X

Archive for Accounting

Why has my business been rejected for a CBILS loan?

Why has my business been rejected for a CBILS loan?

Why are businesses struggling to get Coronavirus Business Interruption Loans Scheme? Our research at Cloud Accounting LLP has found the potential for some businesses to be left with a choice of only three lenders under CBILS. For example:There are 32 active lenders, of which 12 restrict CBILS to existing customers only. If the business is […]

VAT implications of paying for staff gym memberships and subsidised healthy meals

Q. My client is a new social media enterprise company and the directors are keen to encourage a healthy lifestyle amongst staff.

To capitalise on all the good intentions and resolutions of January they are to pay for a corporate membership to a local gym and are offering subsidised healthy meals and snacks in their office café. Please could you advise of the VAT implications of these initiatives.

A. Employee rewards and perks are dealt with in HMRC’s manual VAT Input Tax (VIT43700). Here it explains that services provided to staff can be a legitimate business expense, if they are provided mainly to reward or motivate staff.

If so, the VAT incurred is all input tax. No apportionment under s.24(5) of the VAT Act 1994 (VATA1994) is necessary. In some cases, a charge to output tax for private use may have to be made under the Supply of Services Order.

However, HMRC said: ‘Where facilities are provided to all employees strictly for the purposes of the business it is generally not our policy to apply such a charge.

‘But perks provided to specific individuals within a business should generally be subject to an output tax charge to reflect private use.’

Specific guidance on recreational facilities can be found at VIT43950 and here it is confirmed that where sports and recreational facilities are available to all employees, the VAT incurred on the cost of providing the facilities is input tax.

Again it is not HMRC’s policy to apply the Supply of Services Order. If any charge were to be made, then output VAT would be due on that amount.

With regard to staff meals, HMRC’s manual VAT Food (VFOOD5060); paragraph 10 of Schedule 6 of the VAT Act 1994 specifically refers to the provision of food and drink in the course of catering by an employer to an employee.

Where such supplies are made, the value of the supply is the monetary consideration alone, if any, paid by the employee. So where an employee pays for a meal, snack or drink, the supply is standard-rated and the value of the supply is the amount paid.

Where an employee is not required to pay for a meal, snack or drink the value of the supply is nil and no VAT is due.

Additionally, for completeness, following the judgment of the Court of Justice of the European Union (CJEU) in Astra Zeneca (Case C-40/09), where employees pay for benefits under a salary sacrifice arrangement, employers must account for VAT on the value of the supplies unless they are exempt or zero-rated.

Subject to the normal rules, the employer can continue to recover the VAT incurred on related purchases. Equally where deductions are made from salary for the benefits, the value of the supply is the amount deducted.

Should I charge VAT on expenses recharged to my client?

A common question we are asked is whether or not we should charge VAT on expenses recharged to clients. In this article, we will look at when you should or should not charge VAT to your client.

The simple answer is that if you are selling a standard rated product or service and you incurred expenses doing that – then you must charge VAT on the expenses that you are charging to your client. If you incurred a cost on behalf of your client, that you need to pass over to them – then is a disbursement. You pass the gross cost over to your client without charging VAT.

Let’s look at this in more detail.

Incidental Costs

Sometimes you will incur incidental costs during the delivery of a service or a product to a client that you might want to recharge to the client – such as hotel costs, mileage, taxi fares, train tickets, flights, subsistence or postage. These costs are your costs and they have been incurred by you and consumed in your own business. You have ‘consumed’ the product or service you are buying.

Posting the spend to your accounts:

  • You will post VATable spends net – you can recover any VAT charged on hotel, meal and subsistence costs providing you have the proper VAT invoice or receipt of course. You would recharge that net cost to your client.
  • Mileage expenses will be posted as costs to your accounts using the advisory fuel rates to recover the VAT element of your mileage claim. It is common practice to recharge mileage at 45p per mile whether you have recovered VAT on your mileage claim or not. You would have to charge VAT on the full mileage cost when you recharge it to your client – ie on the full 45p per mile.
  • Train fares and postage are zero-rated items for VAT so you will not be charged or be able to recover VAT on these spends. You would recharge the full cost to your client.

Recharging Incidental Costs

If you are VAT registered and you are recharging expenses to your clients – then you must charge VAT on all of those expenses – regardless of whether or not you paid VAT on the spend in the first place.

So when you recharge zero-rated expenses to the client – you have to add VAT to your recharge as the expenses are incidental to the main supply which is a standard rated.

