:: VAT ::

52 Ways To Save Tax #29

Pay less tax

Drive more carefully and pay less tax

Research in 2014 found that Britain had the highest rate of fuel tax in Europe. Drivers pay around 73p in tax for every litre of fuel that they put in their tank, resulting in a substantial tax bill every year.

In the latest part of our “52 Ways to Save Tax” guide, we look at how you reduce the amount of fuel tax you can pay by driving more efficiently.

52 Ways to Save Tax – Part 29: Drive more efficiently

In the UK, just under two thirds of the price that you pay for a litre of petrol or diesel is tax. The current fuel duty payable is 57.95 pence per litre and then you also pay standard rate VAT at 20%.

Figures from the RAC show that, in 2016, tax accounted for 63.7 per cent of the price of a litre of diesel and 64.9 per cent of the price of a litre of petrol.

Assuming that a litre of petrol costs £1.15, you pay 74.6p of that in tax. A litre of diesel at the same price sees you pay 73.3 pence in tax.

What this means is that the more fuel you buy, the more tax you pay. So, reducing your fuel consumption could save you a significant amount in tax, depending on how much you use your vehicle.

5 ways to save money on fuel

There are lots of ways that you can drive more efficiently. By doing so you will use less fuel, meaning that for every litre of fuel you save you will pay around 74p less in tax. If you rack up the miles, this could result in significant tax savings.

Here are five easy ways for you to drive more efficiently and to cut the amount of fuel tax you pay.

  1. Change gear faster

The higher the gear that you drive in, the lower your engine speed. This can improve fuel efficiency and so it pays to change up a gear whenever you can, without labouring your engine.

Try to change gear earlier when you are accelerating, and don’t wait until the rev counter is in the red before changing up.

  1. Keep your car aerodynamic

The fuel consumption of your vehicle is partly determined by how aerodynamic it is. So, try to avoid driving with boxes or bikes on the roof and keep your windows and sunroof closed if you can.

Driving faster will also increase the wind resistance you encounter, causing your vehicle to use more fuel.

  1. Drive more slowly

Reducing your speed from 62 mph to 56 mph will reduce your fuel consumption by around 10 per cent whilst the AA says that driving at 70 mph instead of 85 mph on motorways decreases petrol consumption by between 20 and 25 per cent.

  1. Reduce excess weight

Every additional kilogram of weight in your vehicle affects your fuel efficiency. So, always remove heavy objects from your vehicle when you are not using them.

In addition, the weight of the fuel itself can affect economy. Some experts suggest putting a smaller amount of fuel in your vehicle more often, rather than filling up your tank in one go.

  1. Have your vehicle regularly serviced

A well-tuned engine can improve your fuel economy. Having your car regularly serviced and using good quality oil can ensure your engine is working well and minimising the amount of fuel it uses to function.

In addition, correctly inflated tyres can help your fuel consumption. A tyre that is under inflated can reduce your fuel economy, meaning greater fuel costs and tax bills.

52 Ways To Save Tax #20

Pound coinsIf you are a small business with a turnover of more than £82,000 in a 12 month period (in 2016) then you will have to register for Value Added Tax (VAT).

Once you have registered for VAT, you will then have to charge the right amount of VAT, pay any VAT due to HMRC, submit VAT returns and keep VAT records.

Considering that the standard rate of VAT in the UK is 20 per cent, your VAT bill can become quite substantial. But, there are ways to mitigate the amount of VAT that you pay. Keep reading to learn more.

52 Ways to Save Tax – Part 20 : Change your VAT scheme

In simple terms, businesses pay VAT on the sales that they make and reclaim the VAT on any purchases. However, while many company owners assume this is the only way to deal with VAT, there are a number of schemes which may be more suitable for you. They may also help you to save money.

Consider a Flat Rate Scheme

If your estimated VAT taxable turnover in the next year will be £150,000 or less then you can join the ‘flat rate scheme’ for VAT.

