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Tax FAQ’s

with you on the journey to a brighter future

Here you will find some answers to the questions we are often asked.

We have popped these into categories to make them easier to find. Click on the category to get going.

General

IR35 was brought in to prevent the payment of less tax and national insurance by using a personal service company or partnership to provide services through rather than being a direct employee.

For example, by using a personal service company it has been possible to extract income from the company in the form of dividends rather than salary so saving substantial amounts of national insurance. In addition, shares of the company may be split with the spouse of the worker to help avoid higher rate tax and there is far more that can be deducted in the way of tax-deductible expenses by operating through a company rather than as an employee.

The regulations are applied where a worker supplies services through a relevant intermediary (which can be a company, partnership or individual), to a client and had the worker contracted directly with the client, the income would have been treated as employment income for tax purposes. The status tests outlined below are used to help determine whether the worker would have been treated as an employee or self-employed if they had contracted directly.

Large amounts of tax and NIC are at stake. Every case needs to be judged on its merits and several factors need to be considered in concluding on whether a contract is caught or not.

HMRC can provide an opinion on whether the contract is caught by IR35 or not, but do not provide opinions on draft contracts. Unsurprisingly perhaps, the view of HMRC often tends to come down on the side that the contract is caught by IR35 but very often their view has been shown to be wrong and should not be accepted without further investigation. Whether HMRC should also be asked for their opinion also needs consideration.

We can help advise you on how to stay on the right side of the law.

A company is a relevant intermediary for the IR35 rules if…

  • the worker (together with his close family and business partners) controls more than 5% of the company; OR
  • the worker receives payments or benefits which are not salary, but which could reasonably be taken to be payment for services provided to the client

For partnerships the IR35 rules are only applied when any of the following apply…

  • a partner (together with his close family) has more than 60% of the profits;
  • most of the partnership profits come from the work of a single client;
  • where a partner share of the profits is based on their income from the relevant contracts.

The Calculation

Any salary paid during the year has PAYE operated on it in the normal way during the year.

However, where there is income that is caught by IR35, then to the extent that it exceeds any salary to which PAYE is already applied plus taxable benefits, the excess will be treated as a deemed salary and is treated as pay on 5th April, and is liable to PAYE and Class1 NIC’s accordingly. This makes the extra tax and NIC payable on 19th April following the tax year concerned, which is a very short timescale, so contractors need to be organised. Interest runs on underpayments from this date.

In arriving at the excess salary, certain expenses can be deducted from the income derived from IR35 contracts as follows…

  • a flat rate allowance of 5% of the net of VAT income;
  • expenses that would have been allowable as an employee – this includes travel from home to the client’s premises as long as the job is expected to and does not last more than 24 months;
  • employer pension contributions;
  • employer national insurance contributions;
  • some capital allowances.

The excess amount is treated as being inclusive of employer’s Class 1 NIC, so these are deducted to arrive at the deemed salary on which tax and NIC is calculated.

The deemed payment and employers NIC payment thereon are then deductible expenses for the intermediary company, treated as if paid on 5th April.

If actual salaries are paid later of amounts that were included in the deemed salary calculation, they cannot be paid free of tax and NI as they only reduce the salary payment of the actual year in which they are paid. To avoid potential double taxation, it is better to use dividends.

If caught by IR35, the method of extracting funds from the company once the deemed payment calculation has been applied needs to be considered. For example…

  • A salary could be paid during the year to avoid a large tax and NIC payment on 19th April, but it does mean you pay the tax earlier.
  • It is possible to borrow from the company and then repay the borrowing out of a salary nearer the 5th April. There can be tax and NIC on the notional interest on the loan and it is possible a payment to HMRC of 25% of the loan will be required if the loan is not repaid in full within nine month of the company’s year end.
  • Paying interim dividends in the tax year following the deemed payment and then claiming for the dividend not to be treated as a dividend for tax purposes relieved to avoid any double taxation – this is often the best way forward.

Status Tests

In determining whether the contract is caught by IR35 it is necessary to consider the existing tests developed over the years to determine whether an individual is employed or self-employed. These tests can be summarised in one question: Is the individual in business on his own account when offering services to the client? If the answer is not a definite ‘yes’ the following factors need to be considered…

Requirement to provide a personal service

  • Must you complete the work personally?
  • Can you send substitute to do the work?

Control and supervision of the worker by the client

  • Can you work at times to suit you?
  • Does the client control how you do the work?

Mutuality of obligation between the parties for the duration of the contract

  • Do you have the option to turn down work offered and does the client have the option not to offer work?
  • Is each side obliged to offer work and accept work?

Financial risk of the worker

  • Do you correct defective work in your own time, at your own cost?
  • Are invoices raised by reference to the job rather than hours worked?
  • Is public liability insurance in place?
  • Is work carried out for more than just one or a very small number of clients?

Provision of equipment and materials by the worker

  • Do you use your own equipment?
  • Are materials supplied by you?
  • Do you work from your own premises?
  • Does your company have its own business stationery?

Trappings of employment

  • Is holiday and sick pay paid to you by the client?
  • Are any employment type benefits provided to you by the client?
  • How long have you been working for the client?
  • Is there a notice period to end the arrangement?

Intention of the parties

  • What was the intention of the parties in forming the contract?

The first three factors are the most important. If one of these does not exist the contract does not have the attributes of an employment contract so must be another type of contract, such as a self-employment relationship. However, to determine whether the worker is self-employed the other factors also need to be considered.

HRMC Business Status Tests

HMRC think they can generalise about what makes some companies fall within IR35 and other escape it. In May 2012 they have drawn-up a set of business entity tests, complete with a scoring system, to help you to judge whether your business would be at high, medium, or low risk of being investigated for falling under IR35.

These business entity tests are not derived from the tax law. They merely represent the Taxman’s view of the risk of a business falling within IR35.

The scoring attached to the tests is controversial, as it penalises businesses that have no bad debts, never pay to advertise and operate from the owner’s home. These IR35 business entity tests do not change the IR35 law one bit, and will probably be ignored by the Tax Tribunal.

If you choose to use the IR35 business entity tests, you don’t have to declare your score to the Taxman, the tests are merely for your own guidance. However, if you are concerned that the business entity tests produce a high risk score for your businesses, we should discuss why this is the case. Are they any changes which can be made to the way your business operates which would make it less likely to be caught by IR35?

Dragonfly Consulting Tax case

The Dragonfly Consulting tax case established that the Tax Inspector can question the relationship between the end client and the worker, and if he decides that it is really one of employee and employer, in spite of all the various contracts, agency and service company in place, the extra tax due will fall on the worker’s own company.

The case demonstrated how the contract between the agency and the final client can knock for six any clever contract drawn up between the worker’s company and the agency. HMRC have proved that the entire stream of contracts needs to be considered and compared to what actually happens on the ground.

For example, the agency may agree to include a substitution clause in the contract with the worker’s company, but if this clause is not reflected in the contract with the final client it is ineffective. Even if a substitution clause does exist in the agency/client contract it will be ignored if the client tells HMRC or the tax tribunal that it would never actually accept a substitute for the worker.

To ensure your working arrangement with your client will stand up to challenge by HMRC you need to see all the contracts in the chain and be sure your client would agree to accepting a substitute if asked to.

It should be noted that in a recent case with judgement issued on 5 Jan 2011 (MBF Design Services Ltd) where a hypothetical contract was sought to be created to examine the relationship between the end client and the worker, the three key status tests of personal service, control and mutuality of obligations led to the decision in favour of the taxpayer. It was particularly noted that the ability to cancel the contract without notice and the fact that contractors were sent home without pay whilst employees had to remain on site meant there was a lack of mutuality of obligations.

Managed Service Companies

A Managed Service Company differs to a Personal Service Company in that there is normally a scheme provider that operates the company on behalf of the worker. Often these are known as “composite companies” with perhaps 10 to 20 workers being put through the same company or “managed personal service companies” with one for each worker but managed by the scheme provider on behalf of the worker.

From 2007/08 the Government has taken action to tackle Managed Service Company (MSC) schemes which are used to disguise arrangements that should be treated as employment arrangements for tax purposes and are used to avoid paying the employed levels of tax and national insurance.

Income that is received by workers through MSCs is now subject to employment levels of tax and NI. It is the responsibility of the MSC to operate PAYE and deduct the necessary tax and NI on the income.

In addition, the rules for tax relief on travel expenses are the same as for other employed workers.

Whilst in many cases these companies should be caught by the IR35 legislation, they did not follow the legislation and when caught they simply liquidate as they have no assets and start up another company the next day. To stop MSCs avoiding payment of these taxes, recovery of underpaid taxes and NICs will be possible from appropriate third parties, principally those behind the company operating such schemes including directors, shadow directors and connected or controlling parties.

These individuals will also be easier to catch as there will be no need to consider the specific relationship between each individual worker and the end client which was proving too labour intensive for HMRC.

The IR35 intermediaries legislation remains in place for personal service companies where the worker operates the company himself. The MSC rules are not targeted at these companies.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

The Working Tax Credit (WTC) is designed to help taxpayers on low incomes by providing top-up payments and includes those who do not have children.

There are extra amounts available for qualifying childcare expenses and working households in which someone has a disability. The basic amount of WTC is £1,960 a year and is always included for qualifying applicants. There are also payments that may be available for couples or for those with certain disabilities. In order to satisfy the rules for claiming the WTC, claimants must work a certain number of hours a week.

For couples, one member has to work at least 16 hours a week, with the joint total being at least 24 hours. Single people who are responsible for 1 or more children can claim the WTC if they work at least 16 hours per week.

Claims can also be made by those without children who work at least 30 hours per week if they are aged over 25. There are different limits for those claiming the disability element.

Backdated claims for WTC will usually only be backdated for a maximum of one month. There are exceptions for those with refugee status and claimants that qualify for certain sickness or disability benefits.

Making a new claim for tax credits is no longer possible for most people and it has been replaced by universal credit. Universal credit will eventually replace tax credits and other social security benefits.

Existing tax credit claimants are expected to be moved across to universal credit between 2020 and 2023 although a small pilot will start from July 2019.Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

If your personal details change, you may be required to notify HMRC as this can affect your entitlement to certain tax breaks and or benefits.

For example, you need to tell HMRC if:

you get married or form a civil partnership
you divorce, separate or stop living with your husband, wife or partner

You can tell HMRC online if you are paid a salary or pension through PAYE. The sooner you tell HMRC the better as the change could result in you paying too much or too little tax.

If you receive tax credits or Child Benefit you also need to tell HMRC separately about changes to your relationship or family.

In the event, that your spouse or civil partner dies it is also a requirement to report the death to HMRC as well as notifying of changes to your income. For example, the death of a spouse would mean that the surviving spouse was no longer entitled to claim the Married Couple’s Allowance.

If you move home, it is of course advisable to let HMRC know as soon as possible so they can update your contact details. HMRC should also be informed if you change gender, although the process is usually automatic if you apply for a Gender Recognition Certificate. Please also inform me of any changes. You can update the records I hold for you by securely logging onto Accountancy Manager. I will be automatically notified of any changes you make so no need to email me separately.

Please contact us for further information.

Disclaimer: This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

Student Loans are part of the Government’s financial support package for students in higher education in the UK.

They are available to help students meet their living costs while they are studying and there are two main types of student loan.

Fixed – term repayment loans (old – style loans).

These loans were available to students commencing a course of higher education up to and including the academic year 1997-98 and are often known as ‘fixed – term repayment’ or ‘mortgage – style’ loans. Repayments are made directly to the Student Loans Company (SLC).

Income – Contingent Loans (new – style loans).

These loans replaced the fixed – term repayment loans and became available to students commencing a course of higher education from the academic year 1998-99. It is HMRC’s responsibility to collect repayments where the borrower is working in the UK. The SLC is responsible for collecting the loans of borrowers outside the UK tax system.

There is an annual threshold below which repayments are not due. If the borrower’s income is above the threshold, repayments will be made according to the level of income.

There are two main types of loan known as ‘Plan 1’ and ‘Plan 2’.

Repayments are deducted at a rate of 9% of income over the threshold, although each plan has a different threshold.

In April 2019, a new loan for England and Wales known as Postgraduate Loan (PGL) was introduced.

There are separate thresholds and rates for these loans which are:

2017/18

Plan 1 – £17,775
Plan 2 – £21,000

2018/19

Plan 1 – £18,330
Plan 2 – £25,000

If you are employed then your employer will collect these sums and they will be reported on your P60. If you are self employed then you MUST tell me about the Student Loan and Plan so that I can calculate the liability. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Categories: Employers, General

A P800 tax calculation is issued if, according to HMRC’s information, the taxpayer has underpaid or overpaid tax.

The first wave of these annual tax reconciliations for 2018/19 started to land on doormats on 17 June 2019.

Who gets a P800?

Following the end of the tax year, HMRC carries out a reconciliation for anyone who received PAYE employment or a pension income in that year but who was not in self-assessment. The reconciliation checks to see if – based on the information that HMRC holds – the taxpayer has paid the correct amount of tax for that year. Reconciliations are also carried out for taxpayers not in PAYE but who receive a state pension that exceeds their personal allowance.

When their work for 2018/19 is complete, HMRC estimate that 85% of those for whom a reconciliation is performed will have paid the correct amount of tax, 10% will be entitled to a refund, and 5% will have an underpayment.

It is the two latter groups that will be issued with a P800 or potentially a PA302 where simple assessment applies, to correct the position. HMRC should not attempt to reconcile anyone who is in self-assessment. However, sometimes the flag that prevents reconciliation can be accidentally removed. If a taxpayer in self-assessment receives a P800 they should contact me and I can in turn contact HMRC and advise that they will be submitting a tax return instead.

Timing

Given the vast numbers of taxpayer records that must be reconciled, it takes HMRC some time to process and issue all the reconciliations. For 2018/19, HMRC aims to complete the bulk of reconciliations by November 2019, with the final deadline to complete the operation for the most complex cases being March 2020.Since nothing is issued if the reconciliation does not throw up a discrepancy, a taxpayer who wants to know if HMRC has carried out a reconciliation can check by looking on their personal tax account (PTA)

Bank interest

HMRC estimates that three-quarters of taxpayers for whom a reconciliation is performed will have bank interest. This information is provided by the banks directly to HMRC by 30 June following the end of the tax year.Where HMRC’s records indicate that bank interest was received in 2017/18, it will wait until data has been received from the bank for 2018/19 before carrying out a reconciliation.

Post receipt

When a P800 is received the taxpayer should check the information HMRC used in its calculations. This will include making sure that any employment or pension income on the P800 matches supporting paperwork from the taxpayer’s employer, interest and dividend figures are correct, and that any allowances such as marriage allowance, or job-related expenses are included.

Refunds

Where the taxpayer is due a refund, this should be issued automatically within two months of receipt of the P800. The taxpayer can speed up this process by logging into their PTA and providing their bank details.

Tax due

P800 letters have been notorious for not making it clear to individuals how they should settle any tax due. HMRC says it has improved the wording for 2018/19 letters.In most cases, the taxpayer will have the tax collected from their employment or pension income through a change to their PAYE coding notice. Where this is not possible, the taxpayer should receive a payslip. Alternatively, HMRC may issue a PA302 (simple assessment) instead of a P800.

Why a simple assessment?

HMRC will issue a simple assessment instead of a P800 where the taxpayer: owes tax that cannot be taken out of their income automatically; owes HMRC more than £3,000; or has to pay tax on their state pension. The intention was to gradually move more taxpayers into the simple assessment regime, but this was paused in May 2018 due to the pressures of Brexit work on HMRC resources.

Appealing a P800 or PA302. What happens if the taxpayer considers that their P800 is incorrect?

In the first instance you should contact me and I in turn can contact HMRC. Where any differences cannot be resolved, the taxpayer cannot appeal against the P800 itself but can appeal against the new PAYE code that gives effect to the tax recovery. In contrast, where a taxpayer receives a PA302, the simple assessment regime does include a right of appeal. If HMRC will not accept the taxpayer’s initial objections (which must be made within 60 days of the issue of the assessment) the taxpayer can appeal against a simple assessment demand. If you have any issues with a P800 please get in touch.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for loss occasioned by anyone acting on information within the App.

Category: General

The High Income Child Benefit charge (HICBC) applies to parents whose income exceeds £50,000 in a tax year and who is in receipt of Child Benefit.

If both parents have an income that exceeds £50,000, the charge will apply to the highest income earner.

The charge claws back the financial benefit of receiving Child Benefit either by reducing or removing the benefit entirely.

If you or your partner have exceeded the £50,000 threshold during the last tax year (2018-19) then you must take action. If you or your partner continue to receive Child Benefit (and earn over the relevant limits) you must pay any additional tax owed (the HICBC), for 2018-19, on or before 31 January 2020.

If you have exceeded the limit for the first time and do not currently submit a tax return you will be required to do so.

The HICBC is levied at the rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000.

If your income exceeds £60,000, the amount of the charge will equal the amount of Child Benefit received. HMRC’s guidance on Child Benefit stresses that if the HICBC applies to you or your partner, it is still worthwhile to claim Child Benefit for your child.

This can help to protect your State Pension and will make sure your child receives a National Insurance number. However, you can still choose to keep receiving Child Benefit and pay the tax charge through self-assessment or elect to stop receiving Child Benefit and not pay the charge. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

The meaning of goodwill for a business and CGT purposes is complex.

