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What are alphabet shares and why do business owners need to be aware of them?

What are alphabet shares?

Limited Companies are traditionally formed with a nominal number of ordinary shares. As the company grows and more shareholders are added, alphabet shares are certainly something to consider.

Dividend waivers vs alphabet shares

Dividends are received by all the shareholders of a Limited Company, in proportion to their personal shareholdings. Should there be a need for one shareholder to be paid a different amount to the other shareholders, there either needs to be a dividend waiver or the share structure needs to be amended.

  • If you believe you’ll use dividend waivers on a regular basis to distribute company profits disproportionately to the same class of shareholder, then it’s advised to use alphabet shares as a permanent alternative method.
  • HMRC are more likely to question dividend waivers
  • Waivers can be seen as unreliable as all shareholders must give their consent each time
  • Alphabet Shares do not need the consent of all shareholders, as dividends are declared by reference to shares held, meaning that dividends declared as being payable to holders of Ordinary shares have no bearing on dividends declared as being payable to holders of an Alphabet share
  • It is possible to attribute rights or restrictions to alphabet shares. This could be in relation to voting rights or or rights to distribution on wind up.
  • Alphabet shares allow freedom and flexibility in paying dividends, so payments can be made to a certain class of share without having to pay the same amount in dividends to each company shareholder. If your Limited Company’s shareholders are taxed at higher rates than one another (if at all) then alphabet shares are a particularly good idea.

Settlement Rules

Whether you decide to use dividend waivers or alphabet shares, it’s important to understand whether either is caught by the Settlement Legislation.  In short, the Settlement Legislation is designed to expose and punish anyone who uses dividend waivers or alphabet shares purely to divert income from one person to another, thus resulting in a tax advantage.

For alphabet shares it’s particularly important to understand that a lack in voting rights (for example) could result in being caught by the Settlement Legislation.

To ensure you do not fall foul of the Settlement Rules, we advise you do the following:

  • Any new shares made under the alphabet scheme must be an outright gift and have exactly the same rights as the original ordinary shares. Restrictions cannot apply (such as being non-voting, carrying lesser rights to capital, or promise to return shares on demand). You must not make the shares redeemable preference shares.
  • If you decide to gift shares to spouses, it’s recommended to show that they have an active interest in the running of the company, such as becoming a director, the company’s secretary or even an administrator.
  • Only pay dividends into a bank account that holds the recipient’s name (such as joint accounts) to ensure you don’t attract unwanted HMRC attention.
  • Remember that in order to claim Entrepreneur’s Relief should you decide to sell the company, a 5% share is required.
  • Pay some dividends to each type of share, so as to minimise the risk of HMRC claiming that dividends should not be paid, unless one class of share was not allocated any dividend.

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.

Please contact us if you want more advice on this topic.

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).

A very short guide to: International VAT

VAT is a tax that is applied in all EU countries. However, each EU country has different rules and regulations governing how it collects VAT. Some non-EU countries have VAT rules which differ from EU VAT rules.If you’re planning to trade internationally, you’ll need to familiarise yourself with the laws of each country you trade with. Most businesses seek professional advice at this stage. However, to get started, here’s an overview of some of the fundamental international EU VAT principles.

Due to the result of the Brexit referendum, it will be necessary to monitor any changes to the UK and EU VAT position when further details on the terms of the UK's exit from the EU are known. In the meantime, our advisors will be able to discuss the possible implications on your business with you.

Trading within the EU

Goods

When you begin buying and selling goods within the EU, there are a few administrative requirements to stay tax compliant. These include:

  • EC sales list – This is a document you need to submit to HMRC with the VAT return which outlines sales to businesses in other EU member states.
  • Intrastat – When the value of dispatches and acquisitions of goods to and from the EU member states breaches certain thresholds, you need to submit an intrastat form monthly. This details the movement of your goods around the EU.

Dispatching goods to an EU member state

If you sell goods to a customer in another EU member state, you are dispatching them.

If the customer is not VAT registered, then UK VAT will be charged just like other sales. This is known as a distance sale; each EU country has a VAT registration threshold for distance sales. If you breach this distance selling threshold to another EU country, you’d normally have to register for VAT there too and start charging local VAT rather than UK VAT.

If the customer is VAT registered in the country you are selling to and you receive their foreign VAT registration number, then you can zero rate (i.e. not charge VAT on) your sale to them. They will then account for VAT themselves under their country’s acquisition tax mechanism (see ‘Acquiring goods from an EU member state’ below).

To apply the zero rate, it is important that appropriate transport documentation is kept to evidence the removal of the goods from the UK to the customer’s site.

Acquiring goods from an EU member state

Here, goods are bought by you (a UK business) from a supplier in another EU country.

Just like a dispatch, you will be charged VAT by the foreign supplier if you are not VAT registered in the UK.

However, if you are VAT registered in the UK and can provide the supplier with your UK VAT registration number they won’t charge you VAT. You then account for this yourself under the acquisition tax mechanism.

The acquisition tax mechanism is a simplification in VAT accounting across the EU, used when goods are sold to a customer who is VAT registered in another EU member state.

If you need to purchase goods from an EU supplier, the supplier can zero rate their supply (i.e. charge no VAT) and you must account for the VAT yourself. It will be charged at the UK VAT rate at the time when the goods entered the UK. You show this on your VAT return by charging yourself the required VAT and, at the same time, recovering this VAT from HMRC.

If you are a fully taxable business who can recover all your VAT then this is merely a paper exercise and it has no effect on how much VAT you owe or receive from HMRC.

Exporting goods to a non-EU member state

If you sell goods to a customer outside the EU, and can prove it through commercial evidence such as bills of lading, then VAT is not normally charged on the sale.

Importing goods from a non-EU member state

When you buy goods from a supplier outside the EU, no VAT will be charged on this transaction by your supplier. Instead, import VAT will have to be paid before the goods will be released from customs.

The amount of VAT is calculated as if the goods were supplied in the UK. So goods which are standard rated will require 20% VAT to be paid. The imported goods may also be subject to Customs Duty depending on the type of good imported.

Services

Selling services outside the UK

When providing services, VAT is accounted for in the country where the place of supply is.

If you’re providing general rule services and your customer is VAT registered, the place of supply is the EU country where your customer is established. In order to avoid far too many VAT registrations, a reverse charge mechanism exists which shifts the obligation to account for this VAT to the customer. This means that no VAT is charged on the sale by the supplier (see below).

The reverse charge mechanism is a simplification for EU businesses to account for VAT on the services they buy and sell. It is very similar in its application to acquisition tax but applies to all services purchased from businesses outside the UK, rather than goods.

Let’s say a business in Spain provides services to a company established in the UK. In this case the place of supply is in the UK and UK VAT needs to be accounted for.

The reverse charge mechanism avoids the Spanish business having to register for VAT in the UK, as the Spanish business can zero rate their sale to the UK business. This shifts the obligation to account for UK VAT on to the UK business.

The UK company accounts for UK VAT by charging themselves the appropriate amount of VAT whilst recovering this VAT on the same return (assuming they are a fully taxable business).

If you’re providing general rule services and your customer isn’t VAT registered, the place of supply is where you, the supplier, are based. Therefore UK VAT is applicable

Buying services from outside the UK

If a UK VAT registered business provides an EU VAT registered business with its UK VAT registration number then they will not be charged VAT. Also, if the supplier of the services is based outside the EU then it is unlikely that any tax will be charged.

In order to account for VAT on these types of purchases, the reverse charge mechanism applies.

CLOUD ACCOUNTING LLP

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