UK Tax Questions Answered by Shrewsbury Accountant No.8

Tax Questions Answered

“Here is the latest tranche of questions I’ve received; which will hopefully be of interest to you.

The Tax Subjects in this round up are:
1. Whistleblowers
2. Flat rate flowers
3. 5% rate of VAT
4. Use of home as office
5. VAT Return errors”

David Jones- Shrewsbury Office September 2014

Question: I’m a bookkeeper and suspect that a few of my clients are into dodgy dealings. I seem to recall that a while ago there were reports that HMRC paid out a load of money to people if they whistleblowed on tax fraudsters. But lately nothing seems to be shown on the subject. HMRC have a fraud hotline, but mention nothing about a reward. Do HMRC still pay out or have they stopped that now?

Yes they still do, but most payments are for low amounts £50 to £100 and are paid out following calls to its tax evasion hotline. Information that leads to higher sums of unpaid tax being recovered can trigger payments running into several thousand pounds, so if you have information which could potentially reveal a significant tax fraud you should visit:http://www.hmrc.gov.uk/reportingfraud/index.htm.

I would however ask the question: Shouldn’t you be reporting because of moral or professional obligations and not monetary reward? And something else for you to think about; if you are aware of a tax fraud and don’t report it and HMRC subsequently discover the tax evasion, they can take action against you!

Question: Could you help me with the treatment of VAT on flowers imported from Holland in the EU by my florist shop and how this dovetails with the Flat Rate Scheme, which is 7.5% for florists? Initially I thought I would benefit from the FRS but now I’m not so sure. Here is an example that highlights my problem:

Let’s say £1000 of flowers are purchased from the EU and the invoice comes in from a VAT registered EU supplier for £1000 plus VAT at 20%, with the flowers sold in the shop in the UK for £1800 which includes VAT.

My understanding is that under the Flat Rate Scheme, my VAT Return should show:
• BOX 1 7.5% VAT on £1800 sales ie £135.00
• BOX 2 VAT due on acquisitions from EU £1000 x 20% = £200
• BOX 3 Total 1 & 2 £335 VAT due
• BOX 4 VAT reclaimable 0.00
• BOX 5 Net VAT payable £335

So when comparing the FRS with the normal VAT rules where I can claim back the £200 VAT on the import, pay £300 VAT on the sales, giving a net payment of £100 the FRS ends up with me paying £235 more VAT. Is this correct?

Answer: Yes it is; unfortunately for you this is a classic trap for people moving to the FRS when they have EU acquisitions and I consider it unfair, especially as the VAT public notice on the subject does not make it clear. My advice is to stick with the standard rate VAT scheme, unless your imports from Holland are only occasional.

Question: The VAT office wants to apply standard rate on renovation of a flat in a listed building that I own. The flat has been empty for more than 2 years and I understood it qualified for the reduced rate of 5% under VATA 1994 sch. 7a group 7). They say that listed buildings do not qualify for the reduced rate. I have tried to trace where in the legislation says that but I am unable to (even the HMRC website does not mention this). Any help please?

Answer: There is no explicit piece of legislation or guidance that says that works to a listed building can/cannot be charged at 5%, but there does not need to be. The reduced rate is based on the period of time that the property has been empty and the two year rule applies, whether or not the property is listed.

In my opinion the HMRC Officer seems simply to have misunderstood her own guidance and you should appeal against the decision.

Question: I am a self-employed website designer and operate from a flat that I own. I have my second bedroom converted into an office/design studio. The room is full of desks, computers, filing cabinets etcetera and can’t realistically be used for anything else. What if anything, can I claim for?

Working from home can be a double edge sword

Answer: You have two alternatives; firstly take the percentage of your home permanently used as business premises and apply that percentage to the total floor space of the flat. The resultant percentage should then be applied to the total of mortgage interest, council tax, gas, electricity, water rates and home insurance to give you the amount you can claim. But be warned, whatever percentage of the property is claimed for, is potentially liable for Capital Gains Tax when you sell it.

The second alternative is to add £20 per week or £1,040 pa to your expenses against trading income. Even if this figure is less, it will be a lot less hassle and you won’t have a potential CGT bill hanging over your head.

Question: I’ve just taken over the book-keeping for a business of a friend and first thing I have noticed is an error on his VAT returns. The VAT due and reclaimed figures are correct however, the total value of sales, box 6, is gross and not excluding VAT, and the total value of purchases, box 7, is also gross. Is this something I should inform HMRC about or just note it in the records for future reference…or do something else?

Answer: This is a common error and unless the outputs and inputs figures are massively wrong, I would not notify HMRC of historic errors. But, do ensure that future VAT Returns are correctly completed and make a note on the VAT file, in the event that HMRC cross check the VAT Returns against the Annual Accounts sales figures.

The data from Boxes 6 and 7 is part of the Governments economic data. However, except for the very largest businesses, an error in those boxes will not affect the published data to any great extent.