Under the flat rate scheme you keep the difference between what you charge your customers and pay to HMRC but you don’t reclaim any of the VAT that you pay on purchases. There is also a one per cent reduction in the flat rate percentages for your first year of VAT registration.

The VAT flat rate you use depends on your business type. Some examples of the flat rate charged to various sectors include:

  • Lawyer/legal services                 5 per cent
  • Pubs                                           6.5 per cent
  • Boarding/care of animals           12 per cent
  • Computer/IT consultancy           5 per cent
  • Hotel or accommodation            5 per cent
  • Retailing food or tobacco           4 per cent

Flat Rate is easy to use and can save you money if you have a lower than average level of VAT purchases.

Use the Annual Accounting Scheme

You can use the Annual Accounting Scheme if your estimated VAT taxable turnover for the coming year is not more than £1.35 million.

When you use the VAT Annual Accounting Scheme you make either nine monthly or three quarterly interim payments throughout the year. You then only need to complete one return at the end of each year and you pay any outstanding VAT due at that time. If you have overpaid, you will receive a refund.

Using this scheme is easier and less time consuming than other methods, helping you to save time and money.

Use a Margin Scheme

Most businesses charge VAT on sales and reclaim VAT on purchases.

However, if you sell second-hand goods, works of art, antiques or collectibles, there may have been no VAT for you to reclaim when you bought them. In this case, it may benefit you to use a ‘margin scheme’.

Margin schemes let you account for VAT only on the difference between the amount you paid for an item and the sale price (the ‘margin’). You won’t pay any VAT if you don’t make a profit on a sale.

Under this type of scheme you can still use standard VAT accounting for other sales and purchases.

52 Ways To Save Tax #19

Man phoneAdding another bill to your list of outgoings might not seem the most prudent advice when looking to save money. However, hiring an accountant to help you to deal with your business and your tax affairs can actually help you to save hundreds or even thousands of pounds.

A good accountant will provide business and financial advice as well as helping you to maximise your tax efficiency. Keep reading to learn more.

52 Ways to Save Tax – Part 19 : Appoint an Accountant

Even though appointing an accountant might add another expenditure, many millions of people find that hiring a professional can help them to save both time and money.

One of the main benefits of hiring an accountant is that they can take a lot of the worry out of running your business. Your priority should be to grow your business and maximise your income and spending hours poring over your paperwork can detract from this. An accountant knows exactly what they are doing and can help you to manage your financial affairs while you get on with running your company.

A good accountant will also be able to provide you with business advice and help you to save money. They can advise you on the type of business structure to adopt – as a sole trader, partnership or limited company – and they can tell you what is the most tax efficient way to take cash from your company.

They can advise you on paying salaries and dividends and they will counsel you on the best way to register for Value Added Tax (VAT) if applicable.

Your accountant will also ensure that all the relevant tax deadlines are met. They can submit your personal tax return and company accounts, helping you to avoid fines and penalties.

Accountants can also help you to grow your business

As well as ensuring that you make your business as tax efficient as possible, a good accountant will also provide you with business advice.

When you appoint an accountant you will usually have a dedicated person that you speak to who. In time, this person will grow to know lots about you and your business and they can then help you to plan your expansion, grow your company and set up structures that are tax efficient.

They can also help you to set up a payroll for your staff and advise you on setting up a business bank account.

Accountants are often worth the investment

Even though you may end up paying your accountant anything from £150 to more than £1,000 – depending on the complexity of your business and accounts – you will often find that they offer superb value for money.

In many cases the tax savings you make will more than cover the cost of your accountant and they can also help you to avoid penalties and fines by doing things properly. The time they save you by looking after your paperwork for you can also be worth the cost in itself.

52 Ways To Save Tax #13

Pay less tax

Pay less tax by sending in your tax return on time

In our series we’ve been looking at easy ways for you to reduce the amount of tax that you pay. As well as using legitimate means to cut your tax bill, making sure you are organised and that you file your tax return on time can also help trim the amount you owe HMRC.

