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Medical expensesTax Question of the Week

Posted by Tony Hawkins FCCA Wed, March 22, 2017 11:55:59

Question.

I am a self-employed cellist. I suffer from back pain which is made worse by long periods of sitting still, particularly during concert performances, I pay for regular visits to a chiropractor. Are the costs of treatment deductible from income for tax purposes?

Answer.

The Courts were asked to consider a similar case of a professional guitarist who paid to have medical treatment on a finger injury which was preventing him from playing. His costs were found not to be allowable because he also played the guitar as a hobby so there was “duality of purpose” and he failed the “wholly and exclusively” test.

It seems likely you also fails the wholly and exclusively test since, presumably, one of the purposes of paying for the treatment is to enable you to enjoy other non-business sedentary activities



VAT Flat Rate Scheme (FRS) Tax Question of the Week

Posted by Tony Hawkins FCCA Wed, November 30, 2016 11:13:37

What is a “limited cost trader”?

In an attempt to cut back on aggressive use of the FRS, the Chancellor announced the introduction of a 16.5% VAT flat rate for businesses with limited costs.

In practice, many traders that currently use the FRS actually pay less VAT than if they had used the standard method (output tax less input tax). Businesses that make the most profit tend to be those that have very low costs subject to VAT.

For example, a business with an annual turnover of £100,000 with no costs subject to VAT and registered for the FRS (using a 14% rate) will be adding £20,000 output tax to their sales invoices but only paying £16,800 (£120,000 x 14%) to HMRC – a cash profit of £3,200. As noted above, HMRC see this as aggressive use of FRS.

From 1 April 2017, FRS traders who meet the following definitions will be considered “limited cost traders” and will be obliged to use a new 16.5% rate. A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

1. less than 2% of their VAT inclusive turnover in a prescribed accounting period

2. greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

- capital expenditure

- food or drink for consumption by the flat rate business or its employees

- vehicles, vehicle parts and fuel (except where the business is one that carries out transport services ,for example a taxi business - and uses its own or a leased vehicle to carry out those services)

HMRC explain: These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.

Extending our example quoted above, 16.5% of £120,000 is £19,800, still a cash profit of £200 from using FRS, but only if there is no lost VAT input tax on costs or capital purchases…





VAT on financial servicesTax Question of the Week

Posted by Tony Hawkins FCCA Fri, November 04, 2016 10:08:21

Question

I am not VAT registered. I am financial intermediary; my turnover is about £100,000. I receive commission from mortgage providers for introducing customers to them and I have heard that some intermediaries doing the same type of work are VAT registered and are accounting for VAT at the standard rate. Why is this?

Answer

In order for a supply of financial intermediary services to be exempt the intermediary must:

1. bring together a person seeking a financial service with a person who provides a financial service;

2. stand between the parties to a contract and act in an intermediary capacity, and

3. undertake work preparatory to the completion of a contract for the provision of financial services, whether or not it is completed (VAT Notice 701/49, section 9.1)

Most practitioners receiving commission from mortgage lenders for introducing borrowers meet conditions i) and ii).

However, it is the final requirement to undertake work preparatory to the completion of a contract that may not always be met, and if it isn’t met, then the commission would be taxable and standard rated rather than exempt.

For your client this means that it really depends on how much work he is doing for the customer or lender. If your client just recommends a mortgage provider to the customer and takes no further part, the commission will be for a taxable supply and count as taxable turnover for VAT registration.

If, however, your client is helping to set the terms of the contract or make representations on behalf of a customer, then they are doing work preparatory to the completion of a contract and so the commission is exempt.

It may be that your client acts differently depending on the customer and so would be making both taxable and exempt supplies. If this is the case your client only needs to VAT register if the taxable turnover exceeds £83,000.

Office GymTax Question of the Week

Posted by Tony Hawkins FCCA Tue, October 25, 2016 11:29:26

Question:

My company's business premises has a spare room. Can my company purchase a cross trainer and some other fitness equipment for staff to use?

Answer:

An employer can provide sporting or recreational benefits tax-free to its employees, or any member of their family and household, provided that the benefits are not on an excluded list and the following conditions are all met:

1. The facilities are available generally to the employees of the employer.

2. They are not available to members of the public generally.

3. They are used wholly or mainly by persons who have a right to use them as employees (they do not need to be employed by the same employer).

But!

This exemption does not allow an employer to hand out membership cards for the local gym and sports club, but it does allow an employer to rent or lay on its own facilities or join with other employers to set up facilities for all to use.





Transfering SavingsTax Question of the Week

Posted by Tony Hawkins FCCA Mon, October 24, 2016 10:46:10

Question:

I want to put some of my substantial savings into the names of my children. The children are all under the age of 18. Will the children be taxed on the interest that is earned from those savings?

Answer:

Children’s income is theirs in their own right, no matter how young they are. They are also entitled to the full personal allowance. However for a child under the age of 18 and unmarried, this does not apply to income that comes directly or indirectly from a parent. Where it has come from the parent it is treated as the parent’s own income with the following exceptions:

1. Each parent can give each child sums of money from the total of which the child receives no more than £100 gross income per annum eg interest on bank or building society deposits. If the income exceeds the limit, the whole amount and not just the excess over £100 will be taxed on the parent.

2. The National Savings ‘children’s bonds’ for under 16 year olds can be given in addition because the return on such bonds is tax exempt.

3. A parent may pay personal pension contributions of up to £3,600 a year on behalf of a child under the age of 18.

4. Parents may contribute towards a Child Trust Fund Account for their children.

A child includes a stepchild, an illegitimate child and an adopted child.

For tax purposes income that arises to the child that has come from the parent is treated as a settlement and is taxable on the parent under ITTOIA 2005 s629.