Blog posts in Tax
Capital gains tax planning for the emergency budget
June 18, 2010
Although capital gains tax (CGT) is set to rise, we do not know when. The start date may be deferred to 6 April 2011, but the changes could also take effect from 22 June this year.
Property owners and investors can expect to bear the brunt of the increases. Trading businesses and shares in trading companies may continue to benefit from Entrepreneur’s relief, although that relief is fairly restricted compared to the old “taper” relief it replaced.
While it may be possible to sell assets by the end of the tax year, it might not be feasible to sell to a third party by 22 June. For this reason, it could be worth locking in the gain at the current 18 per cent using a family trust.
CGT on trust transfer
A transfer into most types of trust is treated as made at market value for CGT purposes. It should therefore crystallize CGT at the current rate on the accrued gain to date. Similarly, the trustees will be deemed to have acquired the asset at current market value, which is then their base cost used for a future sale taxed at the new higher rates.
There is, of course, a risk that if values fall, the trustees actually make a loss that cannot be offset against their gain going into the trust. However, this may be outweighed by the tax rate saving achieved.
The tax on the trust transfer will fall due on 31/1/2012, by which time the asset may have been sold to a third party. Alternatively, there may be scope to pay the tax in installments.
Stamp taxes
A gift of property into trust should not attract Stamp Duty Land Tax (SDLT), although SDLT would arise on any transfer of mortgage to the trustees (this representing consideration). Similarly, there should be no stamp duty on a gift of shares into trust. Stamp taxes will be incurred where there is actual consideration.
Inheritance tax
It is important to note that for inheritance tax purposes, gifts to trust are generally taxable at a 20 per cent lifetime rate once the nil rate band (£325,000) has been exceeded. The tax does not need to be incurred on larger transfers, but the process needs to be carefully managed.
Avoiding unnecessary CGT
Obviously there is a concern that if the asset is not eventually sold to a third party, a CGT liability has been triggered unnecessarily. There are strategies to mitigate the CGT charge on a transfer, if the asset is to be retained.
Those with property or shares likely to be sold in the not too distant future should think carefully about a transfer before 22 June. The position is uncertain, but if the CGT rate goes up to 40 per cent or even 50 per cent, individuals are going to lose a substantial part of their capital appreciation. This, in my view, is akin to retrospective tax.
The points raised above are only intended to provide general information. Professional advice should always be sought in specific situations before taking any action.
Justin is a partner at London-based chartered accountants and tax advisers Jeffreys Henry LLP.
How the Government should handle a VAT increase to help businesses
May 05, 2010
The Liberal Democrats have come under some fire for a negative campaign tactic of claiming that the Conservatives will not commit to saying they will not raise VAT. The reason for the criticism is that the Liberals will themselves not commit to saying they won’t raise VAT either.
I believe the decision taken to lower VAT to 15 per cent was a good one, but was marketed wrongly. It as presented to the general public as a saving across the board. But, as a member of the public who buys different things in his shopping every week, a saving of a couple of per cent was not noticeable on my Tesco receipt.
However, as a director of a company with VAT returns running into thousands of pounds, the VAT decrease was genuinely helpful. To my customers, saving £1 on a violin was irrelevant. Our products are priced to sell, so I decided not to pass on the VAT saving but instead to raise all of our prices.
To the customer, the prices remained exactly the same. But the few thousand pounds I saved by doing this probably saved a job.
If VAT is raised, I would like to see the Government promote it as a rise on the price of all products, just as last year they promoted it as a reduction on all products. But this is not likely. And, without a strong message that this is a universal price rise, many small companies scared of lifting their prices will try to absorb the extra tax themselves. This will be severely to their detriment.
Moving across the VAT threshold is one of the most difficult barriers for the emerging small business and a higher rate of VAT will only add to the burden. I would hope that on the day that VAT is raised, so, too, is the turnover threshold at which a business must register for VAT – and by a considerable amount.
I could write further on many more issues from mortgages for the self-employed to my belief that the Conservative’s recent deluge of signatures from business leaders is a boring stunt with no real message for the struggling small business.
Clearly, business leaders will sign up against any tax that would befall them, so it’s a shame the Tories didn’t use this platform to announce other more relevant, more helpful, business- centric manifesto pledges… but I said I wasn’t going to write about that, so I must stop.
