Are you incorporated yet?

For those of you who don’t study the HMRC ‘Rates and Allowances’ archive and compare tax rates, you may not be aware of the historical tax rates paid by companies and the self employed. In the ‘olden’ days the break even point of incorporation was probably up at around the £50,000 mark, but more recently this has now almost certainly changed…..

With the latest changes in the tax rates from the last budget now in full effect, limited companies are now paying corporation tax at 20%, which is now the same rate at which the self employed pay their income tax at the basic rate. Whereas companies have to wait till their profits reach £300,000 before their tax rates are increased, the self employed have their tax rate hiked up to 40% when their earnings reach £35,000 and then again to 50% at £150,000.

And then of course you then have to take into account the National Insurance charges for the self employed, which have now risen from 8% to 9% for basic rate tax payers and from 1% to 2% for higher rate tax payers. So whereas historically incorporation only became a ‘no brainer’ if you were a higher rate tax payer, the 9% tax differential for basic rate tax payers means even they could be thousands of pounds better off by incorporating.

All businesses should consider incorporation whatever the profit, but incorporation is not easy. So apart from saving money what are the other benefits to incorporation and what are the practical issues that a business needs to consider before taking the plunge?

Benefits

• Reduction in tax bill – basic rate tax payers at least 9% better off, higher rate tax payers much more so.
• Limited liability – before the benefit in tax reduction this was the main reason for incorporation because should a company fail the liability of the shareholder is supposedly limited to the amount unpaid on the shares (if any).
• The word ‘Limited’ may provide enhanced status.
• Different categories of shares can enable different levels of payment to be allocated; advantage being taken of the different personal tax circumstances of individual shareholders.
• Dividend waivers enable transfer of income – possibly from a higher rate tax payer to lower rate. Not possible to transfer income of self-employed unless a partnership is formed.
• IHT Planning – a company enables greater flexibility; on death the company continues to exist as a separate legal entity.
• Depending upon the type of business it might prove easier to sell shares rather than the business and business assets if not a Limited company.  
• Tax free employee benefits and incentives can be provided with the company obtaining tax relief thereon – not possible for the self-employed employer
• Where the business property is held outside of the company in the directors name the director can extract funds from the company in the form of rent – no PAYE or NIC issues. There will usually be a mortgage such that rental income will ensure immediate tax relief for interest paid. No Entrepreneurs Relief is due on the sale of the property as it will be deemed an investment property.
• Overlap relief available on cessation of self-employed trade.
• Transfer of trading loss – relieved against salary then against dividends so long as business exchanged for shares. At least 75% of the shares of company must be retained by the shareholder throughout the tax year in which the loss is relieved. (S86 ITA 2007)

 Practical issues

• Be careful to calculate best date for cessation of self-employment – choosing the wrong date may increase tax liability for the final year.
• Some companies in regulated industries may be required to apply for new licenses as the status of the business has changed.
• Consider whether it would be more beneficial for cars to be held in the director’s personal name outside of the company – calculation as to benefit in kind and Capital Allowance etc. needed. Company cars are no longer tax efficient now that they must be pooled with other plant so unless the car is of low emission the figures will probably show that it is best to keep car out of company. Will leasing the car be an alternative?
• Turnover of a company in excess of £6.5m requires audited accounts; no such requirement for self-employed.
• Care is needed where there is the prospect of the shares being transferred or disposed of within two years of incorporation (Business Property Relief)
• IR 35 ‘personal service’ legislation issues for ‘knowledge based’ businesses.
• Consideration is needed as to the method of transfer of business i.e. via use of ‘Incorporation’ relief (s162 TCGA 1992) or ‘Hold Over’ relief (s165 TCGA 1992). ‘Hold over relief’ is automatically applied by HMRC if the relevant criteria are met therefore suggest write to HMRC confirming position. If the business was set up post 1 April 2002 the cost for goodwill is allowed to be amortised in accordance with accounting practice against the company’s profits; if the goodwill was created pre 1 April 2002 no relief is allowed. The owner can claim Entrepreneurs’ relief on the sale of the business and should full relief not be possible tax is charged at the beneficial rate of 10%.
• The most difficult issue to deal with is the valuation of goodwill – best to use a specialist valuer.

  About the author: Richard Jepson ACCA is the Tax Manager at Adams and Moore. For more information or to make an enquiry contact Richard@adamsandmoore.co.uk

Using your own car for business – A quick reminder.

If you are an employee or director using your own car you are able to make a tax free claim for mileage.  From the 6^th of April this year the mileage allowance on which you can claim tax relief was increased from 40p to 45p per mile. However, as before, this applies only for the first 10,000 business miles in the tax year, with the excess mileage only qualifying for a mileage allowance of 25p per mile.

 Employers do not have to pay mileage allowance nor do they have to pay 45p per mile, however if they pay less than 45p any shortfall can be claimed by the employee/director as a tax relief. If your employer pays you more than the statutory rate, the excess will be taxed.

 Do not forget that if you drive your own car on a business trip and take colleagues with you, your employer (which of course includes your own company) can also pay you a tax-free 5p per mile per passenger, so yourself and two colleagues in your car and you can claim 55p per mile tax free.  But the Revenue in their inimitable way will not allow any tax relief claim should the employer not be willing to pay this additional 5p per person, strange but true!

 The self-employed among you who have not yet reached the VAT threshold (currently £73,000) can also use these new rates to make a claim for business mileage, but of course you will also have the option of to claim the actual business use expense.