Cost To YouRecharge
Cost Net VATGrossNetVatGross
Train Ticket120012012024144
Plane Ticket300030030060360
Hotel1402816814028168
Subsistence2042420424
Mileage – 100 x .454324545954
Total62334657623125748

What if my main supply is zero-rated or exempt?

If your main supply of goods or services is not a standard rated supply, then you would recharge expenses at the same VAT rate. If your main supply is zero-rated or exempt, then your recharge would be zero-rated or exempt.

Disbursements

Sometimes you might buy things on behalf of the client, with the full knowledge and permission of the client – that the client will consume. These are not expenses relating to your business, they relate to your client’s business – these are called disbursements.

To treat a payment as a disbursement all of the following must apply:

  • you paid the supplier on your customer’s behalf and acted as the agent of your customer
  • your customer received, used or had the benefit of the goods or services you paid for on their behalf
  • it was your customer’s responsibility to pay for the goods or services, not yours
  • you had permission from your customer to make the payment
  • your customer knew that the goods or services were from another supplier, not from you
  • you show the costs separately on your invoice
  • you pass on the exact amount of each cost to your customer when you invoice them
  • the goods and services you paid for are in addition to the cost of your own services

In this case, the costs belong to your client and you are acting as the agent.

You will not be able to recover any VAT you may have paid on the iten, because the cost does not belong to your busines.

You can list disbursements at the bottom of your invoice to your client and not charge VAT on them.

If you buy a train ticket for you or your staff to travel to your clients’ office, it’s an expense and you must charge VAT on it when you recharge it to your client. If you are buying a train ticket for your client to travel with you to an event – you can pass the cost on as a disbursement and not charge VAT on it.

Does it matter if a cost is an expense or a disbursement?

If both you and your client are VAT registered, then it makes little difference – you will recover VAT on your spends and charge VAT on the recharge to your customer. Your customer will recover VAT on the purchase.

If your client is not VAT registered and the cost did not have VAT on it, then there is a small advantage to recharging the cost as a disbursement – if the criteria for treating the cost as a disbursement are met.

If your customer is not VAT registered, they will, unfortunately, suffer the additional VAT on the recharge of your expenses.

What should I do if I discover an error in my accounts and I have not been recharging VAT on my expense recharges?

The correct answer is to go back and amend the error. Raise credit notes against invoices raised with the wrong values on and raise new invoices with the correct VAT charged on expenses and ask the clients to pay the difference.

If the client is VAT registered and you have charged VAT inclusive expenses gross, then ultimately – the correction should result in an overall cost reduction – albeit a small one. Although they will pay more VAT to you in the short term, they can recover the VAT paid in their next VAT return.

If the client is not VAT registered, the additional VAT will go straight to their bottom line.

What’s the difference between buying, Hire Purchase, or leasing business-asset


We are often asked what the differences are between buying outright, hire purchase and leasing business assets. So here is a summary of how they work for tax, VAT and what’s shown in the accounts for each method.

The choices will depend on what finance is available, but each method has different treatments for tax, VAT and accounting purposes.

Buy – Outright purchase with cash or a bank loan

How it works for tax
The depreciation charge is not allowable for tax relief but you can claim capital allowances.
100% tax relief may be available up to a maximum of £200,000. This does not apply to cars and the excess over £200,000 gets a lower rate of writing down allowance
Qualifying energy saving or environmentally beneficial equipment gets a 100% tax deduction.Loan interest used for the purchase is tax deductible.

How it works for VAT
If the purchaser is VAT registered, the VAT is claimed back on the VAT shown on the suppliers invoice.VAT can’t normally be claimed on cars.

What the accounts show
The cost of the asset goes on the balance sheet usually as a fixed asset and it is depreciated.


Hire Purchase – The asset usually includes an option to purchase at the end of the term

How it works for tax
This is the same as for an outright purchase.The finance charge is normally an allowable tax deduction.

How it works for VAT
VAT is normally payable with the first installment and claimed back in the normal way.
VAT can’t normally be claimed on cars.

What the accounts show
The asset on HP is shown as if it was purchased i.e. the cost of the asset goes on the balance sheet and it is depreciated.
The hire purchase amount due is shown as a liability on the balance sheet, which is reduced by the HP payments (excluding the interest element).


Operating Leases  – The asset isn’t owned but rented and returned to the owner at the end of the rental period e.g. contract hire

How it works for tax
The tax relief is given for the rental paid, except where the asset is a car with a Co2 emission exceeding 130g/km, where there is a 15% reduction in the tax claimable amount.

