Blog posts in Tax and National Insurance

What you need to know about finding an accountant

The term “accountant” is not regulated, so anyone can call themselves an accountant regardless of their background, experience, training or professional qualifications.

Like any industry or profession, there can be cowboys or people who don’t have the ability to advise clients on all aspects of accountancy and taxation.

If the accountant gets it wrong it will be their client who ends up in trouble. This can result in HMRC imposing fines, penalties and at the very worst – a prison sentence on the client.

How do I identify if my accountant is qualified?

There are formal accounting qualifications and on gaining these, an accountant becomes qualified. Examples of qualified accountants are those that are members of recognised accountancy bodies such as:

• Institute of Chartered Accountants in England & Wales (ACA or FCA)
• Institute of Chartered Accountants of Scotland (CA)
• Institute of Chartered Accountants in Ireland (ICAI)
• Association of Chartered Certified Accountants (ACCA or FCCA)
• Chartered Institute of Management Accountants (ACMA or FCMA)
• Chartered Institute of Public Finance and Accountancy (CPFA)
• Association of International Accountants (AIAA or FAIA)
• Association of Accounting Technicians (MAAT)

Should you only use a qualified accountant?

An accountant who is a member of a recognised accounting body should adhere to rules/ standards/ethics/guidelines set by their professional body.

In addition, if they offer accounting and tax sources directly to clients, they must have gained sufficient experience to hold a “Practicing Certificate”, which is only issued by their accounting body once they have shown evidence of having the necessary experience.

Accountants holding such a Practice Certificate and providing services to clients must take out professional indemnity insurance, which gives their clients protection in the unlikely case of a complaint or litigation being brought.

Of course it may well be the case that a non-qualified accountant has the equivalent experience and insurance cover. It cannot be assumed that your accountant is qualified and you should always check.

Are all qualified accountants good and unqualified accountants bad?

There are many excellent qualified and non-qualified accountants around. Often an unqualified accountant is referred to by the term “QBE” (qualified by experience). The challenge lies in just how you measure the experience of a QBE accountant.

Formal training ensures that accountants have been exposed to many, if not all aspects, of accounting and taxation. While it is essential that the accountant keeps their knowledge up to date in a constantly changing space, at least they have a base knowledge.

A QBE learns by experience. If they have not experienced a particular aspect of taxation or accounting, they will not have learnt about it.

What if my accountant gets it wrong?

Qualified accountants who are members of a professional body must have a complaints procedure that explains what clients should do if they have an issue with their accountant.

Included in the complaints procedure will be the right for the client to complain to the relevant professional body if they aren’t happy with their accountant’s handling of their complaint.

In the event of a serious disciplinary matter, the accountant could be struck off by its professional body following a client complaint. Accountants who aren’t members of a professional body don’t need to have a complaints procedure nor is there any recourse to a professional body.

Do I need a local accountant or can I use a remote one?

Traditionally, businesses have used a local accountant. However, businesses can now use remote/online accountants at a more affordable price.

Good remote/online accountants offer the same service and deliver the same quality as a traditional local accountant. They can be contacted, generally, by email and/or telephone when necessary.

Crucially, the credentials of remote/online accountants should be checked just as thoroughly as you would for a traditional accountant.

How can I ensure I choose a good accountant?

1. Seek recommendations from businesses already using a reliable accountant.
2. Ask prospective accountants for client testimonials or for the names of reference contacts.
3. Check the accountant’s qualifications.
4. Find out about their relevant experience.
5. Ask how many clients that they have like you.
6. Ask for a full break down of their charges – is their fee fixed or will you be expected to pay any ‘extras’?
7. How will they ensure your deadlines will be met and that you won’t have to pay any fines?
8. Are they regulated by a professional body?
9. Do they have professional indemnity insurance?
10. What is their complaints procedure?

Elaine Clark, Chartered Accountant with Cheap Accounting.

For a whole host of information about accounts, tax and finance, look at our Tax Donut.