The term ‘goodwill’ is rarely mentioned in legislation and there is no definition of ‘goodwill’ for the purposes of Capital Gains legislation. In fact, most definitions of goodwill are derived from case law.

At its simplest you could describe goodwill as the ‘extra’ value of a business over and above its tangible assets. In the vast majority of cases when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of putting a monetary value on the business’s reputation and customer relationships.

Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

‘Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.’

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

If you are subject to an HMRC enquiry you can incur significant amounts in accountancy fees, even if at the conclusion it is found that there is no additional tax to pay.

For a very modest premium, Tax Investigation Insurance or fee protection insurance as it is sometimes known covers accountancy fees incurred by your accountant in the event of an enquiry, providing you with peace of mind, knowing that your accountant’s fees are covered and you have the resource to provide a strong defence.

Being the subject of an HMRC enquiry is stressful and tax investigation insurance will help you to relax.HMRC were targeted with achieving additional tax revenues of over £28 billion through compliance activities in 2017/18. They achieved £30.3 billion according to their annual report. In the past decade the number of enquiries undertaken by HMRC has increased significantly year on year. Any individual or business can be subject to an enquiry, even if your affairs are in order.

Through Sch36 of the Finance Act HMRC has wider powers than ever before. In recent years HMRC has recruited 2,500 new Compliance Officers to help achieve their ambitious targets.The chances of you being subject to an HMRC enquiry have never been higher.

An illustration of how the insurance works:

We have been asked multiple times to provide an example of what the insurance does.

Using very simplistic numbers:

Your tax affairs are chosen for an enquiry and HMRC request some more information than the basic records (this is the norm). HMRC review the records and dispute the figures. You are notified by HMRC that you/your business owes £4,500 in unpaid tax. You instruct your accountant to work on your behalf and provide information to HMRC and hopefully get the tax demand down.

Let’s say the accountant spends £1,500 of their time. 

Without Tax Investigation Insurance

The best case scenario: your accountant manages to get the tax bill down to £0, you still have to pay £1,500 in total with their fees.

The worst-case scenario: your accountant hasn’t been successful so you owe the £4,500 to HMRC and £1,500 to the accountant meaning your total is £6,000.

With Tax Investigation Insurance

The best case scenario: your accountant manages to get the tax bill down to £0 and the £1,500 is paid for by the insurance. Your total is £0

The worst case scenario: your accountant has not been successful, so you owe £4,500 to HMRC but the professional fees are paid for by the insurance meaning your total is £4,500.

Please remember- Tax is not optional and Tax Investigation Insurance does not cover the amount owed to HMRC. It simply covers the professional fees associated with a HMRC enquiry.

Please contact us for further information.Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

Here I provide you with an overview of the information to provide to your accountant (me) to enable completion of your end of year accounts. 

Every business is different, and you should discuss your own bookkeeping requirement with me. Between us we can decide what you can prepare for me and agree a time schedule for when you will provide the records and for when I will have your accounts ready for discussion. 

Basic ways in which you may find you can help me…

·         Adding up and balancing your books such as cross casting of column totals

·         analysing your payments and receipts

·         filing your invoices in sensible system so that relevant invoices can be easily found 

If you’re feeling more adventurous, you can also assist by

·         preparing a bank reconciliation that reconciles the balance on your bank statement to that derived from your records after adjusting for unpresented receipts and payments

·         using control accounts for key nominal accounts such as debtors and creditors that reconcile to your year end list of debtors and creditors 

By using reconciliations and control accounts on a regular basis during the year, you help to ensure there are no errors in the records. 

Records to provide to me

Not every business will have all of the following records but if you do, you should provide them to me covering the year (plus one month after)… 

·         Access to your Cloud Accounting records.

·         Your cash book if you have one

·         Petty cash records.

·         Sales and purchase day books if operated.

·         Any ledgers that you keep.

·         Bank statements covering the whole financial year for all business accounts.

·         Purchase invoices.

·         Sales invoices.

·         Cheque books and paying in stubs if used.

·         Copies of VAT returns covering the year together with any workings.

·         Your payroll records for the year together with details of PAYE calculations for payments to HMRC.

·         Copies of any new loan or HP agreements taken out during the year.

·         Details of any business income or expenditure that didn’t go through your business bank account.

·         Anything else you feel may be relevant – if in doubt, include it. 

Schedules to provide to me 

In addition, the following schedules will assist me in completing your end of year accounts. I can prepare these myself but if you wish to do so, it would reduce the time I spend preparing your accounts… 

·         A list of fixed asset additions with copy purchase invoices provided.

·         A year end stock list. This should be at the lower of cost and net realisable value.

·         Details of work in progress at the year end.

·         A list of debtors at the year end, their age and an indication of any that unlikely to pay

·         Sales ledger control account reconciliation.

·         Reconciliations for all bank and cash accounts.

·         A list of trade creditors at the year end and their age.

·         Purchase ledger control account reconciliation.

·         Details of PAYE owed at the year end.

·         Details of VAT owed at the year end.

·         Schedules of key and tax sensitive profit and loss accounts such as repairs, sundry expenses, entertainment, etc. 

How I Can Help You 

I can help you avoid all of the above by moving you to online cloud accounting. There are many benefits to online accounting, and it also means I can work with you throughout the year, giving advice and providing reports when you need it most, not after the year end when it could be too late.   

Please contact us for further information 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Special tax rules apply to the construction industry and workers which are detailed in The Construction Industry Scheme (CIS).

The Construction Industry Scheme

CIS uses a verification system for contractors to confirm whether a subcontractor should be paid gross or net.

Construction Activities

The definition of construction activities is widely drawn and so most businesses working in construction will be caught by CIS. It applies to sole traders, partnerships and Limited Companies but not to private householders who are paying contractors.

Contractors are businesses that carry out “construction operations” as part of their business and subcontractors are those who carry out such work for the contractor, but it does not include employees of the contractor. Some businesses will be both a contractor and a subcontractor.

Registration

New subcontractors have to register with HMRC but as well as calling into the local office it can also be done by phone or online if HMRC already know about you.

The subcontractor will be informed whether they can receive payments gross or net. To qualify to be paid gross a subcontractor must pass the Business Turnover and Compliance Tests. In summary these are…

  • It is run in the UK with a bank account;
  • It has a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and companies);
  • It has complied with all its tax obligations to date.

Verification

When a contractor engages a subcontractor who has not worked for them in the current or previous two tax years, they must get the name, unique taxpayer reference and national insurance number of the subcontractor in the case of an individual and contact HMRC to ascertain if the subcontractor should be paid gross or net, this is called verification. The contractor must also decide the contract proposed is one of self-employment, or whether the worker should be treated as an employee.

It is important to ensure that the status of the worker in terms of self-employment or employment is correctly established. This is a question of fact and not what the parties want it to be. The CIS scheme only applies to self-employment situations, but because a subcontractor is registered under the CIS it does not mean that he should be treated as self-employed for every job he does.

If the subcontractor is registered with HMRC the contractor will be told to pay the subcontractor gross or to apply the standard rate of deduction (20%) to all payments to the subcontractor. If the subcontractor has not registered with HMRC, a higher rate of tax deduction of 30% will be required.

The deductions count as payments on account of the eventual tax and Class 4 NI liability of the subcontractor. If the subcontractor has an accounting period ending early in the tax year, for example 31 Dec they can apply for an in-year repayment where the deductions already taken will exceed the total tax and Class 4 NI bill for the year. Arrangements exist for subcontractors that are companies to be able to set-off deductions against any PAYE, NIC and CIS deductions that they owe.

Contractors will be given a verification number for the subcontractor, or group of subcontractors, that is matched to the HMRC records in one query or phone call. This number is for the contractor’s reference only.

For each subcontractor that cannot be matched either because they are not registered or the wrong details have been given, a special verification number will be given for each unmatched subcontractor and this number must be recorded on the subcontractor’s payment statement. This will be needed to get refunds later.

Records

Payment Statement – Contractors must give a statement to each subcontractor that a deduction has been made from his payments, either done once a month to cover all payments or for each payment, and this must be issued within 14 days of the end of the month in which the payment was made. Statements can be in any format as long as they contain the necessary information. They are not required for subcontractors who are paid gross.

Monthly Return – The contractor will submit a monthly return to HMRC that shows all subcontractors that payments have been made to, the amount paid and where net payments are made, the amount of materials and deductions. The return must be filed with HMRC within 14 days of the month end, with nil returns made if there were no payments in the month.

There are penalties for filing returns late.

There is no annual return required under the new CIS.

Real Time Information (RTI)

Under the rules of RTI you cannot process subcontractors through PAYE. RTI does not change how CIS is reported. Employers will still file monthly returns (CIS300). But for Limited Companies acting as a subcontractor, on the Employer Payment Summary (EPS) each month you are required to declare ‘CIS deductions suffered’, to offset any liability due to HMRC.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

When is a car a pool car?

Rather than allocating specific cars to particular employees, some employers find it preferable to operate a carpool and have a number of cars available for use by employees when they need to undertake a business journey.

From a tax perspective, provided that certain conditions are met, no benefit in kind tax charge will arise where an employee makes use of a pool car.

The conditions

There are five conditions that must be met for a car to be treated as a pool car for tax purposes.

1. The car is made available to, and actually is used by, more than one employee.

2.In each case, it is made available by reason of the employee’s employment.

3.The car is not ordinarily used by one employee to the exclusion of the others.

4.In each case, any private use by the employee is merely incidental to the employee’s business use of the car.

5. The car is not normally kept overnight on or in the vicinity of any of the residential premises where any of the employees was residing (subject to an exception if kept overnight on premises occupied by the person making the cars available).

The tax exemption only applies if all five conditions are met.

When private use is ‘merely incidental’

To meet the definition of a pool car, the car should only be available for genuine business use. However, in deciding whether this test is met, private use is disregarded as long as that private use is ‘merely incidental’ to the employee’s business use of the car. HMRC regard the test as being a qualitative rather than a quantitative test. It does not refer to the actual private mileage, rather the private element in the context of the journey as a whole.

For example, if an employee is required to make a long business journey and takes the car home the previous evening in order to get an early start, the private use comprising the journey from work to home the previous evening would be regarded as ‘merely incidental’. The car is taken home to facilitate the business journey the following day.

Kept overnight at employee’s homes – the 60% test

For a car to meet the definition of a pool car, it must not normally be kept overnight at employees’ homes. In deciding whether this test is met, HMRC apply a rule of thumb – as long as the total number of nights on which a car is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period, HMRC accept that the condition is met.

When a benefit in kind tax charge arises

If the car does not meet the definition of a pool car and is made available for the employee’s private use, a tax charge will arise under the company car tax rules.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Can we deduct entertaining expenses?

The tax rules on the deductibility of entertaining expenses are harsh and often misunderstood – the fact that the expenditure is incurred for businesses purposes does not make it deductible.

Subject to certain limited exceptions, no deduction is allowed for business entertaining and gifts in calculating taxable profits.

What counts as business entertainment?

Business entertainment is the provision of free or subsidised hospitality or entertainment. Hospitality includes the provision of food drink or similar benefits for which no payment is made by the recipient. It also extends to subsidised hospitality whereby the charge made to the recipient does not cover the costs of providing the entertainment or hospitality.

Examples of business entertaining would include taking a supplier to lunch, taking customers to a day at the races, or inviting them to a box at rugby match, and suchlike. The definition is wide.

Exception 1: Entertaining employees

One of the main exceptions to the general rule that entertaining expenses cannot be deducted is in relation to staff entertainment. A deduction is allowed for the cost of entertaining staff, as long as the costs are incurred wholly and exclusively for the purposes of the trade and the entertaining of the staff is not merely incidental to the entertaining of customers. So, for example, a company would be able to deduct the cost of the staff Christmas party in calculating its taxable profits. However, if a company takes customers to Wimbledon, the fact that a number of employees also attended is not enough to guarantee a deduction as the entertaining provided for the employees is incidental to that for customers.It should be noted that unless an exemption is in point, employees may suffer a benefit in kind tax charge on any entertainment provided.

Exception 2: Normal course of trade

The disallowance does not apply where the business is that of providing hospitality, and as such a deduction is allowed for the costs incurred in providing that hospitality as long as they are incurred wholly and exclusively for the purposes of the business. Businesses such as restaurants and events management companies would fall into this category.

Exception 3: Contractual obligation to provide entertainment

Where entertainment is provided under a contractual obligation, this is not treated as business entertainment and a deduction is allowed for the cost. A common example would be where hospitality is provided as part of a package. However, the business should be able to demonstrate that they have received a full return for the entertainment provided.

Exception 4: Small gifts carrying an advert

The provision of business gifts is treated as business entertaining with the result that a deduction for the costs is not generally allowed. However, there is an exception for gifts costing not more than £50 per year per recipient which bear a conspicuous advert for the business. An example of a deductible gift would be a diary or a water bottle featuring an advert for the business.

Remember…Just because entertaining is incurred for business purposes does not mean that it is allowable and business entertaining needs to be added back in the corporation tax computation.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

An individual, Partnership or Company must keep records that enable them to make a correct and complete return.

These records must record income received and amounts paid out to run your business. These records can be maintained on paper, spreadsheet or nowadays it is common for accounting software to be used.

Indeed in light of HMRC’s Making Tax Digital project, it is advisable that all new businesses are encouraged to use software, even if it is not mandatory for the business to use software at that stage. A range of products is available, and each should be considered against the person’s particular circumstances so contact us before making your choice.

Good practice is for the business to have its own bank account, and for all business income to be paid into, and for all business expenditure to be paid out of, this account. In this way, all business transactions can be easily identified and there is a reduced risk of: (1) business transactions being missed; and (2) personal transactions being treated as business transactions.

In addition, the individual should be encouraged to set up a tax savings account and to make regular deposits into this account to cover estimated future tax liabilities. The correct amount to put aside will be determined by the circumstances; for example, the rate at which tax is likely to be payable, the person’s anticipated profit margin, and significant one-off costs, such as the purchase of a van. It is likely that this will need to be revised on a regular basis as the accounting information is reviewed and as the business grows.

Example

Amber commenced trading as a mobile hairdresser on 1 December 2019. She expects to make sales totaling £25,000 for her first year, incurring costs of approximately £5,000. Based on an anticipated profit of £20,000, her estimated tax and NICs liability is:

 Income tax ((£20,000 – £12,500) x 20%) £1,500
Class 4 NICs ((£20,000 – £8,632) x 9%)£1,023
Class 2 NICs (£3 x 52)£156
 Total £2,679
  

Amber would be advised to transfer £225 per month into her tax savings account to ensure that she has sufficient funds to pay her future tax liabilities.

Bear in mind that failure to maintain adequate business records can incur a fine from HMRC of up to £3,000.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

Yes and here’s why. Incidentally although this article is about Companies, the principle applies very well to all those in business.


Why a Limited Company needs its own bank account

It is not a specific legal requirement that a company opens and runs a bank account in its own name and where a new company has been formed to take over an existing sole trader business it can be tempting to continue to use the business bank account that has already been set up for that business. Or, where you have set up a new company it would be tempting to use that “spare” bank account in your own name.

However I strongly recommend that every company opens its own separate bank account and uses it to process all the company’s transactions for the following reasons.

Often when an existing business is transferred to a company, the formalities of the change are handled less than perfectly. For example, there may be no formal documentation of the transfer of assets, the sales invoices raised by the company may not make it clear that the sale is now being made by a limited company and suppliers may be slow to update the details that appear on their invoices. This carries a risk of HMRC arguing that the business has not been transferred with a view to taxing the business at a higher rate. Having a company bank account being correctly set up and used can act as a counter-argument.

Where a person is holding money on behalf of the company he is borrowing money from that company. This is likely to be the case where a person’s own bank account is being used as a company bank account and the account is in credit even if the only transactions on the account are company ones. Borrowing money from the company can be illegal under the Companies Act 2006. It can also lead to additional tax liabilities in the form of Section 455 tax and tax and National Insurance on beneficial employee loans.

If the business is unfortunate enough to be subject to a tax investigation all of its records and bank accounts will be reviewed. Once HMRC discover that a personal bank account is being used for company transactions they may extend the scope of their investigation to the director as well.

If bank interest and charges have been paid on the account HMRC may not allow tax relief on them on the grounds that they have not been incurred in the company’s name.

Where company funds are held in a private bank account, the distinction between the company and its owner is blurred. This may cause difficulties if the company becomes insolvent and the owner wishes to rely on the principle of limited liability to avoid being held personally liable for any business debts. This would be particularly relevant with a bank overdraft if there were no personal guarantee in place.

And, last but by no means least, record keeping is transformed by maintaining a company bank account making my life easier and Accountancy fees down !!

A properly set up company bank account should be an account held by the limited company in its own name which in most cases means that “Limited” or “Ltd” should appear in the account name.

Company legislation provides an opportunity for a business organisation to benefit from the protection of limited liability, separating the legal persona of the organisation from the individuals who own it.

In return for this protection a certain amount of information about a company must be publicly available including, for example, the company’s annual accounts, registered office address and details of directors, company secretary (if there is one) and members. Historically, providing and updating this information has been the job of the company secretary but is now the responsibility of all Directors.

Whilst on the subject of bank accounts there are some very good challenger banks to the traditional High Street that make it easy to set up an account and are well worth looking at. Please contact me for guidance on which ones are the best for your business.

