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A guide to The Flat Rate Scheme

Mar6

UNDERSTANDING THE FLAT RATE SCHEME
As an overview, the Flat Rate Scheme allows you to apply a single percentage to your turnover to work out your VAT liability. This is one amongst a number of schemes offered by HM Revenue & Customs (HMRC) aimed at easing the administrative burdens small businesses face.

 

The scheme provides a number of advantages, such as:

  • the simplicity of the scheme, removing some administrative burdens
  • no partial exempt calculation needs to be performed
  • no fuel scale charge needs to be paid for businesses paying road fuel.
  • HMRC offer a 1% discount for new VAT registered businesses under this scheme (the discount only applies to the first year of registration)

 

HMRC produce a ‘Ready Reckoner’ to see how using the scheme will affect your business, this can be found at: http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm

 

Please note that this scheme can be used by partially exempt businesses, and with ‘Annual accounting scheme’. The Flat Rate Scheme has its own versions of a cash accounting and retail scheme, but is not applicable to margin scheme, retail scheme and cash accounting scheme users.

 

Eligibility for the scheme

A business is eligible for the scheme providing both the following two tests are satisfied.

 

Test 1 is the value of your taxable supplies in the next year does not to exceed £150,000 excluding VAT ignoring the sale of capital assets but include:

 

 

  • standard, reduced and zero rated supplies.
  • sale of second-hand goods sold outside the margin scheme
  • sale of investment gold detailed in the VAT Act Section 55 (see VAT Notice 701/21 Gold for further details)

 

Test 2 is the value of your taxable supplies in the next year does not to exceed £191,500 including VAT ignoring the sale of capital assets but include:

  • all the items included for Test 1
  • the value of exempt supplies (such as rent, lottery commission, bank interest etc.)
  • any other income received or receivable (such as non-business etc.)

 

The scheme can be used until your total turnover exceeds £230,000 excluding ‘one-off’ increases in sales (which need to be notified to HMRC in order to remain in the scheme This must be checked on the anniversary of joining the scheme. If you are aware that within the next 30 days the threshold of £230,000 will be exceeded you will have to leave the scheme.

 

There are also a number of other restrictions to joining the scheme, you cannot join the scheme if:

  • you are not VAT registered
  • you use the second-hand margin scheme or the auctioneers’ scheme
  • you are required to use the tour operators margin scheme
  • you are required to use the Capital Goods Scheme
  • you have stopped using the Flat Rate scheme in the previous 12 months
  • you have accepted a compound penalty offer or been convicted of an offence in connection with VAT in the last 12 months;
  • you have been assessed to a penalty for conduct involving dishonest conduct in the last 12 months;
  • you have been registered for VAT in a VAT Group in the last 24 months
  • you have been registered for VAT in a VAT division in the last 24 months
  • you have been eligible for a VAT group registration in the last 24 months
  • your business is ‘associated’ or closely linked with another business within the last two years

 

APPLYING FOR THE SCHEME

The scheme does not automatically apply, application is made by completing and submitting form VAT 600FRS:

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&id=HMCE_CL_000057&propertyType=document

 

The application form has to be sent to:

National Registration Service

HM Revenue & Customs

Imperial House

77 Victoria Street

Grimsby

Lincolnshire

DN31 1DB

 

The application form can also be submitted by email to: frsapplications@hmrc.gsi.gov.uk

 

If you are also registering for VAT, the form VAT 600FRS can be submitted with the VAT registration form VAT1. In addition a business can join the ‘Annual Accounting Scheme’ together with this scheme, please see the ‘Guide to The Annual Accounting Scheme’ for further details.

 

The Flat Rate Scheme will usually begin from the next VAT period following the receipt of the application form. Applying the scheme to an earlier period must be agreed with HMRC. HMRC will notify you when your business can start using the scheme.

 

If you wish to leave the scheme notice must be made in writing to the Annual Accounting Registration Unit.

USING THE SCHEME

Calculating the Flat Rate percentage

The key issue with this scheme is determining the appropriate flat rate percentage. HMRC have recommended a four step process in order to establish the correct percentage.

  • Step 1 – Review the table of flat rates percentages and see if your business is mentioned
  • Step 2 – Re-review the table making sure that your business is not mentioned in a composite sector
  • Step 3 – If your sector is not mentioned look at the Businesses not mentioned elsewhere
  • Step 4 – Finally If you are still unsure then phone the National Advice Service on 0845 010 9000

 

The choice you make should be on a sensible and reasonable basis, evidence should be retained as to why a particular choice was made. This could help prevent issues later if HMRC were to challenge the rate used.

 

If your business looks like it fits into two or more sectors, the percentage of your main business activity (by reference to turnover) should be used. If this balance of business activity changes, continue using the current percentage for the remainder of the VAT year and then change the percentage used if appropriate.

