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  • Setting Up a Company – 8 Things To Know

    We are seeing lots of examples of companies being set up incorrectly.

    Incorporation agents and companies house let you set up your company without many checks and balances.

    Here are 8 things you need to know:

    1. Nominal Value of Shares Has no bearing on the value of your company. What is a Nominal Value? Helpfully, it’s what it sounds like: Nominal. You can set up a company with £1 Nominal Value of Shares or 10 £0.10 shares or other combinations.
    2. Number of Shares Again, has absolutely no bearing on the value of your company. The value of your company will depend on several factors like Profit and Assets, not on the number of shares issued when you set up the company.
    3. Share Capital The Nominal Value of Shares x Number of Shares eg If you decide to have a £1 Nominal Value, and to issue 10 shares, say 5 shares for you and 5 for your spouse, your company’s Share Capital is £10.
    4. Amount You Pay Aside from the £15 charged by companies house, you also owe your company the total Share Capital referred to in 3. Eg £10.
    5. Directors and Company Secretary You only need to appoint one Director and you do NOT need a Company Secretary.
    6. Registered Office Any postal address, very commonly your home address.
    7. Articles Of Association Your Company’s Rule Book. If the companies house standard doesn’t deal with a situation which may occur eg you don’t want a shareholder to be able to sell his shares to anyone outside of the existing shareholder family, you need to build in a procedure either through amending the Articles or by setting up a Shareholders Agreement.
    8. HMRC Consequences As soon as you set up your company, companies house informs HMRC corporation tax. Instantly you have both companies house and HMRC deadlines to deal with. Make sure you know what they are.

    One client who had set up his company with 1,000 £1 shares, therefore now owes his company £1,000, said that he couldn’t believe how easy it was to set up his company.

    Our client has to either pay £1,000 to the company, strike the company off and start again, or once the company is profitable, sign a statutory declaration that the company will be able to pay its debts as they fall due and reduce its share capital. If the company isn’t profitable this is a further cost he can do without.

    It is great that we can easily set up companies, but do be aware of these pitfalls.

  • #HMRC Business Records Checks – 8 Things You Need To Know

    Business Records Checks are coming to the South East after Christmas. Happy New Year!

    Business Records Checks need not cause SMEs many problems, but there are some pertinent points to know:

    1. Initial contact is a letter from HMRC warning of a forthcoming phone call.
    2. Your accountant or tax agent will NOT receive a copy of this letter, so you must tell him/her.
    3. HMRC may prefer to talk to you, but they should agree to talk to your agent instead.
    4. If the phone call doesn’t allay HMRC’s concerns they are likely to make a visit to the business premises, which is often your home.
    5. HMRC need to know your records are REQUISITE to submit a correct and complete tax return. This might mean your small spread sheet and a plastic wallet of receipts in date order is perfectly appropriate.
    6. You don’t need to know double entry book keeping or have a software package to keep adequate records.
    7. HMRC can’t insist on you running a business bank account, however, businesses often find they get to a point that this makes their life clearer and simpler.
    8.  Even after a visit, HMRC shouldn’t charge a penalty if you make the changes you agreed to.

    In summary, keep your accountant or agent informed, and if you present a clear picture of how you keep your records to make sure all income and appropriate costs are recorded, Business Records Checks shouldn’t be something to cause you undue concern.

  • #Tax Myth 8 – Exporting goods are VAT zero rated

    You may know that exports are zero rated and think that there’s nothing else to worry about. You’re expecting to recover VAT on your costs so you’re in a net recovery position each month. You might even be thinking of submitting monthly VAT returns to optimise your cashflow.

    However, to be correct, you need to be able to agree with the following statement.

    All my EU customers are VAT registered.

    You should know this because you have to get their local VAT number and preferably show it on your invoice.

    So, what do you do if you are selling goods to non-VAT registered people in the EU – probably consumers?

    You have to charge UK VAT like any other sale to a UK consumer.

    You may therefore have to regularly pay over UK VAT like any other UK business.

    If you are selling a lot of goods to one EU country you then have to consider the local VAT rules.

    For France, if you sell more than Euros 100,000 of product to local consumers, your business needs to be VAT registered in France.

    What does that mean for my VAT returns?

