R&D Tax Credits – Are you like many others missing out?

The Research and Development (‘’R&D’’) tax credits legislation has been around for a number of years, but it is still estimated that a vast majority of eligible businesses are not making a claim.

Many businesses are unaware that their activities are R&D qualifying for tax purposes which can lead to significant corporation tax savings or cash repayable credits from H M Revenue and Customs. Such activities can include making bespoke products, product development and changes to manufacturing techniques and processes.

Tom Wilkinson, Associate Director of Blackburn-based accountancy firm Pierce, talked to the Chamber about the legislation. ‘’It is staggering how many eligible businesses there are out there who are not making a claim for R&D tax credits. Part of this is due to poor or non-existent professional advice, but a key factor is that of the awareness of the legislation with is much broader than many realise. I was speaking to a senior tax barrister just before the Christmas break who says HMRC believe some 87% of eligible businesses for R&D are not making a claim!’’

The R&D tax credits system means that companies can claim 230% tax relief on qualifying expenditure which can be attributed to directly to R&D activities, rather than a standard 100% relief. Such expenditure includes materials consumed in R&D and staffing time expended on R&D as well as software, consultancy and utilities costs incurred on qualifying activities. In numbers terms, an R&D spend of £50,000 would result in a company being able to reduce its profits chargeable to corporation tax by an additional £65,000 (£50,000 x 130% extra relief) saving corporation tax of £13,000 at the current UK company corporation tax rate of 20%. There is also relief available for loss-making businesses by way of a repayable tax credit from H M Revenue and Customs.

Tom added ‘Some people have suggested this is a sort of tax-avoidance scheme, which is not the case at all, in fact HMRC are encouraging the legislation and there are some 60 equivalent schemes worldwide. The legislation is there to encourage growth and innovation in the UK. Some of the types of companies I have done claims for include all sorts of manufacturing companies, engineering, food and drink, technological and even construction. Whilst many businesses qualifying activities can be clearly evident, it is surprising how many businesses are undertaking tax-qualifying R&D work without realising it. I recall last year going to see a client about a completely separate matter, a business restructure project, when we started discussing activities on the shop floor and it was evident some of the work being undertaken was R&D qualifying and a subsequent claim was successfully made’’

‘’My advice to businesses who believe they potentially qualify for R&D would be to have a think about what their key business technical challenges have been in the past two or three years. You can potentially go back two previous financial years to make an R&D claim. Once you have considered such potential activities, please do feel free to engage with me on a no-obligation basis and we can discuss whether a potential claim could be made with HMRC. So far we have a 100% success rate and an excellent working relationship with the specialist units at HMRC and have saved local companies over £2.5m in the process’’.

Contact

Anyone interested in finding out more can call Tom Wilkinson on 01254 688100 or email at t.wilkinson@pierce.co.uk

Chancellors Spending Review

Chancellors Spending Review and Autumn Statement 2015: key announcements

 2014 Chancellors Budget images

The Spending Review and Autumn Statement has been set out to Parliament – here’s a summary of what was announced.

1. £4 trillion of spending has been allocated by the government over the next five years

The Spending Review sets out how £4 trillion of government money will be allocated over the next five years, so the government can invest in priorities like the NHS, defence and housing.

On average, departmental spending will fall at less than half the rate of the previous five years.

A full list of departmental spending settlements can be accessed at the bottom of this page.

2. A £10 billion surplus by 2019-20

Last year, the deficit was halved compared to its 2009 to 2010 level. Next year, it will be down by three quarters.

Over the next four years, the deficit will have been eliminated and the government will be running a surplus – raising more than is spent.

3.Tax credits

The government will borrow £8 billion less than forecast – making faster progress towards eliminating the deficit and paying down debt.

The improved public finances allow the government to reach the same goal of a surplus while cutting less in the early years, to smooth the path to the same destination. That means it can help on tax credits.

The government has had representations that these changes to tax credits should be phased in, and listened to the concerns, heard them and understood them.

And because the government has announced today an improvement in the public finances, the simplest thing to do is not to phase these changes in, but to avoid them altogether. Tax credits are being phased out anyway as the government introduces universal credit.

What that means is that the tax credit taper rate and thresholds remain unchanged. The income rise disregard will be £2,500.

The government will propose no further changes to the universal credit taper, or to the work allowances beyond those that passed through Parliament.

On the figures published today (Wednesday 25 November), the government will still achieve the £12 billion per year of welfare savings promised.

4. Introducing London Help to Buy and Help to Buy: Shared Ownership

A new Help to Buy equity loan scheme for London will give buyers 40% of the home value from early 2016, as opposed to 20%, as the current scheme offers.

The government is also announcing a series of other schemes, including Help to Buy: Shared Ownership to help people get on the housing ladder.

From 1 April 2016 people purchasing additional properties such as buy to let properties and second homes will pay an extra 3% in stamp duty. Money raised from tax on people buying their second home will be used to help those struggling to buy their first home.

Read more about the Help to Buy announcements made at the Spending Review and Autumn Statement.

5. Protecting the police budget

The government will protect overall police spending in line with inflation – an increase of £900 million by 2019-20.

Additional funding will be provided for forces who have strong proposals to support efficiency and reform. The National Crime Agency’s budget will also be protected in cash terms to help cut organised crime.

This funding will also allow forces to adapt to changing crime threats and train more firearms officers to make sure the country can be protected from terrorist threats.

£1 billion will also be spent on 4G communications for police forces and other emergency services, allowing officers to take mobile fingerprints and electronic witness statements. This will free up officers’ time, saving around £1 million a day when fully operational.

6. Local councils will get control over local taxes and provide extra support for social care

Councils will be given even more powers over decision making in their local areas. They will be able to add 2% on council tax to pay towards social care in their areas, if they wish.

From 2020 they will be able to keep money from business rates collected from shops and businesses, to spend on local services like street repairs, libraries and transport.

Local police and crime commissioners will also have the ability to raise local council taxes. Council tax is currently made up from money that goes to local services like police and fire services as well as local councils. From next April, police forces will be able to increase the amount they require from council tax collections by 2%.

7. Half a trillion pounds for the NHS

NHS England will receive £10 billion more a year in real terms by 2020 than in 2014-15. This will fund:

  • 800,000 more operations and treatments
  • 5.5 million more outpatient appointments
  • 2 million more diagnostic tests • access to GP services in the evenings and at the weekend, and 7-day access to hospital services by 2020

By 2020, health and social care will be integrated across England, joining up services between social care providers and hospitals. This will mean that health and care will feel like a single service for patients.