 

Where a business activity starts or stops the same review needs to be done in addition to checking that this change does not make your business ineligible for the scheme. Any change in flat rate percentage must be notified to HMRC within 30 days of the change or to: Enquiries.estn@hmrc.gsi.gov.uk

 

Calculating the turnover

The next step is applying the percentage to your turnover, which includes:

  • VAT inclusive sales and takings of standard rated, zero rates and reduced rate supplies
  • Exempt supplies (such as rent or lottery commission)
  • Supplies of capital expenditure goods unless they are in relation to goods where the VAT has been calculated outside the flat rate scheme
  • Despatches to other European Commission countries

 

Amounts excluded from turnover are:

  • Private income
  • Proceeds from the sale of goods you own but not used in the business
  • Sales of gold detailed in the VAT Act Section 55 (see VAT Notice 701/21 Gold for further details)
  • Non-business income and supplies outside the scope of UK VAT
  • Sale of capital expenditure on which input tax was claimed

 

Without confusing matters, your business will have to determine how the turnover is calculated as there are three ways of calculating your turnover.

  • Basic turnover – Mainly for businesses that deal with other VAT registered businesses.
  • Cash based turnover – Similar to the Cash Accounting Scheme, the turnover is on a cash received basis.
  • Retailer’s turnover – Similar to the retail scheme, used mainly for businesses that sell goods to the public.

 

Care must be taken if you have any special circumstances to your business, if you buy or sell goods/services within or without the EU, partially exempt business, fuel scale charges, sales of second-hand margin goods and if you act as an agent. In addition, there are special rules for business like florists and Barristers.

 

Capital Expenditure

The scheme allows for capital expenditure, subject to rules, to be treated outside the scheme. Effectively, the input tax on a capital purchases costing more than £2,000 (including VAT) can be claimed in the normal manner, i.e. through box 4 of the VAT return. The expenditure must be for more than one purchase, over £2,000 and not for a service to qualify. An apportionment must be performed on capital items with a private use element.

 

To mirror the input tax treatment, if input tax was claimed on the purchase of a capital item, output tax must be charged on the sale. If the capital item was within the flat rate scheme, as for example it cost less than £2,000 then there is no output tax accountable on the sale.

 

Record keeping and administration

In regard to record keeping, the requirements relate to the flat rate turnover, details of the percentage used and how the tax was calculated. Additional requirements relate to certain capital expenditure in excess of £2,000 in value.

 

VAT invoices must still be issued for VAT registered customers. The rate of VAT on these invoices should be the appropriate rate of VAT and not the Flat rate percentage. Care must be taken when calculating your VAT liability, the calculation is based on the VAT inclusive total.

 

Care must be taken when completing the VAT return, as the normal rules are not followed. The differences are:

  • Box 1 – this will contain the flat rate scheme amount payable. In addition there maybe output tax on certain capital goods.
  • Box 2 – standard rated VAT on goods bought from other EC countries
  • Box 3 – completed in the normal way
  • Box 4 – this will normally be zero unless there have been capital goods purchased. In addition you can recover VAT on stocks and assets held at registration
  • Box 5 – completed in the normal way
  • Box 6 – the VAT inclusive amount is included. In addition supplies outside the scheme should be added as excluding VAT
  • Box 7 – this will normally be zero unless there have been capital goods purchased or acquired goods from other EU countries
  • Box 8 & 9 – completed in the normal way

 

Accounting treatment

The accounts for your entity need to be compiled using gross amounts. It is normal practice for the flat rate VAT due to be included as a deduction from the turnover figure. This is then disclosed by way of a ‘Turnover’ note to the accounts, for example:

 

“Turnover shown in the profit and low account shall exclude either VAT on taxable outputs or VAT imputed under the flat rate scheme.”

 

Alternatively the Flat rate VAT can be shown as a separate expense item within the Profit and Loss account.

 

 

FURTHER CONSIDERATION

Further details can be found on the HMRC website, as a source of reference please refer to the VAT Notice 733.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&propertyType=document&columns=1&id=HMCE_CL_000345#P39_3090

 

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Filed Under: 01 Tax Tagged With: Accountants in Balham, Accountants in Mitcham, Accountants in Putney, Accountants in Southfields, Accountants in Tooting, accountants in Wandsworth, accountants in Wimbledon, Flat Rate Scheme, vat

October Key Tax Dates

Mar4

1 – Due date for payment of Corporation Tax for the year ended 31 December 2011

5 – If a Tax Return has not been received, individuals and trustees must notify HMRC of new sources of income and chargeability in 2011/12

14 – Return and payment of CT61 tax due for quarter to 30 September 2012

19 – Tax and Class 1B NI due on PAYE settlements for 2011/12

19/22 – PAYE/NIC and CIS deductions due for month to 5/10/2012 or quarter 2 of 2012/13 for small employers

31 – Deadline for 2011/12 self assessment paper returns to be filed for HMRC to do the tax calculation. If a paper return is being filed also the deadline for tax underpaid to be collected by adjustment to your 2013/14 PAYE code (for underpayments of up to £3000 only)

 

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Filed Under: 01 Tax Tagged With: Accountants in Balham, Accountants in Mitcham, Accountants in Putney, Accountants in Southfields, Accountants in Tooting, accountants in Wandsworth, accountants in Wimbledon, cis, CT61., deadline, PAYE, tax

A guide to The Capital Allowances Regime

Feb27

A SIMPLE GUIDE OF PROPOSED CHANGES TO THE CAPITAL ALLOWANCES REGIME

This is a basic guide and should not be used as a definitive guide, since individual circumstances may vary. Specific advice should be obtained, where necessary.