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10 important lessons our Q&As can teach you

1 Buying a business

“Buying an existing business can be less risky than creating one from scratch. If the business has customers, it has income. Risk is also easier to assess because you can calculate costs, turnover and profit – and thereby predict cashflow”

Emilie Corbille of www.daltonsbusiness.com

2 Setting up a limited company

“If you want to form a new company, you must send Companies House your registration fee plus a memorandum of association, articles of association and a completed IN01 form, which details the company’s registered office and the names and addresses of its directors (and company secretary, if applicable)” 

Andrew Millet of Wisteria Formations

3 Tax for the self-employed

“By putting away some money from your earnings each month – say, 25 per cent of your gross earnings – you should have more than enough money in the bank to take care of your tax bills”

James R McBrearty of www.taxhelp.uk.com

4 Market research for start-ups

“Even if you believe you have an excellent idea for a business, you mustn’t allow yourself to get fooled into a false sense of optimism. Test it thoroughly by doing some basic market research. Only then can you move forward on any sound basis”

Start-up author Kevin Duncan

5 Calculating start-up costs

“You should minimise your start-up costs because then you’ll stand a better chance of surviving that crucial first year. Also, it’s a good discipline to get into from day one. In business, you must keep your costs as low as possible ­– and avoid buying things you don’t need”

Martin Dunne of Sayers Butterworth chartered accountants

6 Effective cashflow management

“The old saying ‘turnover is vanity, profit sanity and cash reality’ remains true. Businesses go bust in the long term through lack of profit, but in the short term, they fail because they don’t have enough cash to pay their bills on demand. Cashflow is the lifeblood of any business”

Chartered Accountant Howard S Hackney

7 Supplier contracts

“Having a written contract clearly sets out the roles and responsibilities of both parties, which is helpful when it comes to monitoring the relationship’s success. It can also act as proof if a supplier’s performance falls short”

Marie Kell of Andrew Jackson solicitors

8 Complying with environmental legislation

“The onus is on the business to ensure staff comply with legislation. An act of omission by an employee is likely to have consequences for the business. In some circumstances, directors may even be personally liable. The consequences can be drastic”

Kevin Turnbull of Muckle LLP Solicitors

9 PR for start-ups

“Editorial is regarded as more believable than an advert. I’ve read that it’s 50 per cent easier to sell to someone who has read positive things about your business, products or services. And such publicity is usually no cost or low cost. Even if you have to pay someone to do your PR, gaining one piece of coverage per month can be much cheaper than advertising”

Jane Lee of IT PR specialist Dexterity

10 Setting up a home-based business

“It’s low cost and therefore less risky, because there aren’t any expensive premises overheads. You can also claim for a percentage of your domestic bills, for lighting, heating, telephone calls, etc. A home office means no commute, so you save money and time, too”

Emma Jones of Enterprise Nation

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Should you turn your sole trader business into a limited company?

Since 1 April 2011, the tax paid by small limited companies (Corporation Tax) is the same as the basic rate of income tax – 20 per cent. In addition, the increase in Class 4 National Insurance contributions (NICs) should prompt sole traders to review their business structures for potential tax savings.

Why are you a sole trader?

Maybe you decided to be a sole trader because you thought it was easier. Deciding which business structure to go for isn’t always simple. There isn’t a ‘one-size-fits-all’ answer.

Your personal circumstances should determine your choice – and only you can decide.

Putting aside the misleading perception that a limited company gives you greater status or credibility then, in my opinion, there are two major issues to consider when deciding your business structure.

Limited or unlimited liability?

As a sole trader there is no distinction between you and your business. You do not need to have a separate business bank account. All the debts of the business are your debts. If the assets of the business do not cover the debts, your personal assets could be used to pay the debts – and that includes your house.

The debts of a limited company belong to the company, which is a separate legal entity. Except in cases where personal guarantees have been given, your personal assets will not be used to pay the company’s debts. Maybe this is a more attractive proposition than a sole trader or unincorporated business structure.