Grants for health students will also be replaced by loans, and the cap on the number of nurses and midwives that can go into training each year will be removed, providing up to 10,000 more nurses and other healthcare professionals for the NHS. These students will be able to receive 25% more financial support during their studies as a result.

From 2020, people with suspected cancer will be diagnosed or given the all clear within 28 days of being referred by a GP, helping to save up to 11,000 lives a year.

Over £500 million will also be spent on new hospitals including in Cambridge, Brighton, and Sandwell.

8. The basic state pension will rise to £119.30 a week

From April 2016, the basic state pension will rise to £119.30 per week, an increase of £3.35. This will be the highest real terms increase to the state pension for 15 years.

9. Schools funding will be protected

Schools funding will be protected in line with inflation. £23 billion will be invested in school buildings, creating 600,000 extra school places and 500 free schools.

Maintenance loans will also be available to higher education students who study part time from 2018.

10. The UK will meet its NATO target of spending 2% of national income on defence

The Ministry of Defence’s budget will be increased by more than £5 billion by 2020-2021.

£1.9 billion will also be spent on cyber security over the next five years, including on a new centre to protect the UK against attacks. Counter terrorism spending will increase by 30%, including providing 1,900 new intelligence staff.

11. The UK will continue to spend 0.7% of national income on aid

Aid funding will continue to be protected, including a new £1 billion global vaccine fund speed up the development of drugs to eliminate the world’s deadliest infectious diseases.

A new £500 million crisis reserve will also be set up so the UK can respond quickly and effectively to crises as they happen.

12. Part time season tickets and money back if your train is late

New flexible season tickets will soon be available on certain lines across the country, including C2C between London and Essex, and the Great Northern Route on Thameslink. This means that commuters will be able to buy part time season tickets, if they wish.

Better mobile connectivity will also be provided through a pilot scheme on commuter lines in London, the Midlands and the North.

Commuters will also soon be able to claim compensation from their rail tickets if their train is more than 15 minutes late.

13. More money for Scotland, Wales and Northern Ireland

Scotland, Wales and Northern Ireland will all receive more money to be spent on infrastructure projects, with each government deciding where this will be spent.

This will be an increase of around 14% for Scotland, 16% for Wales and 12% for Northern Ireland.

14. Tampon tax: VAT from the sale of tampons will go towards women’s charities

Around £15 million in VAT is collected each year on sanitary products. While EU rules mean that the government cannot remove all VAT on sanitary products, an annual fund will instead be set up equivalent to the yearly value of this tax.

The fund will be donated to women’s charities over this parliament, or until the UK can remove the tax from sanitary products.

15. Making the cost of going greener cheaper for households

The current Energy Companies Obligation runs until March 2017. This will be replaced from April 2017 with a new cheaper energy supplier obligation to reduce carbon emissions which will run for five years. The changes will mean that on average 24 million households will save £30 a year on their energy bills from 2017.

The Warm Home Discount scheme will also be extended to 2020-2021. This currently gives certain low-income households a one-off reduction of £140 on their electricity bill. People can apply for the scheme online through their supplier.

16. Further detail set out on the Apprenticeship Levy

At Summer Budget it was announced that three million new apprenticeships will be created by 2020, funded by a levy on large employers.

The apprenticeship levy will come into effect in April 2017, at a rate of 0.5% of an employer’s pay bill. A £15,000 allowance for employers will mean that the levy will only be paid on employers’ pay bills over £3 million.

Less than 2% of UK employers will pay the levy.

17. 300,000 homes better protected from floods

300,000 homes will be better protected from flooding by 2021, with £2.3 billion for over 1,500 flood defence schemes across the country.

This includes improvements to sea defences at Rossall in Lancashire which will reduce the risk of flooding for 7,500 homes, and money to protect 3,000 residential properties and 500 businesses in Leeds city centre.

18. Millions of pounds of investment in transport, arts and science in the North

A £400 million Northern Powerhouse investment fund will be created to help small businesses to grow. £5 million will also go to Manchester museum to create a new South Asia gallery in partnership with the British Museum, and £150 million to help make oyster style ticketing a reality across the whole of the North.

The government will also support the Rugby League World Cup bid for the UK in 2021 so matches can be held across the North. £1 million will go towards the Hull City of Culture programme for 2017.

19. Museums and galleries will remain free

Funding for museums and galleries will be maintained so they remain free to the public. To build on the success of the London Olympics and Paralympics in 2012, funding to the UK’s top athletes will be increased by 29% to support Team GB at Rio 2016 and Tokyo 2020.

20. People will no longer be able to get cash compensation for minor whiplash claims

To make it harder for people to claim compensation for exaggerated or fraudulent whiplash claims, the government is ending the right to cash compensation.

More injuries will also be able to go to the small claims court as the upper limit for these claims will be increased from £1,000 to £5,000.

This means that annual insurance costs for drivers could fall by between £40 to £50 a year.

Departmental settlements (£ billion)

Resource Departmental Expenditure Limits (DEL) excluding depreciation

Department 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
Defence 27.2 27.8 28.5 29.2 30.0 31.0
Single Intelligence Account 1.8 1.8 2.0 2.1 2.2 2.3
Home Office 10.3 10.7 10.6 10.6 10.6 *
Foreign and Commonwealth Office 1.0 1.0 1.0 1.0 1.0 *
International Development 8.5 9.1 9.3 10.7 11.0 *
Health (inc. NHS) 111.6 115.6 118.7 121.3 124.1 128.2
Work and Pensions 5.8 6.1 6.3 5.9 5.4 *
Education 53.6 54.4 55.5 56.4 57.1 *
Business, Innovation and Skills 12.9 13.4 12.3 11.7 11.5 *
Transport 2.6 2.0 2.1 2.2 1.8 *
Energy and Climate Change 0.9 0.9 1.0 1.0 0.9 *
Culture, Media and Sport 1.1 1.2 1.2 1.2 1.1 *
DCLG Communities 1.5 1.4 1.4 1.3 1.2 *
Scotland 25.9 26.1 26.3 26.3 26.5 *
Wales 12.9 13.0 13.1 13.2 13.3 *
Northern Ireland 9.7 9.8 9.9 9.9 9.9 *
Justice) 6.2 6.5 6.3 5.8 5.6 *
Law Officers’ Departments 0.5 0.5 0.5 0.5 0.5 *
Environment, Food and Rural Affairs 1.5 1.7 1.6 1.5 1.4 *
HM Revenue and Customs 3.3 3.5 3.4 3.1 2.9 *
HM Treasury 0.2 0.2 0.2 0.1 0.1 *
Cabinet Office 0.2 0.3 0.3 0.3 0.2 *
National Citizen Service 0.1 0.2 0.2 0.3 0.4 *
Small and Independent Bodies 1.5 1.5 1.5 1.5 1.5 *
Resource DEL excluding depreciation is the Treasury’s primary control total within resource budgets and the basis on which Spending Review settlements were made.
As at all Spending Reviews baselines exclude one-off and time-limited expenditure. Cumulative real growth is calculated to 2019-20 from the 2015-16 baseline.
2020-21 departmental budgets have only been set for some departments. For the rest these budgets will be set in full at the next Spending Review.

