Tax Matters

Payroll

Helpful publications

H M Revenue & Customs publish various booklets relating to how PAYE is operated and the legislation that you have to comply with. Not only do you collect and remit PAYE to the Collector of Taxes on behalf of H M Revenue & Customs, you also operate the sick pay scheme and maternity pay scheme. You should run the PAYE scheme in accordance with the legislation and should you fail to comply then H M Revenue & Customs will look to you for the tax or NIC you failed to deduct. This can be costly if you are unable to recover the tax and NIC from the employee.

Real Time Information (RTI) payroll is now in operation. All penalties for late submission will commence period commencing 6th march 2015 ( announced September 2014)

Do you have employees?

Whether an individual is an employee or not in a particular situation is a question of fact depending on the terms on which he works. The question of whether an individual is employed or self-employed is very important for the business “employing” him or her, as that business has to comply with the reporting requirements.
In certain areas H M Revenue & Customs has placed emphasis on reclassifying individuals claiming to be self employed and has issued leaflet IR56 entitled “Tax: employed or self employed”. This booklet sets out the questions that should be answered to determine the problem. If you have treated someone as self employed and subsequently after a routine visit from H M Revenue & Customs it is clear that they were employees, then the tax and NIC which should have been paid will be assessed on you. Therefore it is important to ensure when using the services of self employed people that they are in fact self-employed. If doubt exists as to the status of an individual, the situation can be clarified with H M Revenue & Customs.

The Operation of a PAYE Scheme

Upon registration H M Revenue & Customs will send to you guidelines on operating PAYE, National Insurance, Statutory Sick Pay and Statutory Maternity Pay (employer’s pack). Included will be a number of forms with which to operate the PAYE and NIC system.

PAYE and National Insurance should be paid to H M Revenue & Customs by the 19th of the month following that in which the salaries were paid.

In most businesses, the directors, and often the employees, have benefits that are not immediately taxed through the PAYE system, the most usual being the provision of a car and possibly fuel. Class 1A National Insurance contributions are due on the taxable value of these benefits in kind and are due on the 19 July following the fiscal year in which the benefits are made available. In addition, H M Revenue & Customs requires on an annual basis, a form P11D (Return of expenses payments and benefits) for all directors irrespective of income and all employees receiving remuneration including the benefit in excess of £8,500. For those employees earning less than £8,500 but who receive expense payments and benefits, a form P9D is required.

A form P46(Car) needs to be completed if any employees have been provided with a company car. Up until 6 April 2009 it was necessary to also report changes during a year but this requirement has now been relaxed. H M Revenue & Customs will still require form P11D to be submitted annually in addition to the P46 (car) forms.

Payroll Software

The use of the tables described above can be very time consuming and prone to error so it is recommended that either payroll software or a payroll bureau service is used if you have employees. There are mandatory online filing regulations in place in some circumstances and this requirement is likely to increase in the future. It is also more convenient to file P45 forms for leavers online and to obtain tax code changes direct from HMRC.

VAT

VAT is a tax on consumer expenditure and is ultimately paid by the final customer. Most business transactions involve the supply of goods or services and VAT is payable if they are made:
a) in the United Kingdom
b) by a taxable person
c) in the course or furtherance of business and are not specifically exempted or zero-rated
VAT is collected by HM Revenue & Customs and is normally payable quarterly.

VAT Registration

There are two different types of registration – compulsory and voluntary:

A. Compulsory
A person who makes taxable supplies becomes liable to be registered if:
a) At the end of any month, the value of his taxable supplies in the period of one year then ending has exceeded the registration limit, which is £81,000 from April 2014.
b) At any time, there are reasonable grounds for believing that the value of his taxable supplies in the next 30 days will exceed the £81,000 limit.
c) If, where a business carried on by a taxable person is transferred as a going concern, the taxable supplies for the twelve months prior to the transfer exceed £81,000.

In the most common situation, i.e. (i) above, the person must notify H M Revenue & Customs of the liability within 30 days of the end of the month in which the value of the taxable supplies first exceeded £81,000. If, for example, the value of the taxable supplies first exceeded £81,000 in the twelve months to 31 March, then H M Revenue & Customs must be notified by 30 April and VAT registration would commence on 1 May.

B. Voluntary
In certain circumstances, it is possible to register on a voluntary basis for VAT even though the value of taxable supplies may never exceed £81,000. This is normally only beneficial where the majority of supplies are being made to customers who are themselves VAT registered, e.g. it would not be beneficial for a domestic painter with taxable supplies of £30,000 to be registered, whereas it may be beneficial for a commercial or industrial painter with the same level of supplies.

The other situation in which a voluntary registration might be beneficial is where the supplies are all zero-rated and no VAT is charged on the transaction. All VAT suffered by the trader on expenses can be reclaimed from H M Revenue & Customs.

In summary, the advantages and disadvantages of a voluntary registration are as follows:

Advantages

  • enables input VAT suffered to be reclaimed;
  • a VAT number can give the impression that a business is larger than it actually is which sometimes can increase the possibility of obtaining work.

Disadvantages

  • the requirement to prepare VAT returns on a quarterly basis and to submit them and if applicable pay over the VAT due within one month of the quarter end – is the amount of work involved worth it for the amount of input VAT that can be reclaimed?
  • H M Revenue & Customs may visit the business about every five years to ensure that VAT is being properly accounted for. There may be penalties for incorrect returns.

Taxable Persons and Supplies

a) Taxable Persons
It should always be remembered that it is a person that is registered for VAT and not a business. If a person has two separate different businesses, both with taxable supplies of £50,000, then that person will be required to be registered for VAT and account for VAT at the appropriate rate on the total supplies of £81,000.
It is possible to mitigate the effect of VAT by having one of the businesses operated by a limited company or by a partnership with a relative, but professional advice needs to be taken since H M Revenue & Customs have the power to still treat the two businesses as one if strict criteria are not met.

b) Taxable Supplies
Taxable supplies are all supplies made by a business either to a third party or to the trader himself (goods for own use), which are not exempt supplies. Taxable supplies therefore include zero-rated supplies.

The major categories of exempt supplies are:

  • Land (but not buildings)
  • Insurance
  • Postal services
  • Betting, gaming and lotteries
  • Finance
  • Education
  • Health and welfare

It is important that at the outset of a business, a trader establishes the VAT status of any supplies being made to avoid mistakes, e.g. the services of a physiotherapist are exempt, whilst the services of an acupuncturist are standard rated.