Keep reading to find out how paying your tax bill on time can save you hundreds of pounds.

52 Ways to Save Tax – Part 13 : Pay your tax on time

If you have to submit a self-assessment tax return then there are deadlines for sending in your information. These are:

  • Paper tax return – midnight on 31 October
  • Online tax return – midnight on 31 January

For example, for the tax year that ended on 5 April 2015 you have to submit your paper tax return by 31 October 2015 or your online tax return by 31 January 2016.

You also have to pay any tax that you owe by the 31 January deadline.

If you don’t file your tax return on time, you will face a penalty. You’ll get a penalty of £100 if your tax return is up to 3 months late and you will have to pay more if it’s later, or if you pay your tax bill late.

If you take longer to submit your return you can face a daily £10 penalty – which is capped at 90 days, or £900 – as well as interest on the amount outstanding.

HMRC figures show that 890,000 people missed the 31 January 2015 deadline for submitting their self-assessment tax returns, immediately adding £100 to the bill of almost a million people.

In some cases HMRC will waive the penalty. Reasonable excuses for failing to meet the submission deadline include:

  • the death of a partner
  • an unexpected stay in hospital
  • issues with the online HMRC service
  • fire
  • unpredicted postal delays
  • computer or software failure when preparing your tax return

In these cases HMRC may waive your penalty. Reports in May 2015 suggested that HMRC were waiving more of the penalties than normal if people provided a reasonable reason why they did not submit their tax return on time. However, simply submitting late may still see you pay at least £100 more than you have to.

Paying a surcharge on your VAT

It’s not just your income tax bill that may go up if you don’t pay on time. If you’re a VAT registered business then you can also face penalties if you don’t pay your VAT by the deadline.

HM Revenue and Customs (HMRC) record a ‘default’ if:

  • they don’t receive your VAT return by the deadline
  • full payment for the VAT due on your return hasn’t reached their account by the deadline

If you default you may enter a 12 month ‘surcharge’ period and if you default again during that period you could face a penalty.

For example, if you have a turnover of less than £150,000 you can face a 2% VAT surcharge if you default three times during a 12 month period.

You can also face a £400 fine for sending in a paper VAT return unless HMRC has told you that you are exempt from online submission.

All this means one thing: if you send your tax returns on time and make payments when they are due your tax bill will end up being lower.

52 Ways To Save Tax #3

In the third part of our series ’52 Ways to Save Tax’ we look at a way that you can cut your tax bill by taking more care when you’re buying goods and services. Keep reading to find out how going VAT free can reduce your tax bill and save you hundreds of pounds a year.

52 Ways to Save Tax – Part 3 : Go VAT free

If you buy goods and services then the chances are that you will pay Value Added Tax (VAT). VAT is charged on a wide range of items from the groceries you buy at the supermarket to services such as plumbing and car repairs.

In 2013, the tax raised a staggering £100 billion for the Treasury. Charged at 20 per cent, if you pay VAT on items it increases the cost of your goods and services by a fifth. So, buying items that don’t charge VAT can help you save a significant amount in tax.

Keep reading for our tips on how to save tax by paying less VAT.

Use small businesses

Businesses have to register for VAT if their annual turnover is above the registration threshold of £81,000. This means that any small or medium sized business that has a turnover of over £81,000 has to add the 20 per cent VAT charge to the cost of their goods and services.

Smaller businesses with a lower turnover aren’t liable for VAT and so do not have to charge the 20 per cent tax. So, if you have a choice between a larger or a smaller business it can pay to choose a small, independent business so you don’t pay the VAT.

Here’s an example. If you need a plumber to come and fix your washing machine, a local sole trader who is exempt from VAT may charge you £200.

If a larger, national business charged you £200 for the same service you may well have to pay VAT on top of this. In this case that would be 20 per cent, or £40, making the total cost of the work £240.

By using a smaller business you can avoid paying VAT and, in this example, save yourself £40.