Advisory Fuel Rates from 1 September

Advisory Fuel Rates from 1 September 2015

GOV.Uk image 2727733_orig

Advisory Fuel Rates (AFR) for company car users, when you can use them, and how they are calculated.

These rates apply from 1 September 2015. You can use the previous rates for up to 1 month from the date the new rates apply.

Engine size Petrol – amount per mile LPG – amount per mile
1400cc or less 11 pence 7 pence
1401cc to 2000cc 14 pence 9 pence
Over 2000cc 21 pence 14 pence

 

Engine size Diesel – amount per mile
1600cc or less 9 pence
1601cc to 2000cc 11 pence
Over 2000cc 13 pence

Hybrid cars are treated as either petrol or diesel cars for this purpose.

  1. Current rates

Current rates start from 1 September 2015.

  1. When you can use the mileage rates

The rates only apply when you either:

  • reimburse employees for business travel in their company cars
  • require employees to repay the cost of fuel used for private travel

You must not use these rates in any other circumstances. If you use them correctly you will not need to apply for a dispensation to cover the payments you make.

2.1 Reimburse employees for business travel in their company cars

If you pay a rate per mile for business travel no higher than the AFR, for the particular engine size and fuel type, HM Revenue and Customs (HMRC) will accept there is no taxable profit and no Class 1A National Insurance to pay.

You can use your own rates which better reflect your circumstances if, for example, your cars are more fuel efficient, or if the cost of business travel is higher than the guideline rates.

If you pay rates that are higher than the advisory rates and can’t demonstrate the fuel cost per mile is higher, there is no fuel benefit charge if the mileage payments are solely for miles of business travel. Instead, you will have to treat any excess as taxable profit and as earnings for Class 1 National Insurance purposes.

2.2 Require employees to repay the cost of fuel used for private travel

If you have correctly recorded all miles of private travel and used the correct rate (or anything higher) to work out the cost of fuel used for private travel that the employee must repay to you, HMRC will accept there is no fuel benefit charge.

The advisory rates will not be binding where you can demonstrate that employees cover the full cost of private fuel by repaying at a lower rate per mile.

  1. How rates are calculated

Rates are calculated based on fuel prices and adjusted miles per gallon figures.

  1. Previous rates

Previous rates are available to check from 1 March 2011.

These rates only apply to employees using a company car.

These Advisory Fuel Rates (AFR) are calculated from the fuel prices in the tables below.

Petrol

Engine size (cc) Mean MPG Applied MPG Fuel price (per litre) Fuel price (per gallon) Pence per mile AFR
Up to 1400 53.74 45.7 114.6 520.9 11.4 11
1401 – 2000 43.52 37.0 114.6 520.9 14.1 14
Over 2000 29.03 24.7 114.6 520.9 21.1 21

Diesel

Engine size (cc) Mean MPG Applied MPG Fuel price (per litre) Fuel price (per gallon) Pence per mile AFR
Up to 1600 64.91 55.2 112.0 509.4 9.2 9
1601 – 2000 55.52 47.2 112.0 509.4 10.8 11
Over 2000 45.42 38.6 112.0 509.4 13.2 13

LPG

Engine size (cc) Mean MPG Applied MPG Fuel price (per litre) Fuel price (per gallon) Pence per mile AFR
Up to 1400 43.0 36.5 59.4 270.0 7.4 7
1401 – 2000 34.8 29.6 59.4 270.0 9.1 9
Over 2000 23.2 19.7 59.4 270.0 13.7 14

Notes

Mean MPG – miles per gallon – from manufacturers’ information, weighted by annual sales to businesses (fleet audits average, 2011 to 2013).

Applied MPG – adjusted downwards by 15% to take account of real driving conditions and lower fuel economy for older cars.

For LPG, MPG is assumed to be 20% lower than for petrol due to lower volumetric energy density.

Figures are shown to one decimal place. Figures ending in .5 are rounded downwards to the nearest whole penny for the AFR when the precise figure is less than .5 and upwards to the nearest whole penny for the AFR when the precise figure is .5 or greater.

Department for Energy and Climate Change latest petrol and diesel prices (17 August 2015), LPG (UK Average) from Automobile Association (AA) website (July 2015).

Guidance

Advisory Fuel Rates 1 March 2011 to 31 August 2015

Updated 27 August 2015

Contents

  1. AFR 1 June 2015 to 31 August 2015
  2. AFR 1 March 2015 to 31 May 2015
  3. AFR 1 December 2014 to 28 February 2015
  4. AFR 1 September 2014 to 30 November 2014
  5. AFR 1 June 2014 to 31 August 2014
  6. AFR 1 March 2014 to 31 May 2014
  7. AFR 1 December 2013 to 28 February 2014
  8. AFR 1 September 2013 to 30 November 2013
  9. AFR 1 June 2013 to 31 August 2013
  10. AFR 1 March 2013 to 31 May 2013
  11. AFR 1 December 2012 to 28 February 2013
  12. AFR 1 September 2012 to 30 November 2012
  13. AFR 1 June 2012 to 31 August 2012
  14. AFR 1 March 2012 to 31 May 2012
  15. AFR 1 December 2011 to 29 February 2012
  16. AFR 1 September 2011 to 30 November 2011
  17. AFR 1 June 2011 to 31 August 2011
  18. AFR 1 March 2011 to 31 May 2011

Detail

These rates only apply to employees using a company car.

HM Revenue and Customs review rates quarterly on 1 March, 1 June, 1 September and 1 December.

You should check to make sure you understand when you can use the rates.

 

Changes to National Insurance

Changes to National Insurance

 

Fact Sheet

 

from:    Lisa Kennery

The Government has recently introduced a number of changes to national insurance and further measures affecting both employers and individuals are in the pipeline.

 

This factsheet provides an overview of some key changes, as well as offering advice on a range of strategies to help minimise your national insurance bill.