Whoever you vote for at this election, I encourage you to actually use them. More than once, my company has written to elected representatives and you know what? Some of them are actually out to help us – it’s not all house swapping and duck houses!
Adam Ewart, Karacha
PAYE – new late-payment penalty legislation for the 2010-11 tax year
April 22, 2010
We’ve seen many new taxes come in under the radar over the past few years, but for me, this is probably the most badly thought-out, badly communicated of the lot. And once again, it’s being left to accountants and tax advisors to communicate the bad news.
If you employ staff, you’ll be familiar with the need to pay monthly PAYE and NI contributions to HM Revenue & Customs (HMRC) by the 19th of the following month.
Up until now, the legislation has been such that if you pay late, it doesn’t really matter. HMRC might write nasty letters – or even send someone round – but ultimately, there was no penalty for paying late. The trick was to get everything square by 19 May annually, and there was no comeback.
This changed on 6 April this year, when the new legislation came into effect.
Here is a brief synopsis of the new rules and penalties for those on the main monthly scheme:
- pay your monthly liability by the 19th of the month following (this is the date by which the funds must be deposited in the bank account at HMRC – so beware of paying online on the 19th. Confirm with your bank that it will get there on time);
- pay late once in any year and there’s no penalty – unless the payment is more than six months late – see below;
- pay late two-four times in any year, you’ll be fined 1% of the total amount that is late (ignoring the first late payment), so, if your monthly payment is £10,000 and on four occasions you’re a day late paying, the penalty will be 3 x £10,000 x 1% = £300;
- pay late five-seven times and you’ll be fined 2% of the total amount that is late (ignoring the first late payment);
- pay late eight-ten times and you’ll be fined 3% of the total amount that is late (ignoring the first late payment);
- pay late 11-12 times and you’ll be fined 4% of the total amount that is late (ignoring the first late payment);
- if any payment is more than six months late, you’ll have a pay a penalty of 5% of the overdue amount. If the payment is 12 months late, you will pay a further 5%.
No due reflection is given to the extent to which you’re late. If you are one day late, the penalty will apply.
From an administrative point of view, the law allows HMRC to charge penalties at any stage during the tax year, or after the end of the tax year up to two years of the due date.
In 2010-11, penalties will be charged after the end of the tax year. Therefore, penalty notices will not be sent out until April or May 2011. So please don’t test the system and think you’ve got away with it – you will get a nasty shock in April next year!
Tim Haggard is founder and managing director of My Bookkeeping Online Ltd
Ten top tips for completing your Employer Annual Return
April 06, 2010
- File the returns by 19 May 2010. Late filing can result in a penalty which is £100 per 50 employees for each month or part month that your return is outstanding.
- Nearly all returns must now be filed online. Make sure that you are set up to do this well in advance of the due date.
- You must have paid any outstanding PAYE and NI by 19 April 2010 (22 April 2010 if you pay electronically).
- You have to complete a return for all employees who have been paid at or over the lower earnings limit.
- By 31 May 2010 you have to give a form P60 to all employees who your completed a P11 for and who still worked for you on 5 April 2010.
- You need to complete a P11D for relevant employees by 6 July 2010. Late filing can result in a penalty which is £100 per 50 employees for each month or part month that your return is outstanding.
- Any NI due on expenses and benefits on kind must be paid by 19 July 2010 (22 July 2010 if paying electronically).
- If you are set up as an employer you must still file a return. If you have no entries then you will file a nil return.
- If you are a sole director/employee company paying yourself a small salary you may still need to file an Employer Return. Your accountant may do this for you but check that it is included in your fee.
- If this all sounds too complicated – get an accountant to do it for you!
Elaine Clark, www.cheapaccounting.co.uk
Budget 2010 – how will it affect you?
March 25, 2010
With the general election imminent, it’s hard not to see the most recent budget as strongly political. A number of tax incentives were announced, mainly to benefit the largest groups of taxpayers, but paid for by rises affecting the wealthy.
There were no further announcements on income tax, National Insurance or VAT. Although, as previously announced, a 50 per cent top rate of income tax will be introduced from 6 April 2010 on incomes of more than £150,000. On the same date, a reduction in personal allowances will start on incomes of more than £100,000. Finally, a 1 per cent increase in National Insurance is due to take effect from 6 April 2011.
