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:
Ray Coman, Coman & Co Tax Accountants (specialising in helping start-ups to succeed through quality accounting and tax advice)
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.
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.
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.
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