UK tax system

VATTax22 The official Newsletter and Information Service of the City Council’s VAT & Taxation Advice Office incorporating the City Council’s VAT Manual Update Service. May 2001 Budget 2001 VATTax22 includes our Budget 2001 supplement covering the measures announced in the Budget on 7 March 2001. As the ‘dust has settled’, a number of the measures announced have become clearer but it was still a remarkably ‘non-event’ budget, given it was undoubtedly a ‘preelection budget, with very little in the way of radical new measures. The Budget 2001 Supplement outlines the measures introduced, concentrating primarily on how they impact on the Council, together with a brief overview of the other measures of more general interest. * * * * * * * Tobacco Products Duty Tobacco Products Duty is due on cigarettes, cigars, hand-rolling tobacco and other smoking and chewing tobacco. Other than for cigarettes, the amount of Duty levied is on a per kilogram basis; for cigarettes, there is a two-stage Duty calculated as £90.43 per thousand cigarettes plus 22% of the retail price. Like duty on alcohol, Tobacco Products Duty is payable by the manufacturer (or importer) before the goods can be released for sale in the UK. * * * * * * * INSIDE VATTax22: p.2 VAT and taxation training courses: concern over breadth of coverage for attendance - concern over lack of ‘demand’ for some courses. p3 ‘IR35’: tax rules on ‘one man companies’ ruled to be legal. p.4 Children’s Tax Credit (CTC): how the new CTC works - rules on sharing CTC between separated parents - clawback for higher-rate taxpayers - some anomalies. p.6 Hire or loan?: assets are made available to employees may be ‘hired’, with contributions liable to VAT, or ‘loaned’ and so be a taxable benefit-in-kind. p.6 Assessment dates: VAT assessments now ‘made’ when notified to the taxpayer p.7 Staff secondments: staff secondments can be VATable, exempt from VAT, nonbusiness or possibly not be a supply at all. p.7 Air Passenger Duty refunds: APD is only payable where the passenger flies but airlines UK tax system We just have room for a short article in our series on the UK tax system in this edition, so we will consider two duties that have little direct impact on the Council. Alcohol and tobacco duties Alcoholic Liquor Duty dates back to July 1643 and is the oldest of the UK’s excise duties still in existence. The Duty applies to all alcoholic drinks, ranging from alcopops, through beer, cider and perry, to wines, fortified wines and spirits. The rate of Duty is due per hectolitre on the basis of the nature of the drink and its alcoholic content. It is payable by the brewer or distiller (or importer) before the drink can released for sale in the UK. VATTax is published by the City Council’s VAT and Taxation Advice Office, Room B2.10, New Walk Centre (Tel: 0116-252-7470). Articles and items from VATTax may be freely reproduced and used but the City Council accepts no liability whatsoever for any loss occasioned to any person acting or refraining from action as a result of material herein. are ‘reluctant’ to refund APD to passengers cancelling. GENERAL VAT and taxation training courses One of the key aims and objectives of the VAT and Taxation Advice Office, since its formation on 1 April 1997, has been the dissemination of information to help ensure the Council’s compliance with VAT (and other tax) statutory and regulatory requirements. To this end, the delivery of regular, high quality, training courses has always been regarded as a key factor. To this end, the following courses are offered by the VAT and Taxation Advice Office on a regular basis:  VAT Basics - quarterly,  VAT Basics for Schools - annually,  Construction Industry Scheme (CIS) half-yearly,  Employed versus Self-Employed - halfyearly, and  ad-hoc More Advanced VAT courses covering  Land and Property,  Partial Exemption, and  Business or Non-Business. A detailed courses prospectus is available from the VAT and Taxation Advice Office or can be viewed on the LeicesterNet under ‘Corporate Policies’, ‘VAT and Taxation’. Breadth of coverage of training An issue identified some time ago has been the breadth of coverage of such training, ie whether or not attendance at VAT and tax training courses can be said to be spread reasonably across the whole Council. To this end, attendance by department since 1 April 1997 may be summarised as follows: VAT Basics and VAT Basics for Schools taken together these courses cover the Council reasonably well with the exception of Environment and Development, which appears to have a disproportionately small attendance record, especially given the complexity of that department. CIS - attendance appears reasonably good; though Town Clerk’s and Corporate Resources and Commercial Services are disproportionately high, this is explained by