The introduction of Real Time Information (RTI) for PAYE is being billed as a positive step for all — making it easier for HMRC and employers to operate their PAYE systems. How difficult the transition will be remains to be seen but it is a significant change that every UK business needs to understand and prepare for.
Under the current system — which has remained pretty much unchanged since 1944 — employers are only required to send information about their employees' PAYE and NIC deductions at the end of the tax year. From 2013, they’ll have to do this every month — when they pay their staff. This migration process will take place between April and October 2013.
But businesses need to prepare for the change now.
Is your data accurate?
An important step, according to payroll software specialist Sage, is to make sure your records are 100% accurate. Sage provides nearly half a million employers in the UK with payroll solutions and it has been working closely with HMRC since RTI was conceived.
The wrong data about your staff, it warns, can cause inaccurate tax calculations or HMRC compliance checks.
The vast majority (80%) of data problems, according to HMRC, are concerned with inaccurate information about staff — names, dates of birth and NI numbers.
Its records show that 824 employees had the surname “unknown”, for example. 507 employees are called “A N Other” and over 2,000 have an NI number of AB123456. In addition, some 40 employees on payroll records purported to be over 200 years old!
Recording employee information for RTI
Sage has come up with a useful list of dos and don’ts to help businesses prepare:
• enter the employee’s full forename and surname
• enter a double-barrelled surname in full
• only enter an employee’s correct National Insurance number
• enter the correct date of birth in the format DD/MM/YYYY
• use “known as” names such as Bob instead of Robert or Sam instead of Samuel
• enter an initial in either the forename or surname boxes
• make up an NI number
• enter a default date of birth such as 01/01/1901
There’s more advice on data quality on the HMRC website.
Sage has produced a series of guides and webinars as well as access to training on RTI to help businesses prepare.
• After this blog was published, HMRC announced a "relaxation of reporting arrangements for small businesses". According to HMRC: "Until 5 October 2013, employers with fewer than 50 employees, who find it difficult to report every payment to employees at the time of payment, may send information to HMRC by the date of their regular payroll run but no later than the end of the tax month (5th)."
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.
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 – although there is no specific legal requirement – you are strongly advised to open a separate bank account for the company.
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.
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.
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.
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.
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.
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.”
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.
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?
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
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.
The deadline for submitting your tax return is fast-approaching. Below are some tips to help make this an easier process.
31 January deadline
If you have a tax return and do not file it on time you will be fined £100.
If the return was issued in April 2009, or any time up to 31 October 2009, it must be submitted by midnight on Sunday 31 January 2010, with a very small number of exceptions.
(If you were sent a return after 31 October 2009, you have three months from the date it was issued. You can file it online or by paper, and the guidance below does not apply to you.)
If HMRC receive your tax return after 31 January you'll get a late filing penalty of £100.
If you pay all the tax you owe by 31 January you will not need to pay the penalty.
Submitting your tax return
You will now need to send your return online. If you send in a paper version at this stage, even before 31 January, you will be fined £100.
If you have previously filed online you can use the same system as last time.
You will need your user ID, which was sent by HMRC when you first registered. If you cannot find it, go to the HMRC online filing site where you will be able access 'lost user id' or 'lost password' services.
You will be asked a number of questions, following which a replacement user ID and password can be issued. These may be sent online or by post. If you think you may have lost the details, give yourself plenty of time to get a replacement.
If you can find neither ID nor password you should contact the Online Helpdesk.
Registering to file online
If you have not previously filed online, you will need to register to obtain an activation code. You will not be able to file online without this code.
The code will be posted to you, and to ensure you receive it on time you must register by 21 January 2010.
Tips for online filing
There can be many people trying to file at the same time. In 2008, 200,000 people filed on 31 January. Try to use quiet periods.
HMRC provide year round online services, 24 hours a day. Avoid delays by accessing them on weekdays after 5pm or before 8am.
There may be maintenance issues. Check the HMRC site for scheduled downtime.
Use the HMRC website for step-by-step guides, and also the built in help available in free HMRC software.
Visually impaired users can access specific help.
Paying your tax
As well as filing your return, whether paper or online, you must pay tax due for 2008-09 by 31 January 2010.
Direct Debit payments are now possible, provided you have registered online. Paying this way allows you to make a payment as soon as you have worked out what it should be.
HMRC now kindly let you manage your finances by setting up regular payments towards your next bill.
Exceptions to online filing
HMRC allow you to submit using a paper tax return after 31 October if:
Start-ups, are you looking into angel investment as a finance option? You need to ensure you’re EIS compliant...
If you are raising capital for a start-up business and you plan to use angel investment, the investors will probably want to know whether the business will be EIS compliant.
The EIS is a government backed scheme that gives tax breaks to investors.
The benefits of investing in an EIS compliant business are principally two-fold:
There are a number of rules about the trade you will carry out and the investors who can make the claim. You accountant will be able to explain in more detail or take a look at the HMRC website for further information http://www.hmrc.gov.uk/eis.
If your planned start-up business ticks the boxes for EIS, make sure that you sell this to potential investors. The investors will feel more secure in the fact that it limits their downside risk and that they won’t have to pay capital gains tax when the business succeeds.
If I can help you further, I will - do get in touch.