 

The capital allowances regime has undergone some significant changes in recent years. The most significant changes were introduced in the Finance Act 2008 but further changes were also introduced in subsequent Budgets.

 

Annual investment allowance

The Annual investment allowance (AIA) was originally introduced in the Finance Act 2008. AIA is available to small and medium-sized enterprises (SMEs) and entitles them to claim 100% relief on capital expenditure up to

certain monetary limits. Since inception, the AIA threshold has changed twice and the appropriate limits are as follows:

 

Date Expenditure incurred:

AIA limit

Companies:  On or after 1 April 2012Unincorporated: On or after 6 April 2012

£25,000

Companies:  1 April 2010 – 31 March 2012Unincorporated: 6 April 2010 – 5 April 2012

£100,000

Companies:  1 April 2008 – 31 March 2010Unincorporated: 6 April 2008 – 5 April 2010

£50,000

 

 

If the basis period straddles 1 April for companies, or 6 April for unincorporated entities, the AIA must be time-apportioned accordingly. As a result of the reduction of the AIA limit in April 2012, it is important to

understand how the rules will operate where an accounting period straddles that date:

 

 

Example: Giacami Ltd has a year-end of 30 September 2012. Its maximum entitlement to the AIA for the period is as follows:6/12 x £100,000 (annual limit to 31 March 2012)   =                                                             £50,000

+

6/12 x £ 25,000 (annual limit to 30 September 2012) =                                                          £12,500
Total maximum AIA for y/e 30 September 2012   =                                                                  £62,500

 

The maximum AIA that may be claimed in the period is, therefore, £62,500. However, where there has been a reduction in the AIA limit, the amount of expenditure that may qualify for AIA in the component period following the change is restricted looked at in isolation.

 

So, continuing the example, let us assume that Giacami Ltd made a single acquisition of plant during the year; a new lorry costing £60,000.

 

If the lorry was acquired before 1 April 2012, the amount of AIA due for the year would be £60,000, as this falls within the maximum entitlement of £62,500.

 

However, if the lorry was bought on or after 1 April 2012, the amount of AIA due would be restricted to £12,500, with the balance of £47,500 attracting writing down allowance.

 

An important point to note is that the AIA may be allocated in the most beneficial way.

 

 Example:Brendan Ltd incurs the following expenditure on plant and machinery during the year ended 30 September 2012:

  • 1 January 2012  New lathe (general pool item)             £100,000
  • 1 February 2012 New lift shaft (reduced rate pool item) £100,000

Brendan Ltd should use its entitlement to AIA against the assets which attract the lower rate of writing down allowance (WDA) first and claim the higher WDA on the additions to the general pool.
Assuming there are no brought forward capital allowance pools brought forward, Brendan Ltd’s maximum capital allowances entitlement for the year ended 30 September 2012 would be as follows:

 

 

10%

20%

Rate of

Allowances

AIA

Pool

Pool

C/A

Due

Lift shaft:
Max AIA:
6/12 x £100,000

50,000

+
6/12 x £  25,000

12,500

Total Maximum AIA

62,500

62,500

100%

62,500

Balance (£100,000 – £62,500)

37,500

20%

7,500

New lathe

100,000

10%

10,000

Total capital allowances

£86,250

 

 

 

Enhanced Capital Allowance

100% capital allowances are available on for expenditure on certain categories of new plant and machinery.  If you would like further details on any of these, please contact us:

 

Energy Saving Plant and Machinery The equipment be new and meet the eligibility criteria.
Low emission cars The car must be new, emit 100g/km or less and be acquired before 31 March 2013.The car must be new and acquired before 31 March 2013. 

An extension to the scheme was announced in the 2012 Budget.  However, the CO2 threshold has been reduced from 110g/km to 95g/km.

Zero emission goods vehicles The vehicle must be new and acquired between 1 April 2010 and 31 March 2015 (or 6 April 2010 and 5 April 2015 for unincorporated entities).
Plant and machinery installed at a gas refuelling station to refuel vehicles with biogas, natural gas or hydrogen The plant must be new.  The scheme was due to expire on 31 March 2012 but it was announced in the 2012 Budget that it would be extended for a further 2 years until 31 March 2015.
Environmentally beneficial plant and machinery The equipment must be new and meet the eligibility criteria.
Capital expenditure on Research and Development (Research and Development Allowance (RDA)) Contact us for details of requirements.
Business premises renovation allowance Available for expenditure on renovated disused or derelict properties in certain disadvantaged areas.  The scheme was due to expire on 11 April 2012 but it was announced in the Budget that this would be extended for a further 5 years until 2017.
Flat conversion allowance For expenditure on converting unused space above shops and other commercial premises into residential flats. The government announced in the Budget 2011 that this allowance will be withdrawn “after 2012”.

