NPHAS News for Private Hire, Taxis & Couriers

Accounting & Financial Articles

Using VAT To Your Advantage

Value Added Tax (VAT) has long created concern amongst business and not just within the Taxi/Private Hire Industry. On numerous occasions I have heard the remark, "I don't want to be involved in VAT!" There is, it seems, a fear factor and it is astonishing how ignorant people are of the laws relating to VAT.

VAT started in the early seventies when it replaced Purchase Tax. In common with most taxes, it has developed over time using statute and case law and is constantly evolving. Certain industries have complicated VAT rules and laws and the Taxi/Private Hire Industry just happens to be one of them.

There are three categories of VAT:

a) Standard
b) Exempt
c) Zero Rated

a) Standard rate applies to most transactions. It is charged at the prevailing rate which is currently 20%;

b) Exempt means outside the scope of VAT. In other words, VAT is neither charged nor reclaimed. Exempt businesses effectively do not exist for VAT purposes. Examples of these are insurance companies and land transactions;

c) Zero rated; this category has become much smaller in recent years. Zero rated means that VAT is not charged on supplies but all VAT suffered can be reclaimed. Clearly this has tax advantages and so you can see why this has been reduced in recent years - HMRC (Her Majesty's Revenue and Customs) are essentially giving money back. Examples of this include basic food supplies and certain supplies to children.

Hopefully this gives some assistance with the understanding of VAT. However, the laws can be extremely complicated once we venture outside the basic principles. The Taxi/Private Hire Industry is a trade that suffers from these complications but often these can be used to one's advantage.
Essentially the basic rule of registration is turnover. The current threshold is £73,000 per annum. Remember this is turnover not profit. Turnover above this level forces a business to register and ignorance is not a defence.
There is a category of registration known as Voluntary Registration which allows a business to register for VAT regardless of the turnover level. The business does not have to wait until it reaches the turnover threshold to register.

Why would a business do this?

1) If all the work a business does is account work. The customers of the business are almost certain to be VAT registered and therefore do not mind the charge as they reclaim this. This business is then able to reclaim the total VAT that it incurs and as such is better off by the amount of this VAT.

2) Where a business is a combination of cash work, radio rentals (settle to some readers), account work and vehicle hire. This business structure is extremely common and ensures that all work undertaken attracts VAT. Often a review of the business structure can result in significant VAT savings/gains if changes are made.

3) Certain minibuses do not charge VAT. This is for vehicles that carry more than eight people. This service is therefore zero rated. Utilising this VAT advantage within your business structure can again result in significant VAT savings/gains.

The above are the main, but by no means all of the possible utilisations of VAT to the advantage of a business. It is often a combination of these factors that results in any VAT savings/gains.

In my normal working environment, I find that numerous Taxi/Private Hire businesses are set up wrongly. A little thought, understanding and reorganisation would help these businesses considerably. I have recently undertaken two pieces of work on a "no win, no fee" basis (if there are no improvements, there are no charges) but in both cases I have been paid by two happy customers.

VAT is a minefield, particularly in this industry. The legislation is complicated, but can be used to your benefit. Do not sit back and do nothing. Ensure that you are operating within the law and as efficiently as possible. You may be pleasantly surprised.

Compliance Is In Everyone's Best Interest

Tax related matters are often complicated, but Her Majesty's Revenue and Customs (HMRC) have set up Compliance Centres with a view to improving their service to taxpayers.

'The centres aim to handle high volumes of work accurately and efficiently by telephone and/or letter, whilst keeping the impact on the customer's time to a minimum.' (www.hmrc.gov Aug. 2011)

The centres receive third party information from a wide variety of sources, and check this information against the relative tax return. Where there are discrepancies they need to know why e.g. non-payment of tax on interest received. They aim to be open about the discrepancy and the information they hold - which has not always previously been the case.

They will start their enquiry with an opening letter which should go straight to your agent, but if it comes to you, the client, you should phone HMRC and inform them you want your agent to deal with the matter.

Once your agent is contacted with the details of the discrepancy, hopefully they will be able to offer a simple explanation by phone e.g. the wrong figure was entered, or it is a joint account and my client only declared their half. If your agent can't give an immediate explanation, they can simply say they will check with you, the client, and get back to them as soon as they have the answer.

