Universal Credit Part 3: The Self-Employed

In continuation from Part 2 of this article we will now explore the specific areas of concern that may be of importance to the Self-Employed. You will remember in Part 2 we closed with the following paragraph:

“HMRC is currently consulting on a “cash basis” for those running low income businesses, but the UC regulations, administered by the DWP, have created a standalone system separate from that which HMRC is currently consulting on. This creates additional concerns for us as accountants which we will explore in Part 3, the final instalment of this article on Universal Credit”.    

Concern 1: Mixed Use

The draft regulations only allow the deduction of expenses which have been incurred “wholly and exclusively” for business purposes. This may at first seem to be similar to current tax legislation but on closer inspection we will realise that the tax legislation [ITTOIA 2005, s34 (2)] allows for the deduction of business expenses in instances where it only forms part of the whole expenses. The draft regulation is silent in this regard.

The next issue, concerns the use of the home for business purposes. The Universal Credit regulations in proposing a flat rate for particular deductions as business expenses seem to have excluded the general business administration and storage at home.

Finally, it should be noted that “cash accounting” will be optional for tax purposes but appears to be mandatory for Universal Credit (UC).

Concern 2: Unreasonable Expenses

Under the UC regulation, it will not be possible to get a deduction for expenses which are considered to be unreasonable. There is no definition of unreasonable in the draft regulations and past tax cases tended to define unreasonable expenses as those that have an element of personal choice.

At this stage we are not sure how this issue will be dealt with but it is quite strange that a public servant at the DWP may have the power to dictate to business owners the reasonableness of their business expenses.

Concern 3: Carry Forward

Of the three, this in our opinion is the most serious issue. Cash accounting for tax purposes is based on accounts over the period of a year and allows the carry forward of negative balances to be set of against future positive balances.

In stark contrast the draft UC regulation looks at accounts on a month by month basis and further proposes that negative balances should be treated as zero and therefore disallowing the option for a carry forward to future periods.   The problem with this approach is illustrated in the example below.

Therefore under UC, expenses which are incurred for a whole year will be treated as being wholly applicable to the month in which they arise.

Illustration

James and Wendy were both seasonal retailers of children summer clothing and worked on their separate business ventures during the months of June, July & August. They were both self-employed and each sold £5000 of stock during each month at a gross profit margin of 50%.

Assume for the purposes of this illustration that they have no other expenses and James bought all his stock in June while Wendy bought hers as she needed to in each month.

Calculating their income as required by the draft UC Regulation gives the following results:

	James	Wendy
June
Sales	5,000	5,000
Less Stock Purchased	7,500	2,500
Total	-2,500	-2,500
Reportable for UC		-2,500
July
Sales	5,000	5,000
Less Stock Purchased	-	2,500
Total	5,000	2,500
Reportable for UC	5,000	2,500
August
Sales	5,000	5,000
Less Stock Purchased	-	2,500
Total	5,000	2,500
Reportable for UC	5,000	2,500
Total Income Reportable for UC	10,0000	7,500

Harvey Edwards helps local businesses by launching new VAT Recovery service

Leeds based accountancy firm Harvey Edwards LLP has created a new service offering businesses an opportunity to claim back VAT from the HMRC.  

Marlon Appleton, a partner and VAT specialist in the firm commented that: “we know cash is tight in the current economic environment and realised from our experience that many businesses were inadvertently overpaying VAT”. This comes from potentially years of small human errors, with employees not fully understanding what is required by legislation and employers not having the resources to identify every error made in processing transactions.

FileDoc Ltd, a newly established supplier of multifunctional photocopiers, printers and related consumables is the latest beneficiary of this service that has led to improving cash flow to the start-up business.

Godfrey Gabriel Managing Director of FileDoc Ltd said “the professional service that I experienced with Harvey Edwards did not just help to improve my immediate finances and recover 75% of my VAT liability from just a few invoice;, but also allowed me to put in measures to prevent it from happening again”.

For the 2011-12 tax year HMRC collected £99.6 Billion in VAT. Some of that belongs to you. We therefore encourage businesses to actively seek help in order to recover valued cash that they are due and need.

Research has shown that companies on average under recover VAT by 30% resulting in net outflow of cash.

Universal Credit Part 2: The Self-Employed

In Part 1 of the article “Universal Credit: The Basics” we have highlighted the impact the draft regulations will have on PAYE, and to our disappointment, most of the national attention has been focused in this direction. However, the implications of the Universal Credit (UC) draft regulations are far more serious for the self-employed and it is our intention to add our voice to the public debate by showcasing these concerns. 