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

There are a number of reasons why you may need to register with HMRC to submit a tax return.

This could include:

  • if you are self-employed and earning more than £1,000 per year from the self-employed activity,
  • if you are a company director,
  • if you have an annual income over £100,000 and / or if you have certain income from savings, investment or property.

And see HMRC’s list of criteria to file set out below.

If you need to complete a tax return for the first time you should inform HMRC as soon as possible. The latest date that HMRC should be notified is by 5 October following the end of the tax year for which a return needs to be filed. For example, if you had income that necessitated you registering for Self Assessment in the 2018-19 tax year, you need to notify HMRC by 5 October 2019.

HMRC has published a check list of reasons that you may be required to submit a Self Assessment return. The list includes the following:

  • If you are self-employed;
  • If you had £2,500 or more in untaxed income; Have savings or investment income of £10,000 or more before tax;
  • If you have made profits from selling things like shares, a second home or other chargeable assets and need to pay Capital Gains Tax;
  • If you are a company director – unless it was for a non-profit organisation (such as a charity) and you didn’t get any pay or benefits, like a company car;
  • If your income (or that of your partner’s) was over £50,000 and one of you claimed Child Benefit;
  • If you had taxable income from abroad;
  • If you lived abroad and had a UK income;
  • or If your income was over £100,000.

In certain limited circumstances HMRC can also ask you to complete tax returns for other reasons.

Uncertain if you need to register? Please call us with details of your various income sources in the UK if you would like help to decide, if you do need to register for Self-Assessment and/or need help with the completion and filing of your return.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: General

That really depends upon what you want us to do.

We always agree a bespoke fee with you based upon the work you wish us to undertake.

We are happy to meet with you for a no obligation discussion about your requirements and goals. At this meeting we will be able to prepare and discuss with you a bespoke fee with three distinct levels, Premium Plus, Premium and Esssential.

Whichever fee suits your budget or aspirations is then fixed at the outset and payable monthly to help you manage cashflow.

Category: General

We work alongside all types of business including self employed, partnerships, Limited Companies and landlords / individuals with rental property.

We provide a full range of accountancy services including:

  • Statutory Accounts
  • Tax Returns
  • Payroll
  • Employer Holiday Records
  • VAT
  • Construction Industry Scheme (CIS)
  • Business financial reports
  • Company Formation
  • Company Secretarial
  • Business finance access

And a few other services !

No distance too small or too great and we are happy to have a no obligation discussion at any time.

Category: General

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Trading Style

Here is a quick guide to the differences but please contact us for a more indepth discussion about your options and what’s best for your particular circumstances. 

Sole trader/partnerLimited company
Legal StatusFor the sole trader, there is no barrier between the individual’s business affairs and their private affairs. This means that the individual’s non-business assets may be at risk if the individual’s business fails or experiences difficulties. The partner is in a similar position as a sole trader as the partner is jointly liable with the other partner(s) for the partnership’s debts. It is possible to limit the individual’s liability; for example, by using a Limited Liability Partnership (LLP).  The liability of a shareholder in a limited company is limited to the amount invested by that individual in the share capital of the company. This protects the shareholder’s other assets – for example, his/her home –  in the event that the company is wound-up.The benefits of limited liability may be reduced where the shareholder is required to give a personal guarantee to a creditor of the company (for example, a bank in respect of borrowing by the company).
Taxation of Profits

The sole trader pays income tax and Class 4 NICs in respect of their profits as they are earned. As a rough guide, the combined rates of tax and NICs for profits are: from £8,632 to £12,500 – 9%;
£12,500 to £50,000 – 29%;
£50,000 to £150,000 – 42%,
and above £150,000 is 47%. The partner pays income tax and Class 4 NICs in respect of their share of the profits of the partnership. This is on the same basis as the sole trader. This is also the case for the partner in a LLP.


The company pays corporation tax (CT) on its profits as they are earned. The current rate of corporation tax is 19%; this is expected to fall to 17% from April 2020.A second layer of tax is payable when the business owner withdraws some or all of the after-CT profits from the company. There is a degree of flexibility as to how and when the profits are paid to the business owner. This can give the limited company an advantage over the sole trader/partnership. 
Sole trader/partnerLimited company
 LossesThe sole trader and partner may set a loss realised in the trade against their other income or gains for the current or previous tax year. In the first 4 years of the business, this relief is extended so that losses may be carried back three years.  It is not possible to set a loss realised by the company against the business owner’s income.
Administration

The sole trader must register with HMRC and from then on, submit a tax return each year. For small businesses, only three figures need to be returned to HMRC: income, expenses and profit/loss. Also, it is possible to calculate the tax liability by reference to cash received and paid out.It is advisable for the partnership to have a formal Partnership Agreement setting out the basis on which the partnership will exist. An annual tax return is required in respect of the partnership. The partner records his/her share of the partnership’s profits or losses – as set out in the partnership’s tax return –  in their tax return.For these purposes, a LLP is treated in much the same way as a company (see across). A partner in a LLP records his/her share of the LLP’s profits/losses in their tax return. 


The company must be registered with Companies House. A company must prepare statutory accounts in the format prescribed by the Companies Acts, and those accounts must be filed with Companies House.Further, a company must complete a Confirmation Statement each year and it must notify Companies House of certain developments, such as the appointment of new directors. The company’s accounts, etc. may be viewed on GOV.UK by members of the pubic. The company must submit an annual tax return to HMRC, including supporting calculations. The shareholder records on his/her personal tax return any income received from the company. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Trading Style

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Self Employed

The cost of a staff party or other entertainment event such as a Summer BBQ is generally allowed as a deduction for tax purposes. If you meet the various criteria outlined below there is no requirement to report anything to HMRC or pay tax and National Insurance.

There will also be no taxable benefit charged to employees on:

  • An annual Christmas party or other annual event offered to staff generally and is not taxable on those attending provided that the average cost per head of the function does not exceed £150.
  • Provided the event must be open to all employees.
  • If a business has multiple locations, then a party open to all staff at one of the locations is allowable.
  • You can also have separate parties for separate departments, but employees must be able to attend one of the events.
  • There can be more than one annual event. If the total cost of these parties is under £150 per head, then there is no chargeable benefit. However, if the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt and the others taxable.
  • Note, the £150 is not an allowance and any costs over £150 per head are taxable on the full cost per head. It is not necessary to keep a running total by employee but a cost per head per function.
  • All costs including VAT must be taken into account. This includes the costs of transport to and from the event, food and drink and any accommodation provided.

It is highly recommended when planning a staff party or other annual event to try and stick to the tax rules above. This should ensure that your party does not have an extra tax cost for you or your employees.

If you need help in crunching the numbers to make sure you do not exceed the allowable limits, please call me.

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

The meaning of goodwill for a business and CGT purposes is complex.

The term ‘goodwill’ is rarely mentioned in legislation and there is no definition of ‘goodwill’ for the purposes of Capital Gains legislation. In fact, most definitions of goodwill are derived from case law.

At its simplest you could describe goodwill as the ‘extra’ value of a business over and above its tangible assets. In the vast majority of cases when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of putting a monetary value on the business’s reputation and customer relationships.

Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

‘Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.’

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

If you are an employee or in some cases a Company Director and use your own money to buy things you need for your job, you can sometimes claim tax relief for the associated costs.

It is usually only possible to claim tax relief for the cost of items used solely for your work and you may also be able to claim tax relief for using you own vehicle, be it a car, van, motorcycle or bike. As a general rule, there is no tax relief for ordinary commuting to and from your work but the rules are different for temporary workplaces where the expense is usually allowable and if you use your own vehicle to do other business related mileage.

Employers usually make payments based on a set rate per mile depending on the mode of transport used and there are approved mileage rates published by HMRC. The approved mileage allowance payment rates are available where you use your own car on a business trip and where the approved mileage rates are used, the payments to you are not regarded as a taxable benefit.

Where an employer pays less than the published rates, you could claim tax relief for the shortfall using mileage allowance relief.

For all cars the approved mileage allowance payment for the first 10,000 business miles is 45p per mile and 25p per mile for every additional business mile.

The approved mileage rates are 20p per mile for bicycle travel and 24p per mile for motorcycle travel.

There is an additional passenger payment you can receive of 5p per passenger per business mile from your employer. This is available if you carry fellow employees in your car or van on journeys which are also work journeys for your colleagues. 

Like all things tax the rules around what you can claim can be complicated so if we can help please get in touch. 

Please contact us for further information

Disclaimer: This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Here I provide you with an overview of the information to provide to your accountant (me) to enable completion of your end of year accounts. 

Every business is different, and you should discuss your own bookkeeping requirement with me. Between us we can decide what you can prepare for me and agree a time schedule for when you will provide the records and for when I will have your accounts ready for discussion. 

Basic ways in which you may find you can help me…

·         Adding up and balancing your books such as cross casting of column totals

·         analysing your payments and receipts

·         filing your invoices in sensible system so that relevant invoices can be easily found 

If you’re feeling more adventurous, you can also assist by

·         preparing a bank reconciliation that reconciles the balance on your bank statement to that derived from your records after adjusting for unpresented receipts and payments

·         using control accounts for key nominal accounts such as debtors and creditors that reconcile to your year end list of debtors and creditors 

By using reconciliations and control accounts on a regular basis during the year, you help to ensure there are no errors in the records. 

Records to provide to me

Not every business will have all of the following records but if you do, you should provide them to me covering the year (plus one month after)… 

·         Access to your Cloud Accounting records.

·         Your cash book if you have one

·         Petty cash records.

·         Sales and purchase day books if operated.

·         Any ledgers that you keep.

·         Bank statements covering the whole financial year for all business accounts.

·         Purchase invoices.

·         Sales invoices.

·         Cheque books and paying in stubs if used.

·         Copies of VAT returns covering the year together with any workings.

·         Your payroll records for the year together with details of PAYE calculations for payments to HMRC.

·         Copies of any new loan or HP agreements taken out during the year.

·         Details of any business income or expenditure that didn’t go through your business bank account.

·         Anything else you feel may be relevant – if in doubt, include it. 

Schedules to provide to me 

In addition, the following schedules will assist me in completing your end of year accounts. I can prepare these myself but if you wish to do so, it would reduce the time I spend preparing your accounts… 

·         A list of fixed asset additions with copy purchase invoices provided.

·         A year end stock list. This should be at the lower of cost and net realisable value.

·         Details of work in progress at the year end.

·         A list of debtors at the year end, their age and an indication of any that unlikely to pay

·         Sales ledger control account reconciliation.

·         Reconciliations for all bank and cash accounts.

·         A list of trade creditors at the year end and their age.

·         Purchase ledger control account reconciliation.

·         Details of PAYE owed at the year end.

·         Details of VAT owed at the year end.

·         Schedules of key and tax sensitive profit and loss accounts such as repairs, sundry expenses, entertainment, etc. 

How I Can Help You 

I can help you avoid all of the above by moving you to online cloud accounting. There are many benefits to online accounting, and it also means I can work with you throughout the year, giving advice and providing reports when you need it most, not after the year end when it could be too late.   

Please contact us for further information 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Special tax rules apply to the construction industry and workers which are detailed in The Construction Industry Scheme (CIS).

The Construction Industry Scheme

CIS uses a verification system for contractors to confirm whether a subcontractor should be paid gross or net.

Construction Activities

The definition of construction activities is widely drawn and so most businesses working in construction will be caught by CIS. It applies to sole traders, partnerships and Limited Companies but not to private householders who are paying contractors.

Contractors are businesses that carry out “construction operations” as part of their business and subcontractors are those who carry out such work for the contractor, but it does not include employees of the contractor. Some businesses will be both a contractor and a subcontractor.

Registration

New subcontractors have to register with HMRC but as well as calling into the local office it can also be done by phone or online if HMRC already know about you.

The subcontractor will be informed whether they can receive payments gross or net. To qualify to be paid gross a subcontractor must pass the Business Turnover and Compliance Tests. In summary these are…

  • It is run in the UK with a bank account;
  • It has a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and companies);
  • It has complied with all its tax obligations to date.

Verification

When a contractor engages a subcontractor who has not worked for them in the current or previous two tax years, they must get the name, unique taxpayer reference and national insurance number of the subcontractor in the case of an individual and contact HMRC to ascertain if the subcontractor should be paid gross or net, this is called verification. The contractor must also decide the contract proposed is one of self-employment, or whether the worker should be treated as an employee.

It is important to ensure that the status of the worker in terms of self-employment or employment is correctly established. This is a question of fact and not what the parties want it to be. The CIS scheme only applies to self-employment situations, but because a subcontractor is registered under the CIS it does not mean that he should be treated as self-employed for every job he does.

If the subcontractor is registered with HMRC the contractor will be told to pay the subcontractor gross or to apply the standard rate of deduction (20%) to all payments to the subcontractor. If the subcontractor has not registered with HMRC, a higher rate of tax deduction of 30% will be required.

The deductions count as payments on account of the eventual tax and Class 4 NI liability of the subcontractor. If the subcontractor has an accounting period ending early in the tax year, for example 31 Dec they can apply for an in-year repayment where the deductions already taken will exceed the total tax and Class 4 NI bill for the year. Arrangements exist for subcontractors that are companies to be able to set-off deductions against any PAYE, NIC and CIS deductions that they owe.

Contractors will be given a verification number for the subcontractor, or group of subcontractors, that is matched to the HMRC records in one query or phone call. This number is for the contractor’s reference only.

For each subcontractor that cannot be matched either because they are not registered or the wrong details have been given, a special verification number will be given for each unmatched subcontractor and this number must be recorded on the subcontractor’s payment statement. This will be needed to get refunds later.

Records

Payment Statement – Contractors must give a statement to each subcontractor that a deduction has been made from his payments, either done once a month to cover all payments or for each payment, and this must be issued within 14 days of the end of the month in which the payment was made. Statements can be in any format as long as they contain the necessary information. They are not required for subcontractors who are paid gross.

Monthly Return – The contractor will submit a monthly return to HMRC that shows all subcontractors that payments have been made to, the amount paid and where net payments are made, the amount of materials and deductions. The return must be filed with HMRC within 14 days of the month end, with nil returns made if there were no payments in the month.

There are penalties for filing returns late.

There is no annual return required under the new CIS.

Real Time Information (RTI)

Under the rules of RTI you cannot process subcontractors through PAYE. RTI does not change how CIS is reported. Employers will still file monthly returns (CIS300). But for Limited Companies acting as a subcontractor, on the Employer Payment Summary (EPS) each month you are required to declare ‘CIS deductions suffered’, to offset any liability due to HMRC.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Can we deduct entertaining expenses?

The tax rules on the deductibility of entertaining expenses are harsh and often misunderstood – the fact that the expenditure is incurred for businesses purposes does not make it deductible.

Subject to certain limited exceptions, no deduction is allowed for business entertaining and gifts in calculating taxable profits.

What counts as business entertainment?

Business entertainment is the provision of free or subsidised hospitality or entertainment. Hospitality includes the provision of food drink or similar benefits for which no payment is made by the recipient. It also extends to subsidised hospitality whereby the charge made to the recipient does not cover the costs of providing the entertainment or hospitality.

Examples of business entertaining would include taking a supplier to lunch, taking customers to a day at the races, or inviting them to a box at rugby match, and suchlike. The definition is wide.

Exception 1: Entertaining employees

One of the main exceptions to the general rule that entertaining expenses cannot be deducted is in relation to staff entertainment. A deduction is allowed for the cost of entertaining staff, as long as the costs are incurred wholly and exclusively for the purposes of the trade and the entertaining of the staff is not merely incidental to the entertaining of customers. So, for example, a company would be able to deduct the cost of the staff Christmas party in calculating its taxable profits. However, if a company takes customers to Wimbledon, the fact that a number of employees also attended is not enough to guarantee a deduction as the entertaining provided for the employees is incidental to that for customers.It should be noted that unless an exemption is in point, employees may suffer a benefit in kind tax charge on any entertainment provided.

Exception 2: Normal course of trade

The disallowance does not apply where the business is that of providing hospitality, and as such a deduction is allowed for the costs incurred in providing that hospitality as long as they are incurred wholly and exclusively for the purposes of the business. Businesses such as restaurants and events management companies would fall into this category.

Exception 3: Contractual obligation to provide entertainment

Where entertainment is provided under a contractual obligation, this is not treated as business entertainment and a deduction is allowed for the cost. A common example would be where hospitality is provided as part of a package. However, the business should be able to demonstrate that they have received a full return for the entertainment provided.

Exception 4: Small gifts carrying an advert

The provision of business gifts is treated as business entertaining with the result that a deduction for the costs is not generally allowed. However, there is an exception for gifts costing not more than £50 per year per recipient which bear a conspicuous advert for the business. An example of a deductible gift would be a diary or a water bottle featuring an advert for the business.

Remember…Just because entertaining is incurred for business purposes does not mean that it is allowable and business entertaining needs to be added back in the corporation tax computation.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Whilst there is usually no tax relief for ordinary commuting – home to work – there are a few exceptions. 

The term ‘ordinary commuting’ is defined to mean travel between a permanent workplace and home, or any other place that is not a workplace.

Case law has established the principle that travelling between your home and a permanent workplace is not a travel expense related to the performance of your duties.