Compliance Centres have no special powers and operate under the same legislation as the rest of HMRC, so, when the problem has been dealt with satisfactorily, HMRC are unlikely to carry out further enquiries on that tax return as they will have exhausted their enquiry opportunity.

Therefore, a prompt response is sensible as delayed cases are likely to be passed to a Technical Support Team who may choose to scrutinise the whole tax return, which may lead to the necessity of further man hours and ultimately increased costs.

If you're thinking compliance sounds in your best interest, and I strongly recommend that it is, but you need an agent to act on your behalf - contact NPHAS on 0161 655 2000
N.P.H.A.S for a consultation.
Don't Let The Taxman Charge You Double Fare

Tax related matters are always a pain but, due to the imminent Business Record Checks (BRC), the practice of keeping proper and accurate business records is more important than ever.

Convinced that improper and inaccurate record keeping by small/medium businesses leads directly to an underassessment of the tax due and therefore an underpayment of tax (speculated to be a combined total in the region of £600,000,000) Her Majesty's Revenue and Customs (HMRC) aim to scrutinise the business records of 50,000 such businesses per year for the next four years in an effort to make sure these businesses start to pay the correct amount of tax.

After the findings of the recent Test and Learn Pilot Scheme carried out by BRC inspectors (finished 15th July), which is said to have backed up their initial inclination about the underpayment of tax by small businesses, it is my understanding that BRC inspectors will take a hard-line approach from the implementation of the checks; with them having the power to fine businesses up to £3000 for seriously improper record keeping, although the exact levels of penalty have yet to be confirmed.

Don't be mistaken into thinking you can avoid the checks either as, after seven days notice of a BRC inspection, refusing entry to an inspector will result in an initial £300 fine and a further £60 a day thereafter, and inevitably a full blown tax inspection causing further interruptions to your business and placing greater strain on staff hours.

Although the BRC was originally said to be set up to aid small businesses, it seems the government see them as a potentially double-sided way of boosting the Government spending pot, so act fast and don't let the Taxman charge you double fare.

Principal Versus Agent - Albion Taxis Case

This is yet another case to test the age old problem of 'principal versus agent'. The case is especially interesting as it helps to decide the VAT style of trading of the business.

The case was actually an appeal by Albion Taxis and they are referred to as the Appellant. Her Majesty's Revenue and Customs (HMRC) were the defendant.

The Appellant Company supplies taxi services to account customers which it invoices on a regular monthly basis. The Company receives payment directly for this work from these customers. It also provides cash work which includes taxis picking up at ranks and from the street together with telephone bookings. The appellant argued that it acts as a principal for account work and as an agent for cash work.

The reason it gave for acting as an agent for cash work was that the taxi drivers suffered the loss if a customer did not pay. (Comment - this is a very weak reason for appealing the case). They said this differed from account work as they suffered the loss themselves in this instance.

HMRC argued that it acts as principal for both types of work, which is the main issue here, because if it is acting as principal for both types of work, VAT would then be due on all the fares rather than just account customers.
The Company gave a document to all its drivers entitled the "Self Employed Drivers Agreement". These agreements were not signed (Comment - this is not particularly important). This agreement stated that "by driving you are accepting the terms and conditions" and covered a number of areas including holidays, payments due, forms to be completed and dress code.
The tribunal found that the use of the "Self Employed Drivers Agreement" was significant in that it allowed the Appellant to exercise control over the way the business was operated. (Comment - it is remarkable how often companies rely on a written agreement to prove self- employment. In fact, written agreements are often the proof that drivers are employed. The essence of self-employment is the ability of the driver to do what they want, not being told what to do). Although the drivers were said to set fares and were able to refuse work, the practical reality was that the Appellant had implicit control over the fare levels and the availability of drivers, and explicit control over advertising, record keeping and most costs and expenses.

The tribunal noted that the Agreement did not differentiate between account and cash work. Additionally, fuel costs and insurance costs were deducted from all fares further complicating the lines between account and cash work.

As such, the tribunal dismissed the appeal and Albion Taxis lost the case.
Hindsight is such a wonderful thing, but the facts of the case support the tribunal decision.

