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Readers' forum - Flyboy

08 September 2005
Issue: 4024 / Categories:

I have a client who is a UK national and who recently (one year ago) started a self-employment business on a United States airforce base here in this country. His business is preparing US tax returns and he employs three individuals (spouses of US servicemen) on a seasonal basis from January to June of each year. My client's turnover is in dollars, but equates to approximately £75,000. My specific questions are as follows.

I have a client who is a UK national and who recently (one year ago) started a self-employment business on a United States airforce base here in this country. His business is preparing US tax returns and he employs three individuals (spouses of US servicemen) on a seasonal basis from January to June of each year. My client's turnover is in dollars, but equates to approximately £75,000. My specific questions are as follows.

1. What are the VAT implications and is there is any reporting requirement?
2. My client does not operate a PAYE scheme because the earnings of his employees, who are US citizens with no other source of UK income, are below the PAYE threshold. What is the best form of recording or keeping records in respect of earnings paid and received and is there any reporting requirement?
3. My client uses his car for business purposes. When computing the capital allowances on the business element of his car, which is four years old, is the computation based on the secondhand value of the car on the date of commencing his business or the purchase price of the car?
4. My client only trades on the airforce base, not only with military individuals, but also with their spouses, retirees and civilian workers who live permanently in the UK. Are there any tax consequences to be aware of?

I should be grateful for readers' comments on these and any other tax planning points or issues.
Query T16,675                                               — USAFB.

Reply by N.K.:

US Airforce bases in the UK are treated as being in the UK for VAT purposes. Therefore although the US servicemen, for income and capital gains tax purposes under TA 1988, s 323 and ITEPA 2003, s 303(1) retain their non-resident status, this appears not to be the case for VAT. Therefore the supply of services cannot be zero rated as the services provided are for UK residents. The client should have registered with his local VAT office as the £75,000 turnover is above the registration limit of £60,000. Also, with a small business with a turnover of under £600,000 per year it can be arranged to account to HMRC for VAT on the basis of cash received and paid, rather than the invoice date or time of supply.
As an employer, it is a requirement that the client registers with HMRC as such. The three employees as US citizens will not have National Insurance numbers and so they will need to apply for them. This also will ensure that they have some sort of reference, if needed, for evidence of earnings in respect of their US pension. Obviously, the employees concerned will presumably not have been able to have supplied forms P45 so it might be best if each of them fills in a form P46 ('PAYE — notice of new employee') which are then sent to the relevant HMRC office that will deal with the PAYE of their employer. At the same time, that office should be advised that each of the three employees' earnings fall below the PAYE threshold. So that even though there will not be any PAYE or NIC deductions, the tax office concerned will be made fully aware of the circumstances.
The best way to record details of payments made is on a form P11. Obviously, once registered as an employer, the client will have access to the new employers help line (0845 60 70 1430) or log on to if there are any further queries. There is also, amongst others, the E13 Employers Help Book, which will be sent following recognition by the PAYE office concerned.
Regarding capital allowances, the figure to be used for the four year old car on the date of commencement of the business is the market value on that date, in other words the amount that would have been paid to acquire the vehicle at that time (CAA 2001, s 13, see also Simons Direct Tax Service at B2.303). However, we are told that the client 'only trades on the airforce base'; I wonder if this place would be treated as his base of operations. That being so 'home to work' expenses would not be an allowable deduction for business purposes and unless there were journeys within the base it is hard to imagine the need for a motor vehicle for business use, with a knock-on effect on the claim for capital allowances.
Apart from the US servicemen, under ITEPA 2003, s 303 'a civilian component of such a force' is also treated as being non resident and non domiciled for UK tax purposes.(See also HMRC's Relief Instructions Manual RE2200-2203.) Therefore, apart from these personnel, the others mentioned as customers are all treated as being UK resident for tax purposes and apart from having to fill in a US tax return as US nationals they will, if appropriate, also need to submit a similar form to HMRC.             

Reply by Exile:

We have references to UK nationals and US nationals. USAFB should be aware that an individual's nationality does not affect the tax status. What matters is the residence status and where the work is performed. We are told that the self-employment business is on a US air force base. I am not certain that USAFB means that that is also where the client's office is located. I do not think that anything depends upon the point because, as far as I am aware, that is still within the UK. Now let us answer the questions.
First, the client should register for VAT in the normal way when the turnover limits are reached. The returns are being sent outside the UK, but the supply is being made to someone in the UK.
Secondly, the individuals are working in the UK and PAYE should be operated. The mere fact that, over the year, they may not breach the weekly or monthly limits for the period in which they are working, is irrelevant for the employer. A record of the name, address and amounts paid to the employees should be kept; that is, unless the terms are such that these individuals can be seen to be self-employed subcontractors able to refuse work, to substitute someone else, etc.
Thirdly, a piece of machinery that was bought for private purposes and then brought into business use is brought into the computation at the market value on the date it is brought into use. However, if all the business is on the base and that is where the office is, what business use can there be of the car?
Finally, the tax consequences to be aware of are the issues over residence of the individuals, the impact of the double tax treaty, mutual agreements over social security contributions and a good few more. For the client himself, there are no special rules. A business is being carried on in the UK.

Extract from reply by B52:

Other issues to be considered are as follows:

  • Class 2 NICs are due. Unless HMRC have been notified about the commencement of the business within three months, then a penalty of £100 will be levied.
  • Proper accounts must be kept (TMA 1970, s 12B).
  • A self-assessment tax return, including self-employment pages, must be completed and submitted each year. This should be accompanied, in my opinion, by a profit and loss account and a balance sheet. If the business is to remain that of a sole trader, then an urgent decision should be made about the business year-end.
  • Provision should be made for future liabilities, perhaps by transfers to another bank account. On 31 January 2006, income tax and Class 4 NIC will be due on the profits for the period of commencement up to 5 April 2005 on a proportionate basis, together with half of the estimated 2005-06 liabilities. The second instalment for 2005-06 will be due on 31 July 2006 and so on.
  • It seems likely that the client will pay a substantial amount of UK tax at 40%. Cash flow permitting, he could make a tax-efficient payment into a personal pension and thought might be given to transferring the business to a limited company. The relevant calculations showing the comparison between private and company trading for tax purposes should be made.
Issue: 4024 / Categories:
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