The rules are different for temporary workplaces where the expense is allowable. A workplace is defined as a temporary workplace if an employee only goes there to perform a task of limited duration or for a temporary purpose.

Other home to work travel that may be allowed includes:

  • where the employee has a travelling appointment;
  • where the employee’s home is a place of work and the place where the employee lives is dictated by the requirements of the job;
  • where the duties of the employment are carried out wholly or partly outside the UK; where a non-domiciled employee is working in the UK;
  • emergency call-outs.

There are also specific exemptions from tax for works bus services and subsidies paid to public bus services as well as for the provision by an employer of bicycles and cycling equipment in order to encourage environmentally friendly transport between home and work.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Many small business, whether incorporated or not, pay family members for working for the business. However, as a recent case shows, it is easy to make mistakes which can prove costly.

The case in question, Nicholson v HMRC (TC06293), concerned the payment of wages by a sole trader to his son while at university. Mr Nicholson was a central heating salesman, who was trying to build up an internet business. His son had worked for his father for many years, and when he went away to university, he continued to work for his father, ‘promoting the business through internet and leaflet distribution and computer work’. He was paid at the rate of £10 per hour for 15 hours’ work a week.

However, there was no evidence to support the payment of wages on this basis and payments were made partly in cash and partly through the provision of goods – Mr Nicholson bought his son food and drink to help him whilst at university and claimed a deduction in his business accounts for this as ‘wages’.

The First Tier Tax Tribunal disallowed a deduction for the wages paid to Mr Nicholson’s son. Although there was no dispute that his son worked in the business, there was no evidence to back up the claim that the payments had been made wholly and exclusively for the purposes of the trade. It was not possible to reconcile what had been paid as wages to the bank statements, and without contemporaneous records to support the payments, HMRC were unable to accept the sums claimed were ‘wages’ incurred as a business expense.

The payments had a dual purpose – the underlying motive was the ‘personal and private’ motive of supporting his son while at university.

Avoiding the pitfalls

Had Mr Nicholson taken a different approach, he would have been able to claim a deduction for the wages paid to his son. The judge noted that had payment been made on a time recorded basis or using some other methodology to calculate the amount payable, and had an accurate record been maintained of the hours worked and the amount paid, it is unlikely that the deduction would have been denied. If instead Mr Nicholson had made payments to his son’s bank account at the rate of £10 per hour for 15 hours’ work a week, leaving his son to buy food and drink etc. from the money he had earned working for his Dad, the outcome would have been different. The bank statements would provide evidence of what had been paid and this could be linked to the record of hours worked.

Maintaining the link is key. When paying family members, it is also important that the amount paid is reasonable in relation to the work done. The acid test is whether payment would be made to a person who was not a family member at the same rate. A deduction may also be denied if the wages paid are excessive. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

If you are self employed and running a business from your home, there are simplified arrangements available for claiming a fixed rate deduction for certain expenses where there is a mix of business and private use.

The simplified expenses rules are not available to limited companies or business partnerships involving a limited company.

The use of the flat rate expenses for business work carried out from your home will eliminate tedious calculations based on the proportion of personal to business use for household bills. Instead a monthly deduction is allowable. 

The current monthly rates are based on the amount of business use of the home as follows:

25 or more hours worked per month can claim  £10.00
51 or more hours worked per month can claim  £18.00
101 or more hours worked per month can claim  £26.00

There is no issue if the amount of hours worked varies from month to month as different amounts can be claimed for each month.

The flat rate doesn’t include telephone or internet expenses. You can claim the business proportion of these bills by working out the actual costs and business use.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Self Employed

The Tax Advantages of Self-Employment

There are a number of advantages of being self-employed, but you must also comply with various regulations including the tax law.

When you decide to work for yourself you need to choose which form your business will take. The most common forms of business are:

  • Sole-trader – you run the business on your own, usually under your own name;
  • Partnership – you and one or more other people jointly run the business;
  • Limited liability partnership – a special type of partnership that gives you and the other business owners more protection from creditors;
  • Limited company – an organisation that you own and control, which carries out the business on your behalf.

If you run your business as a sole-trader or as a partnership you are legally self-employed.

When you choose to run your business as a limited company you will normally be a director and an employee of that company. You will be employed rather than self-employed, but in practice you will work for your own business.

It is important to understand the difference between being employed by your own company, and being self-employed, as it will affect the tax you pay, and the regulations you have to comply with. This article deals only with the advantages and regulations of being self-employed.

Tax Advantages

Cash-Flow

As a self-employed person you only have to pay income tax twice a year on 31 January and 31 July. This means you can hang on to your money for longer than an employee who has tax deducted under PAYE from every pay packet.

You must make sure you have the money ready to pay the tax when it is due as you will be charged interest on any tax paid late.

If you work in the co industry you may have tax deducted from each of your sales invoices by the contractor you work for, under the Construction Industry Scheme (CIS). You may be able to reclaim some of the CIS deductions each year when you submit your tax return.

Expenses to Claim

·         The cost of any goods or services you use fully for your business can be deducted from your sales revenue for tax purposes. Where an item is used partially for your business and partly for private purposes, such as private car or home, you can claim the business proportion of the costs against your business profits. However, you must be able to justify the business proportion with evidence such as the miles driven, or space used by the business.

  • Capital allowances – if you purchase an item that is expected to last several years, such as a van, you can claim a special deduction known as a capital allowance. From January 2016, the first £200,000 you spend on equipment each year qualifies for 100% capital allowances in the year of purchase. This does not include cars.
  • Loan interest – if you take out a business loan the interest paid on that loan can be deducted from your sales revenue. The loan must be taken out to fund your business, rather than a personal loan or credit card borrowings.

Goverment Support

  • Government funding – if you live in an area in the UK that has been designated as a regeneration area you may qualify for a government programme to help people start their own businesses.
  • Charitable support is also available from the Prince’s Trust throughout Britain for those aged 18 to 30 who wish to start their own business.
  • Self-employed credit – if you have been registered as unemployed for at least six months you may qualify for a self-employed credit of £50 per week if you start your own business. Ask at your local Jobcentre Plus office for more details.
  • Working and child tax credits – You may qualify for these while you run your own self-employed business. Your tax credit award is based on your family’s joint income including your self-employed profits, but it will also be determined by the number of hours worked by the adults in the family, and the number of children aged under 16.

Your Tax Obligations

Tell the Taxman

When you start your own business you must register as a self-employed person with HMRC. It is best to do this as soon as possible after you start to charge your customers for the goods you sell or for the services you provide. You can register…

  • On the HMRC website
  • By telephoning the tax office
  • By completing the leaflet CWF1: Becoming self-employed and registering for national insurance contributions and tax.

You must register as self-employed even if you make a loss from your business. Every partner in a partnership business must register separately as a self-employed person. If you do not register with the Taxman by 5th October following the end of the tax year in which you started your business you may be charged a penalty of up to 100% of the tax and national insurance you do not pay as a result of the failure to notify. 

National Insurance

As a self-employed person you must pay two types of national insurance contributions (NICs) known as class 2 and class 4.

Tax Returns

You must complete a self-assessment tax return every year to report the income and expenses from your self employed business and any other income you have to the Tax Office.

Register for VAT

When your sales for 12 months reach the compulsory VAT threshold, you must register for VAT within 30 days.

Please contact us for further information 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Self Employed

Load More

Limited Company

IR35 was brought in to prevent the payment of less tax and national insurance by using a personal service company or partnership to provide services through rather than being a direct employee.

For example, by using a personal service company it has been possible to extract income from the company in the form of dividends rather than salary so saving substantial amounts of national insurance. In addition, shares of the company may be split with the spouse of the worker to help avoid higher rate tax and there is far more that can be deducted in the way of tax-deductible expenses by operating through a company rather than as an employee.

The regulations are applied where a worker supplies services through a relevant intermediary (which can be a company, partnership or individual), to a client and had the worker contracted directly with the client, the income would have been treated as employment income for tax purposes. The status tests outlined below are used to help determine whether the worker would have been treated as an employee or self-employed if they had contracted directly.

Large amounts of tax and NIC are at stake. Every case needs to be judged on its merits and several factors need to be considered in concluding on whether a contract is caught or not.

HMRC can provide an opinion on whether the contract is caught by IR35 or not, but do not provide opinions on draft contracts. Unsurprisingly perhaps, the view of HMRC often tends to come down on the side that the contract is caught by IR35 but very often their view has been shown to be wrong and should not be accepted without further investigation. Whether HMRC should also be asked for their opinion also needs consideration.

We can help advise you on how to stay on the right side of the law.

A company is a relevant intermediary for the IR35 rules if…

  • the worker (together with his close family and business partners) controls more than 5% of the company; OR
  • the worker receives payments or benefits which are not salary, but which could reasonably be taken to be payment for services provided to the client

For partnerships the IR35 rules are only applied when any of the following apply…

  • a partner (together with his close family) has more than 60% of the profits;
  • most of the partnership profits come from the work of a single client;
  • where a partner share of the profits is based on their income from the relevant contracts.

The Calculation

Any salary paid during the year has PAYE operated on it in the normal way during the year.

However, where there is income that is caught by IR35, then to the extent that it exceeds any salary to which PAYE is already applied plus taxable benefits, the excess will be treated as a deemed salary and is treated as pay on 5th April, and is liable to PAYE and Class1 NIC’s accordingly. This makes the extra tax and NIC payable on 19th April following the tax year concerned, which is a very short timescale, so contractors need to be organised. Interest runs on underpayments from this date.

In arriving at the excess salary, certain expenses can be deducted from the income derived from IR35 contracts as follows…

  • a flat rate allowance of 5% of the net of VAT income;
  • expenses that would have been allowable as an employee – this includes travel from home to the client’s premises as long as the job is expected to and does not last more than 24 months;
  • employer pension contributions;
  • employer national insurance contributions;
  • some capital allowances.

The excess amount is treated as being inclusive of employer’s Class 1 NIC, so these are deducted to arrive at the deemed salary on which tax and NIC is calculated.

The deemed payment and employers NIC payment thereon are then deductible expenses for the intermediary company, treated as if paid on 5th April.

If actual salaries are paid later of amounts that were included in the deemed salary calculation, they cannot be paid free of tax and NI as they only reduce the salary payment of the actual year in which they are paid. To avoid potential double taxation, it is better to use dividends.

If caught by IR35, the method of extracting funds from the company once the deemed payment calculation has been applied needs to be considered. For example…

  • A salary could be paid during the year to avoid a large tax and NIC payment on 19th April, but it does mean you pay the tax earlier.
  • It is possible to borrow from the company and then repay the borrowing out of a salary nearer the 5th April. There can be tax and NIC on the notional interest on the loan and it is possible a payment to HMRC of 25% of the loan will be required if the loan is not repaid in full within nine month of the company’s year end.
  • Paying interim dividends in the tax year following the deemed payment and then claiming for the dividend not to be treated as a dividend for tax purposes relieved to avoid any double taxation – this is often the best way forward.

Status Tests

In determining whether the contract is caught by IR35 it is necessary to consider the existing tests developed over the years to determine whether an individual is employed or self-employed. These tests can be summarised in one question: Is the individual in business on his own account when offering services to the client? If the answer is not a definite ‘yes’ the following factors need to be considered…

Requirement to provide a personal service

  • Must you complete the work personally?
  • Can you send substitute to do the work?

Control and supervision of the worker by the client

  • Can you work at times to suit you?
  • Does the client control how you do the work?

Mutuality of obligation between the parties for the duration of the contract

  • Do you have the option to turn down work offered and does the client have the option not to offer work?
  • Is each side obliged to offer work and accept work?

Financial risk of the worker

  • Do you correct defective work in your own time, at your own cost?
  • Are invoices raised by reference to the job rather than hours worked?
  • Is public liability insurance in place?
  • Is work carried out for more than just one or a very small number of clients?

Provision of equipment and materials by the worker

  • Do you use your own equipment?
  • Are materials supplied by you?
  • Do you work from your own premises?
  • Does your company have its own business stationery?

Trappings of employment

  • Is holiday and sick pay paid to you by the client?
  • Are any employment type benefits provided to you by the client?
  • How long have you been working for the client?
  • Is there a notice period to end the arrangement?

Intention of the parties

  • What was the intention of the parties in forming the contract?

The first three factors are the most important. If one of these does not exist the contract does not have the attributes of an employment contract so must be another type of contract, such as a self-employment relationship. However, to determine whether the worker is self-employed the other factors also need to be considered.

HRMC Business Status Tests

HMRC think they can generalise about what makes some companies fall within IR35 and other escape it. In May 2012 they have drawn-up a set of business entity tests, complete with a scoring system, to help you to judge whether your business would be at high, medium, or low risk of being investigated for falling under IR35.

These business entity tests are not derived from the tax law. They merely represent the Taxman’s view of the risk of a business falling within IR35.

The scoring attached to the tests is controversial, as it penalises businesses that have no bad debts, never pay to advertise and operate from the owner’s home. These IR35 business entity tests do not change the IR35 law one bit, and will probably be ignored by the Tax Tribunal.

If you choose to use the IR35 business entity tests, you don’t have to declare your score to the Taxman, the tests are merely for your own guidance. However, if you are concerned that the business entity tests produce a high risk score for your businesses, we should discuss why this is the case. Are they any changes which can be made to the way your business operates which would make it less likely to be caught by IR35?

Dragonfly Consulting Tax case

The Dragonfly Consulting tax case established that the Tax Inspector can question the relationship between the end client and the worker, and if he decides that it is really one of employee and employer, in spite of all the various contracts, agency and service company in place, the extra tax due will fall on the worker’s own company.

The case demonstrated how the contract between the agency and the final client can knock for six any clever contract drawn up between the worker’s company and the agency. HMRC have proved that the entire stream of contracts needs to be considered and compared to what actually happens on the ground.

For example, the agency may agree to include a substitution clause in the contract with the worker’s company, but if this clause is not reflected in the contract with the final client it is ineffective. Even if a substitution clause does exist in the agency/client contract it will be ignored if the client tells HMRC or the tax tribunal that it would never actually accept a substitute for the worker.

To ensure your working arrangement with your client will stand up to challenge by HMRC you need to see all the contracts in the chain and be sure your client would agree to accepting a substitute if asked to.

It should be noted that in a recent case with judgement issued on 5 Jan 2011 (MBF Design Services Ltd) where a hypothetical contract was sought to be created to examine the relationship between the end client and the worker, the three key status tests of personal service, control and mutuality of obligations led to the decision in favour of the taxpayer. It was particularly noted that the ability to cancel the contract without notice and the fact that contractors were sent home without pay whilst employees had to remain on site meant there was a lack of mutuality of obligations.

Managed Service Companies

A Managed Service Company differs to a Personal Service Company in that there is normally a scheme provider that operates the company on behalf of the worker. Often these are known as “composite companies” with perhaps 10 to 20 workers being put through the same company or “managed personal service companies” with one for each worker but managed by the scheme provider on behalf of the worker.

From 2007/08 the Government has taken action to tackle Managed Service Company (MSC) schemes which are used to disguise arrangements that should be treated as employment arrangements for tax purposes and are used to avoid paying the employed levels of tax and national insurance.

Income that is received by workers through MSCs is now subject to employment levels of tax and NI. It is the responsibility of the MSC to operate PAYE and deduct the necessary tax and NI on the income.

In addition, the rules for tax relief on travel expenses are the same as for other employed workers.

Whilst in many cases these companies should be caught by the IR35 legislation, they did not follow the legislation and when caught they simply liquidate as they have no assets and start up another company the next day. To stop MSCs avoiding payment of these taxes, recovery of underpaid taxes and NICs will be possible from appropriate third parties, principally those behind the company operating such schemes including directors, shadow directors and connected or controlling parties.

These individuals will also be easier to catch as there will be no need to consider the specific relationship between each individual worker and the end client which was proving too labour intensive for HMRC.

The IR35 intermediaries legislation remains in place for personal service companies where the worker operates the company himself. The MSC rules are not targeted at these companies.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

The cost of a staff party or other entertainment event such as a Summer BBQ is generally allowed as a deduction for tax purposes. If you meet the various criteria outlined below there is no requirement to report anything to HMRC or pay tax and National Insurance.

There will also be no taxable benefit charged to employees on:

  • An annual Christmas party or other annual event offered to staff generally and is not taxable on those attending provided that the average cost per head of the function does not exceed £150.
  • Provided the event must be open to all employees.
  • If a business has multiple locations, then a party open to all staff at one of the locations is allowable.
  • You can also have separate parties for separate departments, but employees must be able to attend one of the events.
  • There can be more than one annual event. If the total cost of these parties is under £150 per head, then there is no chargeable benefit. However, if the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt and the others taxable.
  • Note, the £150 is not an allowance and any costs over £150 per head are taxable on the full cost per head. It is not necessary to keep a running total by employee but a cost per head per function.
  • All costs including VAT must be taken into account. This includes the costs of transport to and from the event, food and drink and any accommodation provided.

It is highly recommended when planning a staff party or other annual event to try and stick to the tax rules above. This should ensure that your party does not have an extra tax cost for you or your employees.

If you need help in crunching the numbers to make sure you do not exceed the allowable limits, please call me.

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

The meaning of goodwill for a business and CGT purposes is complex.

The term ‘goodwill’ is rarely mentioned in legislation and there is no definition of ‘goodwill’ for the purposes of Capital Gains legislation. In fact, most definitions of goodwill are derived from case law.