Change the shopping in your trolley

The rules for VAT on food and drink are complicated. A spokesman for the website mysupermarket.co.uk says: “There are some strange discrepancies between the types of foods that qualify for VAT. By making some smart decisions, consumers can avoid paying VAT on a lot of convenience foods.

“For instance, a gingerbread man decorated with two chocolate eyes is exempt from VAT, but if it contains any more chocolate, standard-rated VAT is charged. Likewise, unshelled salted nuts are exempt, but shelled salted nuts are not.”

Switching from products that attract VAT to those in the zero-rated bracket can save you money. Examples of switches you can make include:

  • Chocolate chip biscuits are VAT free while chocolate coated biscuits are not
  • Tortilla or corn chips are VAT free while potato crisps are not
  • Jaffa cakes are VAT free while arctic rolls are not
  • Mousse is VAT free while sorbet is not
  • Milk shake is VAT free while flavourings for milk shake are not

You could also make your own fruit smoothies (as there is no VAT on the ingredients) whereas VAT is payable on pre-made smoothie drinks.

 

What you do and don’t pay VAT on

Value Added Tax (VAT) is a tax that all of us pay. It is a tax on consumer spending and it is automatically added to goods and services that you buy. And, you pay VAT on a wide range of items from clothes to restaurant meals.

VAT is currently charged at a rate of 20 per cent and is expected to raise the staggering sum of £100 billion for the Treasury in 2013. But, what do you pay VAT on? What goods and services are exempt from VAT? And what attracts the reduced rate of VAT? Keep reading for the answers to all these questions – and we also look at why you’ll pay VAT on crisps but not tortilla chips.

What you do pay VAT on

VAT is charged on a huge range of items – from clothes and cars to big ticket electrical items. Most goods and services in the UK attract VAT at the standard rate – currently 20 per cent. Most of the time, VAT is included in the price of an item in a shop. For example, a pair of shoes priced in a major retailer at £50 will include VAT of 20% (£10).

What you don’t pay VAT on

There are a range of items are zero-rated for VAT or are exempt from the tax. This means that you don’t have to pay VAT on them. Items that are zero-rated for VAT include:

• Books, magazines and newspapers
• The water supplied to your home
• Medical treatment and health care
• Printed music
• Bingo
• Baby wear
• Lotteries
• Children’s clothing and footwear
• Postage stamps
• Goods donated and sold in charity shops
• Betting/gaming
• Burial or cremation costs

The reduced VAT rate

VAT was introduced as a tax on ‘luxuries’ however many of the items now subject to the tax are viewed by most people as essentials. However, some items attract VAT at a considerably reduced rate of 5 per cent. You will pay 5% VAT on:

• Domestic gas and electricity and heating oil/solid fuel for domestic use
• Items to help you to stop smoking such as nicotine patches
• Children’s car seats
• Women’s sanitary products
• Heating oil and fuel
• Mobility aids for the elderly

 

Paying VAT on food

Food and drink for human consumption is, in general, zero-rated. However, you do pay standard rate VAT (20%) on a range of items including alcoholic drinks, confectionery, crisps and savoury snacks, hot food, sports drinks, supplies of food made in the course of catering including hot takeaways, ice cream, soft drinks and mineral water.

There are also a number of odd discrepancies where you can pay VAT on some types of food but not others. For example, you will pay VAT on shelled nuts but nuts in their shells are VAT free.

 

Foods that you do pay VAT on… …and foods that you don’t pay VAT on
Wholly or partly chocolate covered biscuits Chocolate chip biscuits
Sorbet Cream gateaux and mousse
Chocolate bar Chocolate spread
Flavourings for milk shake Milkshake
Arctic roll Jaffa cakes
Potato crisps Tortilla or corn chips
Roasted/salted nuts without shells Roasted/salted nuts in shells (monkey nuts, pistachios)
Cold take-away food Hot take-away food
Luxury biscuits Cakes

Do you pay more of your income in tax than ever before?

At what point in your life were you paying the highest proportion of your income in tax? In the 1970s? The 1980s? In a recession? Or now?