those departments’ close interest in the subject matter - attendance by Arts and Leisure is disproportionately low, however. Employed versus Self-Employed - with the possible exception of Housing, attendance looks particularly poor across all departments; this includes Education, given the number of schools to whom the subject matter is particularly relevant. More Advanced VAT: Land and Property - as is to be expected attendance has been confined largely to Town Clerk’s and Corporate Resources and Environment and Development (the latter including Property Services). More Advanced VAT: Partial Exemption - attendance by Commercial Services and Education is disappointingly low given the relevance of the subject matter, especially its importance for schools. Cancellation of courses It is only viable to run the training courses offered where there is a minimum of four ‘delegates’. This has resulted in a number of course being cancelled due to lack of numbers over the past four years. This is of particular concern in the context of the following courses: Employed versus Self-Employed - of 7 courses offered, 3 have had to be cancelled. More Advanced VAT: Land and Property - of 5 courses offered, 3 have had to be cancelled More Advanced VAT: Business or NonBusiness - the only course offered had to be cancelled. In addition, it has recently been impossible to ‘drum up’ sufficient interest to even offer further More Advanced VAT: Partial Exemption courses. Conclusions There are thus two areas of concern, More Advanced VAT training generally and Employed versus Self-Employed. The Employed versus Self-Employed course covers an extremely important area where the Council‘s compliance must be regarded as questionable, ie the page 2: VATTax22 - May 2001 determination of whether a worker is an employee or a self-employed sub-contractor. This subject was addressed by a report to Strategic Resources Group on 11 July 2000; it is the subject of specific Notes for Guidance, published alongside the VAT Manual, and has featured repeatedly in VATTax. It is, therefore, disappointing and worrying to see the lack of numbers desiring training in this important area. More Advanced VAT: Land and Property covers the VAT and other tax implications of land and property transactions, notably sales, leases and lettings. Though a fairly specialised area, the amounts involved and the complexity of the issues make this a crucial area of compliance and one demanding a thorough understanding of the issues for those staff involved. To this end, there are undoubtedly staff, especially in Town Clerk’s and Corporate Resources, Environment and Development: Property Services and Commercial Services who have a need to attend this course. More Advanced VAT: Partial Exemption covers the importance of partial exemption to the Council and the criticality of our staying below the 5% de-minimis threshold. The subject is of vital importance to all departments but particularly to those with significant VAT-exempt income streams, such as Arts and Leisure and Environment and Development; in addition all schools should have an understanding of the impact decisions made under fair funding arrangements could have on the Council’s de-minimis position.. More Advanced VAT: Business or NonBusiness is a new courses aimed at complementing the More Advanced VAT: Partial Exemption course in attempting to identify whether activities undertaken by the Council are business activities for the purposes of applying VAT law or are activities that may be regarded as nonbusiness. This has relevance for the application of VAT to income streams and can help the Council’s Partial Exemption deminimis position if activities treated as VAT-exempt business activities can be recategorised as non-business. It is also an area that has been the subject of considerable litigation recently. In the light of the above, if you would be interested in attending any of the VAT and taxation training courses offered, contact Ian Harris at the VAT and Taxation Advice Office on extension 7470 (direct dialling 0116-252-7470), fax 0116-247-0689 or e-mail vattax@leicester.gov.uk. Details of forthcoming courses already scheduled can be found on page 8. INCOME TAX/NIC’s ‘IR35’ The infamous ’IR35’ rules, which came into effect in April 2000, have been covered previously in VATTax. Briefly, the measures were introduced (in the 1999 Budget) as an anti-avoidance measure where workers, supplying their services to a client under terms and conditions broadly the same as for an employee, do so in the guise of a self-employed worker through an intermediary, usually a limited company and often a ‘one-man’ limited company. This can considerably reduce the worker’s Income Tax and NIC’s liability and result in the client not having to pay employers’ NIC’s. An organisation