What about the new restriction on finance costs for residential landlords? Would you view the rental of a room in a residential property as falling foul of this new legislation? If so, it is no longer so simple to claim the same amount of expenses as income to arrive at a nil rental income each year.
But a another quandary that arose regarding closing the loopholes is this:
What if a trader buys £500 of stationery each quarter just to meet the 2% relevant goods threshold, but doesn't actually really need it for the business and so just stockpiles it or wastes it. Say they make £4,000 from the FRS in a year, then they have gained £2,000 from the exercise. This is quite clearly artificial abuse of the system but would it stand up?
My view is that this might fall foul of the provision "must be used wholly and exclusively or the purposes of the business" because it is not actually being used in the business and is not needed for the purpose of the business. What does anyone else think?
I watched the HMRC webinar and I too was shocked at the response regarding motor mechanics. However I don't think the person who answered this took enough time to understand the question or the reality of the situation and you would hope that in a tribunal it would be obvious that a mechanic needs to buy and sell motor parts as part of providing a service, just as a shop who only buys and sells motor parts needs to do the same. The legislation has been designed to stop business claiming their own motoring costs as relevant goods, rather than items traded in the normal course of business.
I also today realised there will be a big issue with accounting packages.
In the settings for most accounting packages, you set what the flat rate will be for a specific period prior to entering invoices and transactions. The flat rate vat is then calculated automatically on each transaction for the vat return ready for online filing.
How will a trader know prior to entering transactions and finalising the vat return whether or not they will meet the conditions required to use the lower rate each period, and thus set the correct vat rate for a period?
This will need a swift re-think by a lot of software houses to accommodate this change in time for April, and in my experience thy don't react that quickly. What a mess the so called easy bookkeeping of flat rate vat will be! This will potentially mean manual adjustments on every vat return and manual online VAT filings. And HMRC want to everyone to go digital !
I don't understand why the FRS needs to be complicated with this new legislation. Surely the business categories and rates per category have already been designed to reflect that some trades incur more vatable purchases than other trades, hence why accountancy is 14.5% and building is 9.5%. Other than a bit of stationery, what goods do we buy? I can't really see any small accountancy practice meeting the new spend on relevant goods, so what will be the point of the accountancy category. Most of the service style trade categories will become redundant!
This change has been driven by the growing number of PSC's, so if HMRC wants to stop contractors artificially benefiting from the FRS, then firstly add some new categories relevant to modern trades, and increase the "Any Other Activity" and service style categories to 15.5% or 16%. That keeps VAT simple for them (the whole point of FRS), whilst allowing them to at least have been compensated for incurring VAT on services such as their accountancy or office costs etc.
Expenses relating to business use of home can be calculated by multiplying the number of hours worked at home per month times the following applicable amounts: £10 (for 25-50 hours/month); £18 (51-100 hours); and £26 (101 hours or more). However, business will still have the option to claim any allowable portion of actual expenses.
Am I understanding this correctly?
So if a trader works solely from home pretty much all the time (say 160 hours per month), the allowable deduction from profits would be: 160 x 26 = £4,160
Or £80 per week!
This seems very high and much more than any of my clients have ever claimed based on actual expenditure:
Eg: Simple typical example where a trader uses 1 room in their home 9am to 5pm:
FIXED COSTS
Mortgage interest: 6,000 Water: 500 Home insurance: 500 Council tax: 1,500 Total: £8,500 per year
1 room representing 10% of total dwelling, therefore allowable deductions = £850
VARIABLE COSTS
Gas & Electric: 1,500 Telephone & broadband: 1,000 Total: £2,500 per year
Business use represents 50% of total, therefore allowable deductions = £1,250
TOTAL ALLOWABLE DEDUCTIONS = £2,100 (£40 per week)
And I think that example is being very generous actually!
Plus, none of these new flat rate expenses for use of home even come anywhere close to the figures given in the examples in the business income manual!
