Please note that on 15 March 2018 a new VAT law came into effect which is designed to ensure that people who sell through online marketplaces pay the right amount of VAT on the goods they sell in the UK.

If you have an e-commerce site which sells your own goods but also allows other people to sell their products, you need to ensure that those third parties are registered for VAT (if they need to be).

Overseas businesses

Must be registered for VAT in the UK if they sell VATable goods to UK based customers which are either:

• Stored in the UK, or
• Will be imported into the UK by the seller.

This is regardless of whether the overseas sellee has a UK establishment or how many items they sell.

If you knew, or should have known, that an overseas seller should have registered for VAT in the UK, the marketplace can be made liable for any unpaid VAT due on sales made through the site. The marketplace must stop these people from offering goods through the site, and will continue to be liable for the VAT due until they meet their UK VAT obligations.

UK based businesses

Must be registered for VAT in the UK if their VATable turnover exceeds £85,000 in any 12 month period.

Again If you knew, or should have known, that a seller should have registered for VAT in the UK, the marketplace can be made liable for any unpaid VAT due on sales made through the site. The marketplace must stop these people from offering goods through the site, and will continue to be liable for the VAT due until they meet their VAT obligations.

Many construction workers or professional services providers operate through their own personal service companies. HMRC have tried (with some success) to classify many of these as employment contracts rather than business to business relationships, as the tax paid on employment contracts is considerably greater.

Recently a building contractor won a case with HMRC which offers some clarification about how the rules should be followed.

In this case HMRC had to prove that the indications of employment existed in the hypothetical contract and they out-weighed the indications of self-employment. The judge helpfully summarised the various factors which pointed to employment or self-employment.

For employment:
•No substitution of person performing the work is permitted
•the employee takes no financial risk
•Safety equipment is provided by the employer

Against employment:
•The contractor was not controlled by the company any more than any other contractor
•the contractor had the right to refuse to work in different locations
•The contractor was paid a fixed rate per day
•There was no notice period
•No sick pay or holiday pay
•No employment benefits
•No expenses paid for travel or accommodation
•The contractor was not integrated into the company

The key element of the case demonstrates that one factor (such as substitution) should not outweigh all other factors, and the entire relationship must be considered in its entirety to determine whether someone is employed or a contractor.

In one of George Osborne’s last budgets he announced that the first £1,000 of rental income received can be tax free.
Rather than identifying costs offsetting to the rental income an allowance of £1,000 can be claimed instead.
If properties are jointly owned this is £1,000 per person.

Unfortunately there are a number of rules which make the usage difficult, one of which is rental income from a “close” company or a company the owners of the property “are employees of or participants in”. This means it cannot be used for Home Use relating to small limited companies or LLP’s.

Despite this the use of a Home Use Rental or License can still be tax effective. For the following two reasons:

1) Part of the “property income” generated can be offset by prorating property costs as Gas, Electricity, Insurance, Rent, Water, Council Tax (the latter of these often being questions by HMRC in typical home use calculations but not, so far, in property cost calculations). This makes part of the income tax free.

2) Tax on the excess after 1) above can be a more cost effective approach. As shown in the example below.

Assuming that all the Dividend Allowance taxed at 0% and the Salary up to the NI threshold has been used and you have a £1,000 you wish to take from the business.

For simplicity the numbers below also assume you are in the 20% income tax bracket and so employees NI is paid at 12.8% . We will also assume a best case that the employee allowance offsets employers NI. The calculation can be done for other tax brackets.

Method 1 ….. Salary

Tax would be 20% Income tax and 12% hence Tax/NI paid £320 and net £680.
(with employers NI an extra 13.8% tax could be paid)

Method 2 ……. Dividend

Dividend is taken after Corporation Tax …. For 2018 19 this is 19%. Therefore from £1,000 Corporation Tax would be £190 and £810 left. This would incur 7.5% Dividend Tax (£60.75) leaving £749.25 Net.

Method 3 ……. Home Rental (above prorated costs)

As this is an allowable expense for Corporation Tax purposes the £1,000 income incurs the marginal rate of tax for the person which in this example is 20% so £200 making leaving £800 Net.

Therefore after paying a salary to just above the employee threshold levels the results for tax for an extra £1,000 are …
1) Rental Income £200;
2) Dividend £250.75;
3) Salary £320.
(Remember these are after taking the tax free, 0% allowances)

WARNINGS …..
If the property is jointly owned then the property income should be jointly shared.
If one of the property owners marginal tax rate is above the 20% threshold then the results will change.
A “fair” rent should be charged.
As HMRC advise “Dividends should not be used in lieu of Salary”
Consider Capital gains implications on setting up Rental/License Agreements.