National Insurance shutterstock_15678070

EMPLOYMENT ALLOWANCE

 

The Employment Allowance was introduced in April 2014, with the aim of reducing the employer national insurance liability for businesses and charities, and encouraging businesses to expand and take on new staff.

 

While a small number of exclusions apply, most businesses, charities and Community Amateur Sports Clubs are entitled to claim an annual reduction of up to £2,000 in their employer national insurance contributions (NICs) bill.

 

There are rules to limit the Employment Allowance to a total of £2,000 where there are ‘connected’ employers. For example, two companies are connected with each other if one company controls the other company.

 

The employer’s payment of PAYE and NICs is reduced each month to the extent it includes an employer Class 1 NIC liability until the £2,000 limit has been reached.

 

The allowance can be claimed via payroll software or HM Revenue & Customs (HMRC) Basic PAYE Tools.

 

Do contact us if you believe you are entitled to the allowance as it is possible to claim up to four years after the end of the tax year in which the allowance applies.

 

There are some exceptions for employer Class 1 liabilities which can be covered by the Employment Allowance including liabilities arising from:

 

  • a person who is employed (wholly or partly) for purposes connected with the employer’s personal, family or household affairs
  • the carrying out of functions either wholly or mainly of a public nature (unless charitable status applies), for example NHS services and General Practitioner services
  • employer contributions deemed to arise under IR35 for personal service companies.

With effect from 6 April 2015 Employment Allowance has been extended to those employing care and support workers.

 

If you need guidance on this area please do get in touch so that we can offer specific advice.

 

From April 2016 the Employment Allowance will increase to £3,000.

 

However, companies where the director is the sole employee will no longer be able to claim this allowance.

 

Who will benefit

 

The Government announced the increase in the Employment Allowance in recognition of the fact that the new National Living Wage (NLW) may increase costs for some businesses.

 

Up to 90,000 employers are expected to see their employer NICs liability reduced to zero, allowing businesses to employ up to four full time workers on the new NLW from next year, without paying any NICs.

 

SCRAPPING NICs FOR UNDER-21s

 

Apprentices shutterstock_152179931

From 6 April 2015 employer NICs for those under the age of 21 are reduced from the normal rate of 13.8% to 0%. For the 0% rate to apply the employee will need to be under 21 when the earnings are paid.

 

This exemption will not apply to earnings above the Upper Secondary Threshold (UST) in a pay period.

 

The UST is a new term for this new NIC exemption. It is set at the same amount as the Upper Earnings Limit (UEL), which is the amount at which employee NICs fall from 12% to 2%.

 

The weekly UST is £815 for 2015/16 which is equivalent to £42,385 per annum.

Employers will be liable to 13.8% NICs beyond this limit.

 

In the Second Budget it was confirmed that the UEL will increase in line with the income tax higher rate threshold. This will increase to £43,000 in 2016/17 and to £43,600 in 2017/18.

 

The new rules apply to both existing employees and employers taking on new staff.

 

They do not affect an individual’s entitlement to the State Pension or contributions based benefits such as Statutory Sick Pay or Statutory Maternity Pay. The employee NICs due are unaffected and remain payable by the employee.

 

ABOLISHING NICs FOR APPRENTICES UNDER-25s

 

The Government will abolish employer NICs up to the UST for apprentices aged under 25 with the stated aim of encouraging the employment of younger workers and boosting the economy by bridging the skills gap.

 

From April 2016, employers who engage apprentices under the age of 25 will be able to claim exemption from employers’ NICs on the cost of the apprentice’s salary up to the UST.

 

Detailed regulations will be issued on the NICs for apprentices including the definition of an apprentice.

 

Who will benefit

 

The new measure is expected to save employers an estimated £105 million in employers’ NICs during its first year of operation.

 

NEW CLASS 3A NICs

 

With effect from 6 April 2016, a new single-tier State Pension will replace the existing two-part system plus various means-tested benefits, for those reaching State Pension Age on or after 6 April 2016.

 

The Government is providing a one-off opportunity to allow existing pensioners and those reaching State Pension Age before 6 April 2016 to top up their additional State Pension, by up to £25 per week by paying Class 3A voluntary NICs.

 

How it works

Each unit of Class 3A contributions will result in £1 per week of additional State Pension. The price of Class 3A is based on an actuarially fair rate with prices varying between £127 and £934 per unit depending on the purchaser’s age.

 

Those wishing to take advantage of the Class 3A contribution must meet the following conditions:

 

  • They must be entitled to a UK State Pension
  • They must reach State Pension Age before 6 April 2016.

The facility will apply from 12 October 2015 to 5 April 2017, for eligible individuals.

 

The new Class 3A contribution will not replace the existing Class 3, and those taking up the new Class 3A will be advised to consider making Class 3 contributions where appropriate.

 

Applications and payments relating to Class 3A contributions will be dealt with by HMRC.

 

Who will benefit

 

The transitional measures are likely to be of particular benefit to those with low earnings, particularly women and carers, who tend to have low Additional State Pension entitlement, and also the self-employed who are excluded from the State Earnings Related Pension Scheme (SERPS) and the State Second Pension.

 

Please note that receiving extra Additional State Pension could impact on certain state benefits. It is important to consider a number of areas when deciding whether to make Class 3A contributions. Please contact us for further advice.

 

ADDITIONAL FUTURE MEASURES

 

Abolishing Class 2 and reforming Class 4 NICs

 

The Coalition Government previously introduced significant changes to Class 2 NICs, resulting in the introduction in April 2015 of new provisions for the collection and payment of Class 2 NICs via self-assessment, rather than direct debit generally on a monthly or six monthly basis.

 

From 6 April 2015 liability to pay Class 2 NIC will arise at the end of each year. The amount of Class 2 NICs due will still be calculated based on the number of weeks of self-employment in the year, but will be determined when the individual completes their self-assessment return.

 

It will therefore be paid alongside their income tax and Class 4 NICs. For those who wish to spread the cost of their Class 2 NICs, HMRC will retain a facility for them to make regular payments throughout the year.

 

Those with profits below the stated threshold no longer have to apply in advance for an exception from paying Class 2 NICs. Instead they will have the option to pay Class 2 NICs voluntarily at the end of the year so that they may protect their benefit rights.

 

The Government has announced that Class 2 NICs will be abolished in this Parliament and it will reform Class 4 NICs to include a contributory benefit test.

 

MINIMISING THE NIC BILL

 

We can work with you on a range of ideas for saving employer and/or employee NICs.

 

Dividends instead of salary/bonus

 

For limited companies you should consider paying dividends rather than a salary/bonus.