 

Enterprise Zones

As announced in the Autumn Statement 2011, legislation will be introduced in Finance Bill 2012 to provide 100 per cent first-year allowances for trading companies investing in plant or machinery for use primarily in designated assisted areas within certain Enterprise Zones.  These are:

 

  • Royal Docks, London
  • Irvine, Scotlnd
  • Nigg, Scotland
  • Dundee, Scotland
  • Deeside, North Wales


The allowances will be available from 1 April 2012.

 

Writing Down Allowance (WDA)

Expenditure on qualifying plant and machinery, which is not eligible for either AIA or enhanced capital allowances is put into a pool of expenditure, on which writing down allowances (WDA) may be claimed.

 

The rate of writing down allowances on both the general and reduced rate pools has been reduced with effect from 1 April 2012 (6 April 2012 for unincorporated entities).

 

There are two separate pools, as follows:

  • Main Rate Pool – for expenditure on general plant and machinery
  • Reduced Rate Pool – for expenditure on the following:
    • integral features of buildings and structures, i.e:
    • an electrical system (including a lighting system);
    • a cold water system;
    • a space or water heating system, a powered system of ventilation, air  cooling or air purification, and any floor or ceiling comprised in such a system;
    • a lift, escalator or moving walkway; or
    • external solar shading
    • expenditure on thermal insulation
    • expenditure on long-life assets (assets with an expected life of 25 years or more)
    • from 6 April 2009, expenditure on certain cars (see below).

 

The rates are as follows:

 

   General Pool Reduced Rate Pool
From 1 April 2012(From 6 April 2012 for unincorporated businesses) 18% 8%
Up to 31 March 2012(Up to 5 April 2012 for unincorporated businesses) 20% 10%

Hybrid rates will need to be calculated if an accounting period straddles the date that the rate of WDA changes.

 

Example:Liberty Ltd has an accounting period of 31 December. What would be its WDA rate for general pool for the year ended 31 December 2012?3 months @ 20%                                                                      5.00%

9 Months @ 18%                                                                    13.50%

Hybrid rate                                                                             18.50%

 

If the residual vale of either the general pool or the reduced rate pool is less than £1,000, a writing down allowance equal to the full amount of the pool may be claimed.

 

 

Business Cars

 

From 1 April 2009 (6 April 2009 for unincorporated entities)

The rules were changed by Finance Act 2009 for cars purchased from 1 April 2009 (6 April 2009 for unincorporated entities).   The rate of capital allowances which may be claimed on cars are dependant on the car’s CO2 emissions of the cars.  The car will either be eligible for 100% first year allowances (FYA) or will go either into the general or reduced rate plant and machinery pools, as follows:

 

CO2 emissions of the Car:                 Capital allowances
Cars with CO2 emissions of 110g/km or less 100% FYA
Cars with CO2 emissions of between 111g/km and 160g/km General Pool
Cars with CO2 emissions of 161g/km or more Reduced rate pool

 

It was announced in the Budget that with effect from April 2013, the capital allowances on cars will be as follows:

 

 CO2 emissions of the Car: Capital allowances
Cars with CO2 emissions of 95g/km or less 100% FYA
Cars with CO2 emissions of between 96g/km and 130g/km General Pool
Cars with CO2 emissions of 131g/km or more Reduced rate pool

 

Rules before 1 April 2009 (6 April 2009 for unincorporated entities)

Prior to the change in the rules with effect from April 2008, the capital allowances regime for cars was as follows:

 

  • Cars costing less than £12,000 went into the general pool
  • Cars costing more than £12,000 or with private use were de-pooled
  • The writing down allowance available on cars was the same as the general pool rate,
  • The writing down allowance on cars was restricted to £3,000 if the cost or written down value brought forward exceeded £12,000

 

The above rules will continue to apply for cars acquired before 1 April 2008 (6 April 2008) for unincorporated entities) for accounting periods beginning before 1 April 2014 (6 April 2014).  After this date, any written down value brought forward will be transferred into the main rate plant and machinery pool.

 

Long Life Assets

Long-life assets are defined as assets with a useful economic life of 25 years or more. The rate of writing down allowance is changing with effect from 1 April 2012 (6 April 2012 for unincorporated businesses) and the rates are as follows:

 

Up to 31 March 2012(Up to 5 April 2012 for unincorporated businesses) 10%
From 1 April 2012(From 6 April 2012 for unincorporated businesses) 8%

 

Long life assets are pooled with other reduced-rate assets in the reduced rate pool.

