One of our customers was having problems with a particular online VAT calculator. It turned out that the website in question didn’t actually calculate the VAT correctly.

Creating this free tool was welcome respite from the payroll calculations that I have been investigating of late. VAT is far simpler than payroll!

There are four steps involved in order to be able to submit your VAT returns online with Clear Books.

In total, the online steps take about 20 minutes, however in some cases an activation code might need to be sent to you by post, which can take a few days.

Step 1.

Registering with the Government Gateway

HMRC use a shared login system with other government departments called the Government Gateway. If you don’t already have an account you will need to sign up to get one. This will allow you to access various government services, including the range of HMRC online services such as online VAT returns.

• Click through to http://www.gateway.gov.uk/ - You will see some options to sign up as an individual or an organisation:

Choose individual if you are self employed, or a sole trader business.

Choose organisation if your business is a partnership or limited company.

• You then have to fill out a short form giving your business name, an e-mail address and a password. NB: make note of the password as it’s not easy to change this later! Once you submit the form you will be given a user ID, which is a 12 digit number. Record this somewhere safe along with your password.

Step 2.

Enrolling for the New VAT Returns Service

You will need your VAT Registration Certificate, and your most recent VAT return to complete this step.

• Login to the Government Gateway if you are not already logged in, then click through to the Your Services page.
• Click on the New VAT Returns service.
• It will ask you to fill out your VAT number, the postcode where your VAT returns are sent (or the one listed on your VAT Registration Certificate), the Effective Date (as shown on your VAT registration certificate), the month of your last VAT return, and the last net VAT due on that return.

The service may be activated straight away, or it may require you to enter an activation code that will be sent out by post.

Step 3.

Appointing Clear Books as your VAT Agent

Clear Books is a registered VAT Agent, which allows us to submit returns on behalf of other companies. In order to give us permission to submit returns for you, you need to appoint us as an agent. This can be done online via the Government Gateway.

• Login to the Government Gateway.
• Click Manage Services.
• Click Appoint Agent (to the right of the New VAT Returns service).
• Enter our Agent ID: clearbooks-MKSMH2GFG21S
• You must then agree to some terms and conditions, and re-enter your login details to complete the process.

We have also created a video demonstrating these steps:

Step 4.

Generate and submit your return via Clear books

Step 5.

Set up a Direct Debit and E-mail Notifications with HMRC

If you file your VAT returns online, the easiest way to pay is by direct debit. This way you won’t need to put a cheque in the post, or do a manual bank transfer. You can do this on HMRC’s website. You can also set up e-mail notifications so that you get sent reminders when your VAT return is due.

This is a simple overview of the main rules of the Corporate Venturing Scheme. Consult HMRC or your accountant for more details.

Tax Relief

For qualifying CVS investments, the investing company can reduce its end of year corporation tax bill by 20% of the investment amount.

Example: An investment of £100,000 is made in a company. Up to £20,000 can be offset against the company’s corporation tax liability at the end of its accounting year.

Qualifying Period

This is the period over which the conditions for an investment to qualify for CVS must be met. It is effectively three years from the date the investment is made and shares are issued.

Minority Investor

The investing company must not own more than 30% of the issuing company. Neither may it control the issuing company at any point during the qualifying period.

Issuing Company

The issuing company must be an unquoted company with gross assets of no more than £7 million before, and £8 million after, the investment is made.

The Investment

The investment must be in cash and for fully paid up, full risk, ordinary shares. 80% of the investment must be spent in first 12 months with remainder spent in following 12 months.

Application Process

Advanced clearance is not required. You can simply complete and send off a Corporate Venturing Scheme Compliance Statement.

Applications for Advanced Clearance

A full list of documents required can be found in the Advanced Clearance section on the HMRC website. Briefly:

• Financial accounts
• Draft agreements/contracts
• Shareholder structure
• Details of share issue and investment amount

Qualifying R&D expenditure helps reduce a company’s corporation tax bill but with such a small number of companies participating, either the scheme is unknown or there are not many innovative small companies in the UK.

Following is a brief overview of the R&D tax credit system. Ask your accountant for more details to see if your company can benefit.

R&D Tax Credit

Qualifying R&D expenditure reduces your profits chargeable to corporation tax and therefore reduces your corporation tax bill. Put simply, your company pays less tax.

What is R&D?

Expenditure that qualifies for R&D adheres to these <a href=”http://www.berr.gov.uk/dius/innovation/randd/randd-tax-credits/RandD-Tax-Guidelines/page14094.html”>general rules</a>:

• Developing scientific or technological knowledge that isn’t commonly available e.g. creating or appreciably improving a product, process or service.
• Being innovative in a commercial sense or new to you isn’t enough on its own.
• Scientific or technological challenges have been overcome as part of the work. If a solution is obvious to a competent professional then it is not R&D.
• Simply buying new technology and using it isn’t R&D, but adapting it or developing it for your own purposes might be if it involves scientific or technological advances.

Eligible R&D Costs

• Employing staff directly who are actively engaged in carrying out R&D.
• Paying a staff provider for staff provided to the company who are directly and actively engaged in carrying out R&D.
• Consumable or transformable materials used directly in carrying out R&D (broadly, physical materials which are consumed in the R&D).
• Power, water, fuel and computer software used directly in carrying out R&D.