 

Where directors are in receipt of a salary/bonus from a company, the NIC cost may be such that part of the payment could be more cost effectively made as a dividend. There are special rules for some companies providing personal services.

 

The decision on whether to pay a dividend is complex because doing so may influence the value of the company’s shares and therefore increase the liability to capital gains tax and inheritance tax. There is also a maximum amount that may be paid, based on the company’s results.

 

Further strategies you may also want to consider:

 

  • Increasing the amount the employer contracts to contribute to company pension schemes.
  • Share incentive plans (shares bought out of pre-tax and pre-NIC income – this is a specialist area. Please get in touch for advice).
  • Salary sacrifice arrangements in respect of tax-free benefits in kind, such as the provision of childcare.

 

For further advice on national insurance contributions, please contact us. We have expertise in all areas of running a business and would be delighted to assist you

 

 

 

National Minimum Wage News

New National Minimum Wage Campaign

By: Lisa Kennery

 National Minimum Wage

HMRC have released a webinar to help employers ensure you are paying at least the national minimum wage. Watch their pre-recorded webinar at https://twitter.com/HMRCbusiness/status/580678155150757888

Warning to all Employers

Supported by The Hair and Beauty Industry

To improve compliance HMRC has launched a National Minimum Wage campaign to drive voluntary behavioural change.

The campaign is an opportunity for employers to check they are paying their employees correctly and ensure any outstanding arrears are paid back to employees.

If employers tell HMRC about National Minimum Wage arrears right away, they won’t:

  • have to pay a penalty (100% of amount owed, up to a maximum of £20,000 per employee)
  • be named publicly on the list of employers not paying National Minimum Wage.

Go to HMRC’s National Minimum Wage campaign for full details.

Supported by the National Hairdressers Federation

As part of this ‘first of its kind’ campaign, HMRC and the Department for Business, Innovation and Skills (BIS), supported by the National Hairdressers’ Federation and the Hair and Beauty Industry Authority HABIA , will work with hair and beauty businesses to help them understand their pay obligations to their employees.

HMRC will provide employers with tailored tools and guidance to check if they are paying the correct amount, and put it right where they are not. Employers who take this opportunity to self-correct will not have to pay penalties, nor will they be ‘named and shamed’. If employers choose not to comply with their NMW obligations, HMRC will take action to ensure that employees are paid what they are owed.

All Employers Who Fail to Pay Minimum Wage

HMRC action to tackle employers who fail to pay the minimum wage identified £3.2 million in NMW arrears involving over 26,000 workers across a range of sectors in 2014/15 alone. The Government is committed to ensuring every employee receives at least the NMW, and HMRC is committed to helping workers to recover any money owed to them.

BIS analysis shows that 42% of businesses in the Hair and Beauty sector do not pay level 2 and level 3 apprentices the correct minimum wage – the highest underpayment rate of any sector. Those paying under the minimum wage now have a chance to put things right. If they fail to do so it could result in their business being publicly ‘named and shamed’ and facing a fine of up to £20,000 per employee.

Named and Shamed

75 more employers have been named and shamed for failing to pay their workers the National Minimum Wage.

Big brands have been named and shamed today for failing to pay the National Minimum Wage – find out why
https://audioboom.com/…/3017800-a-further-48-employers-name…

Between them, the named companies owed workers over £153,000 in arrears, and span sectors including hairdressing, fashion, publishing, hospitality, health and fitness, automotive, social care, and retail.

This brings the total number of companies named and shamed under the scheme, which was introduced in October 2013, to 285 employers, with total arrears of over £788,000 and total penalties of over £325,000.

Business Minister Nick Boles said:

“As a one nation government on the side of working people we are determined that everyone who is entitled to the National Minimum Wage receives it. When the new National Living Wage is introduced next April (2016) we will enforce robustly. This means that the hard-working people of the UK will get the pay rise they deserve.”

Hair and Beauty

There are nearly 55,000 businesses and 250,000 employees in the hair and beauty sector in the UK. The typical hourly rate of pay is £7.11, compared with £11.61 in other sectors. Employees can report under-payment of the NMW at Pay and work rights.

Hair and beauty businesses are being asked to come forward as part of the National Minimum Wage Campaign by:

  • Telling HMRC they want to take part in the campaign
  • Disclosing details of arrears now paid to their workers and confirming that wages worth at least the NMW are now paid to all workers.

For full details including ‘Common mistakes’ and ‘What to do if you haven’t been paying National Minimum Wage’ visit National Minimum Wage campaign.

CIPP commentIt was announced in Autumn Statement 2014 that funding for NMW enforcement activity in 2015-16 would be increased by £3 million. So whilst these high level announcements at the time are not directly operational, they do impact our workload in the long term. The Summer Budget 2015 announced that an additional £1 million would be invested to expand HMRCs data analytics and enforcement teams. This new campaign is the first step in expanding HMRCs compliance activities using ‘smart data’ – the new term we shall no doubt become very familiar with.The CIPP are supportive of this initiative. Samantha Mann, Senior Policy & Research Officer says “We believe that when you are responsible for paying employees you should ensure that they are paid ‘on time and accurately’. Additionally, in ensuring that employees receive the pay that they are legally entitled to, employers in business are enabled to compete on a more level playing field.”

 

Changes to National Insurance

 

From The Tax Team and The Payroll Team at Pierce

Changes to National Insurance

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The Government has recently introduced a number of changes to national insurance and further measures affecting both employers and individuals are in the pipeline.

We provide an overview of some key changes, as well as offering advice on a range of strategies to help minimise your national insurance bill.

 

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EMPLOYMENT ALLOWANCE

The Employment Allowance was introduced in April 2014, with the aim of reducing the employer national insurance liability for businesses and charities, and encouraging businesses to expand and take on new staff.

While a small number of exclusions apply, most businesses, charities and Community Amateur Sports Clubs are entitled to claim an annual reduction of up to £2,000 in their employer national insurance contributions (NICs) bill.

There are rules to limit the Employment Allowance to a total of £2,000 where there are ‘connected’ employers. For example, two companies are connected with each other if one company controls the other company.

The employer’s payment of PAYE and NICs is reduced each month to the extent it includes an employer Class 1 NIC liability until the £2,000 limit has been reached.

The allowance can be claimed via payroll software or HM Revenue & Customs (HMRC) Basic PAYE Tools.

Do contact us if you believe you are entitled to the allowance as it is possible to claim up to four years after the end of the tax year in which the allowance applies.