First-time buyers escape stamp duty
The stamp duty threshold will be raised for first-time buyers from £125,000 to £250,000. As the threshold was raised at midnight last night, almost all affected buyers who have not yet exchanged will benefit. The stamp duty rise will take effect for the next two years, and could result in tax savings of up to £2,500, compared with the previous threshold.
Wealthier homeowners will fund the rise. There will be a permanent increase in stamp duty from 4 per cent to 5 per cent on house purchases over £1m.
Tip: Where possible, consider negotiating the asking price to below the threshold by negotiating extras such as curtains or garden furniture in a separate deal.
Good news for SMEs
From October, there will be a business rates cut. This will result in an exemption for properties with a rateable value of less then £6,000 and an increase in small business rates relief for properties with a value between £6,001 and £11,999.
The annual investment allowance will be doubled to £100,000. The relief – which allows a 100 per cent tax deduction for new capital expenditure – will be welcome by small and medium-sized businesses in particular.
The lifetime limit for entrepreneur’s relief will be doubled, with the effect that the first £2m (previously the first £1m) of gains will be taxed at an effective rate of 10 per cent. Contrary to wide predictions, Capital Gains Tax did not rise with the Budget, but will remain at its historically low level of 18 per cent.
Tip: It continues to be a good time for businesses to invest in growth. The difference between the top rate on income tax at 50 per cent and Capital Gains Tax rate at 18 per cent provides a clear incentive for investment in business expansion.
The Chancellor announced a 15 per cent increase in the number of government contracts that will be awarded to SMEs.
The two state-subsidised banks, RBS and Lloyds, will lend a further £94bn, of which at least half will be to small and medium-sized firms.
The Chancellor will set up an investment bank with £2 billion of equity to invest in low carbon industries such as wind farms.
The planned hike in petrol duty by 3 pence will be staggered, so that there will be a 1 pence rise in April, a further 1 pence rise in October and the final 1 pence rise in January 2011.
Good news for savers
As announced in the pre-budget report, the ISA limit will be raised from £7,200 to £10,200 from 6 April. The Chancellor also announced in this Budget that the limit will rise in future years in line with inflation.
Tip: If you have not yet used your ISA allowance there are just a few days before the end of the tax year to use the allowance before it is lost.
The wealthiest targeted
The one-off 50 per cent tax on bank bonuses has raised more than £2bn – double the amount forecast. Further attempts to increase tax revenue from higher income groups were also announced.
The inheritance tax thresholds will be frozen for four years at £325,000. If there is inflation, this will amount to a real term reduction in the threshold.
There will a crackdown on tax avoidance through agreements made with Dominica, Grenada and Belize.
Tax credits rise
Families with one and two-year-olds will receive an additional £4 per week in child tax credit from 2012. The number of hours needed to qualify for working tax credit will be cut for the over 60s.
Tip: Consider making a protective claim for tax credits. Your tax credits claim is based on the prior year unless there is an increase in your income of more than £25,000. Alternatively, you can claim for your assessment to be made on your current income level. Careful planning can ensure you derive the maximum benefit from the system.
The tax system is constantly changing and it is important to review your investment plans, cashflow forecasts and wealth management in the light of new rules and regulations.
Raphael Coman, founder of south London-based Coman & Co, is a chartered certified accountant with many years' experience gained at leading, national accounting firms. He specialises in taxation and small business accounting and offers personal tax advice to business owners, managers and contractors.
Year-end tax planning for start-ups
March 22, 2010
Planning before the end of your accounting year could reduce your tax bill and improve your cashflow. With 5 April fast approaching and many start-ups reaching the end of their year on 31 March, here are my ten tips for year-end tax planning:
- Bring forward costs and get tax relief a year earlier. Be careful though, because some expenses have to be spread over tax years, even if you paid for them now. Also keep in mind that tax rates are increasing next tax year, especially for higher income groups.
- Make your investment in the business before the year-end and enjoy the reduction in your tax liability a year sooner. Businesses are still entitled to 100 per cent tax relief on most capital expenditure of up to £50,000 per year.
- Delay invoices. If possible, plan larger jobs until after the year-end and you will delay payment of tax thereon for a further year. Be careful though, because you must account for tax on fees built up through work in progress.
- Value stock. Now is the time to do a stock take to assess write-offs. Stock is valued at the lower of its cost and its net realisable value.
