Make it Count 2

Welcome to our summer edition. While others are perfecting their beach bodies, we hone in on getting your business accounts back on track and in control by the end of summer!

To start off with, we encourage you to scrutinise the expenses you are claiming as a company, before providing a refresher on basic business finances. Then we focus on the implications of how you withdraw money from your limited company with the changes in S455 tax, as well as reminding all businesses how simple VAT checks can be beneficial in the long run.

Finally, there is a reminder of the first stage of the HMRC Making Tax Digital project going live for VAT in April 2019.

Please get in touch using the contact details on our contact page for any queries on your specific circumstances.

Alan Ovenden, FICB

 

Inside

  • Talk the Talk

Understanding terminology and jargon

  • ISAs Adapt to Thrive

Understanding terminology and jargon

  • Payback Time

Know the rules on director loans

  • No Room for Error

It pays to check your VAT return carefully

  • Getting the Best Return

Your guide to the new digital tax system

 


to claim or not to claim

Are you claiming everything you could be as a limited company, or are your personal and business expenses in a bit of a muddle?

 

Any costs that are wholly and exclusively related to running your business can be used to reduce your profit and therefore your corporation tax bill.

So, if you think through your typical day, what could you be claiming? You turn up at the business premises for which you pay rent, council tax and utilities – these can all be claimed. If you work from home instead of business premises, you can claim a proportion of your household costs.

You answer the phone for which the line rental and business-related call charges can be claimed – and in addition, if you register your mobile phone in the company name and use it solely for business, that too could be claimed. If the mobile is in your own name, you would have to split the business and personal use.

Next you have a meeting about your latest marketing campaign. You can claim the costs of the consultant and any costs of schemes that they recommend from email to telemarketing, to social media ad placements to websites, as long as they are solely for business purposes.

When you get to lunchtime, you can only claim your lunch if you are outside of your permanent workplace as well as the associated travel costs of getting there, through mileage costs or public transport. This doesn’t include ordinary commuting though!

After lunch it’s training time and you attend a course essential to your job, which can be classed as a business expense along with your ongoing professional subscriptions.

You’ve had a busy day and daydream about reaching retirement… but have you taken advantage of the £40,000 a year that can be paid into your pension scheme by your limited company, reducing your corporation tax bill at the same time?

It’s also time to think about your annual staff party for which you can claim up to £150 per employee.

There are many other costs to consider from childcare, bank fees and company cars. Make sure you challenge your costs with your accountant to ensure that you are not missing anything that could make a difference!

 


talk the talk understanding the terminology is key to staying on top of your business finances

To run a successful business, directors and self-employed workers need to have a certain level of understanding of the information provided by their accountant and submitted to HMRC and Companies House. So, do you understand what your accountant gives you?

 

Profit and loss – what comes in and what goes out

The profit and loss is a summary of what comes in from sales, interest etc and what goes out in the form of business expenses to achieve those sales. Business expenses are categorised into cost of sales, those costs directly attributable to a product such as the ingredients and lazbour, or overheads which are more fixed regardless of sales. Overheads might include wages and salaries, rent, marketing and insurance. By having a good handle on these costs, you can ensure that all expenditure is helping to fulfil your business goals. In summary, the profit and loss shows your financial performance in terms of whether your activities for a given period are making money! Not to be confused with…

Cashflow – cash receipts and cash payments

You could report a profit in a given period but find that you have no cash! Cashflow is about the timing of when you physically pay out or receive money. For example, if you have £100 of sales and £50 of expenses in a 30-day period you would have £50 profit. However, if the sales are not due to be paid until the following month but the expenses were paid upfront you would have negative cashflow of £50.

However, it is important to understand if you use the cash basis of accounting or the accruals basis. Cash basis means revenue is reported when cash is received, and expenses are reported when cash is paid, and can only be used by self employed or partnerships with a turnover of less than £150,000. Accruals basis is when revenue and expenses are reported in the period they are earned – so if you put on a festival in July, all the ticket sales and associated expenses would be reported in July.

Balance sheet – what you have and what you owe

The balance sheet is a snapshot of what you have in the form of cash, investments and assets (building, equipment, patents etc) and what you owe in the form of loans, mortgages, suppliers, tax payable etc. This is a statement of your financial position.

If you need help understanding any of your financial reports, let us assist you in gaining more control over your own business finances.

 

ISAs adapt to thrive

ISAs savings

Change to ISA rules means ISAs can continue a period of growth

EACH TAX YEAR, UK residents over 16 years old can save in an ISA without having to pay income tax or capital gains tax on the increases in their value. For the 2018 tax year, this is up to a limit of £20,000.

Before 6 April 2018, any money in an ISA lost all tax advantages at the point of the ISA holder’s death. After this date, investments within ISAs at the time of the account holder’s death will continue to retain their tax advantaged status for three years after the death. This is good news as it means that the ISA can continue to grow tax free until the estate is finalised or three years is up. There will be no income tax or capital gains tax charges in this time.

In addition, surviving partners through marriage or civil partnership will be able to make additional subscriptions up to the higher value of the deceased’s ISA investments on the date that the account is closed. For example, if the deceased held £30,000 in a cash ISA at the time of death, the surviving spouse or civil partner would be allowed £30,000 on top of their own £20,000 allowance for 18/19.

 


 

PAY-BACK TIME?

Know the rules on directors’ loans or the S455 tax could bite

 

Directors of limited companies can pay themselves in three ways: a salary, a dividend or an expense repayment. They can also repay themselves money they have previously loaned to the company. Any money that is paid from the company to the director(s) or other close family members outside of these methods is called a director’s loan.

wallet and banknotesIn these circumstances, section S455 of the Corporation Tax Act will come into play, commonly called ‘S455 tax’ by accountants and advisers. From April 2016, S455 tax moved from 25% to 32.5%. This tax is in place to stop directors from paying themselves through loans that are not repaid in a bid to try and avoid income tax and NI charges on dividends or salary. In fact, the S455 tax rates mirror the higher rate dividend tax rates – therefore, if it is never paid back it is like taking a dividend. The only difference is, if the loan is repaid then the S455 tax comes back.