There are some exceptions for employer Class 1 liabilities which can be covered by the Employment Allowance including liabilities arising from:

  • a person who is employed (wholly or partly) for purposes connected with the employer’s personal, family or household affairs
  • the carrying out of functions either wholly or mainly of a public
  • nature (unless charitable status applies), for example NHS services and General Practitioner services
  • employer contributions deemed to arise under IR35 for personal service companies.

With effect from 6 April 2015 Employment Allowance has been extended to those employing care and support workers. If you need guidance on this area please do get in touch so that we can offer specific advice.

 

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SCRAPPING NICs FOR UNDER-21s

From 6 April 2015 employer NICs for those under the age of 21 are reduced from the normal rate of 13.8% to 0%. For the 0% rate to apply the employee will need to be under 21 when the earnings are paid.

This exemption will not apply to earnings above the Upper Secondary Threshold (UST) in a pay period. The UST is a new term for this new NIC exemption. It is set at the same amount as the Upper Earnings Limit, which is the amount at which employee NICs fall from 12% to 2%. The weekly UST is £815 for 2015/16 which is equivalent to £42,385 per annum. Employers will be liable to 13.8% NICs beyond this limit.

The new rules apply to both existing employees and employers taking on new staff. They do not affect an individual’s entitlement to the State Pension or contributions based benefits such as Statutory Sick Pay or Statutory Maternity Pay.

The employee NICs due are unaffected and remain payable by the employee.

Who will benefit

The Government expects that this change will lift around 1.5 million young people out of employer NICs completely, with an average saving of £355 per employee. The rules mean that employing someone on an annual salary of £12,000 will be at least £500 cheaper, while paying an individual £16,000 per annum will cost at least £1,000 less.

 

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ABOLISHING NICs FOR APPRENTICES UNDER-25s

The Government will abolish employer NICs up to the UST for apprentices aged under 25 with the stated aim of encouraging the employment of younger workers and boosting the economy by bridging the skills gap.

From April 2016, employers who engage apprentices under the age of 25 will be able to claim exemption from employers’ NICs on the cost of the apprentice’s salary up to the UST. Detailed regulations will be issued on the NICs for apprentices including the definition of an apprentice.

Who will benefit

The new measure is expected to save employers an estimated £105 million in employers’ NICs during its first year of operation.

 

Pensioners

NEW CLASS 3A NICs

With effect from 6 April 2016, a new single-tier State Pension will replace the existing two-part system plus various means-tested benefits, for those reaching State Pension Age on or after 6 April 2016.

The Government is providing a one-off opportunity to allow existing pensioners and those reaching State Pension Age before 6 April 2016 to top up their additional State Pension, by up to £25 per week by paying Class 3A voluntary NICs.

How it works

Each unit of Class 3A contributions will result in £1 per week of additional State Pension. The price of Class 3A is based on an actuarially fair rate with prices varying between £127 and £934 per unit depending on the purchaser’s age.

Those wishing to take advantage of the Class 3A contribution must meet the following conditions:

  • They must be entitled to a UK State Pension
  • They must reach State Pension Age before 6 April 2016.

The facility will apply from 12 October 2015 to 5 April 2017, for eligible individuals.

The new Class 3A contribution will not replace the existing Class 3, and those taking up the new Class 3A will be advised to consider making Class 3 contributions where appropriate.

Applications and payments relating to Class 3A contributions will be dealt with by HMRC.

Who will benefit

The transitional measures are likely to be of particular benefit to those with low earnings, particularly women and carers, who tend to have low Additional State Pension entitlement, and also the self employed who are excluded from the State Earnings Related Pension Scheme (SERPS) and the State Second Pension.

Please note that receiving extra Additional State Pension could impact on certain state benefits. It is important to consider a number of areas when deciding whether to make Class 3A contributions.

 

ADDITIONAL FUTURE MEASURES

Abolishing Class 2 and reforming Class 4 NICs

The Coalition Government previously introduced significant changes to Class 2 NICs, resulting in the introduction in April 2015 of new provisions for the collection and payment of Class 2 NICs via self assessment, rather than direct debit generally on a monthly or six monthly basis.

From 6 April 2015 liability to pay Class 2 NIC will arise at the end of each year. The amount of Class 2 NICs due will still be calculated based on the number of weeks of self employment in the year, but will be determined when the individual completes their self assessment return.

It will therefore be paid alongside their income tax and Class 4 NICs. For those who wish to spread the cost of their Class 2 NICs, HMRC will retain a facility for them to make regular payments throughout the year.

Those with profits below the stated threshold no longer have to apply in advance for an exception from paying Class 2 NICs. Instead they will have the option to pay Class 2 NICs voluntarily at the end of the year so that they may protect their benefit rights.

The Government has announced that Class 2 NICs will be abolished in this Parliament and it will reform Class 4 NICs to include a contributory benefit test.

 

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MINIMISING THE NIC BILL

We can work with you on a range of ideas for saving employer and/or employee NICs.

Strategies you may also want to consider:

  • Shareholder dividends instead of salary/bonus
  • Increasing the amount the employer contracts to contribute to company pension schemes.
  • Share incentive plans (shares bought out of pre-tax and pre-NIC income – this is a specialist area. Please get in touch for advice).
  • Salary sacrifice arrangements in respect of tax-free benefits in kind, such as the provision of childcare.

For further advice on national insurance contributions, please contact us. We have expertise in all areas of running a business and would be delighted to assist you.

 

 

 

R&D Tax Credits – Are you missing out?

By: Tom Wilkinson   Research and Development Tax Specialist

 

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R&D Tax Credits

….. Are You Missing Out?

 

Many trading businesses often do not realise they are or have previously undertaken Research & Development (‘’R&D’’) activities in their business.  We are successfully securing R&D tax credit claims for clients.  The credits are generous and allow small and medium sized businesses to claim 230% (from April 2015) of actual R&D costs incurred for up to the past 2 financial years.

So, if you have incurred R&D expenditure of say £100,000 on a project then you can claim £230,000 as a credit against profits in the particular year(s) incurred.  This could generate a refund or tax saving of £46,000.

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Our fees are entirely success based and we will be happy to discuss these further.  Pierce have a good working relationship with HMRC’s specialist R&D tax units and have a 100% track record with all claims.
We have helped our clients claim over £2 million of qualifying Research & Development relief and we could help yours.

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The definition of R&D is quite wide and it is worth considering if you have….