- Consider changing your year-end. If your profits have been going down recently, then you could benefit from extending your year-end towards 31 March. If profits improve over the next twelve months, you will delay tax on these profits. Moreover, any profits you made when you started the business could be offset to further reduce your tax bill.
- Plan when to take profits out of the company. Any profits for the current year, plus any undrawn profits for previous years, can be taken as a dividend. If you are already a higher taxpayer this tax year, you could delay paying a dividend. If you may become a higher taxpayer next year, you could bring forward the payment. If your spouse is a shareholder in the business, effectively, you have two lots of personal allowance and basic rate to keep taxes low across the family.
- Use your ISA allowance. Up to £10,200 for the over-50s and up to £7,200 can be invested in an ISA for the year to 5 April 2010. Income and gains in an ISA are tax-free. Any unused allowance cannot be carried forward, so there are only a few days left to take advantage of the allowance.
- Realise capital gains. You can realise capital gains of £10,100 each tax year before you are liable to pay tax. A capital gain could arise on your shares, second home or buy-to-let property.
- Be aware that it is widely predicted that taxes will rise with this year’s budget. Capital gains tax is at a historically low level of 18 per cent, and many are predicting that it will increase to 25 per cent or more. Cashing in your investments or transferring them to someone else (other than your spouse) now will ensure you are taxed at the current rate.
- Assess whether to change your business type next year. Becoming a sole trader is a cheap, simple way to start – and tax efficient, if you made an initial loss. Now could be the time to go limited or form an LLP, especially with the upcoming rises in tax and National Insurance.
Ray Coman, Coman & Co Tax Accountants (specialising in helping start-ups to succeed through quality accounting and tax advice)
Tax tips for business mums
March 12, 2010
If you're a mum in business, there are a number of areas that could be of benefit to you. As well as making sure you are claiming Child Tax Credits, you could try the following:
Not paying Class 2 National Insurance Contributions
Currently £2.40 a week, Class 2 National Insurance Contributions don’t have to be paid if you earn below £5,075 in 09/10, but make sure you understand that you will be giving up rights to incapacity allowance, basic state pension and maternity allowance. Claim a deferment and you can save £2.40 a week (09/10 rate). You are eligible for state pension anyway if you have children under 12. Make a claim on http://www.hmrc.gov.uk/forms/cf411.pdf.
Investing in The Child Trust Fund
The Child Trust Fund is available to all children born on or after 1 September 2002. The government will give you a voucher for £250 which you can invest in a Child Trust Fund savings account of your choice, and they will give you another £250 when your child is seven. If you have a relatively low household income, you may also receive another payment. You, your friends or family, can top up the fund by up to £1,200 annually and there are no taxation impacts. The fund will be available to your child when they reach 18.
Setting up a pension for your children
An even better place to invest for your child’s future could be in a pension. Obviously this is a long term investment and would not be available from age 18, but many parents may consider that an advantage. Stakeholder pensions are available to non earners and children, and you can invest £2,880 a year, which is then topped up to £3,600 by HMRC.
Making sure interest on savings accounts is tax free
In most cases, your children should be receiving interest on their savings tax free. If this is not the case, complete form R85 and take it to the bank to make sure interest is paid tax free.
Involving children in your business
- Give them shares in your company.
If you are incorporating your business, it could be worth giving your children some shares whilst they are not worth very much. If you decide to give them some shares later when they are worth more, the transfer could be subject to capital gains tax. However, you should bear in mind the voting rights of the shares, and the proportions gifted to make sure you are not at risk of undue influence from your children at a later date. You should also be aware that any income derived from a parental gift is taxed over £100, so any dividends you made would be taxable in your hands. - Employ them.
When your children are old enough (current legal guidance indicates age 13), there is nothing to stop you employing them in your business. There is no requirement to pay your family national minimum wage in a family owned business and their salary will be tax deductible. Not only that, but they will have their own personal allowance of £6,475 (09/10) and hence if you pay them at that level, they will pay no tax on it. From web sites, to book-keeping, to filing and despatching goods, there are many ways that your children could help you grow your business and learn valuable skills at the same time.
Amy Taylor Accountancy takes every care in preparing material to ensure that the content is accurate and up to date. However no responsibility for loss to any person acting or refraining from acting as a result of this material can be accepted by Amy Taylor Accountancy.
