Client Newsletter – December 2010

“Active Accounting and Tax”

Introduction

Normally at this point in the year, my newsletter has commented on the pre-Budget report given by the Chancellor, but this formal occasion was dispensed with this year and instead, there was only a brief update from George Osborne on various consultations that have been taking place and his plans for some tax reliefs mainly for very large international companies.

Indeed, when the Chancellor spoke in Parliament – on November 29^th, one thing we were expecting to hear about and is of importance to all of us – the tax allowances and bands for 2011/12, was not mentioned at all, but information on this was made available later that week.

The immediate issue is of course the increase in VAT to 20% and I comment on this below, together with the update to VAT “mileage rates” and the tax allowances/bands for 2011/12.

HEADLINES

• The standard rate of VAT increases to 20% from 4 January 2011 VAT Flat rates also change – generally being increased by 1½%
• Six-monthly revision to VAT “mileage rates” from 1 December 2010
• Personal allowances and income tax bands and rates for 2011/12 announced – big increase in the personal allowance, but a reduction in the upper limit for basic rate income tax

If you are interested in any other current matters, please do not hesitate to get in touch with Kim or me to discuss your concerns. To find the information you need in this newsletter, please refer to the following headings:

1. VAT standard rate change
2. VAT flat rate scheme
3. VAT and mileage payments to stff
4. 2011/12 allowances and tax bands
5. Practice matters – Christmas office hours

1 Third VAT Standard Rate Change in just over Two Years!

In the “emergency” Budget in June, the Chancellor announced that the standard rate of VAT would increase to 20% with effect from 4 January 2010.

As with the increase back to 17½% last January, whilst HMRC are not particularly bothered if the wrong higher rate of VAT is charged when the rate goes down, they are much more interested if the wrong lower rate is charged when there is an increase! Also, please note that this time the increase comes into force on TUESDAY 4^th JANUARY – the first “working” day after the holiday, not on New Year’s Day!

Dates can be an issue when there is a VAT rate change, so a quick reminder about this. VAT is charged based on the “tax point” of the supply. For most types of supplies, both goods and services, the tax point is the date on which the supply was actually made, but if an invoice is raised more than 14 days after that date, then the tax point becomes the invoice date. This means that you must invoice for supplies made between 21 December 2010 and 3 January 2011, within 14 days, or 20% as opposed to 17½% VAT will have to be charged. As I said last year, this is one of those odd rules that only really comes into play when there is an increase in the rate of VAT to be applied – the last increase before the change back to 17½% in January 2010, being in 1991!

Where you make continuous supplies, or issue an annual invoice for ongoing services you will need to check out the more detailed guidance to ensure that you charge the correct rate of VAT. If you have any queries on this, please do not hesitate to give Kim or me a call.

PAH Comment: As always seems to be the case when VAT goes up, I expect there will be some comment in the press in the run up to Christmas that you can avoid the VAT increase by paying early for something you do not actually receive for up to six months after the date of the increase in VAT rate. Whilst this is true, it is essential that full payment be made and there may be other conditions – if you are thinking of doing this and have a query, again, please do not hesitate to give Kim or me a call.

From a business perspective, if you charge a VAT inclusive price, you do not have to increase your price to take account of the new VAT rate, but of course more of this inclusive price will have to go the Government for supplies requiring to be accounted for at 20%. The VAT fraction– the VAT element of a VAT inclusive price at the 20% rate is 1/6^th of the total to be paid.

CHANGING YOUR ACCOUNTING SYSTEM

As I am sure you appreciate, you will need to set up a new VAT rate of 20%. The procedure here will be basically the same as when you had to set up a new rate of 15% two years ago and as with previous changes, if you have a support contract you may receive some information from your software supplier, although as far as we are aware, as of Monday 6 December 2010, neither Sage nor QuickBooks had sent anything out. Advice may also be available from your software supplier’s website.

If you have any queries on this, please do not hesitate to contact us.

PAH Planning point: Don’t forget that as well as changing the rates, you may have to change the chart of accounts or other links/lists to make sure that various transactions “pick up” the revised rate of VAT from 4 January 2011.

2 VAT Flat Rate Scheme

For those clients who use the VAT Flat Rate Scheme, the rates will also go up from 4 January 2011, in virtually all cases by 1½%, but if you have any queries, please give us a call.

PAH Comment: The Flat Rate scheme is intended to be a revenue neutral, simpler way of accounting for VAT for businesses with a turnover of less than £150,000. We have written separately to clients we believe are affected, but if you have any queries on the Flat Rate scheme, please give us a call.