    You would revert to zero rating as you would now be selling to an EU VAT registered business. You would have to submit another VAT return in France and pay Euros to the french tax authorities.

    Therefore if you make only sales to EU businesses, or are VAT registered locally, all your sales will be zero rated. However, when selling to EU consumers below certain thresholds you will need to charge UK VAT.

  • A Guest At The Olympics? Here Are 6 Different Tax Treatments!

    If you are lucky enough to be a guest at the Olympics, what sort are you and what tax is due?

    1. Your client has invited you and your better half to enjoy the men’s 100m final, plus you are wined and dined, all paid for by your client. Your company pays your train fare. You are hardly going to drive after all that free booze!

    This is the E word – Entertaining! But it’s mainly paid for by your client so it’s his problem. What is that? Well, he can’t claim any VAT deduction or any corporation tax relief for the cost. Happily you don’t any suffer income tax. However, you won’t be able to claim corporation tax relief for the train fare as the reason for the trip was Entertaining.

    2. You take the train to meet a client at his business premises in Stratford, London to go through his year end figures. The meeting takes a while and you treat him to tea and sandwiches to keep you going. At the end of the meeting, he receives a call from his wife that she is too ill to go to the men’s 10k final and he asks whether you’d like to accompany him. Of course you do! Afterwards, you buy a beer and pasty at the Olympic Park before making your way home.

    The main reason for your trip to London was a business meeting and you therefore receive corporation tax relief for your train fare and subsistence. In this case it isn’t unreasonable for a whole day out of the office to claim lunch and dinner, including refreshments for the business meeting.  You can claim any VAT charged should you be inclined to get VAT receipts. No income tax or national insurance is due and if you have a PAYE Dispensation in place, there will be no P11D required either.

    3. Instead of the Annual Christmas Party, you decided to treat you and your 4 staff to a day at the Olympics. You managed to get tickets for your staff plus a guest to go to the 800m womens swimming heats. As well as paying for the Venue ticket, your company paid for the train fare and food and drink all day. The average cost was £140 per head Incl VAT.

    You can claim all costs for corporation tax relief as the total cost per person was less than £150 Incl VAT. You can reclaim the VAT for you and your staff but not their guests. If you had charged the guests say £5 for the day, you would have been able to reclaim all the VAT.

    4. Your staff enjoyed the Olympics so much that you get some last minute tickets for the Paralympics basketball heats.

    As the £150 Incl VAT Annual event limit has been pretty much used up, all costs for this day out are now the E word – Entertaining. This doesn’t affect the corporation tax relief or ability to reclaim VAT, but it does mean there is a taxable benefit in kind so that income tax and national insurance is due. This might add 34% or 54% to the total cost of the day if your staff pay the income tax. You decide this will offset any feeling of goodwill you’ve created and decide to pay the income tax on their behalf, but this might add 42% or 89% to the company’s cost for the day. It would have been better to wait another 12 months and treat the staff to something else!

    5. In view of this you decide to get the company to treat you and your spouse to tickets for the closing ceremony for which some extra tickets were suddenly released.

    As you are a director and you have already had the benefit of an annual staff event, this is entertaining. Similar issues arise as for the previous point, except that HMRC are unlikely to allow VAT to be reclaimed.

    6.  The client who treated you to the 100m men’s final had such a good time that he has also sent you and your spouse the full set of cuddly Wenlocks and Mandevilles.

    As the total cost of these mascots is less than £250, there is no income tax or national insurance charge on you. However, as before, your client won’t be able to save corporation tax or recover the VAT on this purchase. If the cost was under £50 and the gift showed his company logo he would have received corporation tax relief and recovered the VAT paid.

    The final true after tax cost of the Olympics events and gifts varies widely, so choose carefully for this event or for the next one!

  • Spend your capital gain and pay no tax – only 170 days to go!

    This is a one off tax relief within the new SEIS introduced in March’s Budget.

    If you have recently exchanged, or expect to before the end of the tax year, eg on a buy-to-let property, and don’t welcome the 28% capital gains tax bill, you could take the view that a government subsidy to encourage you to invest your gain in a new company will help you take a risk.

    For example, if you sell an asset for £250,000 and make a gain of £50,000, the capital gains tax due @ 28% is £14,000.