 

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Filed Under: 01 Tax Tagged With: Accountants in Balham, Accountants in Mitcham, Accountants in Putney, Accountants in Southfields, Accountants in Tooting, accountants in Wandsworth, accountants in Wimbledon, allowances, CAPITAL, regime

Minimum Waged Employees

Feb25

My office junior is paid exactly the national minimum wage (NMW). Do I have to put his wages up from 1 October 2012?
It depends how old your employee is. From 1 October 2012 the NMW rate for those aged 21 and over rises from £6.08 to £6.19 per hour, and the apprentice rate is increased to £2.65 per hour. However the rates for 16 to 20 year olds have not been increased.

 

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Filed Under: 01 Tax Tagged With: Accountants in Balham, Accountants in Mitcham, Accountants in Putney, Accountants in Southfields, Accountants in Tooting, accountants in Wandsworth, accountants in Wimbledon, Minimum wage, new rates

Corporation tax

Feb20

Corporation tax is the tax paid by companies on their profits. Unincorporated organisations (such as clubs and societies) also pay corporation tax, if they have taxable income. Partners in both traditional and limited liability partnerships and sole traders pay income tax instead.

 

If you use accountants to prepare your year-end figures, or auditors to check them, they may calculate your corporation tax liability, too. But you cannot afford to ignore corporation tax until the year end, because your activities during the year could have a significant impact on the final bill.

 

This briefing explains:

 

  • How corporation tax is calculated.
  • When you have to pay it.
  • When you can offset losses.
  • How to minimise your tax bill.

 

1. Calculating taxable profits

 

Tax is levied on all the profits made during an accounting period.

 

1.1        Profits can arise from several sources. They have to be calculated separately and totalled at the end.

 

  • Trading profits — income from your company’s trading activities, less allowable expenses.

 

For example, if you run a manufacturing or service company, you will have to pay tax on the profits made from selling the goods or services, after allowing for labour, raw material costs, etc.

 

  • Capital gains — the profits made from selling certain company assets.

 

For example, if you make a profit from selling a factory, it will be taxable unless you reinvest the money (see 5.3).

 

  • Income from letting out land or buildings.
  • Interest on any money held on deposit.

 

Unlike individuals, companies generally receive interest without tax having been deducted.

 

  • Most other forms of income or capital gain. For example, any profits made on currency movements.

 

Profits from different sources have to be calculated separately, because different rules apply to income and expenditure on each.

 

The rules are complex. Ask your accountant, tax adviser or auditor for advice.

 

1.2        Companies are taxed on the profits made in an accounting period — normally their financial year.

 

  • The end of an accounting period can also be triggered by the company going into liquidation or ceasing to trade.
  • Tax rates are set for the tax year, which (for corporation tax purposes) runs from 1 April to 31 March.
  • Where the company’s accounting period and the tax year do not coincide, the profits must be time-apportioned to decide which rate should apply.

 

1.3        The geographical basis for the tax charge depends on where the company is resident for tax purposes.

 

  • Companies resident in the UK pay corporation tax on their worldwide profits.
  • Companies resident elsewhere normally pay corporation tax only on their profits from a UK branch or agency.

 

Non-UK profits are generally taxed (often at higher rates) elsewhere.

 

Check your situation with your accountant or tax adviser.

 

2. How much tax?

 

The rate at which tax is paid depends on the level of the company’s profits, with lower profits taxed at a lower rate. But there are provisions to prevent companies from splitting themselves up to reduce tax charges (see 2.2).

 

2.1        There are three corporation tax bands in the tax year 2012/13:

 

profit (£)                       tax rate

0–300,000                       20%

300,000–1,500,000           20-24%

Over 1,500,000                24%

 

If your profits fall between £300,000 and £1.5 million, you are eligible for marginal relief. This is designed to ease the transition from one rate to the next. The limits are reduced for companies belonging to groups.

 

2.2    Where there are several companies under common control the above limits will be split between them, unless it can be proved that they are not carrying on a trade or business.

 

3. Payment

 

Companies are responsible for assessing their own liability to corporation tax and for ensuring that all the money which is due is paid on time.

 

3.1        Most companies have to pay corporation tax within nine months and one day of the end of their accounting period.

 

  • This rule applies to small and medium-sized companies (ie those with profits of up to £1.5 million).
  • Tax must be paid in full at the due date, whether or not HM Revenue & Customs (HMRC) is challenging the figures shown on the return (see 3.3).
  • Interest is charged on late payments.

 

3.2        Larger companies have to pay the tax due in quarterly instalments.

 

  • The first instalment has to be paid six months and 14 days after the end of the preceding accounting period (ie halfway through the accounting period to which the payments relate).
  • Two further quarterly payments then have to be made with the balance payable within three months and 14 days of the end of the accounting period.

 

Special rules apply where the accounting period is not 12 months.

 

3.3        All companies have to notify HMRC of their profits by submitting their corporation tax return.

 

  • The corporation tax return must be made within 12 months of the end of the accounting period.

 

There are penalties for failing to file on time.