Amy Taylor, Amy Taylor Accountancy
Organisation – the key to making tax less taxing
February 26, 2010
Tax is never a popular subject – made even less so by recent revelations that HMRC has got many of our tax codes wrong, meaning excessive charges for some. Mistakes by HRMC aside, ‘tax doesn’t have to be taxing’, as the saying goes. If small firms take the time to keep their books in order throughout the year, a mad dash at key dates in the taxation calendar can be avoided.
2010 has only just begun, so now is the perfect time to turnover a new (bookkeeping) leaf. Start by buying yourself some filing equipment, with different folders for sales invoices, paid and unpaid bills, bank statements and VAT returns, plus wages, if you have staff.
Now you have some inviting looking new folders, go through your in-tray – at least once a week – and put all your bits of paper in the appropriate place. If you set aside a small amount of time to sort out your books, weekly – or even daily – it shouldn’t become too much of a chore. Bookkeeping needs to be part of your routine, like reading emails, otherwise it can be all too easy to find something else to do instead.
Keeping accounts isn’t just sensible, it’s a legal obligation. Companies must keep all records relating to their VAT returns for a minimum of six years after the tax year to which they relate. As a minimum, you must record any income earned or expenses incurred by the company and retain all related documents, including receipts, cheque stubs, invoices, bank statements, PAYE records, etc.
To get a clear picture of where your money is going, your transactions must be recorded in a meaningful way. You should give your ‘expenses’ record a sheet of its own, with columns representing categories such as ‘rent’, ‘utilities’, ‘travel’ and ‘stationery’. This will give you an ongoing sense of where you might be over-spending, which can help you to cut unnecessary costs
Why rely on books or bits of paper when there is a wide variety of accounting software available? For a more simple and cheaper solution, an Excel spreadsheet is a perfectly useful tool for keeping records on your computer.
Keeping your records on a spreadsheet or using bookkeeping software enables you to see your total transactions in an instant. You can also search for a figure among your costs should a mystery debit appear on your bank statement and even produce projections based on the average transactions made in previous months.
You should be using your bank statements as a reference point, checking every figure in your bookkeeping records against transactions on your bank statement. This is a great way to identify missing receipts, while giving you a consistent monthly deadline to follow for getting your records in order.
Make sure you note all key deadlines for filing with HMRC. Set reminders on your computer, so you don’t have to rely on remembering to check your diary. The next one to note is the PAYE deadline on 19 May, when employers must register with HMRC to file online. HMRC is supplying free software so small businesses can file their employee data securely. For more information visit the HMRC website.
If you really can’t commit to the above, it may be time to call in an experienced bookkeeper. Of course, there will be an expense associated with this, but since it could free up your time and give you better information with which to make business decisions, it could be worth the investment.
Anita Brook is director of chartered certified accountancy firm Accounts Assist. Follow her on Twitter.
When to register for VAT
January 22, 2010
There are many excellent articles around on when to register for VAT, including the one on the Start Up Donut, so I'll try not to repeat what is already available.
So, you’ve recently set up or are about to start your business and you want to know what to do about VAT. You should do this when you draw up your business plan and cashflow forecasts, because it could affect your profitability.
What’s the first thing you need to do? Find out the VAT treatment of what you’re selling. The key questions are: would you have to charge VAT if you were VAT-registered? If not, is that because your supplies are exempt from VAT or zero-rated?
This latter point is an important distinction. In simple terms:
- if they are zero-rated, you can reclaim VAT you pay on your expenses.
- if they are exempt, you won’t be able to register or reclaim the VAT on your expenses.
If you fall in the latter category, there’s no need to read on.
Otherwise, what you do is liable to VAT at 0%, 5% and/or 17.5%. How do you work out when to register?
The registration limit is based on the value of your taxable supplies (ie the value of what you’ve sold that attracts VAT, in the past 12 months).
Keep track of this by recording at the end of each month what your taxable turnover has been. Add up the past 12 months to see whether you've gone over the registration limit. If so, you need to apply for VAT registration within 30 days of the end of the month in which your turnover went over the limit.
If you went over the registration limit in less than 12 months, you should still apply to register at the end of that month. Don't wait for the end of a 12-month period or you might find yourself liable to a penalty.
