the company to initially purchase property and this could be repaid tax free.
At the end of the company’s life, it could be closed down and the shareholder would pay capital gains tax on the return of capital. This may save tax compared to taking dividends out on annual basis. A company with trading stock could also claim entrepreneurs relief and so pay tax at only 10%.
The main disadvantage of using a limited company is that there is a double level of taxation, as more tax will need to be paid when the shareholders extract profits,
A limited liability partnership (LLP) may offer the best of both worlds,. This is because they are transparent for tax purposes and can be structured with 1 individual partner and 1 corporate partner. This allows capital and income to be allocated to partners in an efficient manner for property tax planning.
The following table highlights some of the key differences in property tax planninh:
Trading stock
(business income)
Investment property
(capital gains)
Corporation tax rate
20%*
(*if profits > £1.5m rate is 23% in 2013 & 21% in 2014 & 20% from 2015)
20%*
but can also deduct indexation allowance for inflation
Individual tax rate
Income tax rate (20/40/45%) plus Class 4 NIC (9/2%) depending on total level of income.
Capital gains tax at 18% for basic rate or 28% for higher rate taxpayers. (also higher personal allowance for CGT)
Entrepreneur’s relief
Eligible: an individual could pay CGT at 10% on first £10m of lifetime gains, if dispose or close down a trading business
Ineligible
Substantial shareholding exemption
Eligible: a company can get tax free gains from selling trading companies if conditions are met.
Ineligible
Expenses (repairs vs capital)
Expenditure on the property will be added to stock, and so will normally get the tax deduction on sale.
Immediate tax deduction for repairs which do not improve the property. Capital expenses will get relief from CGT on sale.
It is sometimes possible delay VAT liabilities on invoices, and extra care should be taken with the timing of invoices close to the VAT quarter end.
VAT Act 1994
The legislation states that VAT becomes due on the earlier of the following possible tax points:
the services or goods have been supplied to the customer s.6(2,3)
a VAT invoice is issued s.6(4)
payment is received s.6(4)
14 day rule
An exception to this is if the VAT invoice is issued within 14 days of the service/goods being provided s.6(5). For example, if you completed the transaction 7 days before the VAT quarter end, the invoice could be raised within 7 days after the quarter end. This would defer the VAT liability for 3 months until the next quarter.
Use proforma invoice / request for payment to delay VAT
You can also use proforma invoices or requests for payment to delay VAT. Proformas are especially useful if your business takes advance payments/deposits or if services are provided on a continual basis. This will help delay the VAT liability arising until the payment is received. If using proformas or requests for payment make sure that they don’t mention any VAT amount or VAT registration numbers, and also write that “This not a tax invoice”.
But note that some businesses hate requests for payment as it may delay their own claim for input VAT on your invoice!
Many businesses will structure their affairs by using a group of companies. There will be a parent or holding company at the top, and this will hold 1 or more trading subsidiaries.
Advantages of using a holding company
There is no tax on dividends from subsidiaries to the holding company, so you could build up funds to invest without suffering additional tax.
The holding company could sell shares without suffering tax if eligible for substantial shareholdings exemption (eg hold >10% of a trading company for at least 12 months).
In my experience, a key reason for using holding companies is to enable losses and assets to be transferred around the group to minimise corporation tax or capital gains. You could also use the holding company to charge “know how” or management fees to the subsidiaries, which could save tax if the holding company is registered in a lower tax jurisdiction (& managed and controlled offshore).
The major downside to using a holding company is that it may create “associates” for tax purposes which means that the corporation tax limits get split by the number of companies in a group. Although, when the full rate comes down to 20% in 2015 this won’t make any difference.
Sales invoices need to be recognised in the correct accounting period.
An invoice can sometimes be deferred when preparing the annual accounts, thereby deferring corporation tax for another year also.
If an invoice has been raised prior to the year end it is imperative to analyse any supporting contract or sales order and to consider whether the sale has been made prior to the year end.
If the sale is found to occur after the year end, it should be included next year and would be deferred income.
Goods
In the case of goods, the key issue will be whether the significant risks and rewards of ownership have been transferred to the customer. For example, if goods have been shipped prior to the year end this would normally indicate that the risks and rewards of ownership have been delivered.
However, if the seller is responsible for insuring the goods during transit, they would still have the risks of ownership if the goods reach their destination post year end. The goods should be recorded in stock and sale occurs post year end, so there would be deferred income.
Services
With regards to services, the key issues are whether the contractual obligations have been fulfilled and the period to which the services relate. For example, annual services or subscriptions should be recognised over the whole year. eg an annual invoice raised on 30 Nov’12 by a company with a 31/12/12 year end should have 11/12 months deferred income until the following year.
If a business provides services over a length of time it is also important to consider if there are any contractual obligations which need to be fulfilled before the income can be fully recognised in the accounts, but are subject to critical events outside of their control. For example, a business may raise sales invoices on a stage by stage basis eg 40% upfront, 40% on hitting a milestone, 20% on completion.
Deferred income for entire contract? (eg Events)
If the entire contract is subject to final delivery or a critical event then it may not be correct to recognise the invoice beforehand. For example, a business organising/planning events wouldn’t have distinguished all its obligations until the event is successfully delivered.
In this case the income, and therefore tax, should only be recognised once the event occurs.
Further help
If this sounds complicated, MAH would be happy to help and we have lots of experience with dealing with issues around deferred income. Contact us now!
Background to tax/accounting rules:
HMRC guidance mentions:
BIM31019 – courts reluctant to override generally accepted accounting practice.
BIM40080 – case law generally supports the accruals concept.
BIM40075 – mentions no general standard for revenue recognition.
BIM40075 appears to be out of date as FRS 5 was amended in 2003 to cover Revenue Recognition and UITF 40 also gives the following guidance:
p(26) Where the substance of a contract is that the seller’s contractual obligations are performed gradually over time, revenue should be recognised as contract activity progresses to reflect the seller’s partial performance of its contractual obligations. The amount of revenue should reflect the accrual of the right to consideration as contract activity progresses by reference to value of the work performed.
p(27) Where the substance of a contract is that a right to consideration does not arise until the occurrence of a critical event, revenue is not recognised until that event occurs.
p(28) The amount of revenue recognised on any contract for services should reflect any uncertainties as to the amount that the customer will accept and pay. [p(19)… This only applies where the right to consideration is conditional or contingent on a specified future event or outcome, the occurrence of which is outside the control of the seller].