What tax do sole traders pay?

The second reason for a limited liability business is based on tax savings. As a sole trader you pay:

• income tax on profits over your personal allowance, assuming no other income
• Class 2 NICs at £2.50 per week
• Class 4 NICs on profits over £7,225 at a rate of 9 per cent up to £42,475 and 2 per cent thereafter.

If your profits are below the personal allowance of £7,475, in all likelihood it would be better to operate as a sole trader. You will pay no income tax and will only pay a very small amount of Class 4 NICs if your profits exceed £7,225.

If you profits are below £5,315, you can also apply for an exemption to Class 2 NICs.

What tax do limited companies pay?

A limited company pays Corporation Tax at 20 per cent on its profits (up to £300,000, after which the rate rises).

Profits can be withdrawn from the company by way of a salary for the director(s) and dividends for shareholders. Again, this assumes that the directors/shareholders have no other income.

Sole trader or limited company?

I’ll illustrate with an example… Say your business has profits of £15,000 and you have no other income.

Tax as a sole trader would be:

• Income tax (£15,000 – 7,475) at 20 per cent = £1,505
• Class 2 NICs (£2.50 x 52) = £130
• Class 4 NICs (£15,000 – 7,225) at 9 per cent = £700 (rounded)

Total tax = £2,335. So profits after tax are £12,665.

Tax as a limited company would be:

• Pay a salary of £589 per month = £7,068 [allowable expense from the profit].
• So the profit becomes £15,000 – 7,068 = £7,932
• Corporation Tax on the profit is 20 per cent = £1,587 (rounded)

The profit of £7,932 is distributed from the company as a dividend and no further income tax is due on the dividend, because the total income is below the higher rate threshold.

The total available after tax is the available profits + salary – Corporation Tax = £13,413. With profits of £15,000 you would be better off as a limited company to the tune of £748. If your profits are higher the savings may also increase.

Some may argue that this would be wiped out by an increase in accounting fees – I usually respond with “not if you are using CheapAccounting.co.uk”.

One final thing….

There may be the opportunity to sell your sole trader business to your limited company. In doing this you may realise significant tax savings. It would be inappropriate of me to give a specific example here, because savings are absolutely dependent upon your circumstances.

So my advice is to get someone to review your circumstances and work out a specific projection for you.

Elaine Clark, www.cheapaccounting.co.uk

Further information:

• Find out about becoming a sole trader
• Learn more about setting up a limited company

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Budget 2011: a small business response

We have a full reaction to the Budget announcements in our news section. But here are a few brief responses:

Meera Shah, founder, Red Apple Delivery: “Overall for small business it’s fairly positive. The only negative is in terms of employing people - it hasn’t really given me any impetus to hire people. It hasn’t encouraged it. I think he’s done the best he can in very tough situation.”

Neil Westwood, founder, Magic Whiteboard: “I’m glad he’s addressed the fuel. I would have liked more but at least he’s done something about it. On my deliveries it’s costing me a lot more than this time last year. If anything it needs to be reduced by 20p!

“On the tax simplification they’ve got rid of 100 pages, but when you have 10,000 pages, it’s not many. They need to do more but it’s a good start.”

George Derbyshire, chief executive, NFEA: "The impression I got was that there was a range of announcements that were relatively limited individually but together made up a worthwile package. The measures on regulation, tax simplification, public procurement are all worthwhile.

“I think there’s been a reasonable stab at a growth strategy across a wide range of industry sectors and measures. Apprenticeships are a difficult sell but once the penny drops I think lots of small businesses can use apprentices very effectively.”

Chris Gorman, spokesman, Forum of Private Business: “It’s a step in the right direction but we need more radical, hard-hitting, widespread reform to really make a difference to the lives of small business owners…  We wanted to some more drastic things in terms of radical tax and regulatory simplification.”

Brendan Flattery, chief executive, Sage UK: “Whether or not George Osborne’s Budget will amount to his promised ’Bonfire on Red Tape’ remains to be seen, but the three year moratorium on regulation for small businesses can only be good news for small business owners.