Should you apply to register for VAT before you go over the registration limit? That’s a very difficult question to answer and one that can only be determined by you with help from your advisers. There can be benefits to being registered for VAT, particularly where you customers are wholly or mainly businesses that are VAT registered. They will be able to recover the VAT you charge. Some suggest that being registered gives your business a certain credibility, after all, who would register for VAT unless they had to?
One thing that makes this decision a bit of a no-brainer is if you are only selling things that are zero-rated because you will get back the VAT on your expenses, but not have to account for VAT on your sales. This way you get paid by HMRC when you put in a VAT return. The only thing you should consider is whether you will be claiming back enough VAT to make the hassle worthwhile.
Robert Killington, VATark
10 tax tips for parents running their own business
January 11, 2010
When you operate your own business, bringing a child into the world is a costly matter. The good news is the government offers additional financial support you might not be aware of. The following tips are intended to make sure you get all of your state entitlements.
1 For company directors: make sure you receive the correct maternity, paternity or adoption pay
If you run a limited company, you will pay yourself as a director. Provided you meet the qualifying criteria regarding length of your employment, you are entitled to money your company can recover from the government. If you’re female and are taking most of your income out as a dividend, you will at least qualify from minimum statutory maternity pay (currently £123.06 per week). You can receive this for up to 39 weeks. Partners, of course, qualify for paternity leave, while those who adopt also have a legal right to paid leave.
2 For sole traders and partners: check if you can obtain maternity allowance
If you are not entitled to statutory maternity pay, you could be entitled to the maternity allowance paid by the Department of Work and Pensions. If you were self-employed for at least 26 out of the 66 weeks before you your baby is due, you qualify. The benefit is 90 per cent of your average weekly pay or £123.06 per week if higher.
3 Receive your one-off Health in Pregnancy Grant.
Since 6 April 2009, mothers who are 25 weeks into their pregnancy have been able to apply for a £190 grant towards the cost of pregnancy and childbirth. HMRC will make the one-off payment direct to the mother’s bank account, which she can spend as she chooses. It is not means-tested and will not affect entitlement to other benefits. Claim forms are available from your doctor or midwife.
4 Apply for Child Benefit
Register for Child Benefit as soon as your first baby is born. You will receive £20 per week for your eldest child and £13.20 per week for each of your other children. The benefit is not means-tested. You will receive the benefit until your child reaches 16 (or 20 if in certain kinds of education). A claim can only be backdated three months, so don’t delay.
5 Get your Child Trust Fund voucher
Save tax-free for your children by opening a Child Trust Fund. Accounts are available to all children born after 1 September 2002 and up to £1,200 can be added each year. The government will send you a £250 voucher to open the account and pay in a further £250 on the child’s seventh birthday. All income and gains are built up tax-free until your child’s eighteenth birthday, when funds can be withdrawn or rolled over into an ISA.
6 Apply for Child Tax Credits
Make a claim for Tax Credits, if you have children aged below 16. The credits are means-tested, but you only start to lose your entitlement to the child element when household income exceeds £50,000.
If you return to work, you may be eligible for working tax credits where you work or you and your partner (if applicable) work. If so, you may also be entitled to help towards childcare costs. If your earnings have gone down because of pregnancy, it would pay to make a protective claim rather than one based on the previous year’s earnings.
7 Set up a salary sacrifice scheme for childcare costs
Receive some of your pay from the company in the form of childcare reimbursement. The first £55 of childcare vouchers paid through the company is a tax-free benefit, and if paid instead of salary it will also reduce your National Insurance liability.
8 Have assets transferred to your children and save tax
Your children can receive income of up to £6,475 per year before being taxed. However, parents are taxed on income of more than £100 on assets they have transferred to their children who are under 18. Assets should preferably be transferred from grandparents or other relatives.
Children can also make gains of up to £10,100 tax-free. Transferring assets with better potential for capital growth, rather than income, is generally more tax-efficient. A share in the family business may be suitable.
9 Contribute to your child’s pension scheme
You can put up to £2,880 into a Children’s Stakeholder Pension for each child and the government will add a further 20% to your contribution. Income and gains in a pension scheme are tax-free, but your child will not be able to access the fund until they are 55.
10 Employ your children
Subject to conditions, you may make your children employees of your business, if they are aged 13 years or more. Your business will get tax relief on the wage payments, while the first £6,475 of income is tax-free in the hands of your child. You must consider the legal implications of employing children aged between 14 and 18.