My answers
What about the new restriction on finance costs for residential landlords? Would you view the rental of a room in a residential property as falling foul of this new legislation? If so, it is no longer so simple to claim the same amount of expenses as income to arrive at a nil rental income each year.
But a another quandary that arose regarding closing the loopholes is this:
What if a trader buys £500 of stationery each quarter just to meet the 2% relevant goods threshold, but doesn't actually really need it for the business and so just stockpiles it or wastes it. Say they make £4,000 from the FRS in a year, then they have gained £2,000 from the exercise. This is quite clearly artificial abuse of the system but would it stand up?
My view is that this might fall foul of the provision "must be used wholly and exclusively or the purposes of the business" because it is not actually being used in the business and is not needed for the purpose of the business. What does anyone else think?
I watched the HMRC webinar and I too was shocked at the response regarding motor mechanics. However I don't think the person who answered this took enough time to understand the question or the reality of the situation and you would hope that in a tribunal it would be obvious that a mechanic needs to buy and sell motor parts as part of providing a service, just as a shop who only buys and sells motor parts needs to do the same. The legislation has been designed to stop business claiming their own motoring costs as relevant goods, rather than items traded in the normal course of business.
I also today realised there will be a big issue with accounting packages.
In the settings for most accounting packages, you set what the flat rate will be for a specific period prior to entering invoices and transactions. The flat rate vat is then calculated automatically on each transaction for the vat return ready for online filing.
How will a trader know prior to entering transactions and finalising the vat return whether or not they will meet the conditions required to use the lower rate each period, and thus set the correct vat rate for a period?
This will need a swift re-think by a lot of software houses to accommodate this change in time for April, and in my experience thy don't react that quickly. What a mess the so called easy bookkeeping of flat rate vat will be! This will potentially mean manual adjustments on every vat return and manual online VAT filings. And HMRC want to everyone to go digital !
I don't understand why the FRS needs to be complicated with this new legislation. Surely the business categories and rates per category have already been designed to reflect that some trades incur more vatable purchases than other trades, hence why accountancy is 14.5% and building is 9.5%. Other than a bit of stationery, what goods do we buy? I can't really see any small accountancy practice meeting the new spend on relevant goods, so what will be the point of the accountancy category. Most of the service style trade categories will become redundant!
This change has been driven by the growing number of PSC's, so if HMRC wants to stop contractors artificially benefiting from the FRS, then firstly add some new categories relevant to modern trades, and increase the "Any Other Activity" and service style categories to 15.5% or 16%. That keeps VAT simple for them (the whole point of FRS), whilst allowing them to at least have been compensated for incurring VAT on services such as their accountancy or office costs etc.
Am I understanding this correctly?
Expenses relating to business use of home can be calculated by multiplying the number of hours worked at home per month times the following applicable amounts: £10 (for 25-50 hours/month); £18 (51-100 hours); and £26 (101 hours or more). However, business will still have the option to claim any allowable portion of actual expenses.
Am I understanding this correctly?
So if a trader works solely from home pretty much all the time (say 160 hours per month), the allowable deduction from profits would be: 160 x 26 = £4,160
Or £80 per week!
This seems very high and much more than any of my clients have ever claimed based on actual expenditure:
Eg: Simple typical example where a trader uses 1 room in their home 9am to 5pm:
FIXED COSTS
Mortgage interest: 6,000
Water: 500
Home insurance: 500
Council tax: 1,500
Total: £8,500 per year
1 room representing 10% of total dwelling, therefore allowable deductions = £850
VARIABLE COSTS
Gas & Electric: 1,500
Telephone & broadband: 1,000
Total: £2,500 per year
Business use represents 50% of total, therefore allowable deductions = £1,250
TOTAL ALLOWABLE DEDUCTIONS = £2,100 (£40 per week)
And I think that example is being very generous actually!
Plus, none of these new flat rate expenses for use of home even come anywhere close to the figures given in the examples in the business income manual!
http://www.hmrc.gov.uk/manuals/bimmanual/bim47825.htm