“The reduction in corporation tax is encouraging, and shows the Government is at least trying to match words with action. But despite this and other positive steps to encourage investment small businesses are likely to remain cautious in their optimism. A recent Omnibus survey we conducted found small business owners were left underwhelmed by the government’s efforts to get banks lending to business.”

• Enterprise Budget will deliver for "real businesses", says Chancellor
• Budget a "reasonable stab at growth" for small firms, say business groups
• Relive the Budget blow-by-blow with our live Budget blog
• Forum: Did you get what you wanted?

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What is the Budget 2011 going to offer small businesses?

Tomorrow (Wednesday, 23 March) will see George Osborne’s second Budget as Chancellor. Whatever measures Osborne reveals tomorrow, they will be announced against a backdrop of slow growth, rising inflation and impending cuts.

Frankly, it’s not the best time to be Chancellor. As the latest results from Sage UK’s monthly omnibus survey reveal, some 44 per cent of small-business owners are feeling nervous about the impact the Budget will have on their business. Only 5 per cent of the 1,200 survey respondents were optimistic.

So, what are we all worried about? Sage’s survey identified increased National Insurance contributions, enterprise zones and bank lending as the key issues bugging small firms. The small business groups are calling for the business tax system to be simplified and red tape to be reduced - and tax and regulation are likely to be the hottest issues tomorrow.

The coalition government itself has promised the most “pro-enterprise” and “business-friendly” Budget in a generation. They’ve suggested that they’re going to ease employment law, cut red tape and reform the planning system, among other things.

But it remains to be seen whether the government can keep small businesses happy. Follow the Budget 2011  live on the Donuts and find out what happens.

Budget 2011 coverage on the Donuts

• We’ll be tweeting about the Budget throughout the day and inviting your comments and thoughts. Follow us on Twitter.
• From 12.15, we’ll be blogging live as the Chancellor makes his announcements. You’ll be able to join in with your comments and responses. Follow the live Budget blog.
• At about 6pm, we’ll be posting our Budget round-up for small businesses and the reaction of small firms in our news section. By all means join in with the tweeting and blogging to let us know your thoughts about the Chancellor’s announcements.
• You can also have your say in our forum: The Budget 2011 – What are you hoping for?

Read our Budget 2011 previews

• Budget must simplify business taxes, says FPB
• Budget plans put too much pressure on small firms, warn business groups
• Budget fuel duty rise must be scrapped say business groups
• Business face £23bn red tape bill
• Enterprise zones “must meet local needs”, says FPB 

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A basic introduction to bookkeeping, bank accounts and allowable expenses

Every business needs accounts. They may differ in format and complexity, but every self-employed person must produce accounts to complete their tax return, while limited companies must complete accounts according to the Companies Act. Here are the answers to a few frequently asked questions about start up account keeping.

Do I need a separate business bank account?

Some small businesses don't like to open a separate bank account because of the charges, but if you don't have a dedicated bank account for your business, there is much more risk of confusion and your bookkeeping will take longer because there will be more transactions to account for – many of which will be irrelevant to your business.

Banks often give you a good deal when you start up, change banks or keep a minimum balance in the account. Even if there is a cost, this has to be set against the fact it will make your bookkeeping much easier, quicker and cheaper.

If HM Revenue & Customs investigates your business, you will be giving them access to your personal as well as your business income when they look at the bank statements if you mix everything up in a private account. It also means that whoever is preparing your accounts and tax returns will see details of your personal/private spending, of course.

If you operate as a limited company then you must keep a separate business bank account for the company, because it is a separate legal entity.

I’ve put both business and private expenses through my business bank account?

Don't mix private and business expenditure. Your bookkeeping will be quicker and easier if you only put business transactions through your business account.

You will need to take money out for yourself – drawings for a sole trader or partnership; normally salary, dividends and expenses for a limited company – but once a month should be enough.