At its simplest you could describe goodwill as the ‘extra’ value of a business over and above its tangible assets. In the vast majority of cases when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of putting a monetary value on the business’s reputation and customer relationships.

Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

‘Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.’

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

If you are an employee or in some cases a Company Director and use your own money to buy things you need for your job, you can sometimes claim tax relief for the associated costs.

It is usually only possible to claim tax relief for the cost of items used solely for your work and you may also be able to claim tax relief for using you own vehicle, be it a car, van, motorcycle or bike. As a general rule, there is no tax relief for ordinary commuting to and from your work but the rules are different for temporary workplaces where the expense is usually allowable and if you use your own vehicle to do other business related mileage.

Employers usually make payments based on a set rate per mile depending on the mode of transport used and there are approved mileage rates published by HMRC. The approved mileage allowance payment rates are available where you use your own car on a business trip and where the approved mileage rates are used, the payments to you are not regarded as a taxable benefit.

Where an employer pays less than the published rates, you could claim tax relief for the shortfall using mileage allowance relief.

For all cars the approved mileage allowance payment for the first 10,000 business miles is 45p per mile and 25p per mile for every additional business mile.

The approved mileage rates are 20p per mile for bicycle travel and 24p per mile for motorcycle travel.

There is an additional passenger payment you can receive of 5p per passenger per business mile from your employer. This is available if you carry fellow employees in your car or van on journeys which are also work journeys for your colleagues. 

Like all things tax the rules around what you can claim can be complicated so if we can help please get in touch. 

Please contact us for further information

Disclaimer: This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Here I provide you with an overview of the information to provide to your accountant (me) to enable completion of your end of year accounts. 

Every business is different, and you should discuss your own bookkeeping requirement with me. Between us we can decide what you can prepare for me and agree a time schedule for when you will provide the records and for when I will have your accounts ready for discussion. 

Basic ways in which you may find you can help me…

·         Adding up and balancing your books such as cross casting of column totals

·         analysing your payments and receipts

·         filing your invoices in sensible system so that relevant invoices can be easily found 

If you’re feeling more adventurous, you can also assist by

·         preparing a bank reconciliation that reconciles the balance on your bank statement to that derived from your records after adjusting for unpresented receipts and payments

·         using control accounts for key nominal accounts such as debtors and creditors that reconcile to your year end list of debtors and creditors 

By using reconciliations and control accounts on a regular basis during the year, you help to ensure there are no errors in the records. 

Records to provide to me

Not every business will have all of the following records but if you do, you should provide them to me covering the year (plus one month after)… 

·         Access to your Cloud Accounting records.

·         Your cash book if you have one

·         Petty cash records.

·         Sales and purchase day books if operated.

·         Any ledgers that you keep.

·         Bank statements covering the whole financial year for all business accounts.

·         Purchase invoices.

·         Sales invoices.

·         Cheque books and paying in stubs if used.

·         Copies of VAT returns covering the year together with any workings.

·         Your payroll records for the year together with details of PAYE calculations for payments to HMRC.

·         Copies of any new loan or HP agreements taken out during the year.

·         Details of any business income or expenditure that didn’t go through your business bank account.

·         Anything else you feel may be relevant – if in doubt, include it. 

Schedules to provide to me 

In addition, the following schedules will assist me in completing your end of year accounts. I can prepare these myself but if you wish to do so, it would reduce the time I spend preparing your accounts… 

·         A list of fixed asset additions with copy purchase invoices provided.

·         A year end stock list. This should be at the lower of cost and net realisable value.

·         Details of work in progress at the year end.

·         A list of debtors at the year end, their age and an indication of any that unlikely to pay

·         Sales ledger control account reconciliation.

·         Reconciliations for all bank and cash accounts.

·         A list of trade creditors at the year end and their age.

·         Purchase ledger control account reconciliation.

·         Details of PAYE owed at the year end.

·         Details of VAT owed at the year end.

·         Schedules of key and tax sensitive profit and loss accounts such as repairs, sundry expenses, entertainment, etc. 

How I Can Help You 

I can help you avoid all of the above by moving you to online cloud accounting. There are many benefits to online accounting, and it also means I can work with you throughout the year, giving advice and providing reports when you need it most, not after the year end when it could be too late.   

Please contact us for further information 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Special tax rules apply to the construction industry and workers which are detailed in The Construction Industry Scheme (CIS).

The Construction Industry Scheme

CIS uses a verification system for contractors to confirm whether a subcontractor should be paid gross or net.

Construction Activities

The definition of construction activities is widely drawn and so most businesses working in construction will be caught by CIS. It applies to sole traders, partnerships and Limited Companies but not to private householders who are paying contractors.

Contractors are businesses that carry out “construction operations” as part of their business and subcontractors are those who carry out such work for the contractor, but it does not include employees of the contractor. Some businesses will be both a contractor and a subcontractor.

Registration

New subcontractors have to register with HMRC but as well as calling into the local office it can also be done by phone or online if HMRC already know about you.

The subcontractor will be informed whether they can receive payments gross or net. To qualify to be paid gross a subcontractor must pass the Business Turnover and Compliance Tests. In summary these are…

  • It is run in the UK with a bank account;
  • It has a construction turnover, excluding VAT and the cost of materials, of at least £30,000 each year (more for partnerships and companies);
  • It has complied with all its tax obligations to date.

Verification

When a contractor engages a subcontractor who has not worked for them in the current or previous two tax years, they must get the name, unique taxpayer reference and national insurance number of the subcontractor in the case of an individual and contact HMRC to ascertain if the subcontractor should be paid gross or net, this is called verification. The contractor must also decide the contract proposed is one of self-employment, or whether the worker should be treated as an employee.

It is important to ensure that the status of the worker in terms of self-employment or employment is correctly established. This is a question of fact and not what the parties want it to be. The CIS scheme only applies to self-employment situations, but because a subcontractor is registered under the CIS it does not mean that he should be treated as self-employed for every job he does.

If the subcontractor is registered with HMRC the contractor will be told to pay the subcontractor gross or to apply the standard rate of deduction (20%) to all payments to the subcontractor. If the subcontractor has not registered with HMRC, a higher rate of tax deduction of 30% will be required.

The deductions count as payments on account of the eventual tax and Class 4 NI liability of the subcontractor. If the subcontractor has an accounting period ending early in the tax year, for example 31 Dec they can apply for an in-year repayment where the deductions already taken will exceed the total tax and Class 4 NI bill for the year. Arrangements exist for subcontractors that are companies to be able to set-off deductions against any PAYE, NIC and CIS deductions that they owe.

Contractors will be given a verification number for the subcontractor, or group of subcontractors, that is matched to the HMRC records in one query or phone call. This number is for the contractor’s reference only.

For each subcontractor that cannot be matched either because they are not registered or the wrong details have been given, a special verification number will be given for each unmatched subcontractor and this number must be recorded on the subcontractor’s payment statement. This will be needed to get refunds later.

Records

Payment Statement – Contractors must give a statement to each subcontractor that a deduction has been made from his payments, either done once a month to cover all payments or for each payment, and this must be issued within 14 days of the end of the month in which the payment was made. Statements can be in any format as long as they contain the necessary information. They are not required for subcontractors who are paid gross.

Monthly Return – The contractor will submit a monthly return to HMRC that shows all subcontractors that payments have been made to, the amount paid and where net payments are made, the amount of materials and deductions. The return must be filed with HMRC within 14 days of the month end, with nil returns made if there were no payments in the month.

There are penalties for filing returns late.

There is no annual return required under the new CIS.

Real Time Information (RTI)

Under the rules of RTI you cannot process subcontractors through PAYE. RTI does not change how CIS is reported. Employers will still file monthly returns (CIS300). But for Limited Companies acting as a subcontractor, on the Employer Payment Summary (EPS) each month you are required to declare ‘CIS deductions suffered’, to offset any liability due to HMRC.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

When is a car a pool car?

Rather than allocating specific cars to particular employees, some employers find it preferable to operate a carpool and have a number of cars available for use by employees when they need to undertake a business journey.

From a tax perspective, provided that certain conditions are met, no benefit in kind tax charge will arise where an employee makes use of a pool car.

The conditions

There are five conditions that must be met for a car to be treated as a pool car for tax purposes.

1. The car is made available to, and actually is used by, more than one employee.

2.In each case, it is made available by reason of the employee’s employment.

3.The car is not ordinarily used by one employee to the exclusion of the others.

4.In each case, any private use by the employee is merely incidental to the employee’s business use of the car.

5. The car is not normally kept overnight on or in the vicinity of any of the residential premises where any of the employees was residing (subject to an exception if kept overnight on premises occupied by the person making the cars available).

The tax exemption only applies if all five conditions are met.

When private use is ‘merely incidental’

To meet the definition of a pool car, the car should only be available for genuine business use. However, in deciding whether this test is met, private use is disregarded as long as that private use is ‘merely incidental’ to the employee’s business use of the car. HMRC regard the test as being a qualitative rather than a quantitative test. It does not refer to the actual private mileage, rather the private element in the context of the journey as a whole.

For example, if an employee is required to make a long business journey and takes the car home the previous evening in order to get an early start, the private use comprising the journey from work to home the previous evening would be regarded as ‘merely incidental’. The car is taken home to facilitate the business journey the following day.

Kept overnight at employee’s homes – the 60% test

For a car to meet the definition of a pool car, it must not normally be kept overnight at employees’ homes. In deciding whether this test is met, HMRC apply a rule of thumb – as long as the total number of nights on which a car is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period, HMRC accept that the condition is met.

When a benefit in kind tax charge arises

If the car does not meet the definition of a pool car and is made available for the employee’s private use, a tax charge will arise under the company car tax rules.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Firstly, a dormant company isn’t simply a closed company. There are a few rules to owning a dormant company you must meet if you wish your company to be classified as dormant.

So, what is a dormant company and what reasons are there for becoming dormant? We delve into this and other frequently asked questions below.

There are two definitions of ‘dormant’ according to HMRC, one for Corporation Tax and one for Companies House.

A dormant company for Corporation Tax is one which:

·         Has stopped trading and has no other income (such as investments)

·         Is a new limited company that has not yet begun trading

·         Is an ‘unincorporated association’ or club owing less than £100 Corporation Tax

·         Is a flat management company

A dormant company for Companies House is a company which is registered with Companies House but which has had ‘no significant accounting transactions’ during its financial year. A ‘significant accounting transaction’ may be defined by any transaction which should be entered in a company’s accounting records. 

For a company to be dormant for Companies House, its transactions must be limited to: 

·         Payment for shares

·         Fees paid to Companies House for a change of company name

·         Re-registration of a company

·         Filing annual returns

·         Payment of penalties imposed by Companies House 

There are certain exceptions to these such as some financial companies who are required to file their full accounts regardless of their company status.

Why become dormant? 

There a many reason why a company may become dormant either for Corporation Tax or for Companies House including: protecting a brand name or trademark, restructuring an existing business or to hold assets or intellectual property. 

One of the main benefits is that whichever description a dormant company falls under, you will have fewer filing responsibilities, reducing the statutory burden on your company. 

A dormant company is also exempt from paying Corporation Tax, provided it is dormant according to the description above. However, you must pay any outstanding tax liabilities before you can become dormant.

Filing requirements

A company may be dormant as soon as it is formed, or it may become dormant. Either way, it is important to continue managing it in the correct way. 

Each dormant company is still required to meet certain filing requirements.

As a dormant company you will still need to file annual accounts and a confirmation statement to Companies House. You must do this whether your company is dormant for Corporation Tax or for Companies House.

Making an active company dormant

To make an active company dormant, you must inform HMRC that your company is dormant as soon as possible. However, you will not be required to inform Companies House that your company is dormant until you need to file your annual accounts.

To inform HMRC, you can send a letter or contact them by phone. You must do so within three months of your company becoming dormant. 

If your company had employees, you will be required to pay any remaining wages and close your existing PAYE scheme. 

You must also deregister for VAT within 30 days of becoming dormant. 

If you want to be dormant only temporarily and plan to begin trading again in the future, you need to continue sending empty VAT returns while your company is dormant. 

As dormant companies cannot spend or receive any money without becoming active for Corporation Tax, it is best to close business bank accounts to ensure no income is received.

Making a dormant company active

If you have a dormant company and wish to become active, you must inform HMRC within three months of the company becoming active. 

For companies which have been active in the past, this is as simple as signing into your HMRC account and changing the status of the company to ‘active’ for Corporation Tax. 

For companies who have never traded, you will need to register for Corporation Tax. 

You may also need to register for VAT if you expect your turnover to be over the VAT threshold (£85,000 for 2019/20 tax year). 

You do not need to inform Companies House when your company becomes active again, as this will be clear when you submit your annual accounts.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

Taking money from the business for personal use when trading as a sole trade or partnership is normally easy and straightforward and unless proprietors’ drawings are a major drain on the business’ assets, there are generally no tax implications.

However, a company is a separate legal entity and, therefore, making withdrawals from a company (even if you’re a director or shareholder) requires far more consideration.

In this article, we take a closer look at the consequences of an overdrawn director’s loan account and how their impact can be reduced or avoided.

What is an overdrawn Director’s Loan Account?

If a payment is made to a director and it does not form part of their normal remuneration package (typically salary and dividends), the payment is usually set against their director’s loan account. Generally, the only other alternative would be to declare the payment is a bonus, but bonuses can be costly in tax and National Insurance.

If the director has a balance available on their director’s loan account, they can merrily draw down on their loan account with no tax implications or reporting requirements. It’s like they’ve got a bank account they can just dip into, provided the account remains in credit.

However, once the available funds are exhausted, the director is in default and, therefore, a debtor of the company. This can have two implications:

Corporation tax charge – S455

Firstly, if a balance remains outstanding on their loan account at the company’s year end, this can lead to a tax charge on the company called S455. This only applies to ‘close companies’ though – generally speaking a company with less than five shareholders/directors.

The loan account balance must be shown on supplementary pages of the company’s corporation tax return (CT600) and the S455 charge is calculated as 32.5% of whatever balance was outstanding on the director’s loan account at the period end. The S455 tax is payable nine months and one day from the end of the relevant accounting period.

An overdrawn director’s loan account is effectively an interest-free loan, so S455 is supposed to deter the company from providing such generous perks to its directors. However, S455 is rather unusual in that it is temporary – it is repaid back to the company by HM Revenue & Customs (HMRC), as the director repays the loan back to the company.

Furthermore, you only pay S455 on any advances on the loan; not the whole loan balance. So, if the loan balance went from £15,000 last year to £18,000 this year, you’d only pay S455 this year on the additional £3,000; not the entire £18,000.

Where the loan is repaid within nine months of the end of the accounting period though, relief is due immediately, i.e. the S455 is never physically paid (although disclosure is still required in the company’s tax return).

Beneficial Loan Benefit in Kind

The second implication of an overdrawn director’s loan account is that it can trigger a benefit in kind for the so-called ‘beneficial loan’. As mentioned above, an overdrawn director’s loan account is effectively an interest-free loan. Consequently, the director is taxed on the interest that would have been due if it had been a normal loan on the open market (the calculation of which is stipulated by HMRC).

There are a few exceptions, when a taxable benefit for a beneficial loan does not arise:

·         The loan is used for certain ‘qualifying’ purposes by the director, such as buying an interest in a partnership

·         The company charged the director interest (there are criteria surrounding this)

·         The loan is deemed ‘small’, i.e. it is under £10,000 throughout the tax year

Benefit in Kind P11D’s

The returns for Benefits in Kind are called P11D’s. You must supply copies and the P11D(b) (which shows the company’s Class 1A National Insurance liability) to HMRC by 6th July. The P11Ds will summarize what’s happened to the overdrawn director’s loan account across the tax year (not the company’s accounting year end).

This means if your company’s year end is not 31st March (i.e. the tax year), you will need to draw up your books mid-year to complete your P11Ds if you have an overdrawn director’s loan account.

If your director’s loan account is overdrawn and you think it may exceed £10,000 at any point in the tax year, it is important to complete the P11Ds and P11D(b) on time. If your P11D(b) is late, you will be charged a penalty of £100 per 50 employees for each month or part month the return is overdue. You’ll also be charged penalties and interest if you pay HMRC late.

The interaction between S455 and the benefits code

The interaction between S455 and the benefits code can lead to some unexpected consequences:

A S455 charge may be mitigated by an election of a dividend after the year end. However, if the balance on the loan was over £10,000 at some point, then a benefit in kind would arise.

A loan remains under £10,000 throughout the year but does not get repaid by the year end or within the nine months following. This would result in a S455 charge payable but no benefit in kind arising.

As you can see, an overdrawn director’s loan account could result in a S455 charge or a benefit – or both.

Record Keeping and Disclosure

Good record keeping with regards to a director’s loan account is essential. Poor records could result in the misallocation of expenses/ payments and ultimately, the right taxes not being paid.

Record keeping is also important because disclosure of the balance on each overdrawn director’s loan account at the year end must be made in the company’s accounts, as well as the highest, overdrawn balance at any point in the period. 

Overall, the key is to keep timely, accurate records and to keep the transactions relating to each of the directors and each of their loans separate.

