Category: Tax Tip

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Temporary Summer VAT rules 

The government have made a temporary reduction in VAT for businesses serving families with children over the Summer holidays. This applies to restaurants and cafes, cinemas and theatres, amusement parks and museums, etc. 

For children’s meals and entertainment tickets the VAT rate reduces from 20% to 5% from 25 June to 1 September (odd dates but it’s to include the Scottish school holidays too). 

The rules are complex where these reduced rate sales are bundled with unaffected supplies. 

If you think you may be affected then there is more details here Temporary reduced rate of VAT for children’s meals, tickets and family attractions – GOV.UK or clients can contact us with your questions. 

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When does a hobby become a business?

Sometimes it may not be clear when a hobby becomes a trade/business. HMRC have put together a helpful list of what they call ‘badges of trade’. None of these are conclusive but, if you meet more than one, it is likely that you have a business and should register as self- employed. 

  1. You intend to make a profit 
  1. Systematic and repeated transactions may indicate that you have a ‘trade’ 
  1. Are you selling something that could only benefit you by being sold rather than something that might give you ‘pride in possession’ such as a beautiful picture you enjoyed personally? 
  1. If your transactions are similar to those of an existing trade, then you may well be trading 
  1. Was the asset repaired, modified or improved to make it more easily saleable or saleable at a greater profit? 
  1. Was the asset sold in the same way as a trading organisation rather than a forced sale to raise cash? 
  1. Was money borrowed to pay for the asset? And was sale of the asset the only way to repay that funding? 
  1. Was the asset bought and sold within a short space of time 
  1. Was the asset purchased rather than an inheritance or gift? 

If it is not clear, then the courts will decide based on the overall impression when they review all these badges. 

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Does that include VAT? 

If you’re selling to businesses then you would normally quote your prices EXCLUDING VAT 

If you’re selling to individuals you would normally quote your prices INCLUDING VAT 

If in doubt then do specify and, if you’re not VAT registered don’t mention VAT at all (I’ve just heard of a startup that was charging VAT even though not VAT registered!) 

You may have seen adverts ‘we’ll pay your VAT’ but this isn’t strictly correct. What they mean is that they’ll give you a discount equivalent to the VAT amount so, if you’re VAT registered, you can still reclaim the VAT on the discounted price. (Although most of these offers are on domestic purchases but you might need a new sofa for the office?) 

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Align your VAT quarters with your year end 

It’s not just tidier but it makes year end reconciliations much simpler too as you can tell at a glance if your year end VAT return = the VAT balance on your balance sheet report.

To change the VAT period just log onto your HMRC VAT account and change it there. (Bottom of the page with the business details) 

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Inheritance rates and bands 

After my slightly tongue in cheek tax tip last week suggesting that you can avoid inheritance tax (IHT) completely if you trust your beneficiaries enough to hand over everything sooner rather than waiting for your death here are the latest inheritance rates and bands 

  1. Nil-Rate Band (NRB) – The first £325,000 of an estate is normally taxed at 0% 
  1. Residence Nil-Rate Band (RNRB) – An additional £175,000 allowance may apply if a main residence is left to direct descendants (children, grandchildren, etc.). Combining these two bands gives you £500,000 
  1. Married Couples / Civil Partners – Unused NRB and RNRB can generally be transferred to a surviving spouse or civil partner. So the combined tax-free allowance is up to £1,000,000 
  1. Annual Gift Allowance – an individual can give away £3,000 per tax year free of Inheritance Tax. (If you don’t use the exemption in one tax year, you can carry it forward one year only, allowing up to £6,000 to be gifted in some circumstances) 
  1. Marriage / Civil Partnership Gift Allowance – You can make tax-free gifts when someone is getting married or entering a civil partnership: 

£5,000 to your child.  

£2,500 to a grandchild or great-grandchild 

    £1,000 to anyone else 

      1. Other Useful Small Exemptions 

      Small gifts exemption: up to £250 per person per tax year to any number of individuals 

      Normal expenditure out of income: regular gifts from surplus income can be immediately exempt from IHT if they do not reduce your standard of living and are properly documented 

        1. Other lifetime gifts to individuals are usually outside the estate if the donor survives 7 years after making the gift. (Gifts within 7 years may still be taxable, although taper relief can reduce the tax after 3 years) 
        1. Reduced Rate for Charitable Giving – the usual rate for IHT is 40% but this is reduced to 36% if at least 10% of the net estate is left to charity 
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        How to pay zero inheritance tax 

        Statistically most people won’t die leaving enough assets to need to pay inheritance tax. Although, to be pedantic, it isn’t the deceased person who pays the inheritance tax anyway.

        For those with a little more wealth then you can avoid inheritance tax completely by giving away anything over the current limits and then living for another 7 years. (This means that you shouldn’t leave your tax planning to the last minute) 

        The snag is that you need to give away those assets UNCONDITIONALLY. I.e. you can’t give your house to your kids on condition that they continue to let you live there. You have to TRUST them to do the right thing.  

        So, the question is, how much do you trust your potential beneficiaries? 

        (I’ll share a little more serious inheritance tax planning next time) 

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        Pay your spouse a salary 

        This is a favourite bit of advice from ‘Dave at the pub’ and he may well be right as it reduces the corporation tax that you pay. If your spouse works in your business, then it would be right and fair to pay them for that work. Remember that all expenses must be ‘wholly and necessarily for the purposes of business’ so, if your spouse doesn’t work in your business, it could be fraudulent.  

        We always ask our clients to provide a realistic job description (if we do your bookkeeping then you can’t include this as one of their tasks! Nor can you claim diary management if you trade from a mobile phone and book all your own appointments) and an estimate of the number of hours worked. This should show that the salary is reasonable for the work they do. You should pay them at least minimum wage and deduct relevant employment taxes.  

        Please don’t try to claim that minor children are working in your business! There is separate legislation covering minors in the workplace and you will need to get authorisation from their school and the local council as well as your insurance company. 

        Save corporation tax, pay PAYE/NI 

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        Sole trader £1k allowance or utilising losses 

        £1,000 income allowance 

        If you have a small side hustle or startup with income (not profit) of less than £1,000pa then you don’t need to report this to HMRC 

        BUT 

        you might choose to do so. 

        If the business is making a loss, then you can either offset this ‘sideways’ against your other personal income in the same year to reduce the overall tax paid OR carry it forward to set against future profits from the same business and therefore minimise future tax. This sideways loss relief is particularly useful if you are starting your business as a side hustle to your main employment. 

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        Claiming VAT on mileage

        Last week I mentioned the increase in the flat rate mileage allowance from 45p to 55p (for the first 10,000 miles). But did you know that you can also claim VAT on part of this allowance? The amount that you can claim is the VAT on the fuel element which varies each quarter and depends on the engine size of your car.

        This is the same rate used for company car fuel and you can find the latest list here.

        https://www.gov.uk/guidance/advisory-fuel-rates

        eg if your fuel rate is 17p you can claim 17p/1.2x.2=2.83p VAT on the 55p.

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        Mileage rate for private cars used for business 

        It’s long overdue but, finally, the HMRC allowable mileage rate has been increased from 45p per mile to 55p per mile (for the first 10,000 miles per tax year). This change has been backdated to April. 

        All other mileage rates are unchanged.