Paying private costs out of the business can create serious tax problems for a limited company, but even for a sole trader/partnership, you’ll only have to pay your bookkeeper or accountant to work their way through your private transactions. And – you may not want them to see how much you spend or what you buy.

Don't be tempted to pay for non-business things out of the business just because that is where the money is and it is convenient.

I have paid for some expenses privately. Can I still put these through the accounts?

If you pay business expenses personally you are, of course, entitled to reclaim them back from the business. Try to avoid this as much as possible by using a debit card on your business account or using a petty cash tin so all payments are made directly.

Where it is unavoidable – and this will particularly apply to limited companies claiming mileage in lieu of motor expenses – take the same approach as if you were claiming expenses from an employer.

Detail the claim on a sheet of paper; don't forget to attach supporting receipts (and the mileage log if relevant); and file it in the purchase invoice file in the month in which it is paid.

Finally, try to do it at least once every month so you don't forget any costs or lose receipts and so miss out on claiming a legitimate expense against tax.

What if I’ve used my personal credit card for business expenses?

It is often easier to use a debit card linked to your business account because you should not be using a credit card as a source of finance. If you are using a credit card for business expenses, try and use it exclusively for the business (don't put private expenditure on it) and pay it off in full at the end of every month.

You will need to analyse the amounts spent on the credit card across the business expense items (eg VAT, travel, motor expenses, etc), because credit card transactions will often fall into different categories.

Sometimes credit card companies will summarise expenditure into different categories, but this is not usually very helpful as their analysis is not the same as the one suitable for the business.

Some of my costs are part business, part Private. What should I do?

This often causes confusion, but you can simply look at it as your private expenditure and make an expense claim for the business part in the way described above. If you run your own business as a limited company this may be the best way, because paying private costs from the company can cause tax problems.

You will need to have a sensible method of assessing how much the “business part” is. A common example is the cost of running your business from home. You will need to calculate how much your house costs in total and then make a reasonable estimate of the proportion of property used for the business and apply that proportion to the total costs.

It is important to realise that this is just a method of finding out what the business cost is, and if necessary being able to explain why it is 10 per cent or 20 per cent of the total rather than, say 5 per cent.

For which costs can I claim?

To be allowable, costs must be incurred for the “sole purpose of the business”. You cannot claim for personal expenses (eg suits or general clothing). Obviously, you can claim for the cost of the goods you have acquired to make your sales. For example, taxi drivers, minicab drivers, etc and those in the road haulage industry should enter fuel costs in this box rather than elsewhere unless they are claiming mileage rate; hairdressers should enter shampoo and hair product costs here.

At the end of the year you will need to make an adjustment for the stock you have left. So the value for cost of sales will be: the value of opening stock brought forward from last year, plus purchases made during the year; less value of closing stock at the end of the year.

Other direct costs might include: discounts; commissions; carriage; and research costs. For permanent, temporary and casual employees you should include: salaries/wages; bonuses; pension contributions; benefits; employer's NICs (National Insurance contributions); canteen expenses; any recruitment agency fees; any subcontract labour costs.

Allowable premises costs include rent; business rates; water rates; light; heat, power; property insurance; security; use of home as office; as well as repairs and renewals and general maintenance of premises and maintenance of machinery.

You can also claim for general admin expenses, such as telephone; broadband; postage/courier; stationery; printing costs; professional journals and subscriptions; insurance (eg public liability, etc). Travel and subsistence costs are also allowable, including vehicle insurance; servicing; repairs; vehicle licence; fuel (or mileage claimed at approved rates); rail/air tickets; taxi fares; hotel accommodation; subsistence/similar costs.

Advertising, marketing and promotional costs can be classed as expenses, as can fees you pay to an accountant, solicitor, surveyor, architect, stock taker, etc. You can also claim back interest and alternative finance payments on bank and other loans (including overdrafts) and alternative finance arrangements, as well as bank/credit card charges and interest charges on hire purchase agreements.