called the Professional Contractors Group, or PCG, was formed in the wake of the introduction of the rules in order to fight them. The PCG sought a judicial review of the rules on the grounds that they contravene EU freedom of labour, state subsidy and human rights laws. The case was heard in April and resulted in defeat for the PCG, albeit with the Court severely criticising the way the rules were introduced - especially the hostile, antagonistic atmosphere created - and the manner in which the Inland Revenue interpret them, especially their inflexibility in the definition of employed versus self-employed status, a key determinant in the application of the ‘IR35’ rules. ‘IR35’, and the need to identify income from ‘disguised employment engagements’ for the purposes of accounting for Income Tax and NIC’s, is thus here to stay. Though not directly relevant for the Council, its result could be to increase the fees charged by such page 3: VATTax22 - May 2001 workers in order to cover their increased costs. page 4: VATTax22 - May 2001 INCOME TAX Children’s Tax Credit (CTC) The Children’s Tax Credit, or CTC, was announced in the 1999 Budget as the longterm replacement for Married Couples’ Allowance, which was abolished with effect from 6 April 2000. CTC is - despite the name - a tax allowance given to families with children. CTC, introduced with effect from 6 April 2001, is worth £10 per week to a basic rate Income Tax payer and is given as a £5,200 tax allowance but restricted to a marginal rate of Income Tax of 10%. together as one family, only one CTC can be claimed. Splitting CTC on divorce, separation or split-up If there are shared childcare responsibilities on divorce, separation or other split-up, CTC may be split between the parents by agreement. For example, where a child spends term-time weekdays with one estranged parent and weekends and holidays with the other, the parents can agree a mutually acceptable split of the CTC between them. Only if there are two (or more children) who each live full-time with different parents, can each estranged parent claim CTC, there then being seen to be two family units. If childcare responsibilities or circumstances change during the course of the tax-year, eg a relationship breaks down and the parent who had been claiming CTC no longer has responsibility for the child(ren), then the Inland Revenue must be advised immediately and entitlement to CTC adjusted accordingly. Claiming CTC CTC can be claimed by either parent or shared between them if they are both basic rate taxpayers. However, if one parent is a higher rate taxpayer, that parent must claim CTC, which is then clawed back at a rate of £1 for every £15 by which that parent’s taxable income exceeds the higher rate threshold, currently £29,400. Self-employed taxpayers must claim CTC as part of their annual Self-Assessment Return and, as such, actual receipt is significantly delayed. This can be mitigated by applying to offset CTC against payments-on-account but care must then be taken to accurately predict taxable income. Employed taxpayers claim CTC by completing the application form sent to all taxpayers towards the end of 2000 (or available on request from the Inland Revenue). CTC will then be given as an adjustment to the taxpayer’s PAYE tax-code. Some examples These examples assume all the claimants are basic rate taxpayers (unless stated otherwise) and agree to split CTC between them. Jack and Jill, who had been living together, separate on 21 August 2001 and the children then live permanently with Jill. CTC must be adjusted as follows:  prior to the separation, CTC was split between Jack and Jill, giving £520 x 137/365 each (there being 137 days between 6 April and 21 August 2001), ie both Jack and Jill receive £97.50;  after the split, Jill is entitled to all the CTC calculated as £520 x 228/365 (there being 228 days between 21 August 2001 and 5 April 2002), ie Jill receives £325. To take a more complex example, Peter is married to Alison and they have one son. However, on 10 September 2001, Alison leaves Peter to live with Anthony and takes their son with her, Anthony assuming financial responsibility for him. CTC must be adjusted as follows:  prior to the separation, CTC was split between Peter and Alison, giving £520 x 157/365 each (there being 157 days between Entitlement to CTC Entitlement to CTC depends on there being at least one child in the family unit who is:  a child of the claimant taxpayer or of his or her partner, a step-child or adopted child or a child looked after at the expense of the claimant taxpayer.  