Prepare for the VAT rate rise in January 2010
December 22, 2009
Just as you were getting used to the VAT rate at 15 per cent, it’s nearly time for the rate to change again. From the 1 January 2010, the rate will be going back up to 17.5 per cent, after 13 months at the lower level. Many businesses are already using the change to encourage customers to make purchases before the start of 2010, but there are other ways to benefit from the lower VAT rate. The VAT rate that applies is established by the tax point. If the tax point is before 1 January, then the rate to apply will be 15%. The tax point is the earlier of the date the invoice is issued, the date money is received and the date that the goods are delivered or the service is completed. As an exception, if an invoice is raised within 14 days of the supply of goods, then the invoice date will become the tax point. Therefore, you may wish to consider the following options that may be attractive to customers:
- You may accept a deposit or a pre-payment before 1 January 2010, which will be charged at 15 per cent.
- You provide goods or services in December and more than 14 days before the issue of the invoice. For instance, you must apply VAT at 15 per cent for goods or services supplied before 18 December, for invoices raised on 1 January 2010.
- Where you supply a service over a period spanning the rate change, it is possible to charge VAT according to the value of work done before the 1 January. Be careful, though, because you must be able to show that the way that you have split the value of the work is fair.
There are special rules to prevent avoidance of VAT by establishing a tax point before the new rate comes into force. Under the rules, a 2.5 per cent VAT charge will apply where:
- The total value of sales are more than £100,000 (and the advance invoice or pre-payment is not normal commercial practice)
- The supplier and customer are connected
- Payment is due more than six months after the invoice date or
- you provide funding for your customer to make a pre-payment.
HMRC has indicated it will only seek adjustment to an error on a VAT return relating to the rate change where there has been an overall revenue loss. With careful planning, there are ways to reduce the impact of the VAT change on your business, but the fact of the rate rise is unavoidable. To prevent misunderstanding, it may be prudent to start making your customers aware as early as possible of the VAT change and any increase in prices that will result.
Lifting the lid on accountants’ fees
December 07, 2009
Historically, accountants have charged large fees for preparing the accounts and completing the tax returns for businesses.
In these changing times are these high fees a thing of the past?
All businesses, regardless of size, must prepare accounts and submit a tax return to HMRC. The traditional view is that preparing these returns is a complex procedure resulting in sky-high accountancy fees.
However, two key factors have evolved over recent years that challenge this and as a result the fees charged by accountants should reduce dramatically.
Advances in technology
In all areas of life, there have been huge advances in technology over the past decade. At last the accounting profession is catching up.
Computer-based bookkeeping packages have become easily accessible to business owners at an ever-reducing cost and ever-increasing ease of use.
This means the quality and completeness of information made available to accountants at year-ends is constantly improving.
Coupled with this, accountants now use accounts production software that greatly simplifies the preparation of annual accounts and tax returns.
Logic would dictate that the evolution of technology would have led to a reduction in accountancy fees.
Increase in the number of small businesses
There are nearly five million businesses in the UK. Small, non-complex businesses account for 99.9 per cent of this number. In fact, the growth of small businesses is at its highest level since statistics were recorded.
The accounts and tax affairs of these businesses are simple. They do not demand many hours of tax advice. Most of the time is spent in what is generally known as compliance duties. For example, preparing the accounts, filing the tax return and making sure all deadlines are met.
The accountant’s fee should reflect the level and complexity of the work required.
The accounting profession is gradually waking up to the changes in technology and businesses over the past decade.
This is very good news for small businesses out there that should be able to benefit for dramatic reductions in their accounting fees. A great help in these tough times.
Elaine Clark, www.cheapaccounting.co.uk
How to set up a business at home - regulatory
November 18, 2009
My first blog post on setting up a business at home proved popular - I thought I would follow it up with some tips on the regulatory side to working from home.
- Decide whether to trade as a sole trader or to set up a limited company.
- Incorporate a company using a formation agent (e.g. @UKplc) or an accountant. This is easy and you should not have to pay more than £150 - including disbursements.
- As a sole trader, you will need to register as self employed with HM Revenue & Customs.
- You will be able to offset a portion of your home costs against your profits. This is a great way of reducing tax.
- VAT registration – this is compulsory if your sales are greater than £70,000. You can register voluntarily if wish to reclaim VAT suffered on purchases. It’s a complex area and you should seek the advice of an accountant. Make sure your accountant is set up to register and file returns online for you.
