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November questions and answers

Newsletter issue - November 2018.

Q. Are there any advantages to registering voluntarily for VAT even if my taxable turnover is less than the registration threshold?

A. A business can register for VAT even if its turnover (total sales) is below the threshold and it may actually save tax by doing so, particularly if its main clients or customers are organisations that can reclaim VAT themselves.

Say you want to purchase a new office printer for your business which costs £100 plus VAT, i.e. £120. You set the £120 paid out against your profits for income tax purposes. If you are a basic rate taxpayer paying tax at 20%, this deduction will save you £24 on your tax bill (20% of £120), so the printer actually costs you £96.

However, you were registered for VAT, you can reclaim the £20 VAT paid on the item (the input tax) and set £100 against your profits for income tax. The tax reduction is therefore £20 (20% of £100) and the printer costs the business just £80 - so £16 is saved by being registered for VAT.

VAT-registered businesses supplying goods and services to private individuals often feel dis-advantaged compared to their non-registered counterparts because they have to charge an additional 20% on every bill issued.

Q. What counts as a gift for inheritance tax purposes?

A. The broad answer is that for inheritance tax purposes, a gift is anything that has value, for example, money, property or possessions. However, a gift may also arise if the value of an individual's estate is reduced following a transfer of value, for example, if you sell your house to your children for less than it is worth; the discount element will be treated as a gift.

Gifts to spouses and civil partners are free of inheritance tax.

The IHT annual gifts exemption allows individuals to give away £3,000 of gifts in total each tax year. If the exemption is not used in full in one tax year, the unused amount can be carried forward to the following year, after which it is lost if it is not used.

Tax-free gifts can also be made, up to certain limits, on the occasion of a marriage or civil partnership. The tax-free limit for wedding gifts is £5,000 where the gift is to a child of yours, £2,500 where it is to a grandchild and £1,000 where the gift is to someone else.

Other small gifts of up to £250 per person, per year can be made free from IHT. Such gifts can be made to as many people as you like, as long as the recipient has not benefited from another exemption.

There is also a useful IHT exemption for 'normal expenditure out of income', which may be used to make tax-free lifetime gifts. It is often used by grandparents to pass money to grandchildren (say by way of a monthly standing order), or to pay for school fees. For the exemption to apply, the gift must satisfy the following conditions:

  • it must form part of the donor's regular expenditure
  • the gift must be made out of income (taking one year with the next)
  • the donor must retain sufficient income to maintain their normal standard of living.

Gifts made in this way are completely exempt from IHT - they are not subject to the seven year rules applicable to Potentially Exempt Transfers (PETs).

Q. I am a builder. I have recently started operating the construction industry scheme (CIS) although it is still quite new to me. I have recently taken on two labourers, both of whom are registered with HMRC as subcontractors. One of the subcontractors worked for me 3 months ago, the other has never worked for me. Could you please clarify what I need to do with regards deducting tax from their wages?

A. Before you can pay a new subcontractor, you need to 'verify' them with HMRC. HMRC will tell you:

  • whether they're registered for the CIS; and
  • what rate of deduction to use or if they can be paid without making deductions.

You do not, however, need to verify a subcontractor if you have included them on a CIS return in the current or last 2 tax years.

The CIS deduction rates are currently as follows:

  • 20% for registered subcontractors
  • 30% for unregistered subcontractors
  • 0% if the subcontractor has 'gross payment' status - for example they don't have deductions made

You are required to remit these deductions to HMRC as they count as advance payments towards the subcontractor's tax and National Insurance bill.

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