Summary - The business was not set up properly to achieve principal/agent status. Much greater thought/planning should have been undertaken. In reality, the Company was probably not really aware of the VAT implications. Achieving self-employed status needs careful planning when the Company operates both account and cash work. Often vehicles are owned by the Company and "split bag" is operated on the fares. Both are recipes for disaster and usually end up costing the Company significant monies.

This case is not an isolated one. Numerous operating businesses are traded in this way and are just waiting for a VAT visit. Do something before this happens.

Take professional advice.

Tax Investigations - The Taxi Driver strikes back.

When it comes to HMRC commencing enquiries into the tax returns of self employed individuals, it would not be surprising if taxi driver's accounts were seen by HMRC as something of a 'soft option'. The record keeping standards expected by many HMRC officers appears to be very high, and even the smallest discrepancy can result in proposed additions to turnover and/or disallowances of business expenses. However, a recent tax tribunal case, Stephen Ho v HMRC perhaps offers the self-employed cash operators some comfort.

The case concerned Mr Ho, who is a taxi driver mainly working in and out of Heathrow Airport. HMRC enquired into Mr Ho's 2004 tax return. Following the completion of the enquiry, HMRC increased Mr Ho's self-employed profits for that year, and also raised discovery assessments (effectively extending the investigation over five years) for the tax years ended 5 April 2003, 2005, 2006 and 2007, resulting in additional liabilities for those years. Mr Ho appealed.

Demonstrating turnover

HMRC contended that Mr Ho underestimated his takings and taxable profits. Mr Ho argued that his profits had not been understated, except for two specified days.

With regard to Mr Ho's records, on each working day he would purchase fuel at the start of the day, and write the fares received on the back of the fuel receipt. He worked principally out of Heathrow Airport, which operates a system of 'cab tags' (these are purchased in batches, and must be handed over before the taxi driver can make his cab available for hire at the airport). A list of cab tags enabled Mr Ho to account for all but two working days. Both sides accepted that there was a small error in Mr Ho's records in respect of those days. HMRC's case against Mr Ho was based around the expected number of trips out of Heathrow. No account was apparently taken of certain health problems suffered by Mr Ho. HMRC also relied on a cashflow test, based on business receipts and private cash expenditure. HMRC's conclusions about Mr Ho's private expenditure were also based on assumptions.

The tribunal held that Mr Ho failed to declare income for two days due to the accidental loss of receipts, but that this was insufficient to amount to negligence under the discovery assessment provisions.

The tribunal also rejected HMRC's contentions about Mr Ho's working pattern, and the conclusion of HMRC's cashflow test (which the tribunal considered was 'fundamentally flawed').Mr Ho's appeal against the HMRC amendment to his 2004 self assessment return and the discovery assessments for other years was therefore allowed. Interestingly, the tribunal made a direction for costs against HMRC.

The tribunal concluded that there had been 'unreasonable conduct' by HMRC, on the grounds that HMRC's arguments lacked sufficient evidential foundation, and that the cashflow test was flawed.

Record keeping

Mr Ho was perhaps fortunate that the taxi 'tagging' system at Heathrow Airport enabled him to verify his journeys to and from the airport, which in turn helped to substantiate his income. Unfortunately, many business owners are not so lucky. HMRC's guidance states: "In an enquiry case you will often be examining the possibility that the taxpayer has spent unrecorded cash".

The importance of keeping full and accurate business records cannot be overstated, particularly for cash based traders. In practice, it may prove difficult to satisfy HMRC that a taxpayer's business records are adequate. HMRC's Enquiry Manual gives the following advice to its officers "Even where the Return figure appears to be based on contemporaneous records, you should consider whether the nature of the trade or business is such that there are opportunities for unrecorded cash transactions. Even where the business is said to be mainly cheque based, transactions may be settled in cash.

"The Enquiry Manual provides an interesting insight into HMRC's approach, such as in respect of personal and private expenditure and accounting records. HMRC also cites another case of a London cab driver. In that case, the taxpayer used notebooks to record daily takings, which were not considered to be an accurate record and therefore enabled HMRC to assess further profits. This was an odd ruling as it is difficult to record takings in a moving vehicle any other way. Hopefully, the subsequent taxi driver case of Mr Ho should encourage HMRC officers to proceed with caution when dealing with enquiries into small and cash based businesses in the future.