- PAYE registration – you will need to do this if you plan to pay yourself and/or your staff a salary. Again, use an accountant and make sure that the accountant is set up to make all the necessary submissions online.
- Home insurance – make sure that your building and contents policy covers you for working from home. Similarly, make sure that your car insurance covers business use. There should be no/minimal extra cost.
- Liability insurance – if you need it, you might want to make sure that it covers Public Liability Insurance at your home, particularly if you plan to regularly host clients, suppliers and/or staff.
- Business Rates – there is an element of scale to consider here – you on a laptop on the sofa is not a problem. Five staff turning up every day to work in the spare-room may be. If in doubt, check out your local council’s position.
- Registered Office – if you set up a company, you will need to have an “official” address. If you use your home address, you will need to display the company name outside your front door. The sign can be business card size. Alternatively, use your accountant or virtual office service.
- Make a note in your diary of the dates and deadlines that matter – particularly on the submission of official documents - because you get fined if you are late.
I'm always looking for new topics to blog about so if you have any suggestions - do get in touch or leave a comment below.
Do you work at home? Rent a room to your company!
November 13, 2009
If you operate a limited company and work at home, why not rent a room to your business?
Then you can offset the rental against your business profits and reduce your overall tax bill.
So how does this work?
Well there are just a couple of things you need to do to put this in place.
Rental Agreement
You would need to put a rental agreement in place between you, the home owner and your limited company.
Your accountant should have a standard agreement available for you to use. So this will not be an onerous task.
Calculate the rent
The rent that you charge should be equal to the amount that the room in the house costs you.
That means that the income received is equal to the costs and there is no personal profit on the rent. So you do not have to pay any income tax on the rent received, although the income and costs will need to be shown on your self assessment tax return – just a couple more boxes to complete.
Let’s take an example to show how this works.
Sam runs her business from home. She works in one of the bedrooms. The bedroom is used exclusively for business during the week but serves as a guest room at the weekends.
Her house has a total of six rooms.
Sam has added up her mortgage interest, council tax, utilities, insurance and broadband costs and they amount to £12,000 for the year.
She calculates the rental charge as follows:
Cost per room = £12,000 divided by six rooms = £2,000.
She uses the office five out of seven days, so charges 5/7th of the room cost to the business.
The rental charge is £1,428 for the year.
Sam is paid this rental from the business.
The business records this as a cost in the company accounts, which reduces its tax bill.
Sam enters the figures onto her self assessment tax return but has no further tax to pay on the amount received from the company.
What Next?
The rent charged will be based upon your own circumstances. For example if you rent your property you can use the rent paid instead of the mortgage interest in the calculation. So you will need to do your own specific calculation.
Have a chat to your accountant about how to get this in place. They should be able to help you with the figures and the rental agreement to ensure that you are claiming this tax deduction for your business.
Elaine Clark, www.cheapaccounting.co.uk
Is Twitter and Social Networking part of your self employed business strategy?
June 24, 2009
I specialise in helping self employed people pay less tax and avoid fines - our clients are mainly one person businesses, usually working from home.
As such, I am always looking at ways of increasing their profits for a low cost - we have had several start up businesses recently where they are particularly looking for low costs in their first year as they build up the business.
The traditional way of doing things when you started a small business was to maybe print some flyers and distribute them, or to take out an advert in the local press or printed listing directory.
Vanessa Warwick started an excellent discussion on the propertytribes forum, regarding Social Networking for business, which very much applies to every small business owner.
I recently ran a talk on 'Social Media for Business' at the Epsom BNI group, where I am the chapter director, and was surprised by the number of people who hadn't considered the business return that is possible from social networking.
This got me to posing the question: How many accountants offer advice on Social Networking to increase their client's profits?
Following feedback from the talk I gave to Epsom BNI, in addition to continuing to promote ecademy and twitter for business to our clients, I have decided to offer a simple introduction to Social Networking for Business as part of the service I offer to small business owners, helping them to increase their profits.
Social Networking is ideally placed for the type of clients we specialise in, the small self employed business, as there are low costs and great potential benefits for the business.
A good example of what is possible is another propertytribes member, Sally Asling, who has in fact generated £6,000 of income via twitter in 3 months.
'The twittering tax man'
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