Tax Credits Overview

Tax credits are payments from the government. If you work and currently on low income you may qualify for Working Tax credit; additionally, if you are responsible for at least one child or young person you may qualify for Child Tax Credit. You may qualify for both of these payments which are not taxable. 

How it Works

Tax Credits are usually based on your income for the previous year and the payments are only ever amended during the current year if you notify HMRC of a fall in income for the current period. 

After the end of the current year, you will then have to provide details to HMRC of total income received for that year, usually by July 31^st for the employed and January 31^st for the self-employed. 

Reason for the Change 

Remember we mentioned that the calculation and payment of Tax Credit are based on your income for the previous year? Now this has always created a bit of a dilemma for the DWP, namely for example what to do where a person whose current income is higher than their previous year’s income but they are currently receiving Tax Credit based on their previous year’s income levels. This would naturally result in an overpayment of Tax Credit.  To reduce the number of repayments requested from claimants an “income disregard” of £10,000 has been put in place. The income disregard is an amount that you can earn above your previous year’s earnings without the need for you to make repayments to the DWP.  

 

However, with the advent of Real Time Information for PAYE the designers of UC have determined that Tax Credit payments should now be based on current year’s income rather than that of the previous year. Further, the draft regulations require payments to change immediately as your income level changes. This is to ensure that HMRC knows of all earnings of taxpayers immediately as is realistically possible.  

The Self Employed

This takes us into the problem of the self-employed. They need to be brought within UC but HMRC has no intention of collecting their information other than through Self-Assessment (or VAT returns where applicable). The draft regulations therefore suggest that the self-employed should submit monthly statements of income. You probably need to go and get yourself a drink at this point huh? I can assure it’s not a typo, a monthly statement of account is what will be required if the current draft regulations remain unchanged. 

The draft regulations suggest that income will be reported on a “simplified cash income basis”, and that this will make it easier for a claimant to report monthly without the need for an accountant. This statement in our view highlights the naivety of the UC designers as it relates to accounting for the self-employed.  

HMRC is currently consulting on a “cash basis” for those running low income businesses, but the UC regulations, administered by the DWP, have created a standalone system separate from that which HMRC is currently consulting on. This creates additional concerns for us as accountants which we will explore in Part 3, the final instalment of this article on Universal Credit.  

www.he-llp.com

0113 815 1315

15 Queens Square, Leeds, LS2 8AJ

Income Contraction for Contractors

Background

It is common practice in the UK for individual contractors to contract their services to clients through a Personal Service Company (PSC), rather than be on the client's payroll as an employee. This could be as a cover for maternity leave, an IT contract or simply as a means to build a consulting business from scratch.

This arrangement provides a variety of tax advantages, such as avoidance, not evasion, of PAYE and National Insurance.

The PSC in most cases would raise an invoice to the engaging company, with VAT where applicable, and records this as trade income as opposed to employment income which is totally legitimate and legal.

HMRC's Position

HMRC has recently opened consultation into this practice as it seeks to counter this advantage by requiring the engaging company to deduct PAYE & NI at source before paying the invoice of the intermediary company.

Current Legislation

The IR35 legislation enacted in April  2000 was designed specifically to ensure that persons who control these PSCs that obtained contracts from clients, pay the relevant PAYE & NI is there engagement would be one of employment were it not for the imposition of the PSC.

This consultation now aims to shift that responsibility onto the contractor's client which would create a raft of unwelcome results the least of which would be:

·         The client in deducting PAYE & NI at source would then need to make payments of employer's NI adding additional costs to the client

·         The employment status now being afforded to contractors may result in the need to provide all the benefits that normal employees enjoy

Our Position

The consultation document has raised quite a few questions for us here at Harvey Edwards, namely:

1.      How is VAT to be treated, now that the trade income of the PSC will become the employment income of the director?

2.      Are we now to assume that where the PSC accounts are concerned there will be no income to report?

3.      Wouldn’t it be more commercially viable to use the current IR35 legislation as a means to grant amnesty to those contractors who have failed to account PAYE & NI; similar to the amnesty provided to the medical profession, plumbers & electricians which have yielded great success for HMRC?

To read the consultation document in its entirety please click here.

For more information on this document please contact:

  www.he-llp.com

0113 815 1315

15 Queens Square, Leeds, LS2 8AJ

Indirect Tax Update: Automobile Sector 2/12

Headlines – Bad Debt Relief (BDR)

Following last week’s breaking news of the Upper Tribunal’s Judgment please find below text of an alert sent to all readers subscribed to HELLP’s Indirect Tax Update.