Summary

This is a landmark case. In the past HMRC have used the fact that the accounting records are not "absolutely perfect" to discredit the profits returned by the taxpayer. Once HMRC has established this, they have then made numerous assumptions to arrive at the tax assessed and therefore payable. This treatment has long been considered very unfair by accountants/ tax practitioners and this appears to be a significant step in changing attitudes and the treatment within tax investigations. It should continue to be stressed that good records need to be maintained as poor records will inevitably lead to similar rulings as in the past.

Tax investigations into cash operators may now change slightly. HMRC will not be able to make unfair assumptions if the standard of the records is good. This case and its findings may often be used as a reference in the future.

Double cab pickups

There has been a lot of publicity lately about the tax advantages of running cars with low CO2 ratings. There are a number of benefits:

. possible 100% first year tax deduction for the cost of the vehicle,
. much reduced benefit in kind charges,
. lower road fund tax and so on.

But not all of us want to run such vehicles even if there are tax, VAT and running cost advantages.
Double cab pickups, sometimes described as crew cab pickups, are an anomaly!

For business users, especially the self-employed, they present an unusual tax opportunity.

The HMRC web site describes double cab pickups as:

"... a front passenger cab that contains a second row of seats and is capable of seating about 4 passengers, plus the driver with four doors capable of being opened independently (two door versions are normally accepted to be vans, even those with rear doors that can only be opened after the front doors and that must be closed before the front doors) and an uncovered pick-up area behind the passenger cab."

From the tax year 2002 -03 onwards a double cab pickup is classified as a van for both VAT and benefits purposes if it has a payload of 1 tonne (1,000kg) or more.

If your double cab pickup meets this definition:

1. You can reclaim any VAT added to the purchase price, and
2. The net capital cost (after VAT has been reclaimed) could be available for a 100% first year tax allowance as part of your Annual Investment Allowance up to a maximum of £50,000 each tax year.

If you are a director or employee any significant private use of the double cab pickup, will trigger a standard benefit in kind charge of tax on £3,000 per year. In addition if your firm/employer provides fuel to cover private use of the vehicle there will be an extra benefit charge of tax on £500 per year at current rates. The best way to minimise any risk of these benefits being applied is to restrict the use of the pickup to business use only, or make sure that any private use meets the HMRC definition of "insignificant private use".

If you would like more information regarding this article, or any advice regarding tax effective strategies for running your business vehicles please call.

Am I Running My Taxi Company Correctly?

I regularly receive phone calls and letters from Taxi Operators asking: "Am I am running my taxi company correctly?"

There is no such thing as a perfect taxi operator. A good operator is one who employs the laws of the country and those pertaining to the taxi trade to their advantage. Many give little or no thought to the set up of their company and "fly by the seat of their pants" rather than seek professional advice.

When the above question is asked of me, I always state there are three issues: self employment; value added tax (VAT) and profitability. It is important that these are addressed individually. There is a significant interrelationship between self employment and VAT and the correct utilisation of both benefit the operator significantly. Profitability naturally ensues the correct set up of any business. Addressing the above factors individually, I would comment as follows:

Self Employment

Many operators consider all their drivers to be self employed whether or not the driver provides their own vehicle.

Genuine self employment within the taxi trade is based upon the provision of the vehicle by the driver and not by the operator. Any operator who considers drivers to be self employed when they are providing the vehicle themselves may face serious taxation and financial consequences.

If the vehicle is provided by the company it is considered under tax law to be the "tool of the trade", therefore here he driver is using the assets of the company and should be employed by the company. Any taxi operators who conduct their business this way will find that when their affairs are inspected by HM Revenue & Customs (HMRC) their drivers are not self employed and that the amount "earned" by this driver will effectively be their net wage. It will be necessary for this wage to then be "grossed up" for tax purposes and employers national insurance added to this figure.