under 16 years of age at the start of the tax-year, and  living with the claimant taxpayer for at least part of the tax-year. Only one person per family unit can claim CTC, so if the claimant is living with a partner who also has a child but they all live page 5: VATTax22 - May 2001 6 April and 10 September 2001), ie both Peter and Alison receive £112;  after the split, Alison is entitled to the CTC along with Anthony and CTC is calculated as £520 x 208/365 (there being 208 days between 10 September 2001 and 5 April 2002), ie Alison and Anthony each receive £148. Another example illustrates where a child of a relationship spends part of the year with one parent and part with the other. Jenny and Andrew are married but Jenny has a son from a previous marriage to James. The son lives with Jenny and Andrew for 9 months and with James for 3 months. CTC can then be split ¾ (£390) to Jenny and Andrew and ¼ (£130) to James. A further complication occurs where children come into a relationship from different sources. For example Bill and Mary live together with Bill’s daughter from his previous marriage and Mary’s daughter from an earlier relationship. Though the children are from earlier relationships, Bill and Mary can only claim one CTC between them. However, if Bill’s son only lives with Bill and Mary for part of the tax-year, this does not affect their claim to CTC, as Mary’s daughter triggers entitlement (assuming she lives with Bill and Mary for the full tax-year). Only if both Bill’s son and Mary’s daughter do not live full time with Bill and Mary do the apportionment rules outlined in the previous examples need to be carried out (vis a vis Bill’s ex-wife and Mary’s former partner) thus:  Bill and his ex-wife might agree that Bill’s son spends ¾ of the tax year with Bill and Mary and ¼ with his ex-wife; as such Bill’s ex-wife can claim 25% of the CTC but Bill’s 75% will have to be adjusted to reflect the fact that Mary’s daughter also lives with her father for part of the tax-year. In the latter case, say, Mary’s daughter lives with her father for 1/3 of the tax-year, he will be entitled to 33% of the CTC, with Mary entitled to the other 67%.  The amount of CTC to which Bill and Mary are then entitled can be calculated as 75% of half the CTC for Bill’s son, ie £195, plus 67% of half the CTC for Mary’s daughter, ie £174, a total of £369. The above examples become ever more complicated where one of the partners is a higher rate taxpayer and clawback of CTC applies, as noted above. No attempt will be made to demonstrate what happens on a splitup but using a simple example of Jeremy and Louise, who remain together throughout the tax-year, an idea of the calculations necessary can be gauged. Louise is a higher rate taxpayer, earning £36,200 in 2001/02. As such Louise must claim all the CTC for the couple’s daughter (even though Jeremy also works, he is a basic rate taxpayer so cannot share CTC). As Louse’s income is £2,265 above the higher rate threshold (£36,200 less the £4,535 personal allowance compared to the threshold of £29,400), this will result in £151 of CTC being clawed back (£2,265 divided by £15), ie Jeremy and Louise will only receive £369. Single and dual earner families One particular criticism levelled at CTC is that single earner families are at a disadvantage. Where there is only one earner - the traditional family unit - but that earner is a higher rate taxpayer, CTC is clawed back, as outlined above. The effective maximum earnings before clawback is £33,935 (£4,535 personal allowance plus £29,400 taxable income). However, in a dual earner family, both partners could earn at just below the higher rate threshold, eg at £32,000 giving a combined family income of £64,000, without clawback being triggered. Married and unmarried couples The CTC rules make no differentiation for married or unmarried couples (providing the couple is of a man and a woman - gay and lesbian couples do not qualify for CTC). CTC and WFTC and DPTC Finally, the interaction between CTC and Working Families Tax Credit (WFTC) and Disabled Persons Tax Credit (DPTC) can result in a reduction in family income. This is because WFTC and DPTC both use net posttax earnings to determine entitlement. Yet CTC reduces Income Tax and so increases post-tax earnings. The full £10 per week, CTC will, therefore, reduce entitlement to WFTC or DPTC by £5.50 where family income exceeds £92.90 per week. page 6: VATTax22 - May 2001 VAT/INCOME TAX/NIC’s Hire or loan? Where the Council makes assets (eg equipment) available to an employee for his or her private use, there are significant tax implications. The first thing that needs to be determined is whether the Council is hiring the asset to the employee or whether the asset is loaned to the employee free of charge. Where the asset is hired - which will be the case where the employee makes a ‘contribution’ to cover the private use - the ‘contribution’ from the employee should be enough to take the asset out of the taxable benefits-in-kind rules (see below). However, it will normally result