Since the 1960s, the Office of National Statistics has analysed how much of your income you are paying in taxes. And, this analysis is not just looking at your income tax. Research has considered the impact of both direct taxes and indirect taxes on household incomes.

  • Direct taxes include: Income tax, National Insurance contributions, Capital Gains tax, Inheritance tax
  • Indirect taxes include VAT, fuel duty, tax on alcohol and tobacco, Stamp Duty

The graph below shows the ‘effective’ tax rate over the last 50 years. The ‘effective’ tax rate is the total amount paid by households in both direct and indirect taxes as a percentage of their gross income.
Effective tax rate

In 1961, after accounting for inflation, the average household paid approximately £4,000 in direct and indirect taxes, compared with £12,900 in 2011/12.

Why you’ve paid a different proportion of your income in tax since the 1960s

Since the 1970s, the general pattern of change in headline rates of tax has been for reductions in income tax, and increasing Employee’s National Insurance contributions and VAT. However, many other factors, including the income levels at which income tax and National Insurance contributions are levied, as well as changing working patterns, household compositions and demographics, have also had substantial influence on how these taxes have affected average household incomes.

The effective tax rate grew during the 1960s and 1970s from 28.4 per cent in 1961 to a peak of 39.4 per cent in 1983. However, since then the trend has been downward, reaching a low of 32.8 per cent in 2009/10, before increasing slightly over the last two years to 34.6 per cent. This means that the average household in the UK now pays just over a third of their gross income in direct and indirect taxes.

These figures do, however, hide another important fact: namely that the richest and poorest households in the UK are paying almost exactly the same proportion of their gross income in taxes. The most recent figures reveal that the poorest households pay 36.6 per cent of their income in taxes compared to the richest households who pay 35.5 per cent.

So, if you have been paying taxes for years then you were contributing a higher percentage of your income in 1983 than at any other time. But, the figure is gradually creeping up again. So, is the amount of tax you pay fair? Should richer households pay a higher proportion of their income in taxes than poorer households? Please share your thoughts below.

How Much Is Tax?

You pay tax on everything from your income to your groceries.  However, everyone in the UK pays a slightly different amount of tax.

So, our guide looks at the three main types of tax that you pay and what the current tax rates are.

Income Tax

There are four rates of income tax in the UK: 0%, 20%, 40% and 50%.

The amount of tax that you pay depends on the personal allowances that you receive and the amount that you earn.

The vast majority of taxpayers are allowed to earn a certain amount each tax year without paying any tax (your ‘personal allowance’.  In the 2011/12 tax year, this amount is £7,475.  However, you may also receive other allowances based on your age, if you are married or if you are registered blind.

You then pay 20% tax on the next £35,000 of your earnings over your personal allowance, 40% of the next £150,000 and 50% of any amount above this.

National Insurance contributions

The amount of National Insurance contributions you pay depend on your earnings and whether you are employed or self-employed.

Employed

If you earn under £139 per week, you won’t pay any National Insurance contributions.  If you earn more than £139 a week and up to £817 a week, you pay 12 per cent of the amount you earn between £139 and £817.  If you earn more than £817 a week, you also pay 2 per cent of all your earnings over £817.

Self-employed

If you’re self-employed you pay Class 2 and Class 4 National Insurance contributions.

You pay class 2 National Insurance contributions at a flat rate of £2.50 a week (unless your profits are expected to be under £5,315 when you may not have to pay any contributions).

Class 4 National Insurance contributions are 9 per cent on profits between £7,225 and £42,475, and a further 2 per cent on profits over that amount.

Value Added Tax (VAT)

VAT (Value Added Tax) is a tax that you pay when you buy goods and services in the European Union, including the UK.

There are three main rates of VAT in the UK: 0%, 5% and 20%.

There are some items on which you pay 0% VAT, such as most food items, children’s clothes and books, magazines and newspapers.

A VAT rate of 5% is charged on some items such as home gas and electricity and car seats.