How to deal with an overdrawn director’s loan account

As with a lot of scenarios, it’s hard to give one solution that will suit everyone’s circumstances. But as a rule, the triggering of a benefit in kind and S455 charge can be fairly painless provided the director is intending to repay the loan quickly. 

However, if the overdraft persists for some time, it may be preferable for the company to declare dividends (profits permitting). Although there will almost certainly be personal tax due on the dividends, it should be a one-off hit, whereas the impact of an overdrawn director’s loan account can go on year-after-year.  Dividends also do not attract National Insurance, so it is also likely to be a cheaper option too.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

The general rule is that a dividend is preferred to salary/bonus because less tax is paid on a dividend. There are several reasons why this is the case but, on the whole, the tax saving is driven by the fact that NICs are not payable in respect of a dividend.

That is not to say that a dividend should be paid in preference to salary/a bonus in all cases – the tax position will depend on the particular circumstances and there are other considerations; for example, company law requirements; payments must be made by reference to shareholdings; the impact of the settlements legislation and the fact that dividends are not earnings.

It is important that the tax liability is calculated for both options and that the client is made aware of all the implications of his/her decision.

The following example illustrates the tax saving that may be achieved where a company pays profits of £50,000 as a dividend rather than additional salary/a bonus. It is assumed that the individual receives a salary for the year of £8,632 per annum.

 SalaryDividend
Company:  
Profits£58,632£58,632
Less, basic salary(£8,632)(£8,632)
Less, bonus(£43,937)£nil
Less, employer’s NICs(£6,063)£nil
Taxable profits£nil£50,000
Corporation tax£nil(£9,500)
Profits after tax / Dividend paid£nil£40,500
  Individual:  
Employment income£52,569£8,632
Dividend income£nil£40,500
Total income£52,569£49,132
Less, income tax payable(£8,528)(£2,597)
Less, employee’s NICs(£5,015)£nil
Net amount received£39,026£46,535
Additional funds under dividend route £7,509

In other words, the individual will be better off by roughly £7,500 if he extracts the company’s profits of £50,000 as a dividend rather than as salary/a bonus; and a saving of this order is generated at a range a profit levels.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

As a Director / shareholder of your own Limited Company you will have heard a lot about how tax efficient it can be to combine a salary with dividends to form your income.

When you make a dividend payment however you need to ensure that you’ve sufficient funds available to do so. Otherwise the dividend could be “illegal” which could cause a number of issues later down the track.

How to work out your dividend

To establish if you can pay a dividend and how much you can take there are some very simple rules to follow:

Start by working out the company profits

Income less allowable costs = company profit

Then take off the estimated Corporation Tax

The current rate of corporation tax is 19% So profits x 19% = corporation tax

Work out the “Distributable Profits”

The amount left after taking off the corporation tax is what you can take out of the company in dividends. This is known as distributable profits; a term that it’s worth being familiar with.

Quick rule of thumb calculation for distributable profits

After corporation tax at 19% then 81% of profits are distributable as dividends.

Final things to bear in mind

To arrive at the amount that you can take out of the business as distributable profits at this point in time you need to add on any Retained Profits brought forward and deduct any dividends taken already this financial year. The retained profits brought forward will be found in your last set of accounts. This figure will be nil if this is your first year of trading.

Remember that you should have a record of your dividends taken to date and they should be shown in your accounting records.

Here’s a quick recap

Income less costs = profit X 19% = Corporation Tax

Profit – Corporation Tax = distributable profits

Distributable profits + Retained Profits brought forward less dividends taken this year = Profits available to take as dividends (Distributable Profits)

Of course if this is a negative figure then you have no available profits to take as a dividend. Any dividend payments at this stage will be illegal.

The importance of up-to-date Accounting Records

Clearly to even attempt the above requires your accounting records to be completely up to date.  If you are using a digital accounting system there should be a report available to show your company profits. Some systems even show you the available distributable profits but if you haven’t got records like this it will be almost impossible.

Disguised remuneration

Dividends are not like paying a salary and should try not to fall into a trap of paying out the same amount every month.

With this in mind avoid setting up a regular payment for the same amount on the same day and make sure you perform a check on “available profits” before you withdraw any dividends.

If you need any help with this just get in touch. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

You might think that once you have set up your limited company, you’re free to dip into and out of the company’s profits as you see fit – it’s your company after all.

In reality, directors who employ this ‘what’s yours is mine’ attitude to their company profits could find themselves in a lot of trouble.

Limited companies become a legal entity in their own right when they are incorporated at Companies House. That means the company’s assets and profits belong to the company, not the business owner. Therefore, you cannot simply take money out of the business like a sole trader, whose personal and business assets are one and the same.

Money can only be taken out of a limited company in one of three ways, and all three of these methods must be recorded and accounted for. You must also be careful to only take money out of a company if it is making a profit and once tax and all other financial liabilities have been accounted for.

Three Ways you can Take Money out of a Limited Company

The first thing you should ask yourself is not can I take money from the company but should I? The vast majority of directors who contact me have not set aside any cash buffer to counter when things go wrong. Notice I said when things go wrong not if ! Ok you may be regarded as being a pessimist to expect everything to go wrong all the time but only a fool expects everything to go right all the time too. Get the balance right and set aside 10% off the top of your sales revenues and put it to one side for a proactive cash account. This account should be in addition to setting aside taxes – each month! Yes each month – do not wait until the end of the year. Then and only then if you have sufficient revenues should you consider taking bonuses or dividends and even then pay them quarterly.

Money can be Drawn in the Following Ways:

  • Director’s salary, expenses and benefits
  • Dividends
  • Director’s loan

The careful use of a combination of these methods can be an extremely tax efficient way to minimise personal tax liabilities and run a business. This is due to the fact that corporation tax is payable at just 19 percent, while income tax on earnings over £50,000 (with the £12,500 personal allowance) sits at 40 percent.

Salary

The most familiar method of taking money out of a limited company is for the directors to pay themselves a salary. Company directors are employees of the business just like anyone else, so they will have to be registered with HMRC for PAYE and will also have to pay National Insurance Contributions on their earnings. Most company directors choose to take a very small salary, up to the National Insurance Contributions threshold of £8,628, and instead take the lion’s share of their pay in dividends. Paying this level of salary ensures a director qualifies for the state pension and benefit entitlements, but does not incur a personal tax liability.

I will say up front that I am not a great lover of the way dividends are taken and or accounted for by most one man limited companies. This is for a variety of reasons but suffice it to say that if you are taking dividends monthly and you are not setting aside corporation tax and paying VAT and PAYE you should not be taking dividends. I know this may upset some directors but any director paying him/herself dividends monthly and cannot or will not pay taxes is setting themselves up for a big fall.

Dividends

If you cannot afford to pay your taxes then the company is not viable, possibly insolvent, and dividends should not be taken. All the director is doing by taking dividends is building up a negative balance which will have to be repaid at some point if the company is liquidated insolvently. Therein lies the rub – some directors will just bury their heads in the sand and hope the problem will go away. It won’t.

The majority of directors of limited companies will also be shareholders in profitable companies who do pay taxes and have a proactive cash buffer. In this case, income can be taken out of the company in the form of dividends, which are paid out of the company’s profits after corporation tax has been deducted.

Solvent Companies

It is essential to remember that a company cannot pay out more in dividends than it has in retained profits from current and previous financial years. You can learn more about the level of tax you pay on dividends here.

Directors’ Loans

A director’s loan is another efficient way to take money out of a company, although it can be fraught with hazards if the process is not handled correctly. If you take money out of a business and it is not a salary or a dividend, you have what is known as a director’s loan. All transactions of this type must be recorded in a directors’ loan account, which keeps a running balance of the transactions between a director and the company itself. Account balances can be ‘in credit’, if the director has paid more into the company than he has taken out, or ‘overdrawn’ if the director has withdrawn more money than he has paid in. Overdrawn directors’ loan accounts are a common problem in insolvent companies, but in the normal course of viable solvent businesses they can be repaid in full or in the correct circumstances even written off by the company.

All transactions in a director’s loan account have to be accounted for in the company’s balance sheet, and may also have to be included in the company tax return and the director’s self-assessment return.

In most cases, directors with overdrawn loan accounts will not have to pay any tax as long as the sum is repaid within nine months and one day of the company’s account reference date. If a director’s loan account is overdrawn by more than £10,000, the sum will have to be declared on the director’s self-assessment tax return, and the appropriate rate of tax will apply.

Is There a way to take Money out of a limited Company Without Paying Tax?

As this article explains, there is no way not to pay tax, however depending on your situation there will more efficient or less tax efficient methods. This is where I can assist you the most but please take early advice. Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

As well as filing accounts with Companies House, there is a further requirement to check that the information Companies House holds about your company is correct every year.

This is done by the filing of an annual company confirmation statement which replaced the annual return a few years ago.

A confirmation statement must usually be filed at Companies House once every 12 months and rather than resubmitting data every year, the confirmation statement only needs to be updated if you have changes to report. If there are no changes then you just need to confirm the information is correct and submit the statement. Failure to submit the statement is an offence which could lead to a fine or the Company being struck off the register.

The following details need to be checked:

  • the details of your registered office, directors, secretary and the address where you keep your records
  • your statement of capital and shareholder information if your company has shares
  • your SIC code (the number that identifies what your company does)
  • your register of ‘people with significant control’ (PSC)

Any necessary updates to the statement of capital, shareholder information and SIC codes can be made when submitting the confirmation statement.

However, the confirmation statement cannot be used to report changes to your company’s officers, the registered office address, the address where you keep your records and people with significant control. These changes must be filed separately with Companies House and this should be done at the same time or prior to submitting the confirmation statement.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

If you own a business as a sole trader or in partnership, a Capital Gain will arise if your business is transferred into a company structure, ie you become a Company..

The gain will be assessed by reference to the market value of the business assets, including goodwill, at the date of transfer. This could give rise to a chargeable gain based broadly on the difference between the market value of the assets and their original cost.

In most cases, the incorporation of the business will be completed so that incorporation relief can be claimed. The claim for incorporation relief should defer any tax until you sell your shares in the business.In order to qualify for incorporation relief, all your business assets other than cash must be transferred as a going concern, wholly or partly in exchange for shares in the new company.It is important to note that where the necessary conditions are met, incorporation relief is given automatically and there is no need to make a claim. The relief works by reducing the base cost of the new assets by a proportion of the gain arising from the disposal of the old assets.

Although the relief is automatic, it is possible to make an election in writing for incorporation relief not to apply. An election must be made before the second anniversary of 31 January next, following the tax year in which the transfer took place e.g. an election in respect of a transfer made in the current 2019-20 tax year must be made by 31 January 2023.

The election deadline is reduced by one year if the shares are disposed of in the year following that in which the business was incorporated.

Incorporation Relief is just one possible strategy that can be used to minimise tax liabilities if you incorporate your business. However, there are other planning options. If you are considering incorporation, be sure to contact me.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Can we deduct entertaining expenses?

The tax rules on the deductibility of entertaining expenses are harsh and often misunderstood – the fact that the expenditure is incurred for businesses purposes does not make it deductible.

Subject to certain limited exceptions, no deduction is allowed for business entertaining and gifts in calculating taxable profits.

What counts as business entertainment?

Business entertainment is the provision of free or subsidised hospitality or entertainment. Hospitality includes the provision of food drink or similar benefits for which no payment is made by the recipient. It also extends to subsidised hospitality whereby the charge made to the recipient does not cover the costs of providing the entertainment or hospitality.

Examples of business entertaining would include taking a supplier to lunch, taking customers to a day at the races, or inviting them to a box at rugby match, and suchlike. The definition is wide.

Exception 1: Entertaining employees

One of the main exceptions to the general rule that entertaining expenses cannot be deducted is in relation to staff entertainment. A deduction is allowed for the cost of entertaining staff, as long as the costs are incurred wholly and exclusively for the purposes of the trade and the entertaining of the staff is not merely incidental to the entertaining of customers. So, for example, a company would be able to deduct the cost of the staff Christmas party in calculating its taxable profits. However, if a company takes customers to Wimbledon, the fact that a number of employees also attended is not enough to guarantee a deduction as the entertaining provided for the employees is incidental to that for customers.It should be noted that unless an exemption is in point, employees may suffer a benefit in kind tax charge on any entertainment provided.

Exception 2: Normal course of trade

The disallowance does not apply where the business is that of providing hospitality, and as such a deduction is allowed for the costs incurred in providing that hospitality as long as they are incurred wholly and exclusively for the purposes of the business. Businesses such as restaurants and events management companies would fall into this category.

Exception 3: Contractual obligation to provide entertainment

Where entertainment is provided under a contractual obligation, this is not treated as business entertainment and a deduction is allowed for the cost. A common example would be where hospitality is provided as part of a package. However, the business should be able to demonstrate that they have received a full return for the entertainment provided.

Exception 4: Small gifts carrying an advert

The provision of business gifts is treated as business entertaining with the result that a deduction for the costs is not generally allowed. However, there is an exception for gifts costing not more than £50 per year per recipient which bear a conspicuous advert for the business. An example of a deductible gift would be a diary or a water bottle featuring an advert for the business.

Remember…Just because entertaining is incurred for business purposes does not mean that it is allowable and business entertaining needs to be added back in the corporation tax computation.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Whilst there is usually no tax relief for ordinary commuting – home to work – there are a few exceptions. 

The term ‘ordinary commuting’ is defined to mean travel between a permanent workplace and home, or any other place that is not a workplace.

Case law has established the principle that travelling between your home and a permanent workplace is not a travel expense related to the performance of your duties.

The rules are different for temporary workplaces where the expense is allowable. A workplace is defined as a temporary workplace if an employee only goes there to perform a task of limited duration or for a temporary purpose.

Other home to work travel that may be allowed includes:

  • where the employee has a travelling appointment;
  • where the employee’s home is a place of work and the place where the employee lives is dictated by the requirements of the job;
  • where the duties of the employment are carried out wholly or partly outside the UK; where a non-domiciled employee is working in the UK;
  • emergency call-outs.

There are also specific exemptions from tax for works bus services and subsidies paid to public bus services as well as for the provision by an employer of bicycles and cycling equipment in order to encourage environmentally friendly transport between home and work.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Many small business, whether incorporated or not, pay family members for working for the business. However, as a recent case shows, it is easy to make mistakes which can prove costly.

The case in question, Nicholson v HMRC (TC06293), concerned the payment of wages by a sole trader to his son while at university. Mr Nicholson was a central heating salesman, who was trying to build up an internet business. His son had worked for his father for many years, and when he went away to university, he continued to work for his father, ‘promoting the business through internet and leaflet distribution and computer work’. He was paid at the rate of £10 per hour for 15 hours’ work a week.

However, there was no evidence to support the payment of wages on this basis and payments were made partly in cash and partly through the provision of goods – Mr Nicholson bought his son food and drink to help him whilst at university and claimed a deduction in his business accounts for this as ‘wages’.

The First Tier Tax Tribunal disallowed a deduction for the wages paid to Mr Nicholson’s son. Although there was no dispute that his son worked in the business, there was no evidence to back up the claim that the payments had been made wholly and exclusively for the purposes of the trade. It was not possible to reconcile what had been paid as wages to the bank statements, and without contemporaneous records to support the payments, HMRC were unable to accept the sums claimed were ‘wages’ incurred as a business expense.

The payments had a dual purpose – the underlying motive was the ‘personal and private’ motive of supporting his son while at university.

Avoiding the pitfalls

Had Mr Nicholson taken a different approach, he would have been able to claim a deduction for the wages paid to his son. The judge noted that had payment been made on a time recorded basis or using some other methodology to calculate the amount payable, and had an accurate record been maintained of the hours worked and the amount paid, it is unlikely that the deduction would have been denied. If instead Mr Nicholson had made payments to his son’s bank account at the rate of £10 per hour for 15 hours’ work a week, leaving his son to buy food and drink etc. from the money he had earned working for his Dad, the outcome would have been different. The bank statements would provide evidence of what had been paid and this could be linked to the record of hours worked.

Maintaining the link is key. When paying family members, it is also important that the amount paid is reasonable in relation to the work done. The acid test is whether payment would be made to a person who was not a family member at the same rate. A deduction may also be denied if the wages paid are excessive. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Becoming a Director ? Here’s what’s involved.

Directors Responsibilities

Whilst shareholders are the owners of limited companies the job of running them rests with the directors and they must do so for the benefit of the shareholders whilst ensuring compliance with the law. Directors can be liable to penalties if information is not sent to Companies House on time. They must approve the annual accounts and are also responsible for all the general day to day running of the company including matters such as health and safety.

Acting improperly can lead to fines, disqualification from being a director, personal liability for the company’s debts or a criminal conviction. Appointment of Directors Appointment of new directors, resignation of directors and change of directors details need to be notified to Companies House on forms AP01, TM01 and CH01 respectively for actual persons within 14 days.

For corporate directors the forms are AP02, TM02 and CH02 respectively.

Private limited companies must have at least one director and public limited companies must have at least two. If a limited company only has one director, the director must be an actual person.

In general anyone can be a director, but all directors must be aged at least 16. A director must also not be disqualified by the court from acting as a director and must not be an undischarged bankrupt – if you are, you need the court’s permission.

The Articles of Association set out the rules for how the company is to be run including for example how many directors there should be, how long they can serve and what happens at the end of their term.