  • Made bespoke products or customised products
  • Developed any new products or involved with introducing them
  • Made any environmental improvements to your processes
  • Consistently made manufacturing processes improvements
  • Carried out design work in-house or sub-contracted design
  • Carried out prototyping or made models, patterns or tooling
  • Developed or improved any in-house software
  • Changed the composition of your products in response to changes in legislation
  • Consider yourself to be a market leader in a product, process or technology
  • Regularly problem solving to meet your customers’ needs

Many companies are unaware of the activities that can qualify for R&D relief.  Pierce C. A. Limited have specialist skills and knowledge of the R&D tax system and are able to help you identify qualifying projects and formulate a successful claim.

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Client Testimonials

From David Baxendale at Promedics Orthapaedic Limited

Tom Wilkinson from Pierce proactively found and recommended corporation tax savings for our company that resulted in a 2 year corporation tax refund. He worked under his own initiative and ensured that HMRC agreed with his calculations. Tom’s drive and professionalism was first class and we would highly recommend his and Pierce’s services.”

From Richard Mottram at Hills Panel Products Limited

Pierce compiled an extremely detailed and comprehensive Research and Development Tax claim on the company’s behalf which lead to a significant corporation tax saving.

The report and associated computations were a significant improvement from our previous R&D tax advisers and was also undertaken in a very timely manner”

 

Emergency Budget – Holiday Reading

The Emergency Budget – HOLIDAY READING!

By: Anne Wilson

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Tax advisors and MPs will have a little light holiday reading to enjoy following George Osborne’s emergency budget which will take place on 8th July.  Having shaken off the Lib Dems, the government is keen to make its mark on tax policy as soon as possible.

What announcements can we expect based on the Conservative’s manifesto?

Tax Lock

One promise was the introduction of a “tax lock” to prevent increases in VAT, National Insurance Contributions or Income Tax during the life of the parliament.  Why does this commitment need to be legislated for; are politicians so untrustworthy as to break a promise!

The Personal Allowance and the Minimum Wage

The personal allowance will be increased so that by 2021 this will be £12,500.  The personal allowance will be linked with the minimum wage so anyone earning the minimum wage and working for 30 hours a week should not pay any tax.  This suggests that the minimum wage will be £8 an hour by 2021.

Higher Rate Band for Higher Income Only

Alongside these measures is the target to raise the basic rate band so that by the end of the parliament no one with income of less than £50,000 will pay tax at the higher rate.  The basic rate band has been eroded over the years, in 1994/95 approximately 2m people were paying tax at the higher rate compared with 4.6m people now.

Transferable Inheritance Tax Relief

A new transferable inheritance tax relief will be introduced to enable a couple to pass an additional £175k each of value in their main residence to their children so that potentially they could leave £1m to their children without inheritance tax.

The relief tapers away where the estate is worth more than £2m.  This seems likely to add fuel to the fire of the north/south debate as this is will be of far greater benefit to taxpayers in high property value areas.

For example a couple whose only asset is a property worth £1m could leave this to their children free of inheritance tax.  Contrast this with a couple with a property worth £200k and investments worth £800k, their estate would suffer inheritance tax of £140k!  It is unclear at present if the £175k is the top slice of the estate and how it will interact with the nil rate band.

Limit Pension Contribution Tax Relief for High Earners

There is also a proposal to limit tax relief for pension contributions for high earners.  It is thought that relief will be  restricted for those with incomes of between £150k and £210k with the current contribution limit of £40k tapering away so that the maximum someone with income of £210k can contribute to a pension scheme and claim tax relief on will be £10k.

The Child Benefit Anomoly

These are the manifesto pledges but we can expect to see other changes, it is possible that the child benefit high income withdrawal will be calculated by reference to a couple’s income.  This will correct an anomaly,  currently  a couple with income of £49k each can still claim benefit whereas a couple with one  earner who has income of £60k loses the allowance in full.

Capital Gains Tax

There are question marks over the top rate of Capital Gains Tax which was not included in the tax lock announced in the Queen’s speech.  It would also be useful for businesses to know sooner rather than later what the annual investment allowance for capital allowances will be on 1 January 2016.

Up the Chancellors Sleeve

We shall have to wait and see what other surprises the Chancellor has in store.

2014 Chancellors Budget images

 

 

 

 

1st April VAT rules change – not a joke

By: Margaret Scott

1st April VAT rules change – not a joke. The changes to the VAT rules relating to Prompt Payment Discounts may cause some problems, please do not hesitate to contact us for clarification and assistance.

The following information relates to a Sage Bulletin.

Sage

PDP – Prompt Payment Discount – what to do when you raise or receive a VAT invoice offering a PPD from the 1 April 2015 when the change takes effect.

Summary of Changes

Currently where businesses offer PPD terms to customers they calculate the VAT due on the discounted price. If the discount is not taken up HMRC does not require businesses to alter the amount of VAT invoiced and accounted for.

For example:

“.A discount of X% of the full price applies if payment is made within Y days of the invoice date. No credit note will be issued. Following payment you must ensure you have only recovered the VAT actually paid.”How can Sage ERP X3 customers meet these requirements?

 

  1. Correctly calculate VAT on Invoices.

Currently VAT may be calculated on the full value or the discounted value of an invoice, this is controlled the parameter BRIDISC.

From the 1st April 2015 to be in line with the new legislation, VAT must be calculated on the full value of an invoice:

  • In Sage ERP X3 V6 the parameter BRIDISC should be set to NO
  • In Sage ERP X3 V7 the parameter DEPMGTMOD (Discount management mode) should be set to 2 (Breakdown by VAT).
  • The payment attribute used for Early Settlement Discount should be set to Tax Recovery

From the 1st April 2015, businesses must account for VAT on the full consideration received for supplies of goods and services. Therefore invoices must calculate VAT with no reduction for PPD.

Where a discount is subsequently taken, it is therefore necessary to ensure VAT records are amended to reflect the lower VAT amount. Businesses may comply with this change in two ways;

  • Credit Notes must be issued for the difference.
  • Each party must make appropriate internal accounting adjustments.

When choosing the latter option businesses must add suitable wording to the terms of any discount.

  1. Provide details of Customer VAT responsibilities on Sales Invoices

We would recommend that our customers add suitable wording to their settlement discount terms rather than issue credit notes for each discount taken.

(Note: In the HMRC guidance there is an optional requirement for the invoice to show Total Gross, Total VAT and Total Net amounts with and without the discount appliedSage ERPX3 only shows totals without the discount applied).

  1. Make appropriate internal accounting adjustments

Sage ERP X3 has functionality to “claw back” VAT. VAT is calculated on the full invoice value, and when any PPD is taken in Cash Entry, the VAT element of the discount is calculated and posted to specified GL account(s), thereby recording the VAT clawed back.