Most items that you buy will have VAT at 20%.

Thousands of businesses missing tax return deadlines

Have you ever missed your tax return deadline?

If so, new research has found that you’re not alone.  Large numbers of small and medium sized businesses miss important payment and tax return submission deadlines every year whilst many other businesses are missing out on beneficial tax breaks and grants.

One in ten businesses have missed the tax return deadline

The recent survey from Yorkshire and Clydesdale Banks of 500 small businesses found that one in ten owners admitted to missing vital tax payments or tax return deadlines whilst almost one in five confessed to losing out on tax breaks and grants.

19 per cent of small business owners questioned had not taken advantage of tax advantages open to them whilst 10 per cent admitted to missing the deadline for their tax return or making late Value Added Tax (VAT) payments.

And, it seems that one of the major problems is that small business owners simply do not know where to turn for advice and guidance.  The research found that 15 per cent of people struggled to understand new tax rules whilst 16 per cent did not know who to ask for advice on regulation.

Gary Lumby, director of small business banking at Clydesdale and Yorkshire Banks, said: “For small businesses, every penny really does count, so the cost of falling foul of red tape can make a fundamental difference to their ability to succeed.

“In extreme cases, not understanding red tape could lead to them closing. It is worrying that a significant number of small firms do not know where to turn for advice on these matters and we hope to change that for our customers.”

Tax return deadlines

There are two deadlines for submitting a self assessment tax return depending on whether you use a paper based return or an online return.

All paper returns have to be received by HM Revenue and Customs (HMRC) by midnight on 31 October following the end of the tax year.  Online tax returns must reach HMRC by midnight on 31 January.

If you miss the deadline, you will face penalties.  If your tax return is just one day late you will pay a fixed penalty of £100.  If it is three months late, you will pay £10 for each following day up to a maximum of £900.  The penalties then increase if your return is 6 or 12 months late.

How Much Is VAT? And Other VAT Questions

If you’re buying any goods or services in the UK, the chances are that you’ll pay some Value Added Tax (VAT).  Companies add VAT to the price they charge for goods and services to both business and non-business customers.

For example, a clothing manufacturer would add VAT to the prices they charge a store whilst an electrical retailer includes VAT in the prices they charge you when you buy a TV or other appliance.

How Much Is VAT?

There are currently three rates of VAT in the UK depending on the specific type of good or service that is being provided.  These rates are:

  • Standard rate (20 per cent)
  • Reduced rate (5 per cent)
  • Zero rate (0 per cent)

Standard rate VAT – 20 per cent

The standard rate of VAT is charged on the majority of goods and services in the UK.  Most items that attract VAT will have the tax charged at 20 per cent.

For example, if the net price of a television is £300, VAT will then be added at 20 per cent (£60).  The price you pay will be £360.

Reduced rate – 5 per cent

Some goods and services in the UK attract VAT at a reduced rate of 5 per cent.  Such items include:

  • Children’s car seats
  • Sanitary hygiene products
  • Energy saving materials for installation (solar panels, insulation etc)
  • Domestic fuel/power (gas and electricity etc)

Zero rate – 0 per cent

There are a number of items in the UK that are ‘zero rated’, meaning that no VAT is payable on these items.  Examples of zero rated goods and services include:

  • Books
  • Most food (excluding hot takeaways or meals in restaurants and other items such as confectionery, ice cream, crisps, alcoholic drinks)
  • Public transport
  • Children’s shoes and clothes
  • Newspapers
  • Donated goods bought from charity shops

Why Don’t Some Businesses Charge VAT?

You may find that you don’t pay any VAT when you buy certain goods or services from small businesses.  This is because businesses that have a turnover of less than £73,000 do not have to register for VAT.

If the turnover of a business’ VAT taxable goods and services supplied within the UK for the previous year is more than the current threshold of £73,000 (or the business owner expects it to go over that figure in the next 30 days) they must register for VAT.

If a business has a turnover under £73,000 then you may not have to pay VAT on the goods or services you purchase.