How it works for VAT
VAT is charged on each rental. Most businesses will be able to claim back 50% of the VAT on a car.  This restriction does not apply to maintenance charges shown separately on car contract hire.

What the accounts show
The rentals appear on the profit and loss account as an expense.


Finance Lease

How it works for tax
For short term leases tax relief is normally  given for the finance lease payments,  with a 15% disallowance  for cars with Co2 emissions exceeding 130g/km
For long term leases tax relief is given in line with the accounting treatment  and capital allowances claimed.

How it works for VAT
VAT is charged on each rental. Most businesses will be able to claim back 50% of the VAT on a car.

What the accounts show
For short leases (up to 7 years) the rental payments are shown as an expense on the profit and loss account.For longer term leases the asset is shown on the balance sheet and depreciated. 
There is  also a liability shown for the future rental payments.

I am a UK VAT registered business: how do I reclaim VAT on expenses incurred in Europe?

How to reclaim VAT on purchases abroad: refunds of VAT in the European Community for EC and non-EC businesses. 

Under the Thirteenth VAT Directive (86/560/EEC) UK businesses visiting other EC countries are able to claim VAT refunds on VAT incurred in those countries.

  • For a UK registered business the application is made online, via HMRC’s VAT services (log in to HMRC/the Government Gateway, go to VAT services and scroll down to see VAT EU refunds).
  • If the business has an agent, the agent is required to obtain authorisation (go online) for their client and then it may access the service.
  • A separate online application is required for each Member State in which a claim is to be made.
  • The refund period must not exceed one calendar year or be less than three calendar months unless the period covered represents the remainder of a calendar year following submission of an application which covers the earlier part of the year.
  • Claims must be made by 30 September following the calendar year that the VAT is charged.
  • Member States have their own special requirements; details can be obtained from the relevant tax authority.

Minimum claim level:

  • €400 euro if a claim covers a period of more than three months but less than a year
  • €50 euro if a claim covers a whole year or the remainder of a year (ie where a claim covers the whole period between the end of a prior claim and the end of the year)

Am I eligible to make a claim?

You can make a claim from an EU country if:

  • You’re not VAT-registered in that EU country and don’t have to be or can’t be registered there
  • You don’t have a place of business or other residence there
  • You don’t make any supplies there, unless
    • They’re transport services for the international carriage of goods
    • The person you’re supplying pays VAT on them

What can I claim?

A business can claim VAT on goods and services purchased during the refund period, and VAT on goods imported into the UK during the refund period.

No claim is allowed for VAT:

  • That has been incorrectly invoiced, or where VAT has been charged on the dispatch of goods to another member state, or the export of goods outside the EU.
  • On the purchase of a motor car
  • On goods and services used for business entertainment. As an exception, VAT on entertainment for overseas customers may be reclaimed but only if it is of a very basic nature.
  • On goods and services used for non-business activities.

Only 50% of the total VAT charged may be claimed on hiring or leasing a motor car.

The nature of the goods and services acquired have to be described according to the following expenditure codes.

1. Fuel.

2. Hiring of means of transport.

3. Expenditure relating to means of transport.

4. Road tolls and road user charge.

5. Travel expenses, such as taxi fares, public transport fares.

6. Accommodation.

7. Food, drink and restaurant services.

8. Admissions to fairs and exhibitions.

9. Expenditure on luxuries, amusements and entertainment.

10 Other.

Many Member States will require sub-codes in addition to the main codes set out above, and where applicable, these sub-codes will appear as completion options on the electronic portal. Where code 10 is used, without an accompanying sub-code, a narrative description of the goods or services must be entered in a free text box, using the language(s) required by the Member State of Refund.

If an invoice includes items covering more than one expenditure code the code relating to the highest proportion of expenditure is the one that should be used.

Currency of EU VAT Refund claims

All invoices entered on EU VAT Refund claims must be expressed in the currency of the Member State of Refund or the claim will be rejected by that Member State. If a claim is to a Member State where the Euro is not the national currency and a business has invoices that are in Euros they must be converted. The exchange rate used should be as on the date of the invoice as provided by the European Central Bank (ECB).

CLOUD ACCOUNTING LLP

#NumbersinBlackandWhite

ONLINE CHARTERED ACCOUNTANTS

BELFAST ADDRESS
Catalyst Inc,
Titanic Quarter
Belfast
BT3 9DT
+44 2895 219365


LONDON ADDRESS
New Broad Street House
35 New Broad Street
London EC2M 1NH
+44 207 971 1002

Name: Cloud Accounting LLP
Email address: richard@cloudaccountingni.com
Phone: +447868663538