in VAT being due on the ‘contribution’ as if it were a ‘commercial’ hire fee. VAT will not be due where the asset hired is zero-rated (notably books) or exempt from VAT (unlikely) and is not due on ‘contributions’ for the private use of a ‘company’ car (including Council leased cars), which are specifically excluded from the scope of VAT; in virtually all other cases VAT will be due on the ‘contribution’, so it is important to be clear on the amount of the ‘contribution’ and whether that amount is VAT-inclusive or not. Where no ‘contribution’ is made towards private use by the employee (or such ‘contribution’ does not cover the volume of private use), the making available of the asset for private use will be a taxable benefit-inkind. There are a few exceptions - notably covering computer equipment up to a value of £2,500 and mobile phones - but the loan of any other asset will generate a tax liability for the employee. The tax liability is calculated as 20% of the market value of the asset when first made available, with the employee then paying Income Tax at his or her marginal rate of tax on that value. For example, for an asset valued at £1,000, the taxable benefit will be £200, so a basic rate taxpayer will pay £44 Income Tax. In addition, although there are no employees’ NIC’s payable on benefits-in-kind, Class 1A NIC’s are payable by the Council at 12.2% of the value of the taxable benefit. So, in the above example, the Council will have to pay £24.40 in Class 1A NIC’s. Taxable benefits-in-kind are declared to the Inland Revenue by way of a Form P11D in July each year to cover the tax-year ending on the previous 5 April. A copy of the appropriate P11D must also be given to the employee. The Inland Revenue then normally recover the Income Tax due by adjusting the employee’s PAYE tax-code in the new tax-year. ACTION: If you make assets available for private use make sure you know whether they are ‘hired’ or ‘loaned’. If they are ‘hired’, remember to account for VAT on the ‘contributions’ from the employee. If they are ‘loaned’, you must provide details to the VAT and Taxation Advice Office when requested - usually in April or May each year - so that a Form P11D can be correctly submitted. VAT Assessment dates Following a number of legal challenges, Customs and Excise have amended their internal procedures governing the key dates for raising an assessment. An assessment (to recover underdeclared VAT) must be made within one year of Customs and Excise having sufficient evidence on which to base the assessment and within two years of the end of the VAT period in which the misdeclaration occurred, whichever is the later. The use of the term ‘made’ has led to a number of challenges, almost all revolving around the point that it is virtually impossible for the taxpayer to know (or even ascertain) precisely when the assessment was made. Consequently from 1 March 2001, Customs and Excise policy is to interpret the term ‘made’ as meaning the date the assessment is notified to the taxpayer. This should make it much easier to determine whether an assessment has been made in time or whether it can be challenged on that basis page 7: VATTax22 - May 2001 VAT Staff secondments The VAT treatment of staff supplied or seconded to a third party can be tricky. Such can be VATable at standard-rate, exempt from VAT, a non-business supply or possibly not a supply at all. The default position for most supplies of staff is VATable at standard-rate. However, where the supply is closely related to a supply of education, eg a teacher seconded to a university or FE college, the secondment can be exempt from VAT. This is because the supply is then between two ‘eligible bodies’ in terms of VAT and education and is closely related to their delivery of education. Another possibility is that where the Council supplies or seconds a member of staff under statutory powers then the supply might be non-business. It will be necessary to meet the criteria for non-business treatment, ie the Council acts under a special legal regime and there is no distortion of competition, but this might well be the case, for example, where a social worker is seconded to work in a charity nursing home. Or there might be no supply at all. This is typically the case where the employee undertakes to do work for a third party with the Council’s only involvement being merely his or her release for the time necessary. This applies most obviously to teachers seconded to work for examination bodies. As the teacher has a separate contract of employment with the examination body, there is no supply of his or her services by the Council. Remember also that staff may be seconded to a grant-funded voluntary body in lieu of grant. This would then constitute a ‘grant in kind’ and would be outside the scope of VAT. Section 33 