 

  • If HMRC disputes any of the figures shown on the corporation tax return, the company may face an enquiry or a demand for extra tax. The Inspector normally has 12 months from the filing deadline to make enquiries into a return.
  • Company tax returns for corporation tax must be delivered electronically. Corporation tax, and related interest and penalties, must also be paid electronically.

 

4. Losses

 

Losses can sometimes be used to reduce the corporation tax bill. However, their use is subject to strict rules, to prevent tax evasion.

 

4.1       Trading losses can be offset against any other profits (including capital gains) made in the same accounting period.

 

  • They can also be carried back against profits made in the preceding accounting period.
  • Alternatively, they can be carried forward and set off against future profits from the same trade.
  • But they cannot be carried forward if the company changes hands and there is a major change in the business.

 

So there is no point in buying or selling companies purely for the sake of their tax losses.

 

4.2        It may be possible for other companies within the same group to make use of a company’s trading losses.

 

  • To qualify, at least 75% of the shares must be owned by the parent company.
  • There are other restrictions. For example, when a company joins or leaves the group.

 

4.3        Capital losses can only be offset against capital gains.

 

They cannot be offset against trading income.

 

  • However, they can be carried forward indefinitely, so they should always be recorded, even if they cannot be used immediately.

 

Take the example of a company which makes a loss of £20,000 on the sale of an asset in one year, cannot use the loss for three years, but then makes a profit of £30,000 on the sale of a lease.

 

The capital loss can be offset against the later gain to reduce it to £10,000 for tax purposes.

 

5. Minimising the tax bill

 

Increasing profits is generally more important than avoiding tax. However, you may be able to reduce unnecessary tax payments.

 

5.1        Limit the number of your subsidiary or associate companies.

 

This is because the top limit on the tax band applying to each subsidiary will be split according to the number of companies within a group.

 

  • Profits above that limit will be taxed at the marginal rate applying to the next band. So the existence of small companies within a group could have a serious impact on the amount of tax paid.
  • If you must set up subsidiary or associate companies, try to spread profits evenly between them.

 

It may be possible to use inter-company management fees to do this, although HMRC could disallow them if there is not a legitimate business reason for the service.

 

5.2        Consider using loans, rather than shares, to finance the company.

 

  • Interest on loans is an allowable expense against profits, whereas dividends on shares are not.

 

5.3        Ask your professional advisers about the standard methods of reducing profits without damaging the company or its prospects.

 

  • Take advantage of capital allowances and the Annual Investment Allowance available on equipment purchases. The Annual Investment Allowance limit is £25,000 in 2012/13.
  • If possible, reinvest the proceeds of any asset sale and use ‘rollover relief’ to reduce capital gains.

 

5.4        Consider using benefits in kind, rather than extra salary, as a mechanism for taking money out of the company.

 

  • Employers have to pay National Insurance (NI) on almost all benefits in kind.

 

But employees do not pay NI on most benefits.

 

  • Income tax has to be paid on such benefits, but they qualify as earnings when you calculate how much you can pay into a personal pension scheme.
  • It is important that the company purchases the benefit (eg medical insurance), rather than reimbursing you.

 

5.5        Consider using dividends, rather than a higher salary, to take money out of the company.

 

  • All profits paid as dividends to a shareholder which is not a company are taxed at a minimum of 20%. The zero rate remains if profits are re-invested in the business.
  • But, in a company with profits up to £300,000, dividends might still be more tax efficient than pay.

 

They are exempt from NI, and for basic rate taxpayers there is no income tax to pay.

 

  • Higher rate taxpayers would have to pay more income tax, but not immediately as with earnings.
  • You may need advice on how to structure any dividend payments.
  • Payment by dividend may limit the amount you can contribute to an approved pension scheme, as the amounts do not count as earnings.
  • Payment by dividend may also limit your rights to state benefits.

 

This sort of planning may not be effective if yours is a personal service company and you work under the control and management of any of your clients.

 

In such cases you may be caught by the IR35 rules and be deemed to receive a salary larger than the one you actually draw. If you run such a company, seek professional help.

 

6. Where to get help

 

6.1        HMRC assumes that you will employ a properly qualified accountant or tax adviser to help you with corporation tax.

 

  • Appoint an adviser to deal with correspondence with HMRC (see 6.2).
  • HMRC will send you the appropriate forms as soon as a company has been registered with Companies House.
  • Your local tax office can assist with minor problems.

 

6.2        Most firms of accountants can provide you with advice on corporation tax.

 

  • The service and expertise offered by accountants varies greatly. The fees charged vary accordingly.

 

Shop around for the right level of advice at the right price level for your circumstances.

 

  • Accountants should be members of the Institute of Chartered Accountants (signified by the initials ACA or FCA) or the Association of Chartered Certified Accountants (ACCA or FCCA) or the Chartered Institute of Management Accountants (signified by the initials FCMA or ACMA).

 

6.3        Chartered Tax Advisers who are members of the Chartered Institute of Taxation (CTA, ATII or FTII) can advise you on your tax affairs and calculate your tax liability.