Elaine Clark, www.cheapaccounting.co.uk

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All you need to know about the VAT increase

There is now just over a month remaining before the standard rate of VAT climbs from 17.5 per cent to 20 per cent. VAT-registered businesses are being urged to prepare themselves for the change.

Any sales of standard-rated goods or services made on or after 4 January 2011 must carry a VAT charge of 20 per cent. All VAT invoices must charge the 20 per cent on bills raised on or after 4 January.

Retail businesses do not have to pass the increase on to customers, but they will have to pay HMRC the additional VAT.

If a customer pays on or after 4 January for an item that has been collected or delivered prior to the 4 January, the sale is normally deemed to have occurred before the changeover and the old 17.5 per cent rate applies.

Where the supply of services is continuous (ie a consultancy service), a business must charge VAT at 20 per cent on invoices issued and payments received on or after 4 January. It can, however, apply the 17.5 per cent rate for the services that have been supplied up to 3 January and the 20 per cent rate thereafter.

Moreover, from 4 January 2011 there will be a new list of flat rate percentages. The threshold for joining the scheme will remain at £150,000 in respect of income in the next 12 months and the exit threshold will increase from £225,000 to £230,000.

Non VAT-registered businesses should consider making any large purchases prior to 4 January and expect the cost of standard rated supplies to increase by 2.5 per cent. The VAT registration threshold of £70,000 remains the same.

VAT registered businesses that have questions about the time of supply and the tax point for any VAT transaction should contact their accountant to make sure the relationship between the two is correct. Zero-rated (0 per cent) and reduced-rated sales (5 per cent) will see no change.

You can visit the Jeffreys Henry LLP website at www.jeffreyshenry.com

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How you can legally get away with not paying Corporation Tax

Amazingly, a change in policy means that if Companies House compulsorily closes your company you could avoid paying any Corporation Tax you owe.

How? It seems that Companies House has adopted a new approach to closing a limited company (by a process known as “striking off”) if that company does not complete an annual return.

An annual return, of course, is a snapshot of certain company information at the made-up date (ie address of registered office, details of directors etc). It is different to the company accounts and does not contain any financial data about the company’s performance.

There are no fines for filing the annual return late, unlike if you file your accounts late, where fines start at £150 and rise to £1,500 for private companies.

For clarification, I telephoned the Companies House helpline and was told: “We changed this in about August 2009. If companies do not reply to our letters, we begin the ‘strike-off’ after about two to three months. The change was as a result of a policy decision – not a change in law.”

What does this mean?

As a result of the action by Companies House to close the company, technically, the company no longer exists. And a company that no longer exists cannot pay Corporation Tax.

Because Companies House took this action, the directors or shareholders have not avoided their duties to inform creditors.

So let’s just say you have a company that has traded, made a profit but for whatever reason has been compulsorily closed down by Companies House, then you could just start another one and do the same again.

What is going wrong?

It seems that while HMRC is told of these compulsory closures, it is not doing anything about them.

It could easily stop the close down until it has the final accounts and tax paid by the limited company.

Why doesn’t HMRC do something about it? That’s the question I would love to have answered.

Should HMRC do something? Well in my opinion – yes. At the moment, in this regard, HMRC is avoiding collecting taxes. Mind you – should we be surprised about another HMRC fiasco?

Footnote

While I totally disagree with the ethics behind owners of companies taking advantage of this loophole, it is legal and done with full knowledge of Companies House and HMRC. So who am I to question it?

Caution – if the company is closed the business bank account will be closed and the money belongs to the Crown, as will any other company assets.

There may also be other reasons for not wishing your company to be closed down. However, I’m sure there will be a few who will enjoy making use of this loophole.

Elaine Clark, www.cheapaccounting.co.uk

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Capital gains tax planning for the emergency budget

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.

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PAYE – new late-payment penalty legislation for the 2010-11 tax year

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 19^th. 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

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Budget 2010 – how will it affect you?

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.

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Tax tips for business mums

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

1. 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.
2. 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

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