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Key tax updates and reminders for businesses and charities
HMRC is currently issuing letters under its One to Many (OTM) campaign to support taxpayers in meeting their tax obligations. The following summarise these campaigns, including guidance on VAT at the Flat Rate Scheme, foreign income reporting, and VAT considerations for charities.
1. VAT Flat Rate Scheme – are you using the right sector?
HMRC reminds businesses participating in the VAT Flat Rate Scheme to ensure they are using the correct sector when calculating their flat rate percentage. The appropriate sector is crucial to ensure businesses pay the correct VAT amount.
1.1 Agriculture and farming sectors
For businesses involved in agriculture and farming, the Flat Rate Scheme is available, but it is important to identify the correct sector to apply. If you conduct any additional business activities, such as bed & breakfast services or retail, the Flat Rate Scheme may no longer be suitable.
Businesses should refer to VAT Notice 733 and check the list of trade sectors on GOV.UK for more details. If you’re unsure about whether the Flat Rate Scheme is still applicable, review the VAT Notice for additional support on this matter.
Download HMRC’s letter on the agriculture and farming sectors
1.2 Construction services – labour-only vs general services
In the construction sector, businesses must determine whether they should apply the ‘labour-only building or construction services’ or ‘general building or construction services’ sector:
- Labour-only services: These refer to situations where the value of materials supplied is less than 10% of the turnover for those services.
- General construction services: If materials exceed 10% of turnover, businesses should apply the general construction services rate instead.
HMRC also reminds businesses that any supplies made under the domestic reverse charge should be excluded from the Flat Rate Scheme calculation. Further information about operating the VAT domestic reverse charge with the Flat Rate Scheme can be found in VAT Notice 733, paragraph 2.7. If you have used the wrong rate, VAT Notice 700/45 provides guidance on notifying HMRC of errors in past VAT returns.
Download HMRC’s letter on construction services
2. Help and support for reporting foreign income
HMRC reminds taxpayers that foreign income is subject to UK income tax, even if tax has already been paid abroad. Foreign income must usually be reported in a self assessment tax return, which includes a specific section for foreign income.
Foreign income includes:
- wages or income from working abroad
- interest from overseas savings and bank accounts
- dividends from foreign companies
- rental income from overseas property
- income from overseas pensions
- capital gains from overseas assets.
You are required to declare your foreign income on your self assessment tax return. For further guidance on how to report this income, visit the HMRC website and access the foreign income pages for detailed instructions.
Download HMRC’s letter on dealing with foreign income
3. Charities – understanding business vs non-business activities
Many charities and non-profit organisations carry out both business and non-business activities. Understanding the distinction between these activities is vital for correctly handling VAT input tax.
For VAT purposes, ‘business’ refers to any activity primarily concerned with making supplies for consideration. If your charity engages in non-business activities, it may affect the VAT you can treat as input tax.
HMRC encourages charities to carefully review whether their activities qualify as business or non-business. The following sections of GOV.UK provide guidance:
- Section 4.6 outlines the difference between business and non-business activities, with examples.
- Section 32 explains how to apportion tax between business and non-business activities.
If a charity has overclaimed input tax related to non-business activities, HMRC urges them to notify the department. VAT Notice 700/45 explains how to notify HMRC of errors on previous VAT returns. For more information on potential penalties related to non-compliance, visit GOV.UK and search for ‘HMRC compliance checks factsheets’ under the ‘Penalties’ section.
Download HMRC’s letter on understanding business vs non-business activities
Conclusion
HMRC’s One to Many campaigns provide important reminders for businesses on topics ranging from VAT Flat Rate Scheme eligibility to reporting foreign income and understanding VAT for charities. Businesses that receive a letter or need clarification are advised to consult the relevant guidance and take necessary actions to ensure compliance.