Your tax questions answered by Nick Casson

Changing from a sole trade to a company and VAT

I am presently trading as a sole trade and not VAT registered. I was intending to go limited and at the same time, register for VAT. Am I able to recover any of the VAT I incurred on expenses in the sole trade?

Normally a business can recover VAT incurred on their expenses incurred prior to VAT registration subject to two key rules:

1. in the case of goods (either stock for resale or fixed assets), the goods remain “on hand” at the date of registration and will be used in the newly registered business

2. in the case of services, the supply was made not more than six months before the date of registration. Six months represents a period in which it is deemed that services obtained will relate to business activity carried on at the time of registration. The VAT would also need to be incurred by the same business that is now registered for VAT.

However, there is a specific exception for sole traders becoming limited companies. Once formed, your company should be able to claim VAT on goods and services if they relate directly to the business that it intends to carry on. The six-month limit in respect of services and the four-year limit for goods also apply to pre-incorporation claims. It can also only be claimed to the extent that, at the time the tax was incurred, the relevant goods and services were used, or to be used, to make taxable supplies. So for example, you could not recover the VAT on a van that was purchased when the trade didn’t even exist.

If you would like any assistance with managing your VAT or company affairs, please contact your local TaxAssist Accountants.

Director’s motor expenses:

I am the director of a limited company and I am buying a car personally and using it for business and private usage. The business will be paying the fuel once it can afford to – in about 6 months' time. Up until then, can I claim the 45p a mile? Can I also write off any of the cost of the car or insurance as it will be mainly business use?

The mileage allowance payment of 45p per mile (25p after 10,000 miles) is designed to cover not only fuel costs but also the cost of the car itself and the other running costs such as insurance and repairs so there is no need to account for anything else. If the company is not reimbursing you, you will be able to claim the tax relief on the 45p per mile not paid by the company. When the company starts paying the allowance, there are no further tax implications. If the company just pays for the fuel, there are further issues with reporting a benefit in kind or paying for the private fuel and claiming part of the mileage allowance.

To claim all of the running expenses in a company, the car needs to be held in the company's name. You need to carefully consider putting the car in the company. Firstly, the mileage allowance payments can often result in a larger deduction for the company, which reduces its profits and therefore its corporation tax bill. But more significantly, private use of a company asset will lead to tax charges on you personally. Unless the private use is major, the personal tax consequences can often outweigh the benefit of owning the car through the company.

Contractors and VAT registration

I am a contractor and presently my turnover is under the VAT registration threshold. Lots of my friends have registered for VAT early and are using the Flat Rate Scheme, because they claim they can make money from the scheme. How do I know if the Flat Rate Scheme might work for me?

Under the Flat Rate Scheme:

· you charge your customers the standard rate of VAT

· you cannot recover the VAT on any of your expenses, unless they are certain capital items costing over £2,000

· you pay HMRC a fixed rate of VAT based on the industry you operate in and your VAT-inclusive sales figure

· if the amount of VAT you’ve charged customers is greater than the fixed rate you pay HMRC, the business gets to keep the difference

The Flat Rate Scheme is less onerous because expenses can be recorded including the VAT. It can also be lucrative, but only under certain conditions such as:

· you don’t have a lot of zero-rated or exempt income. Normally, you wouldn’t need to charge VAT on these, but under the Flat Rate Scheme, they are included within your total sales figure that you apply your industry-specific percentage to

· you don’t make a lot of despatches to other Members States of the EC

· your customers are generally other VAT-registered businesses. Otherwise, for unregistered businesses, the VAT represents additional cost because they are not able to reclaim it. If you’re more expensive than your competitors, you could lose customers

National Minimum Wage:

How much is the National Minimum Wage?

Most workers in the UK over school leaving age are entitled to be paid at least the National Minimum Wage (NMW). There are no exemptions for smaller businesses; they should still pay their workers the NMW. The NMW tends to increase in October each year.

Since October 2015, the rates have been:

· £6.70 for workers 21 and over

· £5.30 18 - 20 years

· £3.87 for 16-17 years, who are above school leaving age but under 18

· £3.30 for apprentices under 19 or 19 or over who are in the first year of apprenticeship

But from October 2016, the rates will be as follows:

· £6.95 for workers 21 to 24 years

· £5.55 18 - 20 years

· £4.00 for 16-17 years, who are above school leaving age but under 18

· £3.40 for apprentices under 19 or 19 or over who are in the first year of apprenticeship.

It is important to note that these rates, which come into force 1st October 2016, apply to pay reference periods beginning on or after that date.

National Living Wage:

In April 2016, the National Living Wage was introduced at £7.20 an hour for workers aged 25 and older. The National Minimum Wage still applies to workers aged 24 and under.