Directors’ powers and financial liabilities

The powers of the directors are limited by the company’s Articles of Association, although these are usually very widely drawn. These can for example restrict the type of business activities allowed or monies that can borrowed, so it is important to check them.

A director is expected to have the skill expected that a reasonable person would do looking after their own business and act in good faith for the company and treat all shareholders equally.

Directors duties include:

  • A duty to act within powers – not to abuse or exceed their powers (usually as defined by the Articles) or use them for an improper purpose;
  • A duty to act as the director considers will promote the success of the company for the benefit of its members as a whole, having due regard.
  • A duty to exercise independent judgement the likely long term consequences of employees’ interests business relations with suppliers, customers and others impact on the community and the environment desirability of a reputation for high standards of business conduct need to act fairly as between members This duty is made subject to any requirement to act in the interests of creditors (e.g. where the company is insolvent and wrongful trading might occur).
  • A duty to exercise reasonable care, skill and diligence (this introduces a minimum standard of competence)
  • A duty to avoid conflicts of interest – but conflicts can be authorised by the board (so long as there are enough “independent” directors)
  • A duty not to accept benefits from third parties – they can still only be approved by the shareholders
  • A duty to declare to other directors any interest in a proposed transaction or arrangement – a “general” notice can be provided at a board meeting dealing with ongoing transactions with a particular company.

A director must declare any potential conflict of interest and if they plan to enter into substantial deals with the company, they must be approved by the shareholders in a general meeting.

Other responsibilities of Directors

Apart from Companies House responsibilities directors are also responsible for the general running of the company such as complying with employment law, health and safety law, tax law, etc. Failure to carry out some of these duties, such as where health and safety is concerned, can result in a criminal conviction.

Filing Documents at Companies House

Directors are responsible for filing documents at Companies House, even though such tasks may be delegated to the Company Secretary. Late filing of accounts leads to an automatic civil penalty, in the range of £150 to £1,500 for a private company, and £750 to £7,500 for a public company. Failing to file accounts or the annual return on time, or not at all, is also a criminal offence. If you are prosecuted and convicted you could end up with a criminal record and a fine of up to £5,000. You may also be disqualified from acting as a director.

The directors also need to check and return the annual return which is the information that Companies House holds on the directors, shareholders and so on. The must also ensure the company produces and files an annual report and accounts. A director must sign the balance sheet and the board must also approve and sign off the directors’ report. If required by law, an audit of the accounts must also take place.

You must advise Companies House if you change your registered office address, using form AD01. You must advise of changes of directors and Company Secretary.

Disqualification of Directors

Directors can be disqualified for any of the following:

  • allowing the company to trade while insolvent;
  • not keeping proper accounting records;
  • failing to prepare and file accounts;
  • not sending returns to Companies House; failing to send tax returns and pay tax.

In some cases, the directors can face criminal charges, fines or be made personally liable for the company’s debts. Disqualification proceedings are handled by the courts and disqualification can be for between 2 and 15 years. While disqualified, you must not: be a director of any company nor act like a director – even without being formally appointed influence the running of a company through the directors be involved in the formation of a new company ignoring a disqualification order is a criminal offence. For that you could be fined and sent to prison for up to two years.

Shadow Directors

Even if you haven’t been appointed as a director, you could possibly be a shadow director if the other directors are ‘accustomed to act’ under your instructions.This can also happen if you resign as a director but continue making decisions and giving instructions. In this case you would have the same responsibilities and potential penalties as if you were a director.

Other Penalties

Failure to properly comply with director responsibilities can lead to the following penalties: 

  • You can be personally liable for illegal acts such as those beyond your powers.
  • You can be liable for company debts incurred through fraudulent or wrongful trading

Wrongful (or even fraudulent) trading occurs when you allow the business to carry on and run up debts when you know or should know there is no reasonable prospect of the company being able to repay them. Just because you are making losses does not necessarily mean it is wrongful trading but all circumstances need consideration.

If as a director you disagree with the decisions made by the board as whole you should ensure this is noted as you can still be joint and severally liable for decisions taken as a collective.

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Limited Company

Load More

Employers

Student Loans are part of the Government’s financial support package for students in higher education in the UK.

They are available to help students meet their living costs while they are studying and there are two main types of student loan.

Fixed – term repayment loans (old – style loans).

These loans were available to students commencing a course of higher education up to and including the academic year 1997-98 and are often known as ‘fixed – term repayment’ or ‘mortgage – style’ loans. Repayments are made directly to the Student Loans Company (SLC).

Income – Contingent Loans (new – style loans).

These loans replaced the fixed – term repayment loans and became available to students commencing a course of higher education from the academic year 1998-99. It is HMRC’s responsibility to collect repayments where the borrower is working in the UK. The SLC is responsible for collecting the loans of borrowers outside the UK tax system.

There is an annual threshold below which repayments are not due. If the borrower’s income is above the threshold, repayments will be made according to the level of income.

There are two main types of loan known as ‘Plan 1’ and ‘Plan 2’.

Repayments are deducted at a rate of 9% of income over the threshold, although each plan has a different threshold.

In April 2019, a new loan for England and Wales known as Postgraduate Loan (PGL) was introduced.

There are separate thresholds and rates for these loans which are:

2017/18

Plan 1 – £17,775
Plan 2 – £21,000

2018/19

Plan 1 – £18,330
Plan 2 – £25,000

If you are employed then your employer will collect these sums and they will be reported on your P60. If you are self employed then you MUST tell me about the Student Loan and Plan so that I can calculate the liability. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Categories: Employers, General

The cost of a staff party or other entertainment event such as a Summer BBQ is generally allowed as a deduction for tax purposes. If you meet the various criteria outlined below there is no requirement to report anything to HMRC or pay tax and National Insurance.

There will also be no taxable benefit charged to employees on:

  • An annual Christmas party or other annual event offered to staff generally and is not taxable on those attending provided that the average cost per head of the function does not exceed £150.
  • Provided the event must be open to all employees.
  • If a business has multiple locations, then a party open to all staff at one of the locations is allowable.
  • You can also have separate parties for separate departments, but employees must be able to attend one of the events.
  • There can be more than one annual event. If the total cost of these parties is under £150 per head, then there is no chargeable benefit. However, if the total cost per head goes over £150 then whichever functions best utilise the £150 are exempt and the others taxable.
  • Note, the £150 is not an allowance and any costs over £150 per head are taxable on the full cost per head. It is not necessary to keep a running total by employee but a cost per head per function.
  • All costs including VAT must be taken into account. This includes the costs of transport to and from the event, food and drink and any accommodation provided.

It is highly recommended when planning a staff party or other annual event to try and stick to the tax rules above. This should ensure that your party does not have an extra tax cost for you or your employees.

If you need help in crunching the numbers to make sure you do not exceed the allowable limits, please call me.

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

There are late filing penalties in place for employers that don’t report payroll information on time. The size of the late filing penalties depends on the number of employees within the PAYE scheme.

Number of employees Monthly penalty per PAYE scheme
1 to 9£100
10 to 49£200
50 to 249£300
250 or more£400

Payments that are over 3 months late can be subject to an additional penalty of 5%.

HMRC has confirmed that having reviewed the effectiveness of the risk-based approach to late filing PAYE penalties, they have decided to continue with their same approach as for the 2019-20 tax year. This means that late filing penalties will continue to be reviewed on a risk-assessed basis, rather than being issued automatically.

The first penalties for 2019-20 will be issued in September 2019.This approach means, that penalties will not be charged automatically if Full Payment Submissions (FPSs) are filed late but within 3 days of the payment date and there is no pattern of persistent late-filing.

This is not an extension to the statutory filing date, which remains unchanged, and HMRC has confirmed that employers who persistently file after the statutory filing date, but within three days thereof, will be monitored and may be charged a late filing penalty.

This move confirms that HMRC will continue to focus on penalising those who deliberately and persistently fail to meet statutory deadlines, rather than those who make occasional and genuine errors.

Please contact us for further information 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Employers

Almost all full time workers in the UK are legally entitled to 5.6 weeks (28 days) paid holiday per year.

This is known as statutory leave entitlement or annual leave.

Legally, employers can include bank holidays as part of statutory leave, although not all employers do this. Employers are also free to provide additional non statutory holiday entitlement.

An employee’s actual statutory entitlement depends on how many days they work per week, but all employees including part-time, agency or casual workers are entitled to holiday.

There is no statutory entitlement to holidays for the self-employed and there are special rules for those in the armed forces, police and civil protection services.

Part-time workers are entitled to a pro-rata entitlement. For example, 5.6 days holiday per year if they work one day a week.

Employees who work irregular days or hours or that are in the first year of a new job can use HMRC’s holiday entitlement calculator to work out how many days they are entitled to.

HMRC is clear that workers have the right to:

  • get paid for leave;
  • build up holiday entitlement during maternity, paternity and adoption leave;
  • build up holiday entitlement while off work sick;
  • request holiday at the same time as sick leave.

Any employee that has a problem with their holiday pay should try and resolve the issue with their employer.

If this does not work, there are a number of ways to resolve the dispute including contacting ACAS or taking the employer to an employment tribunal.

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Employers

Payroll – how to deal with new starters ?

From a payroll perspective, there are various tasks that an employer has to perform when they take on a new starter.For 2019/20 an employer needs to operate PAYE where the employee earns more than £118 per week (the lower earnings limit for National Insurance purposes). However, if any employees earn more than £118 per week, the employer must comply with RTI and report all payments to employees to HMRC (even those below £118 per week).

Work out what tax code to use

The tax code is fundamental to the operation of PAYE and it is important that the correct tax code is used. To ensure that a new employee is taxed correctly, the employer will need to know the correct tax code to use. If the employee has a P45 and left their last job in the current tax year, the employer can simply use the code shown on the P45.

If the employee left their last job in the 2018/19 tax year, the code on the P45 can be updated by adding 65 to codes ending in L, 59 for codes ending in N and 71 for codes ending in M.If the employee does not have a P45, the employer will need to ask the employee to complete a new starter checklist.

New starter checklist

The new starter checklist enables the employer to gather information on the new employee. Even if the employee has a P45, it is still useful for the new starter to complete the checklist as it contains information which cannot be gleaned from the P45 (such as the type of loan where the new starter has a student loan which has not been repaid). As far as establishing which tax code to use, the employee will need to select one of three statements:

A: ‘This is my first job since 6 April and I have not been receiving taxable Jobseeker’s Allowance, Employment and Support Allowance, taxable Incapacity Benefit, State or Occupational Pension’.

B: ‘This is now my only job but since 6 April I have has another job or received taxable Jobseeker’s Allowance, Employment and Support Allowance or taxable Incapacity Benefit. I do not receive a State or Occupational Pension.

C: ‘As well as my new job, I have another job or receive a State or Occupational Pension’.

The following indicates what code should be used for 2019/20 depending on what statement the employee has ticked.

Statement A ticked: Tax code to use1250L on a cumulative basis

Statement B ticked: Tax code 1250L on a Week 1/Month 1 basis

Statement C ticked: Tax code BR

Does the employee have a student loan?

The employer will also need to establish whether the employee is making student loan repayments. If the employee has a P45 and is making loan repayments, the student loan box will be ticked. However, the P45 will not provide details of the type of loan. Student loan information can be provided on the new starter checklist, enabling the employer to ascertain whether the employee has a student loan, and if so what type, and also whether the employee has a post-graduate loan.

Tell HMRC about the new employee

The employer will need to add the new employee to the payroll and also tell HMRC that the employee is now working for the employer. This is done by including the new starter details on the Full Payment Submission (FPS) the first time that the employee is paid.

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Employers

A person who provides work to an individual is responsible for correctly establishing the employment status of the worker.  For tax and National Insurance contribution (NIC) purposes that is whether the worker is an employee or self-employed.

Why employment status matters

An individual’s employment status affects the amount of tax and NICs they pay, how they pay them, their employment rights, and if applicable their employer’s responsibilities.

EmploymentstatusMethod of paymentEmployment rights
EmployeeThe employer deducts tax and NICs at source from the employee’s pay under the Pay As You Earn (PAYE) system An employee has a wide range of rights, including entitlement to:·         statutory sick pay;·         maternity/paternity pay; and·         holiday pay.Where necessary, the employer’s disciplinary and grievance procedures apply to an employee, as does the employer’s redundancy policy
Self-employedSelf-employed individuals are normally exempt from PAYE and instead report and pay tax and NICs personally through the self-assessment tax systemA self-employed individual does not have the rights of an employee, for example they are not entitled to holiday or sick pay

If an employer incorrectly treats an employee as self-employed, it can cost the employer (or sometimes the employee) a lot of money to put things right. 

An individual can have one employment status for tax and NICs purposes and a different one for employment law purposes. For example, taxi drivers in the gig economy may be self-employed for tax and NICs purposes but a ‘worker’ for employment law purposes and as such entitled to some employment rights. 

Establishing an individual’s employment status

There is no comprehensive definition in law to say whether an individual is an employee or self-employed. An individual’s employment status is established by weighing up all relevant facts and looking at the overall picture. The factors to be considered are derived from case law.

To emphasise, self employment is a matter of FACT NOT CHOICE

Summary of key factors to be considered:

For employmentAgainst employment
There is an employment contract  There is no employment contract
The engager controls the way the work is doneThe worker controls how they do the work
The worker must do the work themselvesThe worker can send someone else to do the work on terms of their own choice and pay them out of their own pocket
The worker does not bear the losses nor keep the profitsThe worker bears the losses and keeps the profits
The worker does not correct unsatisfactory work in their own time and at their own expenseThe worker corrects unsatisfactory work in their own time and at their own expense
The engager decides where the worker must workThe worker decides where to work
The worker is paid a regular salary by the engagerThe worker invoices the engager for work done
The worker receives benefits in kindThe worker is only paid in cash, cheque or bank transfer
The engager provides the tools and equipmentThe worker provides their own tools and equipment
The engager lays down regular and defined working hoursThe worker decides when they want to work
The engager cannot withhold paymentThe engager can withhold payment until the work is done as agreed
The engager can dismiss the workerThe engager cannot dismiss the worker or cancel the work once the work is agreed, without compensation
The worker works for one engager at a time or a few regular jobsThe worker has lots of engagers at the same time
The engager and worker understand the relationship to be that of employer and employeeThe engager and worker understand the worker to be self-employed
The worker does not risk their own moneyThe worker risks their own money in the business
  • “worker” refers to the person who does the work (not a “worker” for employment right purposes): and
  • “engager” refers to the person for whom the work is done (this could be the individual’s employer)

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Employers

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Landlords

A buy-to-let property is a popular investment choice, but there are many different taxes associated with it that you may be subjected to. 

Stamp Duty

Buy-to-let properties are subject to stamp duty, and the amount you pay is directly linked to the value of the property you buy. The stamp duty needs to be paid when the purchase is completed or within the first 30 days after completing.

The stamp duty amount is staggered according to the price of the property. The first £125,000 has 3% tax, with 5% on the portion up to £250,000 up to £925,000, then 13% on the amount up to £1.5 million and 12% on anything over that amount.

A supplement applies for all three taxes where an additional residential property is purchased for more than £40,000 (unless replacing the main residence). It is also payable by all Corporate purchasers. The rate is 3% of the total purchase price.

Inheritance Tax

Should you inherit a buy-to-let property, you will need to pay inheritance tax if the property exceeds £325,000 minus any outstanding mortgage. However, if the landlord chooses to operate as part of a joint partnership with a married or civil partner, their inheritance threshold is combined and would only need to pay inheritance tax when the property value exceeds £650,000. Anything over these thresholds would be taxed at 40%.

Capital Gains Tax

If a profit is made when the property is sold and stamp duty and other fees have been deducted, then Capital Gains tax will be applied. Each person has an allowance to set against any gain, so if you gain over that amount in a single year, the Capital Gains tax will be applied at 18% or 28% depending on the income and capital gains that they have.

It is possible to reduce the amount of Capital Gains that you pay as estate agent fees, solicitor fees, stamp duty, property advertisement costs, capital expenditure and any losses made on previous buy-to-let property investments can all be deducted from the capital gain.

It is important that you declare any gains on your self assessment tax return. This means that the tax will be payable by the end of January the year following the tax year in which the property was sold.

This is all set to change in April 2019 when the tax will be required to have been paid with 30 days of the property sale.

Buy-To-Let Property Income Tax

The monthly rental payments that an investor receives are considered to be income, and that income is taxable. The rent that is received needs to be declared on your self assessment tax return and the tax on this income will be charged alongside your income tax banding,

There are what is known as ‘allowable expenses’ such as insurance, council tax, ground rents, professional property fees, property maintenance, finance charges, property expenses and buy-to-let mortgage interest. These expenses can be deducted from the taxable rental income, which will minimise the overall tax that is needed to be paid.

From the spring of 2017 the buy-to-let mortgage tax relief has been reduced which has meant that landlords that were paying higher or additional rate tax could claim tax relief at their highest rate. From April 2020 the tax relief can only be reclaimed at the basic rate of 20%.

Limited Companies

Limited companies are not subject to the mortgage interest relief restrictions, and the interest can be classed as a business expense. Limited companies pay a fixed rate of 19% corporation tax, and this is set to be lowered in the future, making it a much more appealing tax rate.