It is difficult to specify the liabilities exactly but a driver who earns in the region of £300 per week will have additions by way of taxation and employers national insurance (NIC) of approximately £100 per week. When one considers this is a weekly amount it is interesting to consider the implications of treating the driver as self employed. If a driver is truly SELF EMPLOYED the actual cost to the company is the actual amount paid not the additional costs. It they are employed whether actually or not, the actual cost is considerably greater. Hence this reflects itself in the profitability of a company

Value Added Tax (VAT)

VAT is extremely complicated within the taxi industry. It is one of the few industries that has its own VAT scheme to deal with the complexities within the industry. The reasons are difficult to explain but it is a consequence of the original legislation that was set up when VAT was "introduced in 1973". The position relating to the taxi industry was not modified to the current position via statutory changes but predominantly by case law.

The position now is that the taxi operator has to act either as a "Principal" or "Agent". It is possible to act as both but this is extremely complicated and awkward and rarely works to the advantage of the operator.

Whether an operator wishes to act as a Principal or an Agent has to be "determined by their operating style." Do they for example undertake only cash work or do they do a considerable amount of account/contract work or a combination of both?

The additional difficulty is the utilisation of "Split Bag" by many taxi operators. This is a poor way of operating a taxi business due to VAT implications. The reason for this is that the total income on a split bag operation is deemed to belong to the taxi operator whereas the operator's pinion is that monies received after the driver has taken their share, should be treated as the company's income.

I have highlighted the majority of the problems although there are some other minor ones that need to be taken into consideration. When one considers the issues of principal and agent and split bag, it does indicate that a thorough professional overview of the trading style of the taxi operator should always be considered.

Applied correctly, the utilisation of VAT can add significantly to the profitability of the business.

Profitability

Many taxi operators exist and operate in exactly the same way as their competitors and would not consider changing their trading style although this may enhance profitability.

Change is difficult but is often needed for the good of the business. A simple example of this is where companies operate account work but do not make any profits as they give the full fare to their drivers. What other business would operate in this way?

The profitability of any business depends on sound management. An independent overview of the business may be very useful and should be considered by current operators.

Hopefully the above goes some way to providing answers to the question raised at the start. Seek professional help if necessary and your life may be easier and more profitable.

For further advice please contact us

Unfair Dismissal - Don't Get It Wrong

You may have had to cope with a whole host of personnel-related issues over the years, and almost certainly played it by the book. However, even experienced employers can get it wrong. Here is a case in point.

Pushing the boundaries

An employee's performance and attitude were deteriorating and so she was spoken to by her manager. Six months prior she had suffered a miscarriage and although distressed had returned to work and appeared her usual self. Another 'pull your socks up' chat ensued three days prior to her announcing she was pregnant again.

Now, not only was her work rate particularly slow, but her punctuality was wanting.
She worked part time on Friday, Saturday & Sunday but booked all her ante-natal appointments for Fridays. This was apparently the only time her midwife was available. She would arrive at work at 9am, and then leave at 10am for her appointment and not return until lunch. At the time there were eight people working at various times, so her absence at such short notice caused significant issues. Furthermore, when she had time off due to sickness, she failed to produce a sick note, maintaining that her doctor refused to until she had recovered!

She was written to by her employer on numerous occasions but never responded and even when disciplined failed to react.

After yet another bout of sickness, she was asked to attend a 'return-to-work' meeting. This was not a disciplinary hearing and was never described as such. When questioned by her boss regarding her behaviour, she simply sat smirking and produced a letter for her manager to read. Although reluctant her boss finally agreed and left the office to read this letter. On returning she told her employee that she did not appreciate her accusatory tone and then sacked her!

In the letter the employee made several allegations professing that she had been discriminated against because of her sex and pregnancy. Her boss had been pushed to the limit and on returning to the meeting was unable to think rationally. But by dismissing her without following a procedure, the damage had already been done.

The employee as expected claimed unfair dismissal and discrimination. With regard to the unfair dismissal the employer was guilty as charged and acknowledged this. However they strongly denied any discrimination or victimisation. Sadly, they were confronted with a real issue here as they had stated that they never intended to dismiss her at the meeting and it was the allegations towards them that pushed the boss to do so. The tribunal considered the letter to be the reason for her dismissal and she won.

TIP: This above case proves how vital it is to not allow emotions to impede decision making. Always stick to the correct procedures, even if it pains you to do so!