Meg is an unincorporated sole trader. She requires advice regarding a planned change of accounting date, bringing her husband into the business, either as an employee or as a partner, and the value added tax (VAT) implications of purchasing supplies from an overseas supplier.
Meg:
– Is 60 years old and is married to Laurie.
– Owns an unincorporated sole trader business, MT Travel.
– Has rental income of £8,600 each year in addition to any profits from MT Travel.
MT Travel:
– Was set up by Meg on 1 January 2012.
– Has had accounts prepared to 31 December annually.
– Generated overlap profits of £7,400 on commencement.
– Meg will change its accounting date to 31 March by preparing accounts for the 15 months ending 31 March 2018.
MT Travel – recent and forecast tax-adjusted trading profits:
£
Year ended 31 December 2016 17,000
15 months ending 31 March 2018 9,000
MT Travel – the future:
– From 1 April 2018, Meg’s husband, Laurie, will start to participate in the business.
– Meg will either:
(1) employ Laurie part-time, paying him an annual salary of £12,000, the commercial rate for the work he will perform; or
(2) admit Laurie into the business as a partner, sharing profits and losses in the ratio 75% to Meg, and 25% to Laurie.
– The business is expected to generate a tax-adjusted trading loss in the tax year 2018/19 of £20,000, before making any payment to Laurie.
– The business is expected to become profitable again in the tax year 2019/20 and thereafter, but profits are not expected to exceed £30,000 per year for the foreseeable future.
Laurie:
– Is 63 years old.
– Was employed for many years by Hagg Ltd, earning gross annual remuneration of £60,000, until 31 March 2017.
– Has received annual dividends of £18,000 for many years. This is currently his only source of taxable income.
MT Travel – VAT:
– MT Travel is registered for the purposes of VAT.
– MT Travel currently buys standard-rated marketing services from a UK supplier, who is VAT registered.
– MT Travel can buy the same services from a supplier located in an overseas country, which is not in the EU, where the rate of VAT is 12%.
Required:
(i) Calculate the taxable trading profit of MT Travel for each of the tax years 2016/17 and 2017/18 before considering relief for the anticipated trading loss of the tax year 2018/19.
(ii) Identify and explain ONE practical tax disadvantage of MT Travel having a 31 March year end, rather than a 31 December year end.
Meg and Laurie
(i) Taxable trading profit
(i) Calculate the allowable trading loss available to each of Meg and Laurie for the tax year 2018/19 if Laurie becomes an employee, or, alternatively, a partner in MT Travel on 1 April 2018.
(ii) Advise Meg and Laurie of the alternative ways in which their respective trading losses as calculated in (b)(i) could be used depending on whether Laurie is taken on as an employee or as a partner, and state the rate at which income tax would be saved in each case.
(i) Allowable trading losses if Laurie is an employee
Laurie will not have an allowable trading loss in this case.
Note: Laurie’s salary of £12,000 each year is an allowable expense for Meg’s business. No Class 1 employer’s national insurance contributions (NIC) will be payable in respect of this as they will be covered by the £3,000 annual employment allowance.
Allowable trading losses if Laurie is a partner
Explain the value added tax (VAT) effect of MT Travel purchasing the services from the overseas supplier, rather than the UK supplier.
Implications of purchasing services from the overseas supplier
As MT Travel is registered for value added tax (VAT), this is a business to business (B2B) service, so will be treated as supplied in the UK, as this is where the business (MT Travel) is established. MT Travel must therefore pay VAT at the UK standard rate of 20% to HM Revenue and Customs under the ‘reverse charge’ principle. The rate of VAT overseas is irrelevant.
Input VAT can be reclaimed on this expense in the normal way.
MT Travel’s VAT position is therefore the same as if the services had been purchased from the UK supplier.