    If you risk the £50,000 (only 20% of your sale proceeds) and reinvest it in a promising qualifying company, you will save this £14,000.  Not only that, but you will receive a credit for income tax purposes of up to 50% of the gain of £25,000.

    This is a total tax saving of up to £39,000 on an investment of £50,000. The net amount risked by you could therefore be only £11,000 out of your £50,000 gain.

    The income tax saving will be with us for a while and is still valuable. However, the capital gains saving is with us only for this tax year.

    As it isn’t wise to make an investment until the Finance Bill receives Royal Assent in July, there are only approximately 170 working days left to take action to top up your income tax relief by this one off capital gains relief.

    As with many tax reliefs, there are numerous conditions to check before you go ahead. You may find it is worth it.

    SEIS – Seed Enterprise Investment Scheme

  • #Tax Myth 7 – The Highest Income Tax Rate Is 50%

    You may be aware that income of £150,000 and above suffers a tax rate of 50%.

    What is less well known is that at a lower level of income the tax rate is in fact higher than 50%.

    For income of between £100,000 and £116,210, the income tax rate is 60%.

    Why is this?

    From £100,000 the personal allowance available to all taxpayers is gradually taken away at a rate of £1 for every £2 of income. The change from completely tax free income to that income being taxed at 40% causes that income to pay a marginal tax rate of 60%.

    As the tax free personal allowance increases, the band of income which pays a rate higher than 50% (or 45%) will increase. If the tax free personal allowance becomes £10,000, the income level affected will be between £100,000 and £120,000.

    For those who can spread income across different tax years, such as owner-directors, this is a valuable tax saving.

  • #Tax Myth 6 – Sole Trader Start Ups Don’t Receive Tax Incentives

    You have probably heard of lots of incentives for those who invest in start up companies. This is where individuals pay money to a company in exchange for shares in that company. The tax system helps subsidise the investor’s risk in the new unproven business.

    But what about your own sole trader business?

    It might be small scale and, as there are no shares, it’s probably just your money. Aren’t you taking a risk? Where are the incentives for you? After all, you might have a good idea which in the future trades from a limited company.

    Happily the tax system does assist you.

    It works by offsetting tax losses from your new venture against other taxable income you have earned in the same year or the previous three years. In addition, this relief is available for any tax loss in the first four years of your new venture.

    How does this translate in practice?

    Often you will have left your salaried employment where you have paid 40% income tax. If your start your business in January and before 5 April spend say £5,000 on a website, you will have made a tax loss of £5,000.

    This £5,000 is offset against the salary you earned in the same tax year before January. The PAYE income tax of £1,000 you paid on £5,000 of salary will be refunded to you after you have sent in your income tax return.

    A very helpful addition to your cash flow to invest further in your new business.

  • #Tax Myth 5 – You have to pay national insurance to earn a state pension

    Employees who earn at least £107 per week or £464 per month for a full tax year will be achieving a credit towards the 30 years they need in order to earn a basic state pension.

    At these earnings there is no national insurance to pay by you or your employer. Your employer may be your own company.

    Therefore, you aren’t paying anything to earn a state pension.

    Earnings up to £144 per week or £624 per month, continue to be free of national insurance. In addition you benefit from a further top up to the basic state pension, called the  S2P. You are deemed to be earning a higher salary but for no cost to yourself or your company.

    Therefore, you or your employer aren’t paying national insurance and you are earning more than a state pension.

    If you are a sole trader, you build up a state pension from paying Class 2 National Insurance of £2.65 per week. A low contribution but not free as for the employees described above.

    You don’t receive any benefits from paying Class 4 National Insurance of 9% on your profits. This is odd bearing in mind that this is by far the most expensive National Insurance element if you are a profitable self employed business.

    If you are near retirement age, transitional provisions may apply, but the general points made above are still likely to remain valid.

  • Budget 2012 – Wealth Creators 1, Wealthy Grannies 0. Simplification 2, Complication 1.

    Today’s Budget certainly had a strong business emphasis to encourage and incentivise business growth. On the other hand, artificial transactions set up simply to avoid tax would not be tolerated.