Passing the money from the limited company to an individual becomes the tricky part. If taken as a dividend, income over the first £2000 will be taxed at 7.5% for basic rate payers, 32.5% for higher rate taxpayers or 38.1% for additional higher rate taxpayers. Taking the money as a salary means the company would have to pay Employers National Insurance, which could be costly.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Landlords

The rent-a-room scheme is a set of special rules designed to help homeowners who rent-a-room in their home.

The current tax-free threshold of £7,500 per year has been in place since 6 April 2016.

The relief only applies to the letting of furnished accommodation and is used when one bedroom is rented out in a furnished house to a lodger. The relief is being applied more widely as more people rent out rooms online. The relief also simplifies the tax and administrative burden for those with rent-a-room income up to £7,500.

The limit is reduced by half if the income from letting accommodation in the same property is shared by a joint owner of the property. The rent-a-room limit includes any amounts received for meals, goods and services provided, such as cleaning or laundry.

If gross receipts are more than the limit, taxpayers can choose between paying tax on the actual profit (gross rents minus actual expenses and capital allowances) or the gross receipts (and any balancing charges) minus the allowance – with no deduction for expenses or capital allowances.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: Landlords

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VAT

A change to the VAT rules first announced at Budget 2018 will come into effect from 1 October 2019.

This change will make the supply of construction services between construction or building businesses subject to the domestic reverse charge.

The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector. The introduction of this reverse charge targets fraud where VAT due to HMRC is never paid by a building subcontractor.

New guidance on the workings of the domestic reverse charge (referred to as the reverse charge) has been published by HMRC. Using the reverse charge procedure changes the usual VAT treatment such that the customer receiving the service is liable to account for the VAT due rather than the supplier.

There is no cash impact for building clients affected. The main contractor will pay the subcontractor the amount of their charge excluding VAT. They will simply add the VAT reverse charge to their return and claim back the VAT amount as input VAT.

The reverse charge will affect certain specified supplies of building and construction services supplied at the standard or reduced rates that are reported under the Construction Industry Scheme (CIS). These are called specified supplies. This will place the onus for dealing with the VAT charge due on subcontractors’ bills to the main contractor.

There are now less than 4 months until the new rules come into effect and businesses that will be impacted should already be making the necessary preparations. HMRC has said that they understand that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: VAT

When you issue a VAT invoice to your customer, you must ensure that you charge the correct rate of VAT.

Whilst most businesses in the UK charge VAT at the standard rate of 20% there are a number of different VAT rates and exemptions that you will need to be aware of. 

In the UK, there are three separate VAT rates, the standard rate of 20%, the reduced rate of 5% and the zero rate 0%. In addition, there are two other categories that the supplies of goods and services can fall under:

Exempt – where no VAT is charged on the supply.Supplies that are ‘outside the scope’ of the UK VAT system altogether.
Where a transaction is a standard, reduced or zero-rated taxable supply, you must:

Charge the right rate of VATWork out the VAT if a single price is shown that includes or excludes VATShow the VAT information on your invoiceShow the transaction in your VAT account – a summary of your VATShow the amount on your VAT Return
If you charged the wrong amount of VAT and it is too high, then you are still responsible for accounting for the higher sum.

If the amount is too low, then you must account for the amount you should have charged. Your customer can also ask for a replacement invoice to be issued reducing / increasing the amount of VAT due.

The timing of finding an error can also impact on how the issue is resolved.It is important to be aware that if the amount of VAT you charge is too high, your customer can only claim back the correct amount of VAT they should have been charged. A credit note will usually be required to rectify the situation.

If you are concerned that you may not be charging VAT at the correct rate, please call.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: VAT

For most fully taxable businesses, VAT can be reclaimed on goods and services used in the business.

This means that businesses must consider where there is any personal or private use of goods or services purchased for the business as the business can only reclaim the business proportion of the VAT.

For example, VAT is recoverable on all the costs of mobile phones provided to employees where no personal use is allowed. Where businesses allow private calls to be made at no charge, the VAT recovery must be apportioned on a fair and reasonable basis. Where employees pay for the private use of their phones, the business is allowed to reclaim the input tax in full provided an output tax charge is accounted for in respect of private use payments received from employees.

You cannot reclaim VAT for:

  • anything that’s only for private use;
  • goods and services your business uses to make VAT-exempt supplies;
  • business entertainment costs;
  • anything you’ve bought from other EU countries (you may be able to reclaim VAT charged under the electronic cross-border refund system);
  • goods sold to you under one of the VAT second-hand margin schemes;
  • business assets that are transferred to you as a going concern.

There are different rules for a business that incurs expenditure on taxable and exempt business activities. These businesses are partially exempt for VAT purposes and are required to make an apportionment between their taxable and exempt activities using a ‘partial exemption method’ in order to calculate how much input tax is recoverable.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: VAT

In short NO but many try and fall foul of HMRC regulations.

The artificial separation of businesses is where one busness or two or more are split, and each “separate” entity operates below the VAT registration threshold (currently £85,000). 

This is known as disaggregation. 

HMRC has legal powers to direct that businesses that have been artificially separated to avoid VAT be treated as a single entity for VAT purposes.

The underlying legislation requires HMRC to consider the extent to which businesses are ‘closely bound to one another by financial, economic and organisational links’ when determining it there has been an artificial separation of businesses for the purposes of VAT avoidance.

HMRC must be able to prove that businesses are linked by all three criteria as set-out in the legislation. If this is done, then the businesses will need to be treated as one entity for VAT (subject to the usual appeals process). Businesses that have deliberately avoided VAT registration may be liable to penalties and prosecution following a direction by HMRC to aggregate their businesses.

This measure can also have retrospective effect dating as far back as 20 years. This can result in significant amounts of additional VAT and penalties being chargeable.

Taxpayers that are seeking to avoid VAT registration are likely to be caught by HMRC’s rules.

However, as many Tribunal cases on this issue have demonstrated it is possible for businesses to be separate even if they appear closely related at first glance.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: VAT

Here is a short guide to VAT and when to register.

What is VAT?

VAT is short for ‘Value Added Tax’. It’s a tax on the sale of most goods and services. Registration for VAT is compulsory when the annual turnover of your business, calculated to the end of any month, reaches the VAT registration threshold of (currently) £85,000.

If your turnover is close to this figure and you think it may reach the threshold you have to register as soon as this happens. Do not make the mistake of waiting until the end of a calendar quarter, or until your annual income tax return is due.

You should also register if you expect that your turnover will exceed the threshold in the next 30 days – and this period can start at any time.

What happens if I do not register?

If you fail to register for VAT at the appropriate time you will be liable to a penalty. This is calculated at 5%, 10% or 15%, depending on the delay between the date of hitting the threshold and the date which HMRC received registration notification.Up to 9 months delay incurs a penalty of 5%, then up to 18 months is 10% and over 18 months is 15%.

Can I register for VAT even if my turnover is lower?

Yes, and this can be advantageous.

Some of the main advantages are:

Registering and having a VAT number may help give your company the appearance of being larger than it is. Some companies insist that suppliers must be VAT registered and you can claim VAT back on items purchased.

Voluntary Registration

If you want to register despite not reaching the threshold, you can make a voluntary registration. You may need to satisfy HMRC that you are carrying on a business, or intending to carry on a business, and that you are making what is known as ‘taxable supplies’ e.g. selling products or services on which VAT could be applied.

When do I start charging for VAT?

You start charging on the day you register for VAT. Do not wait until you receive your certificate; it can take up to 30 days for this to arrive.

Whilst waiting for your VAT certificate, you will need to raise your invoices as a total figure, which includes the sale amount and the VAT amount.Then, once you have received confirmation of you VAT number, you can add this to your invoices, separate the sale and VAT amounts, and re-issue to your customers; who will then be able to claim the VAT which you have charged.

Standard VAT scheme

If you have elected to use the standard method of accounting for VAT, the return must show all your ‘output’ tax i.e. the total VAT your company has charged your customers on products and services which you have provided. It must also include the VAT you wish to claim back against charge you have incurred on purchases for your company, such as supplies, equipment and stock. This is known as ‘input’ tax. The key thing to remember is that the VAT return must include all income invoices during that quarter, not income received – even if you do not get paid for 30 days or more afterwards. Once the VAT form is submitted, HMRC will then review it. Should your outputs exceed your inputs, you must then pay the difference to HMRC. However, if your inputs exceed your outputs, your company is entitled to a refund.

Flat Rate VAT scheme

The Flat Rate VAT scheme is a simplified way to account for VAT. HMRC have introduced a new higher rate (16.5%) for business where goods cost less than 2% of turnover or £1000. This has removed the advantage of the flat rate scheme for some businesses.

However, you should be aware that if your annual turnover exceeds £230,000 per year then you are not eligible for the Flat Rate VAT scheme.

The way the Flat Rate scheme works, is that you charge VAT on your invoices at 20% but only pay back HMRC at a lower rate; typically, 12% or 13%. This rate differs depending on your profession or trade. A table of business types and rates can be found on HMRC’s website.

In your first year as a VAT registered company, when using the flat rate scheme, you receive an extra 1% discount for the year.

Companies on the Flat Rate scheme are unable to claim back any VAT on purchased goods and expenses for their business. You can however reclaim VAT on capital asset purchases over £2,000, for example on a PC and printer, providing the capital purchases are on the same receipt. You cannot, however, buy these items on separate months and then file them together; they have to be on the same receipt.

The Flat Rate scheme still requires you to complete a quarterly VAT return form. As mentioned, you will need to charge the standard VAT rate on your invoices, but when you complete the form you calculate your VAT payable as the relevant percentage of the amount you have invoiced that quarter – including the VAT.

So, for example, if you have invoiced £10,000 VAT in a quarter, you must calculate your payment as 13.5% of £12,000, not 13.5% of £10,000. Can generate extra income through paying less VAT than you charge A massively reduced amount of paperwork for you to handle An extra 1% reduction in your first VAT registered year Flat Rate scheme disadvantages If you buy lots of stock or other item for your business, then you cannot claim the VAT back on these.

The Cash Accounting Scheme

The cash accounting scheme is as its name implies; based on the amounts received and paid.

You cannot claim or reclaim VAT on purchases or services that have not yet been paid for. So even though an invoice was raised in January, if the payment was not received until April, then you would not include this in your VAT return for the quarter ending in March. Instead this would be included in your quarter ending in June.

Please contact us for further information

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up to date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Category: VAT

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Capital Gains Tax

Currently the due date for paying any Capital Gains Tax owed to HMRC is 31st January following the end of the tax year in which a Capital Gain was made.

This deadline will change for UK residents from April 2020. This change will mean that any CGT due on the sale of a residential property will need to be reported earlier than is current the case. In addition, a payment on account of any CGT due (an advance payment towards their tax bill) will need to be made within 30 days of the completion of the transaction.In practice, this change will apply to the sale of any residential property that does not qualify for Private Residence Relief (PRR).

The PRR relief applies to qualifying residential properly used wholly as a main family residence. The new deadline will mainly apply to clients who are disposing of a second / holiday home, an investment rental property or a home that does not qualify or only partially qualifies for PRR.

There are also changes to the PRR rules which will see the final exempt period for CGT purposes being reduced from 18 months to 9 months from April 2020. This time period can be extended to 36 months under certain limited circumstances such as the owner having to move into care. This relief applies even if the homeowner was not living in the property when it was sold.

These CGT changes have already come into effect (from April 2019) for non-UK residents. If your client lives abroad and sells a UK residential property, they must inform HMRC within 30 days of the sale. The notification must be made whether or not there is any non-resident CGT to be paid. Any non-resident CGT that is due must be paid within 30 days of the sale.

This App and its contents have been produced as a helpful reference point.The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice.

Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

Nominating your main residence

Private residence relief shelters a gain on the sale of a residence from capital gains tax while the property has been the owner’s only or main residence. Where a property has been an only or main residence at some point, the final period of ownership (currently 18 months but reducing to nine months from 6 April 2020) is also exempt from capital gains tax.

Only one main residence at a time

As the name suggests, the relief is only available in respect of the only or main residence. Thus, where a person has more than one home, only one of those homes can be the ‘main residence’ at any given time. However, as long as certain conditions are met, the taxpayer is free to choose which property is classed as the ‘main’ residence for capital gains tax purposes – it does not have to be the one in which the owner spends the majority of his or her time.

Only one main residence per couple

A couple who are married or in a civil partnership and who are not separated can only have one main residence between them.

Property must be a residence

Only properties that are lived in as a home can be a ‘main residence’ – a property which is let out can’t be a main residence while it is let.

Making an election

Where a person has only one residence, that residence is their only or main residence. Where they acquire a second residence, they have a period of two years to nominate which residence is the main residence for capital gains tax purposes. Where residences are acquired or sold, the clock starts again from the date on which the particular combination of residences changes, and the taxpayer then has another two years in which to elect which residence is the main residence.

The election should be made in writing to HMRC. The letter should include the full address of the property being nominated as the main residence and should be signed by all owners of the property.

No election made

In the absence of an election, the property which is the main residence will be determined as a question of fact and will be the property in which the person lives in as their main home. For example, if a couple has a family home and a holiday home, in the absence of an election, the family home will be treated as the main residence.

Advantages of flipping

There are a number of advantages to a property being the main residence at some point in the period of ownership as not only is any gain while the property is the only or main residence exempt from capital gains tax; the final period of ownership is also exempt. Where the property is let, occupying the property as a main residence at some point may open up the option of lettings relief (although it should be noted that the availability of lettings relief is to be seriously curtailed from April 2020).

Once an election has been made to nominate a property as a main residence, this can be varied any number of times (‘flipping’). This can be very useful from a tax planning perspective, for example, occupying a property as a main residence after it has been let but before it is sold can shelter some of the gain.

Flipping properties and making use of the capital gains tax annual exempt amount to shelter any gain that falls into charge when the property is not the main residence can be beneficial in reducing the tax bill.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

If you own a business as a sole trader or in partnership, a Capital Gain will arise if your business is transferred into a company structure, ie you become a Company..

The gain will be assessed by reference to the market value of the business assets, including goodwill, at the date of transfer. This could give rise to a chargeable gain based broadly on the difference between the market value of the assets and their original cost.

In most cases, the incorporation of the business will be completed so that incorporation relief can be claimed. The claim for incorporation relief should defer any tax until you sell your shares in the business.In order to qualify for incorporation relief, all your business assets other than cash must be transferred as a going concern, wholly or partly in exchange for shares in the new company.It is important to note that where the necessary conditions are met, incorporation relief is given automatically and there is no need to make a claim. The relief works by reducing the base cost of the new assets by a proportion of the gain arising from the disposal of the old assets.

Although the relief is automatic, it is possible to make an election in writing for incorporation relief not to apply. An election must be made before the second anniversary of 31 January next, following the tax year in which the transfer took place e.g. an election in respect of a transfer made in the current 2019-20 tax year must be made by 31 January 2023.

The election deadline is reduced by one year if the shares are disposed of in the year following that in which the business was incorporated.

Incorporation Relief is just one possible strategy that can be used to minimise tax liabilities if you incorporate your business. However, there are other planning options. If you are considering incorporation, be sure to contact me.

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

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Inheritance Tax (IHT)

Beware of triggering an IHT bill on cash gifts

When deciding what to give as gift, perhaps at Christmas, birthday or any other special occasion the possibility of triggering an unintended inheritance tax liability is not one that immediately springs to mind.

However, there are traps that may catch the unwary.

Income or capital

When making a gift, it is important to ascertain whether the gift is being made out of income or from capital. There is an inheritance tax exemption for normal expenditure from income. To qualify, the gift must be made regularly and only from surplus income. It is important that after making the gift you have sufficient income left to maintain your usual lifestyle. To avoid unwanted questions, it is a good idea to set up a regular pattern of giving and keep records to show that the gifts were made from income.

A gift that is made from capital – for example, from the proceeds from the sale of a property or a gift of a valuable antique – will reduce the value of the estate. Unless the gift falls within the ambit of another exemption, the gift will be a potentially exempt transfer (PET) and will be taken into account in working out the inheritance tax due on the estate if you die within seven years of making the gift.

Gifts to spouses and civil partners

The inter-spouse exemption protects gifts between spouses and civil partners. Consequently, gifts of any value can be given to a spouse or civil partner without worrying about the inheritance tax implications.

Annual allowance

Everyone has an annual allowance for inheritance tax purposes of £3,000. The annual allowance enables you to give away £3,000 every year in assets or cash, in addition to gifts covered by other exemptions, without it being added to the value of your estate.

You can also carry forward the annual exemption to the following year if it is not used, so if you did not use it in the last tax year, you can make gifts of up to £6,000 this year without having to worry about inheritance tax. However, any unused allowance can only be carried forward to the following tax year, after which it is lost.

Small gifts

The small gifts exemption enables you to make gifts of up to £250 a year to as many people as you like without having to keep a tally for inheritance tax purposes. However, the same person cannot benefit from a small gift of £250 in addition to the annual gifts allowance.

Wedding gifts

If a family wedding is on the horizon, you can take advantage of the wedding gifts exemption to make further gifts. To qualify, the gifts must be made before the wedding not afterwards. The exempt amounts are set at £5,000 for gifts to a child, £2,500 for gifts to a grandchild or great-grandchild and at £1,000 for a gift to another relative.

Please contact us for further information. 

Disclaimer:  This App and its contents have been produced as a helpful reference point.  The information should be used as a guide only and your specific circumstances are best discussed directly with us. 

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.

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