VAT Flat Rate Scheme capital expenditure

The VAT Flat Rate scheme (FRS) has been designed to simplify the way a business accounts for VAT and accordingly, reducing the administration costs of complying with the VAT legislation. VAT is calculated under the FRS by applying a flat rate percentage to the flat rate turnover. The flat rate percentage varies from 4% to 16.5%.

There are special rules that apply to expenditure on capital assets worth more than £2,000. These transactions must be dealt with outside the FRS with any input tax claimed using a traditional VAT Return. This is different to other transactions made using the FRS where the input tax has already been included in the calculation of the relevant flat rate percentage.

Businesses can only apply to use the FRS if they expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT. The annual taxable turnover limit is the total of everything that a business sells during the year. It includes standard, reduced rate or zero rate sales and other supplies. It excludes the actual VAT charged, VAT exempt sales and sales of any capital assets. If a business leaves the scheme, they must wait 12 months before applying to re-join the scheme.

Capital Gains Tax reliefs for businesses

If you are in business as a self-employed sole trader or as part of a partnership, then you will be liable to pay Capital Gains Tax (CGT) if you make a profit selling all or part of a business asset. CGT is normally charged at a flat rate of 20%. However, there are various reliefs available that can reduce the amount of CGT you are required to pay.

We have listed below the main CGT tax reliefs for businesses:

Entrepreneurs' Relief – Where this relief is available, you will pay CGT of 10% in place of the standard rate. There are a number of qualifying conditions that must be met in order to qualify for this relief.

Business Asset Rollover Relief – This is a valuable relief that allows you to defer payment of CGT on gains made when you sell or dispose of certain assets and use all or part of the proceeds to buy new assets. The relief means that the tax on the gain of the old asset is postponed. The amount of the gain is effectively rolled over into the cost of the new asset and any CGT liability is deferred until the new asset is sold.

Incorporation Relief – A capital gain will be deemed to arise if your business is converted into a company. The computation of any taxable gain will be made by reference to the market value of the business assets including goodwill. The incorporation relief means that you can delay the payment of CGT when you transfer your business in this way to a company.

Gift Hold-Over Relief – This relief can help when you give away assets or sell them for less than their full value. The relief means that any gain on the asset is 'Held-Over' until the recipient of the gift sells or disposes of the asset. Your gifting of the asset is not subject to CGT as the person you gave it to will pay tax when they sell it.

Planning note

It is important to remember that CGT is not payable by limited companies or unincorporated associations when they sell an asset and make a gain. Instead, the gain (less any allowable costs and reliefs) is subject to Corporation Tax.

Please call if you need to clarify the impact of any future sales that will incur a CGT charge.

Basic Income Tax reliefs

As we are now almost three-quarters of the way through yet another tax year it can be useful to consider the benefits of basic Income Tax reliefs. This will help ensure that your tax liability is no higher than necessary. 

We have listed some of the main reliefs below:

Pension contributions – Tax relief for contributions to pension schemes is given at your highest marginal rate of Income Tax. You can get tax relief on private pension contributions worth up to 100% of your annual earnings subject to the annual and lifetime allowances. The income and gains which arise as part of your pension savings are generally exempt from Income Tax and CGT.

Charitable donations – Donations to charity over the course of a tax year can add up and you should ensure that you keep a proper record of all donations to record on your tax return. Donations that are made through the Gift Aid scheme allow for the recipient charity to claim 25p worth of tax relief on every pound donated. Higher rate and additional rate taxpayers are eligible to claim relief on the difference between the basic rate and their highest rate of tax.

Cap on Income Tax reliefs – There is an overall cap for certain Income Tax reliefs which is set at 25% of income or £50,000, whichever is the greater. The reliefs affected by the cap include trade loss reliefs, property loss relief, post-cessation trade relief and qualifying loan interest relief.

Business tax reliefs – There are also tax reliefs that may be available on certain expenses incurred in running your own business or if you use your own money to travel or buy things for your job.

Call now to organise a planning consultation prior to the tax year end

We can help you consider the financial planning opportunities that are available to reduce your tax bill. Also, it may still be possible to reduce your tax bill for 2018-19. For example, you could make a gift to charity in the current tax year and then elect to carry back the contribution to 2018-19. A request to carry back the donation must be made before or at the same time as the 2018-19 Self-Assessment return is filed. If you would like to discuss any of the issues raised, please call.

X-factor Charity single

The Government will waive the VAT equivalent on the sales of this year’s X Factor Celebrity Christmas Charity single. All proceeds from the sale of the single are going to two children’s charities; Together for Short Lives and Shooting Star Children’s Hospices.

Both charities provide support for the families of children with life-limiting illnesses. The donation will be the equivalent of the sum of the VAT receipts collected on sales of the single the winner of the reality show.

The single, a cover of Snow Patrol’s Run, features all the stars of the X Factor Celebrity including Jenny Ryan, Max and Harvey, Megan McKenna and girl group V5. The charities will share 100% of the profits from the sale of each download.

The Government has previously waived the VAT on X Factor single releases as well as for the 2016 Jo Cox Foundation single, 2015 Save the Children single, 2011’s Military Wives Choir single and the 2010 Haiti earthquake appeal single.

Basic Corporation Tax reliefs

There are a significant number of reliefs that can reduce the amount of Corporation Tax your company needs to pay on profits made. Your company can also claim Capital Allowances for assets such as equipment, machinery and cars bought to use in your business.

The basic Corporation Tax reliefs include the following:

Research and Development tax reliefs – There are two schemes for claiming relief for R&D expenditure. The schemes are known as the Small or Medium-sized Enterprise (SME) Scheme for smaller companies and the Research and Development Expenditure Credit (RDEC) scheme for large companies. Large companies can currently claim a 12% RDEC also known as an 'above the line tax credit' for qualifying expenditure, whilst the SME scheme offers even more generous reliefs.

The Patent Box – This relief allows qualifying companies to apply a lower 10% Corporation Tax rate on profits arising from patent exploitation.

Creative industry tax reliefs (CITR) – This is the term for a collection of Corporation Tax reliefs that allow qualifying companies to claim a larger deduction, or in some circumstances claim a payable tax credit when calculating their taxable profits. The relief applies to qualifying expenditure in the production of certain films, high-end television, animation, video games, children’s television, theatre, orchestra and museum & galleries exhibitions.

Relief on goodwill and relevant assets – Since 1 April 2019, the Corporation Tax relief restriction rules for certain acquisitions of goodwill and relevant assets changed. If relief is available, it is at a fixed rate of 6.5% a year on the lower of the cost of the relevant asset or 6 times the cost of any qualifying IP assets in the business purchased.

Loss relief – There are various Corporation Tax reliefs that may be available where your company or organisation makes trading, terminal, capital or property income losses. For example, trading losses may be used to claim relief from Corporation Tax by offsetting the loss against other gains or profits of the business in the same or previous accounting period.

Planning point

If you are concerned your company may not be receiving the appropriate amount of tax relief please call so that we can help you consider your options.