 

  • Contact the Chartered Institute of Taxation for more information (020 7340 0550 or www.tax.org.uk).

 

6.4        Solicitors can advise you on the legal aspects of corporation tax.

 

The company bank account

 

Owner managers should avoid using the company bank account as a second personal account.

Every payment must be accounted for.

 

  • If cash payments to owner managers cannot be identified as salary or dividends, they will be treated as loans from the company.
  • Such loans can have serious tax consequences.

 

To avoid these, it is generally necessary to repay the loan within nine months of the year end.

 

  • Use of the company’s bank account for personal expenditure also creates extra work for the company’s accountants, and may lead to increased fees.
  • If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Filed Under: 01 Tax Tagged With: Accountants in Balham, Accountants in Mitcham, Accountants in Putney, Accountants in Southfields, Accountants in Tooting, accountants in Wandsworth, accountants in Wimbledon, Corporation Tax

Invoices not issued on every sale

Feb18

I’m a painter and decorator, working mainly for individual householders. I only give out an invoice for work done if my customer asks for one. Is this acceptable to the Taxman? I’m not VAT registered.
As you are not VAT registered there is no legal requirement to issue invoices for every sale, but it is good business practice. If you accurately record the money you receive from customers, and those amounts can be tied up to the cash and cheques you bank, the Taxman should not have a problem with your business records. However, if the Taxman suspects that you have been under-recording your sales, because you receive many payments in cash which are not immediately banked, you may have a problem. We can help you set up a system which will accurately record your sales, and keep the Taxman happy.

 

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Filed Under: 01 Tax Tagged With: Accountants in Balham, Accountants in Mitcham, Accountants in Putney, Accountants in Southfields, Accountants in Tooting, accountants in Wandsworth, accountants in Wimbledon, no Invoice, self-employed, Small customer

A guide to Termination Payments

Feb13

Taxation of termination payments

A payment to any director or to an employee when their period of office or employment ends is taxable on general principles if it is a reward for services.

 

If a payment is made to compensate an employee for loss of rights in respect of their employment, the position is more complicated.

 

 

EXEMPT PAYMENTS

Statutory redundancy payments.

Outplacement counselling and related fees or travelling expenses

Genuine non-statutory redundancy payments, even if they form part of the employee’s contract of employment.

 

 

TAXABLE PAYMENTS

Payments in lieu of notice (PILONs)

These are taxable as normal where the employee has been paid a lump sum, but has not worked after giving notice. For example, where an employee is on ‘gardening leave’ prior to joining a competitor. Normal taxation also applies where the employee’s contract provides for PILON to be paid as an alternative to notice.

 

Charge under Section 403 ITEPA 2003

  • Employer and employee agree at the time of termination that the employment is to be terminated without proper notice, but on making a PILON
  • Contract does not provide for a PILON, the employer terminates the contract and offers a PILON.

 

Section 403 exempts the first £30,000 of payments made in respect of termination in the relevant tax year.

 

 

 

The £30,000 threshold applies in respect of:

  • the same employment;
    • different employments with the same employer
    • employments with employers who are associated

 

 

FURTHER EXEMPTIONS

These include:

Contributions to approved personal pension schemes

Death or disability payments or benefits

Payments and benefits under tax-exempt schemes

Contributions to registered pension schemes.

Partial or full exemption for overseas service under Sections 413 and 414 ITEPA 2003

 

Funded unapproved benefit schemes (FURBS)

Unapproved schemes are often used to top up benefits arising under an approved pension scheme. If an employer sponsors a payment to such scheme in advance of any payout, it becomes a funded unapproved benefit scheme (FURBS). Any benefit is chargeable on the cash or cash equivalent of the payment or benefit.

 

Non-cash benefits are valued in accordance with the benefit in kind rules for earnings.

 

Ex gratia lump sums

Most ex gratia payments are charged under normal principles, subject to Section 403 ITEPA, as above.

 

They may, however be taxed as FURBS where the payment is made under ‘an arrangement’.

 

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Filed Under: 01 Tax Tagged With: Accountants in Balham, Accountants in Mitcham, Accountants in Putney, Accountants in Southfields, Accountants in Tooting, accountants in Wandsworth, accountants in Wimbledon, payment, tax, termination

Employee Benefits: Car Benefit

Feb11

I am employed by a charity that provides me with a Skoda Yeti car as my work involves transporting disabled people. I pay for all the petrol, but the charity reimburses me for work-related journeys at 15p per mile. This rate has not changed since June 2011, although the price of petrol has increased. Can I claim back any more of my petrol costs for work journeys from the Tax Office?
Unfortunately not. The advisory fuel rate for cars with petrol engines of up to 1400cc is 15p per mile and it hasn’t changed since 1 June 2011. The rates for LPG cars and diesels have moved slightly over that period but not much. You could ask your employer to pay more per mile, but you will then be taxed on the excess above 15p per mile, unless you can show your car is particularly fuel-hungry, which is unlikely for a Skoda.

