Joseph Cox

Founder/Managing Partner

Do I need to provide a purchase invoice for EVERYTHING?

admin
The best practice is to provide copies of each purchase invoice to your bookkeeper and to save copies of these on your bookkeeping system (e.g. Xero). These should then be matched against the appropriate payments made for them on your bank account.

However, we appreciate that this can be quite time-consuming and impractical, especially if you are making a high volume of purchases from the same supplier.

In practice, where we are able to know that all purchases are definitely 20% VAT (e.g. the supplier is VAT registered and only sells VATable goods) then we are happy to reclaim VAT without an invoice. This is on the condition that you, the business owner, are able to provide records if/when asked by HMRC. We will usually ask for a sample of invoices first (and occasionally) to confirm.

Alternatively, where a percentage of your purchases are mixed between standard-rated goods and zero-rated goods (or where they don't contain VAT altogether) then we usually ask you to provide each invoice that contains UK VAT - we then assume that any payments made that do not match invoices do not contain VAT.

If providing invoices is impossible, then as a last resort we will make an approximation of how much standard-rate VAT can or should be reclaimed. Please note that when taking this approach, if HMRC disagrees with our estimation, or refuses to include it all together, there may be late payment interest and penalties applied on any VAT that they disallow.

Please note that where we are using an approach where you do not provide all purchases, we will ask for a sample of purchase invoices for our records. Even if we have done this in the past, we will occasionally we may ask for more from time to time. This is in order to double-check the logic of any assumptions and to ensure that our approach is correct.
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Is there a VAT threshold for dropshippers?

admin
Since the Brexit VAT changes on 1st January 2021 the way that dropshippers approach VAT changed.

If you are sending goods from overseas (outside the UK) to UK consumers then the UK VAT threshold does not apply and you need to register immediately.

This is supported by HMRC’s online guidance on the VAT changes, here. I’ve highlighted a couple of points within the following screenshots, see point 1 and more importantly, point 2.

Q: What do we need to do in order to comply with HMRC in order to export the goods from UK to EU?

admin
If you are exporting goods from the UK to anywhere outside of the UK (after Brexit the EU is treated the same as anywhere else) then IF you are VAT registered you will charge 0% VAT on those sales.

In terms of the practicalities, there is nothing you/we need to do on an accounting front, however, you should speak with your shipping provider to find out what information they might need as they are the ones responsible for processing any export paperwork (not to mention the import requirements on the other end).

Q: Do I not pay any VAT upon import to release my cargo? How about duty?

admin
Import VAT will need to be paid by businesses but can be reclaimed when preparing the VAT return using a combination of the supplier invoice, shipping/agent invoice, and a form C79 provided by HMRC.

Duties will need to be paid by businesses but this can't be reclaimed from HMRC. 

Traders also have the option to use postponed VAT accounting. This allows the UK VAT registered businesses to declare the VAT and recover the VAT on the same VAT return (similar to the reverse charge mechanism). No payment is made upfront. 

Duties and the shipping handlers’ fees would still be paid when importing goods into the country.

Traders using deferred import VAT payments can access a postponed import VAT statement through their online account - This will show a monthly summary of all their imports where they opted to postpone the import VAT through the customs clearance paperwork. Each statement shows the total postponed import VAT for the previous month and this figure needs to be included in box 2 and box 4 of your VAT return (known as PVA adjustment).

Q: If we use a bonded warehouse in the EU, are we still liable for VAT on import?

admin
Yes, import VAT will become payable when goods leave the warehouse (when the sale to a customer is made).

You should be able to time the import VAT and duty with the sale.

As there are regulations involved (i.e., occasional inspections by someone from customs to make sure business is operating correctly), using a bonded warehouse is more expensive than just a normal warehouse.

However, it will be worthwhile checking this with the actual warehouse company though.

Intercompany Loans

admin

What is an intercompany loan?


This is the term used to describe a loan between two companies - usually - with the same (or linked) ownership. 

For example, if you own 100% of the shares in Company A and Company B, if B loans A £50,000 then this would be an intercompany loan for £50,000.

Is there a special process that needs to be followed when making an intercompany loan?


Strictly speaking, it is best practice to have a loan agreement in place whenever making a loan. However, in practice, if you own both entities, this might not make practical sense.

Therefore, if you wanted to make an intercompany loan without any formal agreement in place, all you would need to do is transfer the funds between the two organisations.

What is the 'default' if no formal agreement in place?

If a loan does not specify any terms, the default would normally be to assume it is repayable on demand, since the borrower has no enforceable right to avoid repaying the money.

Is a formal agreement needed?

Not necessarily. However, it would be best practice to have something in place that outlines the key terms of the loan.

Are there tax implications when making an intercompany loan?


As loans are not income or an expense, there are no tax implications on the loans themselves.

However, if the loan has interest, there will be tax implications for both companies.


Points on anti-avoidance

There must be a genuine business reason for making an intercompany loan - if it's being done as something artificial to avoid taxes, then it might fall foul of general anti-avoidance rules, which could land you in trouble.

Examples of general business reasons:

  • Starting a new entity that needs working capital
  • Making a commercial loan to another business

Examples of something artificial:

  • Loaning the money to a new company, to then withdraw from that company as a loan (rather than dividend)
  • Loaning to a company in a lower tax jurisdiction and charging a high rate of interest (increasing profits in the low tax jurisdiction and decreasing profits in the higher rate jurisdiction)

Tax Implications of Payments to Charity - Should I pay via Limited Company or Personally?

admin
A client asked whether or not they should make a payment to a charity via their limited company or from their personal account. 

Here is a quick summary with scenarios:

Scenario A - Paying £1000 into Charity via Limited Company


Corporation Tax reduced by 19% = £190 CT saved.

Note: Charity does not benefit from gift aid (20% government top-up).

Scenario B - Withdrawing £1000 dividend from a company and then paying to charity as a higher rate taxpayer (<£100k)


Corp Tax = £190
Dividend Tax @ 32.5% = £320
Subtotal paid on taking dividend: £510

£1000 paid to charity with gift aid @ 20% (£1000/0.8) = £1250 band rate extension

Therefore £1250 of dividends taxed @ 7.5% rather than 32.5% (32.5% - 7.5% = 25% saving): 25% @ 1250 =  £312.50 personal tax reduction 

Corp Tax = £190
Dividend Tax (£320 - £312.50) = £7.50
Total tax paid on taking dividend: £197.50

Note: The charity receives £1250 in total (£1000 donation plus £250 of gift aid @ 20%)


Scenario C - Earning above £100k


When you earn >£100k you lose £1 of your personal allowance for every £2 earned. The effective rate while in this bracket is 60%. 

Therefore if someone is earning >£100k then the benefit of donating to charity is increased as the bracket extension saves some of their personal allowance too (example calculations below).

£110k dividend calculations/examples (click each for screenshot):

Calculation of someone receiving £110,000 in dividend income only = £23,787.50 income tax due (However, £190 corp tax saved - The charity receives £1000)

Calculation of someone receiving £111,000 in dividend income AND paying £1000 to charity personally: 23,759.37 - (However, £190 corp tax paid - The charity receives £1250)

£28.13 personal tax reduction when taking additional dividend in the above example - £190 corporation tax increase


Summary

Paying directly from the company is usually more beneficial as it reduces corp tax and there are no personal tax considerations HOWEVER paying via company means the charity won't get the gift aid uplift.