3 VAT and Mileage Payments to Staff

In accordance with the twice-yearly review timetable, HMRC has once again updated the “company car” mileage rates, which represent the accepted figures for tax-free reimbursement of fuel costs to company car drivers for business mileage, assuming that there are no payments for petrol made other than in respect of business mileage claims. These rates can also be used by all registered businesses as the gross of VAT rate on which VAT on staff mileage can be recovered as input tax;

The revised table, showing the two previous rates as well, is as follows – the figures in brackets being the pence per mile in VAT that can be reclaimed:

Engine Size	Petrol Cost (per mile)			Diesel Cost (per mile)			LPG Cost (per mile)
	From 1 Dec 2012	1 June to 31 May 2010	From 1 Dec 2009	From 1 Dec 2009	1 June to 30 Nov 2010	1 Dec 2009 to 31 May 2010	From 1 Dec 2009	1 June to 30 Nov 2010	1 Dec 2009 to 31 May 2010
1400 cc or less	13p (1.936) until 4/1/11 then (2.167)	12p (1.787)	11p (1.435) until 1/1/10 then (1.638)	12p (1.787) until 4/1/11 then (2.000)	11p (1.638)	11p (1.435) until 1/1/10 then (1.638)	9p (1.340) until 4/1/11 then (1.500)	8p (1.191)	7p (0.913) until 1/1/10 then (1.043)
1401 – 2000 cc	15p (2.234) until 4/1/11 then (2.500)	15p (2.234)	14p (1.826) until 1/1/10 then (2.085)	12p (1.787) until 4/1/11 then (2.000)	11p (1.638)	11p (1.435) until 1/1/10 then (1.638)	10p (1.489) until 4/1/11 then (1.191)	10p (1.489)	8p (1.174) until 1/1/10 then (1.191)
Over 2000 cc	21p (3.128) until 4/1/11 then (3.500)	21p (3.128)	20p (2.609) until 1/1/10 then (2.979)	15p (2.234) until 4/1/11 Then (2.500)	16p (2.383)	14p (1.826) until 1/1/10 Then (2.085)	15p (2.234) Until 4/1/11 Then (2.500)	14p (2.085)	12p (1.565) until 1/1/10 Then (1.787)

PAH Comment: There appears to be an anomaly in the above table in that the rate for a diesel car over 2,000 cc has gone down whereas all the other rates have remained the same or increased. I have checked the HMRC press release carefully and it appears the mileage per gallon for diesel cars they use in their calculations has increased from 39.4 to 41.5 mpg for this “class”. They advise this figure is determined from “manufacturers’ information, weighted by annual sales to businesses in 2009 (latest available information)”.

PAH Planning Point: The new rates can be used for business mileage from 1 December 2010. As at this time last year, with the change in the standard rate of VAT to 20% from 4 January 2011, this does give the added complication of the underlying reclaimable VAT per mile changing on both 1 December 2010 and then again on 4 January 2011. However, given these are both increases in the amount reclaimable, I imagine there will not be too many complaints!

PAH planning point: The VAT reclaim on business mileage can amount to a significant figure and we strongly recommend that you consider reclaiming VAT on this basis if you have not previously done so. If you need any assistance with this, or have any queries on the matters referred to above, please do not hesitate to give either Kim Upton or me a call.

4 Personal Allowances and Tax/NIC Bands 2010/11

As announced in the June 2010 Budget, the personal allowance for 2011/12 is to be raised by £1,000 to £7,475. However, to stop 40%/50% taxpayers from benefitting from this increase, the threshold for the 40% band will start at £42,475, rather than at £43,875 of taxable income.

Separately, to avoid lower earners being affected by the 1% increases in National Insurance rates, the threshold at which these begin to be paid have been raised to £7,225 for employees and £7,070 for employers – this being intended to ensure no one earning more than c. £20,000 per annum has an actual increase in the amount of NICs payable.

Finally, on tax credits the “family” element of Child Tax Credit of £545, will no longer be paid to any family unit for Tax Credits purposes earning more than £41,329 and will begin to be reduced (at 41 p in the £) for families earning more than £40,000. For the avoidance of doubt, this is a separate (and additional) measure to the withdrawal of Child Benefit from 2012 if there is a 40% taxpayer in the family.

I will comment in more detail on these measures in my Spring 2011 newsletter at the time of the Budget – already announced as taking place on 23 March 2011.

5 Christmas Closure

This year, both our offices will be closed from 5 pm on Thursday 23 December 2010, and re-open at 9 am on Tuesday 4 January 2009. If you have an urgent query during the Christmas period, please do not hesitate to telephone me on 01480 462713, where, if I am not at home, there is an answering machine; I will endeavour to deal with the matter as soon as possible after I return.

Our business grows mainly by referrals and we are always looking for new clients. I should appreciate it if you could let me know of any colleagues, customers or associates who may be interested in the way we do business.

Thank you

PAUL HILL

This newsletter is prepared for the general information of clients and contacts of Paul A. Hill & Co. only. No liability can be taken in respect of any action taken or not taken because of relying on the information contained in this newsletter alone. Only the general position can be stated here and there are often qualifying conditions or other criteria that affect the way in which tax relief is given or other proposals will affect you or your business. You should always take individual advice based on the exact circumstances that you have before taking any form of action, or indeed refraining from any action.

© Paul Hill and Paul A. Hill & Co. – December 2010