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Filed Under: 01 Tax Tagged With: Accountants in Balham, Accountants in Mitcham, Accountants in Putney, Accountants in Southfields, Accountants in Tooting, accountants in Wandsworth, accountants in Wimbledon, benefit, Car, employee, Miles

Finance for small businesses: seed enterprise investment scheme

Feb6

The scheme

A specialist tool aimed at a small group of investors and entrepreneurs that will assist them in developing a few businesses that might never gain funding.  It is only available to individual investors in very small companies; it is not available to investors in partnerships or LLPs. The scheme is not there to replace the Enterprise Investment Scheme (EIS), but to run alongside that and the Venture capital Trust (VCT) regime.

 

The time limit

The scheme is not permanent, but relates to shares issued from 6 April 2012 until 5 April 2017; this term may be extended by Treasury Order. The claim must be made no later than 5 years after the normal self assessment filing date.

 

The investment limit

The investment limit for a qualifying individual in a fiscal year is £100,000. They cannot claim tax relief until the company has spent at least 70% of the money invested.

 

The investor

The individual must not be an employee of the company from the date of incorporation of the company until at least 3 years following the issue of the shares.  A director is not an employee for this purpose. They must not have a ‘substantial interest’ (more than 30% of the ordinary share capital or votes) and anti-avoidance provisions exist where there are pre-arranged exits or loan arrangements.

 

The investment

The investment must be in cash and must be invested in shares which are fully paid when issued.  They cannot carry a preferential right to dividends, to assets on a winding up, or to redemption.  They must be held by the investor for three years after issue; there will be a claw back of relief if the shares are not held for the requisite period.

 


The tax relief

The relief is income tax relief of 50% (30% for an existing EIS scheme ) and any gain will be exempt, provided the investor (or spouse or civil partner) held the shares for three years following the issue.  A spouse or civil partner receiving the shares from the original investor will be charged to tax on any claw back on a disposal.  Any gain will be completely exempt; the existing EIS scheme only offers a deferred gain, but there is no limit to the amount of gain deferred.

 

To obtain the relief:

  • The company must be a new company, incorporated within the two years prior to the issue of the shares.
  • The shares must be issued in order to raise money for a new trade and the cash raised must be spent within the two years following issue.
  • The total of SEIS investments must not exceed £150,000; the limit for VCTs will increase from £2m to £5m.
  • The company must exist for the purpose of carrying on one or two new qualifying trades.
  • It must have a permanent establishment in the UK and its shares must be unquoted.
  • The company cannot be part of a group and must not be a member of a partnership or similar entity.
  • The total value of the company’s gross assets must not exceed £200,000 at the time of issue.  If there is a related company the relevant proportion of the assets must be included in this total.
  • The total full-time equivalent employees must not exceed 25 at the time of issue; employees include directors for this purpose.  The limit for an ordinary EIS scheme will increase from 49 to 249.
  • There must be no EIS or VCT investment in the company before the SEIS shares are issued.

 

Companies considering using the Seed Investment Scheme (SEIS) have the option to obtain Advance Assurance or formal clearance from HMRC Small Company Enterprise Centre (SCEC).

 

Before giving the assurance HMRC will consider if the company will be a qualifying company carrying out a qualifying business activity, if the shares will be eligible shares and if the money raised will be used in a manner which satisfies the rules of the scheme.

 

If the company wishes to rely on an assurance, the onus would be on the company to provide all relevant information drawing attention to any particular issues which could mean that the company may not meet the requirement of the scheme when the shares are issued.

 

Full guidance on the Advance Assurance application can be found on the HMRC website.

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Filed Under: 01 Tax Tagged With: Accountants in Balham, Accountants in Mitcham, Accountants in Putney, Accountants in Southfields, Accountants in Tooting, accountants in Wandsworth, accountants in Wimbledon, business, finance, small, tax

VAT on Incorporation

Jan28

If the previous business was VAT registered it can pass its VAT number on to the new company under the transfer of going concern rules (TOGC). However, this is not always advisable as the VAT number will carry with it all the ‘history’ of the old business, including defaults for late payment and error records. If the owners of the new company are not exactly the same people as those who owned the old business, the new owners may not want to take on the VAT ‘sins’ of the old business.

In this case the new company will have to apply for a new VAT number. This is the same procedure as a new VAT registration, and penalties will apply if it is not done on time.

If you want the new company to adopt the VAT number of the unincorporated business you must inform the Tax Office of the change in structure of the business within 30 days. If this deadline is not met the Taxman will impose a ‘failure to notify’ penalty which could be up to 100% of the VAT due, even where all the VAT due has been paid on time.

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

Filed Under: 01 Tax Tagged With: Accountants in Balham, Accountants in Mitcham, Accountants in Putney, Accountants in Southfields, Accountants in Tooting, accountants in Wandsworth, accountants in Wimbledon, incorporation, vat

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