My Blog

Author: Rick_admin

  • #Tax Myth 4 – Submitting my tax return early, means I pay my tax earlier

    Now we’ve just finished the usual flurry of last minute income tax returns, it’s a good time to remind ourselves why we should submit our income tax and corporation tax returns early.

    When I suggest this to people, about a quarter of them query it as a bad idea because it means the tax is due earlier.

    This isn’t true for any tax payments. Tax due dates are fixed according to accounts and tax year ends.

    What submitting your tax returns early does is provide more certainty about whether HMRC might have a query about your accounts, tax calculation and tax return.

    A time limit starts from the day you submit your return. HMRC have to raise their enquiries within 12 months of the date your return is submitted.

    If you hear nothing you can be reasonably comfortable there isn’t anything they want to ask you for that year.

    It doesn’t provide 100% certainty because if they find an issue in a subsequent year. HMRC are able to revisit earlier years, but it does provide some comfort.

    And to be near-to or late in filing your accounts and tax return is likely to be a factor for HMRC when considering who to open enquiries into.

    Even if there is still an enquiry and an adjustment is agreed with HMRC, you have nipped the issue in the bud so there will be fewer months or years in which you might have repeated the error.

    Many years of experience in accounts and tax has shown me that having the space and time to prepare figures without an immediate deadline, means more time to get clarification on potential issues, a more accurate return and a better service for you.

  • #Tax Myth 2 – Tax Reliefs For Funding Your Company Are Always Available

    With SMEs having to be more creative as to how to fund their companies, it’s become more likely that you may fall on the wrong side of a tax rule.

    The traditional method of a company borrowing the money direct from a bank is a no-go area for many SMEs. Even when a loan is granted, it comes with a fee, a high interest rate and you have to provide a personal guarantee against your assets, even the family home.
    With tighter cash flow in the recession there is a greater need for working capital, so the funds may not even be for expansion, but merely to enable the company to continue trading.
    Consequently, SMEs have been forced to look elsewhere. You may find it costs less to borrow the money personally or, at the very least, it’s easier. If you have to provide security you’re no worse off if your company had borrowed the money.
    If you take out a personal loan and lend those funds to your company, it works very well. You charge your company an interest rate, probably the same or a bit more than the amount you’re paying. Your company saves 20% corporation tax, you would get taxed on the amount it pays you, but you claim tax relief because you’ve lent money to your company. The net tax on you is £Nil and your company receives a 20% tax saving.

    What if you take out or use an existing personal overdraft or credit card? It’s tempting as it’s easy and flexible. However, the rules are different and this has been confirmed in a recent tax case.

    For some odd reason, you can’t claim tax relief for the interest you’ve paid on an overdraft or credit card even where you can easily demonstrate where the money has gone and what it’s been used for.
    You’d therefore be left with an income tax charge which might match the 20% relief taken in the company but is clearly a worse position than it might have otherwise been. Or if you are a higher rate taxpayer, you’d pay 40% income tax, and between you and your company you’d pay an additional 20% of income tax. A disaster.
    The Solution
    The solution is simple. Make sure your personal funding to your company is through a personal loan. Not a personal overdraft and not a personal credit card.

  • #Tax Myth 1 – Limited companies have to be VAT registered

    This probably stems from the more administration required when running a company. It seems to be assumed that this additional administration includes VAT registration. VAT registration is only required when your annual turnover reaches £73,000.

    However, many businesses choose to be VAT registered. This can be a sole trader, partnership or limited company business. The reasons to choose to be VAT registered include benefiting from the HMRC flat rate scheme or being eligible for VAT repayments.

    This myth may also come from the fact that businesses with low turnovers are less likely to be run as a limited company. This is because the additional costs such as accountants fees may outweigh the financial benefits of a limited company such as tax savings.

    As always, the facts applying to each business need to be reviewed before a recommendation can be given.

  • Tax Myths – Introduction

    I’m using the start of 2012 to introduce a new OTS feature to help you understand your business tax. Some will seem more esoteric than others, but all of them should be of interest to several small businesses. Some will seem very simple, but might be worth confirming where they are important, useful or interesting. I hope you enjoy them!

  • Tax Relief For Losses

    The short answer is ‘Very Likely’!

    The longer answer involves considering:

    1. Your prior years income and profits
    2. Any other income received in the same year
    3. Your anticipated future income and profit levels

    This will enable you to maximise your tax repayment or reduce your future tax payments. Where different tax rates apply, this will affect your optimum claim.

    Maximum flexibility is available to sole traders/partners, particularly those in the first 4 years of  trading, or when a partner joins a partnership. Tax paid on past salary, redundancy, or rental profits, for example, may be refunded.