    Administrative Simplifications For Business

    A very important message for business is the introduction of more simplification. HMRC are merging parts of their online screens so it’s easier to check your tax due and paid. PAYE and NIC administration is being merged possibly followed by a merger of the rates. If your turnover is less than £77,000 you can opt to prepare your accounts on a cash basis. Helpfully, this is the same as the VAT threshold so you needn’t worry about VAT either.
    Therefore you may find the navigation of the tax system that bit easier. I also suspect this means small businesses won’t be subject to the new business records checks so often as the risk of an error must be much lower and it can’t be worth an Inspector’s time.
    Any of your staff earning less than £8,105 this tax year and £9,205 next tax year, often part time employees, will pay no income tax and little national insurance. However, this seems to mean the PAYE system must still be operated and this will allow your staff to achieve their state pension credits. Importantly, it may help in the recruitment and retention of part time staff, as they will have a higher take home pay. Always something useful to know when hiring staff.

    Corporation Tax Rate Simplification

    Profits up to £300,000 are taxed at 20% and profits over £1.5m are taxed at 24% from April 2012. Profits in between £300,000 to £1,500,000 suffer a higher marginal rate than the 24%. With the continual reductions to the main corporation tax rate, it looks as though the Chancellor wants all companies to eventually pay the lowest 20%. This is very welcome as it means companies don’t have to worry about crossing the £300,000 threshold which does cause successful companies some issues.

    Tax Free Personal Allowances and Higher Rate Tax Band Complication

    The higher rate tax kicks in at £42,475 for 2011/12 and 2012/13, however, it reduces by £1,025 to £41,450 for 2013/14 bringing in many more taxpayers to the tax return system. Along with the tapered loss of child benefit, there is a certain lack of simplification about this area.

    Wealth Creators Encouraged – Share Options – (EMIs)

    The threshold per employee has increased from £120,000 to £250,000. This increase may encourage more companies to offer these share options. It is also very useful where the market value of a private company is difficult to determine as it gives some ‘wriggle room’ should HMRC dispute the value given. EMIs are probably under-utilised as there is a certain amount of paperwork required. However, they are an important way of providing a share-based incentive without having to give any of your shares away. And they can apply to just one employee. Plus there’s no income tax or national insurance to worry about at the beginning and in many cases none due later on if the employee pays the original market value of their shares. Your new employee feels incentivised but you still own your company and there’s no up front tax to pay.

    Wealthy Individuals Anti-Avoidance

    Generally there is a strong message that this will no longer be tolerated. What is it? It’s not seen to be things like allocating your salary and dividends to an optimum level. But it does include putting in high value residences into a company for no other reason than to save stamp duty. Many regard this is as an artificial transaction. The Chancellor has come down very hard on the stamp duty avoidance – something HMRC itself did not so long ago! – and applied very stringent tax rates much higher than the stamp duty which has been avoided. This sort of anti-avoidance has popular public opinion behind it and looks set to continue.

    Wealthy Grannies

    They are likely to be living off large pensions, interest and dividend income, but they aren’t new wealth creators. Under the guise of simplification, these higher allowances for pensioners are being reduced. With the increase in the standard tax free personal allowance applying for all of us, perhaps this was inevitable.

    Conclusion

    The Budget is sending out a message that the Government is behind business. However, more than that, it needs business to succeed. 

  • Final Chance For The Best Tax Relief When Buying Machinery

    And a few other assets…….

    April 2012 sees the end of 100% capital allowances tax relief for annual spend up to £100,000.

    What am I talking about?

    This is the amount your business can spend on plant and machinery and receive 100% of tax relief in the same year. Normally, the tax relief is spread over about 15 years!

    For March 2012 year ends, if your profits are £200,000 and you spend £100,000 on a new machine, your corporation tax bill is reduced from £40,000 to £20,000.  After April 2012, this will be reduced to £25,000 plus 20% of £75,000 = £8,000.

    If you enter into a contract to buy the machinery before April 2012, you can therefore achieve an extra £12,000 of cash flow to help grow your business.

    You don’t even need to have the cash leaving your bank account before April 2012.

    There are important transitional rules when your year end isn’t March, but the basic point remains that it is likely to be better to enter a contract before March 2012.

    Do contact us if you think you might benefit from acting on this tax relief before it goes.