If a part payment has taken place, at the time of the payment, the Settlement Discount line will have the full amount of the discount. This will also post the full amount of the VAT claw back which is not correct under the new legislation. It is recommended that customers change the ESD line on the payment to correctly account for the ESD on the part payment. This will result in the posting of the part of the VAT claw back that is relevant on the payment.

In the instance of a credit note being raised after the invoice has been paid, manual adjustments will need to be done.

What does this mean

a) If the customer pays the full price they record it in their records and no VAT adjustment is necessary.

b) If the customer pays the discounted price in accordance with the PPD terms on receipt of the invoice they may record the discounted price and VAT on this in their accounts and no subsequent VAT adjustment is necessary.

c) If the customer does not pay when the invoice is first issued, they must record the full price and VAT in their records as shown on the invoice. If they subsequently decide to take-up the PPD then:

  • If the supplier’s invoice states that a credit note will be issued, the customer must adjust the VAT they claim as input tax when the credit note is received. They must retain the credit note as proof of the reduction in consideration.
  • If they have received an invoice setting out the PPD terms which states no credit note will be issued, they must adjust the VAT in their records when payment is made. They should retain a document that shows the date and amount of payment (e.g. a bank statement) in addition to the invoice to evidence the reduction in consideration.

The invoice must contain the following information (in addition to the normal invoicing requirements):

  • The terms of the PPD (PPD terms must include, but need not be limited to, the time by which the discounted price must be made).

A statement that the customer can only recover as input tax the VAT paid to the supplier.

Worked Example

Example for a Sales Invoice, with Settlement discount 10%, VAT rate 20%, using Claw back:

Before 1st April

Invoice net value is £100.00, Settlement Discount is £10.00 (10% of 100), VAT is £18.00 (20% of £90.00). Cash paid is £108.00

GL Postings:

From GL Account Credit Debit
Invoice Control £118.00
Invoice Goods £100.00
Invoice VAT £18.00
Cash Control £118.00
Cash Bank £108.00
Cash Discount £10.00

 

After 1st April

Invoice net value is £100.00, VAT is £20.00 (20% of £100.00),  Settlement Discount is £12.00 (10% of £120). Cash paid is £108.00

GL Postings :

From GL Account Credit Debit
Invoice Control £120.00
Invoice Goods £100.00
Invoice VAT £20.00
Cash Control £120.00
Cash Bank £108.00
Cash Discount £10.00
Cash Claw back VAT £2.00

 

Example for a Sales Invoice, with Settlement discount 10%, VAT rate 20%, NOT using Claw back:.

GL Postings:

From GL Account Credit Debit
Invoice Control £120.00
Invoice Goods £100.00
Invoice VAT £20.00
Cash Control £120.00
Cash Bank £108.00
Cash Discount £12.00

 

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Source: Gov.UK

A PPD is an offer by a supplier to their customer of a reduction in the price of goods and/or services supplied if the customer pays promptly; that is, after an invoice has been issued and before full payment is due. For example a business may offer a discount of 5% of the full price if payment is made within 14 days of the date of the invoice.

  • at present, suppliers making PPD offers are permitted to put on their invoice, and account for, the VAT due on the discounted price, even if the full price (i.e. the undiscounted amount) is subsequently paid. Customers receiving PPD offers may only recover as input tax the VAT stated on the invoice.
  • after the change, suppliers must account for VAT on the amount they actually receive and customers may recover the amount of VAT that is actually paid to the Suppliers.

Guidance

a) on issuing a VAT invoice, suppliers will enter the invoice into their accounts, and record the VAT on the full price. If offering a PPD suppliers must show the rate of the discount offered on their invoice (Regulation 14 of the VAT Regulations 1995 (SI 1995/2518)).

b) the supplier will not know if the discount has been taken-up until they are paid in accordance with the terms of the PPD offer, or the time limit for the PPD expires.

c) the supplier will need to decide, before they issue an invoice, which of the processes below they will adopt to adjust their accounts in order to record a reduction in consideration if a discount is taken-up.

d) when adjustments take place in a VAT accounting period subsequent to the period in which the supply took place the method of adjustment needs to comply with Regulation 38 of the VAT Regulations 1995 (SI 1995/2518).

e) suppliers may issue a credit note to evidence the reduction in consideration. In which case, a copy of the credit note must be retained as proof of that reduction.

f) alternatively, if they do not wish to issue a credit note, the invoice must contain the following information (in addition to the normal invoicing requirements):

  • the terms of the PPD (PPD terms must include, but need not be limited to, the time by which the discounted price must be made).
  • a statement that the customer can only recover as input tax the VAT paid to the supplier.

Additionally, it might be helpful for invoices to show:

  • the discounted price
  • the VAT on the discounted price
  • the total amount due if the PPD is taken up.

g) if a business has adopted the option at (f), the VAT invoice, containing appropriate wording as described above, together with proof of receipt of the discounted price in accordance with the terms of the PPD offer (e.g. a bank statement) will be required to evidence the reduction in consideration, and the reduction to the supplier’s output tax (in accordance with Regulation 38 of the VAT Regulations 1995).

h) we recommend businesses use the following wording on the invoice:

“A discount of X% of the full price applies if payment is made within Y days of the invoice date. No credit note will be issued. Following payment you must ensure you have only recovered the VAT actually paid.”

i) if the discounted price is paid in accordance with the PPD terms, then the supplier must adjust their records to record the output tax on the amount actually received.

If the full amount is received no adjustment will be necessary.

Customers:

On receiving an invoice offering a PPD a VAT registered customer may recover the VAT charged, in accordance with VAT Regulation 29 of the VAT Regulations 1995.

As adjustments may take place in a VAT accounting period subsequent to the period in which the supply took place the method of adjustment needs to comply with Regulation 38 of the VAT Regulations 1995 (SI 1995/2518).

In practice this will mean:

a) if the customer pays the full price they record it in their records and no VAT adjustment is necessary.

b) if the customer pays the discounted price in accordance with the PPD terms on receipt of the invoice they may record the discounted price and VAT on this in their accounts and no subsequent VAT adjustment is necessary.

c) if the customer does not pay when the invoice is first issued, they must record the full price and VAT in their records as shown on the invoice. If they subsequently decide to take-up the PPD then:

  • if they have received an invoice setting out the PPD terms which states no credit note will be issued they must adjust the VAT in their records when payment is made. They should retain a document that shows the date and amount of payment (e.g. a bank statement) in addition to the invoice to evidence the reduction in consideration.
  • if the supplier’s invoice does not state that a credit note will not be issued, the customer must adjust the VAT they claim as input tax when the credit note is received. They must retain the credit note as proof of the reduction in consideration.