    You may arrange the use of your losses to ensure you don’t waste your personal allowance, currently £7,475, and may even be able to offset them against a personal capital gain, such as a property disposal.

    As a sole trader/partner, regardless of your claims for income tax and capital gains tax purposes, your loss will reduce your future Class 4 national insurance contributions. And you may use the same loss to reduce your income for Working Tax Credit purposes potentially increasing the payments made to you.

    If repayment of past tax isn’t available, your loss may always be carried forward indefinitely to reduce the tax you pay in later years, for when those profits return.

  • VAT Cashflow

    By asking your suppliers to invoice you just one day earlier, with no effect on your normal payment terms, can improve your VAT cashflow by three months.

    A £10,000 invoice due to be invoiced on 1st April 2011, could be invoiced on 31st March 2011 enabling you to offset the £2,000 VAT in the quarter to 31st March 2011 rather than the quarter to 30th June 2011. Similarly, delaying issuing your own supply invoices by one day has the same effect. Together, this would provide you with interest free working capital of £4,000 for three months without involving your bank.

    If your turnover is under £1.35 million, annual VAT accounting can be helpful. VAT is paid for the first three quarters on account on the normal due date. The balancing amount for the last quarter is paid one month later than usual. With a quarterly VAT payment of £10,000 you have the use of £10,000 for an additional month. Moreover, the VAT due on account is a quarter of your previous year’s VAT. If you are enjoying an increasing turnover, this is a useful cashflow advantage.

    If you suffer from a slow paying customer you can reclaim the VAT when the debt is six months old, even though you might get paid after this. When you do get paid you simply include this in your next VAT return. If your customers are regularly slow payers and your turnover is under £1.35 million, cash VAT accounting may improve your cashflow.

    And always check you are maximising your VAT recovery on less visible items like employee expenses.

    Understanding your business’s commercial arrangements and recent/prospective trading patterns are essential to maximising your VAT cashflow.

  • Motivating Staff Tax Efficiently

    You can make one off, personal, unexpected small gifts as a gesture of goodwill, such as a wedding present, without a tax consequence.

    If you agree that an employee can work from home regularly for, say, one day a week, you can pay £208 per year without any further calculations. If the employee’s domestic bills reveal the cost is higher than this, this higher cost may be reimbursed tax free.

    You could hold a party after your year end and/or in the summer, as you can spend a tax free total of up to £300 incl VAT per employee with guest each year. Make a small charge to the guests and all the VAT is recoverable as well.

    For peace of mind for you and your staff, offer free private healthchecks, as these aren’t taxable regardless of whether annual private health premiums are already paid and taxed.

    A payment of up to £5,000 with reference to the financial benefit to your business, may be made tax free to an employee who makes a suggestion outside of his/her normal duties.

    Pension contributions can be increased through lower company/employee national insurance costs if employees give up a bonus or some salary in advance.

    For key staff, allow them to buy shares in your company at a later date at today’s value, free of income tax or national insurance. The arrangement can include performance criteria so shares are only available if the company does well over a few years.

    Your company gets corporation tax relief for all the above, as for normal salary.

    Correct documentation is key to ensuring these amounts can be provided tax free.

  • Capital Allowances

    Until March 2012, expenditure up to £100,000 over 12 months receives 100% tax relief. For a small limited company this is an immediate tax saving up to £20,000 (or 20%) and for a higher rate sole trader/partner up to £40,000 (or 40%).

    From April 2012, this limit is reduced to £25,000, so if you are making a large investment this year, be sure to be committed before April.

    If your expenditure exceeds £100,000 or the new £25,000 it may still be possible to receive 100% relief for your total expenditure by delaying some expenditure so it is incurred over two or more 12 month periods.

    For a sole trader/partner the resulting lower profits may increase your Working Tax Credit claim providing you with a further benefit.

    Eligible expenditure includes:

    • Machinery
    • Computers
    • Furniture
    • Heating and air conditioning
    • Moveable partitions
    • Battery chargers and generators

    For example, an office or warehouse refurbishment may be more affordable than you think and be a good bridge before committing to larger premises.

    Other existing favourable capital spend allowances include 100% relief for environmentally friendly fixtures such as certain electrical systems. Or 100% relief to renovate a flat above, say, a shop. This may have the added advantage of improving your rental income.

    If you are struggling to persuade your bank to lend you money, explaining the tax rebates and beneficial cashflow may help to receive their approval.

    Your capital spend decision should be made after checking your existing/potential trading losses and capital allowances and your personal allowance position, because the timing of expenditure is crucial to maximising the tax benefit to your business. And you need to be clear the rules apply as you expect as they are quite specific in certain situations.