Restrictions

• There must be qualifying expenditure of at least £10,000 on R&D in the accounting period in order for a claim to be made.
• If any IP arises from the R&D then it must vest in the company to be eligible as R&D.
• An SME is a company with fewer than 250 employees, and either annual turnover not exceeding €50M or a balance sheet totalling €43M, and which is not part of a larger enterprise that would fail these tests.

HMRC provide a useful flow chart to gauge whether expenditure is eligible for an R&D tax credit: R&D Tax Credit Flowchart.

R&D Tax Credit Example

Ordinarily, expenditure that is wholly and exclusively for business purposes is an allowable expense for corporation tax. For example, if you spend £50,000 on salaries then 100% of that salary cost (i.e. the full £50,000) is eligible to reduce profits chargeable to corporation tax.

Assume SME corporation tax is set at 21%. £50,000 normal expenditure effectively reduces a corporation tax bill by £50,000 * 21% = £10,500.

The R&D tax credit permits 175% (from 1 August 2008) of qualifying expenditure in SMEs to offset profits chargeable to corporation tax. If the salary cost referred to above qualified as R&D then £50,000 * 175% = £87,500 is eligible to reduce profits chargeable to corporation tax.

Assume SME corporation tax is set at 21%. £50,000 R&D expenditure reduces a tax bill by £87,500 * 21% = £18,375.

£50,000 expenditure qualifying as R&D saves an additional £7,875 in tax (£18,375 – £10,500).

The three types are client entertaining, staff entertaining and subsistence.

There are different types of tax involved. We will look at the implications of these in turn.

1. Value added tax
2. Corporation tax
3. Income tax and National insurance contributions

1. Value added tax

Reclaiming VAT on Business Entertainment

You cannot reclaim VAT on business entertainment. Business entertainment is defined as any form of free or subsidised entertainment or hospitality to non-employees.

You can reclaim VAT on employee expenses and entertainment expenses if those expenses relate to travel and subsistence or where you entertain only employees.

VAT: Examples of non-tax allowable business entertainment

i.e. business entertainment for non-employees:

• food and drink
• accommodation – eg hotels
• theatre and concert tickets
• sporting events and facilities
• entry to clubs and nightclubs
• use of capital assets such as yachts and aircraft
• payments made to third party business entertainment organisers
• free samples
• business gifts
• when you provide entertainment or hospitality only for the directors or partners of your business

2. Corporation Tax

An expense is tax allowable for corporation tax purposes if it is wholly and exclusively used for business purposes. An exception to this rule is business entertainment.

Business entertainment is not allowable for corporation tax purposes. There are of course a couple of exceptions to the rule.

Corporation Tax: Examples of tax allowable business entertainment

• Staff entertainment
• Subsistence
• Sponsorship if wholly and exclusively for the business

3. Income Tax and National Insurance Contributions
Income tax and employee NICs (Class 1) are a tax on the employee whereas employers NICs (Class 1a) are a tax on the employer.

The basic rule is that if you provide an employee with anything other than pay it may count as an expense or benefit.

Expenses that are wholly, exclusively and necessarily incurred in the performance of duties are not subject to income tax and NICs. For example staying in a hotel on a business trip (subsistence) does not attract these taxes.

When an employee receives a benefit in kind they may be liable to tax on that benefit. Entertainment is a benefit in kind and has the following implications.

In a difficult economic climate, companies are looking at ways to cut costs and reduce overheads. We have recently seen retailers such as Woolworths and Adams go to the wall, victims of the global economic recession. In light of this, salary sacrifice schemes are likely to become increasingly popular.

The scheme works by an employee ceasing to contribute to their pension scheme and instead the employer increases its contribution to the scheme by the same amount.

In the first instance, the employee was paying NICs on contributions to the pension. This was by virtue of their basic pay being taxed, from which a contribution to the pension was then made.

Under the smart pension scheme the employer is now making equivalent contributions which are not taxed. This is because employers do not pay NICs on their pension contributions.

A tax saving is made as  national insurance contributions are cut. Ask your accountant for more details about implementing a salary sacrifice scheme.

HMRC provides some guidance on the smart pension salary sacrifice scheme:

• The employee gives up an amount of cash salary equivalent to the contributions they are making to the company’s approved pension scheme.
• The employer agrees to increase employer contributions to the pension scheme by an equivalent amount.
• Employees are notified that the new arrangements will automatically apply from a particular date unless they opt out in advance.
• If they do not opt out at the start, employees cannot opt out again until the first anniversary of the commencement of the scheme, unless they experience a ‘lifestyle change’ (marriage, birth of a child, separation or divorce, death of a partner or child, change from full-time work to part-time).
• Participation in the scheme brings about a change to the terms and conditions of employment of the participants.
• The employee’s previous gross salary (“base salary”) remains the yardstick for other issues (e.g. the calculation of overtime pay, annual salary increases or salary- related benefits).

Worked Example

Assume an employee earns £18,000 and both the employee and employer contribute 10% to the employee’s pension scheme. The following example illustrates how a saving of £876 can be made using a salary sacrifice scheme shared between both the employee and employer.

salary sacrifice example