GMAC 3 – Upper Tribunal Judgment

The case is about the vires for the restrictions to the UK Bad Debt Relief (BDR) rules which applied between 1978 and 1997, as well as the way in which s.22 VATA 1983 (‘the Old Scheme’) was repealed. Judgment has now been released by the Upper Tribunal.

Background

Let us start with reminding our readers what the current bad debt relief (BDR) rule is: If you send an invoice to your customer on the 1^st of January for say £100 plus £20 VAT you will immediately need to account for the output tax and pay the £20 VAT over in the next VAT return that covers the January period. Now if six months has passed from the due date of the invoice and your customer has not paid you, then you can claim BDR by requesting that HMRC pays back the £20 to you, subject to certain conditions; hence the term Bad Debt Relief.  

Prior to 1989, no BDR claims were possible unless the debtor became insolvent (‘the Insolvency Condition’). For the whole of the 1978 to 1997 period no BDR claim was possible if the contract of sale included a ‘Reservation of Title’ (ROT) provision (under which title to the goods did not pass to the customer until and unless all payments due under the contract had been made) (‘the Property Condition’).

In Section 39(5) of the Finance Act 1997, the UK sought to withdraw the right to bring claims under the Old Scheme by providing minimal notice (‘the Time Limit Issue’).

GMAC’s Position

GMAC argued that the Property and Insolvency Conditions were ultra vires and could not be relied upon.

GMAC also argued that Section 22 VATA 1983 was repealed without giving taxpayers sufficient notice, and that the repeal should be ineffective.

HMRC’s Position

HMRC opposed these arguments, and also argued that GMAC was trying to rely on a directly effective right in conjunction with domestic legislation to produce a result not intended by the Directive. HMRC said that GMAC would benefit from a windfall if it relied on both a directly effective BDR claim and on the domestic law de-supply of the subsequent sale of any repossessed vehicles. HMRC said that there could be no directly effective right to a windfall (‘the Windfall Issue’).

The Decision

The Upper Tribunal has found in favour of GMAC on the Property Condition, the Insolvency Condition and on the Time Limit Issue; however the Upper Tribunal found the Windfall Issue extremely complex, and has invited the parties to make further submissions before finally deciding whether or not to make a reference to Europe. It is currently hoped that further submissions will be made at a hearing in October.

Why is this important?

This is a positive decision for taxpayers. The Windfall Issue is relevant only in connection with BDR on repossessed hire purchase goods which are resold. Other taxpayers with historic BDR claims are unlikely to be affected by the Windfall Issue and based on the Judgment as it presently stands, other taxpayers should now be able to make domestic law claims under s.22 VATA 1983 (although it remains likely that HMRC will continue to reject such claims until the GMAC 3 litigation is finally determined one way or the other).

How it affects you

The outcome of the above case should give tax payers the motivation to lodge BDR claims which were previously denied, with HMRC as a precedent has now been set by the GMAC ruling.

Serious thought to lodging their claim, as HMRC may now seek to‘re-repeal’ s.22 VATA 1983.

Taxpayers who have already lodged claims, had them rejected, and appealed will not need to take any further action, save for keeping their claims up-to-date on a four year basis.

Contacts

Feel free to contact one of our VAT advisers if you need to lodge a VAT claim or if you have any questions about this case and its implications for your business. 

www.he-llp.com

0113 815 1315

15 Queens Square, Leeds, LS2 8AJ

HELLP’s Indirect Tax Update: Education Sector 1/12

HMRC Update - Framework for Higher Education Institutions PESM

HMRC has now made publicly available the new version of the Framework for Higher Education Institutions (HEIs) partial exemption special methods (PESM).

This has been agreed with the British Universities Finance Directors' Group and the Higher Education Funding Council for England providing guidance on formulating PESM for HEIs. The framework includes guidance on:

• How to determine a fair ‘value’ for supplies of grant-supported education;

• When to add ‘sectors’ to a PE method; and,

• How to identify and deal with ‘distorting supplies’.

The document adds that this framework is not mandatory and does not replace the content of VAT Notice 706 (Partial Exemption), but adopting its principles will enable HMRC more readily to give approval for a PESM for which a Statutory Declaration has been made. It takes full account of the findings of the KPMG Review of Partial Exemption in the Higher Education Sector (KPMG Review) that was commissioned by BUFDG, HEFCE and HMRC and which was published in June 2007.

Click here to view the guidance in full.

www.he-llp.com

0113 815 1315

15 Queens Square, Leeds, LS2 8AJ