of the VAT Manual covers staff secondments in more detail. APD (along with foreign departure taxes on return flights and airport charges) are only payable where the passenger actually catches the flight. Where the passenger cancels and no refund of the ticket price is made, the airline can thus significantly increase its profits by ‘pocketing’ the APD, etc (APD and other levies can amount to as much as 80% of the ticket price for ‘budget’ flights). Under pressure from the Air Transport Users’ Council, a number of airlines have now conceded the point and will refund APD where a passenger who cancels applies for such a refund (as yet there is still no commitment to offer automatic refunds). However, some airlines have stated that, though they will refund APD paid in such cases, they intend to levy an administration charge of £10 for doing so. As APD on economy flights within the EEA is now only £5, it is hardly worth applying to such airlines (to destinations beyond the EEA, APD is now £20 on economy flights). Customs and Excise have, a little surprisingly, stated that, as far as they are concerned, the airlines are not obliged to refund APD levied but not due; Customs’ view is that this is a ‘moral’ issue for airlines to address! * * * * * * * Question and Answer? Corporation Tax and local authorities Why doesn’t the Council have to pay Corporation Tax on charges levied; I thought all ‘incorporated bodies’ had to? The reason the Council does not have to pay Corporation Tax (or Income Tax for that matter) is quite simply Section 519 of the Income and Corporation Taxes Act 1988 which statutorily exempt all local authorities from both Corporation Tax and Income Tax. It was not always so, however. Historically a local authority had to identify its income and carry out detailed calculations to produce a tax return to the Inland Revenue demonstrating that there was no taxable profit (because expenses incurred in generating the income exceeded the income received). Thankfully this bureaucratic nonsense is no longer necessary! APD Air Passenger Duty refunds A piece of ‘sharp practice’ has come to light concerning Air Passenger Duty (APD) paid by a passenger who subsequently fails to catch the flight. page 8: VATTax22 - May 2001 Training courses The following VAT and taxation training courses are currently scheduled: VAT Basics 5 June 2001 (9:30am to 12:30pm) 2 October 2001 (9:30am to 12:30pm) 6 December 2001 (9:30am to 12:30pm) VAT Basics for Schools – 2 October 2001 (9:30am to 4:30pm) The Construction Industry Scheme 27 September 2001 (9:30am to 12:30pm) Employed versus Self-Employed Status 27 September (2pm to 4pm) As ever, to book a place on any of these courses or to enquire about other courses (such as the More Advanced VAT courses on Land and Property, Partial Exemption and Business or Non-Business?), contact Ian Harris at the VAT and Taxation Advice Office on extension 7470 (direct dialling 0116-252-7470) or e-mail VATTax@leicester.gov.uk. * * * * * * * * If you have not received a personal copy of VATTax and would like to be put on the circulation list, contact Ian Harris at the VAT and Taxation Advice Office. If you have any items you would like to see covered in a future edition of VATTax, or would even like to contribute an item yourself, contact Ian Harris at the VAT and Taxation Advice Office on extn. 7470 (direct dialling 0116-252-7470) or e-mail VATTax@leicester.gov.uk.  VATTax23 will be out in July. VAT Manual Update Service At last, May 2001 sees the re-launch of the LeicesterNet version of the VAT Manual and associated other guidance published by the VAT and Taxation Advice Office. To access the on-line information - which includes comprehensive automatic crossreferencing and e-mail facilities - go to ‘Corporate Policies’ (under ‘Useful Information’) and then ‘VAT and Taxation’. At the moment the VAT Manual, Notes for Guidance on Members Allowances and Income Tax, NIC’s and Social Security Benefits and on Employed or SelfEmployed Status are available, together with the VAT and taxation training course prospectus and on-line versions of all VATTax newsletters and current Alerts. The VAT Manual and the Notes for Guidance on Employed or Self-Employed Status have been comprehensively revised and updated to reflect legislative and case law developments and experience. The Notes for Guidance on Members Allowances, etc will be similarly updated shortly. For those users unable to access the LeicesterNet or who have requested they continue to receive paper updates of the VAT Manual, etc, the fully revised and updated paper version will be issued in the next few weeks.  It is hoped to replicate the LeicesterNet VAT and taxation information on the LION Education Intranet site in time for start of the 2001/02 academic year in September. page 9: VATTax22 - May 2001