So…

If the director repays the loan within nine months of your corporation tax accounting period:

→ Claim back the 32.5% corporation tax that you have paid on the loan, but not the interest. There are no personal tax responsibilities.

If the director doesn’t pay back the loan with nine months of your corporation tax accounting period:

→ Claim the corporation tax back on repayment of the loan, but not the interest. Interest on the corporation tax will be added until the corporation tax or the loan is repaid. There are no personal tax responsibilities.

If the loan is written off (ie never paid back):

→ Class 1 NI must be deducted through the company’s payroll and the director has to pay income tax on the loan through their self-assessment tax return.

If the loan reaches more than £10,000

→ Then the loan would be considered a benefit in kind and the company would have to deduct class 1 national insurance.

From April 2016, S455 tax moved from 25% to 32.5%.

Get in touch to see how this affects your company.

 

No Room for Error

Take care to check your VAT return carefully as mistakes will cost you

In the Spring Statement 2018, the chancellor announced consultations on future changes to the VAT threshold, because of suggestions that the current threshold may discourage small businesses from growing.

If you have already reached the VAT registration threshold, do you rely on someone else to complete your VAT return or do you sense check it before it goes to HMRC? If not, penalties can be applied for up to 100% of tax understated or overclaimed if you send a return with a careless or deliberate inaccuracy. It is therefore always worth doing a high-level sense check of the numbers in line with what you as a director know about the business performance and versus previous VAT returns.

In a recent HMRC tribunal, one director of a computer equipment supplier claimed to rely on another member of staff to complete the VAT return which had missed more than £50,000 of sales. This was not seen by HMRC as a reasonable excuse for the error as a quick check against the sales books would have made the mistake very apparent. Therefore, lack of care had led to the penalty.

From April 2019, legislation will require businesses above the VAT threshold to have a digital tax account and file quarterly returns online (see section ‘Getting the best return’), which will greatly help VAT checks. More of your electronic transactions will be visible to HMRC but this also makes it easier to check for errors before submission.

Key areas to check

  • Compare to previous VAT return and check if movements look reasonable.
  • Investigate any significant unexplained variances.
  • For standard rated output, box 1 should be 20% of box 6.
  • If box 8 is a higher value than box 6, or box 9 is more than box 7, you may have put the figures the wrong way round in error.
  • Have you adjusted for credit notes received and issued in boxes 1 and 4?

getting the best return don't be caught out by the change to a new digital tax system

Making Tax Digital is the UK government’s vision for a digital tax system to ‘make it easier for individuals and businesses to get their tax right and keep on top of their affairs’ (HMRC July 2017).

 

As with any major project, this is happening in phases and the first deadline to look out for is Making VAT Digital in April 2019.

If your business is VAT registered and has a taxable turnover of more than £85,000 then from April 2019 it must comply with the new Making VAT Digital rules. Non-compliance could lead to fines of up to 15% of your annual VAT charge!

If your business continues to submit returns using the old system and pays on time, you may still be subject to the default late payment surcharge as HMRC are expecting the information in the new format.

Let us help you to unravel what this means…

1. VAT RETURNS MUST BE FILED ELECTRONICALLY FROM APRIL 2019

This means no more filing VAT returns through the government gateway. The information must come straight from accounting software to HMRC.

2. RECORDS MUST BE HELD DIGITALLY

Software must be used to calculate the VAT due, report the VAT figures to HMRC and receive information back from HMRC. This must include time of supply, value and rate of VAT charged, and amount of input VAT allowed in the case of purchases. This information must be recorded by the date of the VAT return.

If easier, businesses could keep records in a spreadsheet and pass the spreadsheet onto an accountant with compatible software who can upload or input by the VAT deadline. Watch out though, by April 2020 digital links must be in place between spreadsheet and software, and manually retyping data from one system to another will not be allowed. The actual data provided to HMRC will be no different to the totals currently submitted with no additional backing required, although there will be the option to submit certain supplementary data.

If your business is VAT registered and has a taxable turnover of more than £85,000 then from April 2019 it must comply with the new Making VAT Digital rules

WHAT MAKES YOU EXEMPT FROM MTD REPORTING FROM APRIL 2019?

  • Turnover is less than the VAT registration threshold.
  • Owners are practising members of a religious society whose beliefs prevent the use of computers.
  • Disabilities of individuals or location of business make it very challenging to use digital tools.
  • The business is going through insolvency.

If any of these apply to you, call the VAT helpline on 0300 200 3700 to notify them and discuss options for submitting.

Otherwise, the business must continue to file VAT under the Making Tax Digital regime until it is completely deregistered from VAT due to falling below the threshold.

NOTE: There will be no change to VAT reporting dates and no requirement to change VAT quarters to align with accounting period or tax year.

 


 

Self-assessment Deadlines

 

Self-assessment Deadline
Register for self-assessment if self-employed or sole trader, not self-employed (eg due to investments or property), partner or partnership. 5 October 2018
Paper tax returns Midnight 31 October 2018
Online tax returns Midnight 31 January 2019
Pay the tax you owe Midnight 31 January 2019
First payment on account* Midnight 31 January 2019
Second payment on account* Midnight 31 July 2019

* Check with your accountant if you are not sure if this applies to you.

Posted in Newsletter at 2018-07-20 by Alan Ovenden

Tags: Spring Newsletter