 Volunteer drivers can also use the rates to calculate the taxable profit on mileage allowances received from hospitals, social service agencies and other voluntary organisations.

About the author: Nigel Dack FATT is a client manager at Adams and Moore Charetered Certified Accountants.  Contact Nigel at Nigel@adamsandmoore.co.uk if you have any questions or wish to find out how we can help you. 

HMRCs new late filing penalties

The new tax year inevitably means one thing – your tax return is now due!

You have until 31 January 2012 to get your 2010/11 tax returns filed online, but be mindful of the new HMRC late-filing penalty regime that packs much more of a punch than anything we have seen in recent times.

But if you are one of these upstanding citizens who always file their returns and pay their taxes well before the 31 January deadline, then carry on; there’s nothing to see here!

 

Key changes

For the rest of us, the changes to the penalty regime are well worth noting.

• From April 6, you can no longer use the well-honed get out clause ‘I’ve paid all my taxes’ or ‘I don’t have a liability so you can’t fine me £100 if my return is late’, because now they can.
• What’s more, penalty fines could increase to over £1,300 if HMRC get their way!

So what else has changed?

Well the new late filing penalty regime for tax returns is:

Day one: you will be charged an initial penalty of £100, even if you have no tax to pay or you have already paid all the tax you owe.

Three months late: you will be charged an automatic delay penalty of £10 per day up to a maximum of £900.

Six months late: You will be charged further penalties, which are the greater of 5 per cent of tax due or £300.

12 months late: You will be charged yet more penalties, set at the greater of 5 per cent of tax due or £300.

Defending this policy, HMRC have released the following statement

“The vast majority of people don’t have to pay penalties because they send in their return and pay on time. But there are always a small number of people who have avoided filing or paying on time. HMRC spends a lot of time pursuing late returns and getting involved in unnecessary appeals work. We want to focus our resources on more productive work such as catching criminals and collecting tax. The old £100 penalty was not much of a deterrent and these new penalties, which increase over time, will get people to submit returns as soon as possible. Basically, the greater the delay, the greater the penalty.”

It is important to note that these penalties are in addition to any interest charged on overdue payments, so can end up being fairly considerable. So don’t get caught out.

About the author: Richard Jepson ACCA is the Tax Manager at Adams and Moore. For more information or to make an enquiry contact Richard@adamsandmoore.co.uk

Business Secretary seeks to cut red tape for small business – Good news and Bad news

In a recent Mansion House speech, Vince Cable the Secretary of State for Business outlined his vision of the audit and accounts requirements for small companies. Notably, Mr Cable will like to see:

• Small and medium sized businesses exempt from audit
• Companies with turnover and assets less than £2m exempted from the requirements to file accounts.

Mr Cable is not alone. Generally, law makers’, not just in the UK but across Europe believe that the statutory filing requirements for small and medium sized businesses are an undue burden to small and medium-sized businesses.

Assuming Vince Cable gets his way, over 75% of UK companies  that currently file their accounts will no longer be required to do so. This in theory, should translate to reduced accountancy fees, which if it happens in practice, is great news for clients.

Now the not so good news

This is unlikely to become law anytime soon. Mr Cable does not yet have enough backing in Europe to see his ideas through to statute, nor can he expect to pass them through the UK parliamentary system without the backing of the accounting professional body’s pressure group.

Judging by recent developments in de-regulations however, it may well be just a matter of time before these changes make it to law. The big question is; when they do, will the savings be passed on to clients?

At Adams and Moore, we have reviewed our entire clients services portfolio. Where possible we have reduced clients’ fees by providing clients with adequate training so that they can maintain some of the non-accounting tasks associated with fulfiling their statutory requirements.

About the author: Egbert Johnson FCCA is the manager responsible for Audit and Accounts at Adams and Moore Chartered Certified Accountants. For more information contact Egbert@adamsandmoore.co.uk

It all comes down to bookkeeping

Nigel Dack FATT, Client Manager at Adams & Moore CCA writes  

The 2008 Finance Act has given HM Revenue and Customs the power to investigate up to 50,000 small and medium-sized businesses books and records. This is over and above their normal investigatory power.  The checks on business records are due to start in the second half of 2011. Businesses could face fines of up to £3,000 if their records are found to be lacking. 

 Why wait for the Revenue to come knocking and find weaknesses in your records that could open you to potential fines, when you can be proactive and ensure that your business records are up to scratch? 

 The Revenue has produced a very helpful fact sheet in their ‘Tax help series’ which outlines the records that are required by law. It is probable that this will be the bench mark from which they will work in the forthcoming investigations.

 The fact sheet above covers various types of business, but specifically I turn my attention to the records required to be kept by organisations liable to Corporation Tax. In the main, we are talking (but not exclusively) about companies.

 The Revenue say:

‘If your company or organisation is liable for Corporation Tax, you must keep and retain adequate business and accounting records to file an accurate Company Tax Return and calculate how much Corporation Tax you need to pay.’

But what do they mean by this?

 There is a legal requirement on companies to keep accounting records as stipulated by Companies House. These are:-

• a record of your company’s assets, for example, a record of ‘capital expenditure’ such as the purchase and sale or disposal of company assets, equipment, office furniture and vehicles
• a record of your company’s liabilities
• a record of your company’s income and expenditure
• details of any stock on hand at the end of your financial year.

The Revenue says that if your company keeps these records then ‘you will not need to keep any more for Corporation Tax.’ However the Revenue goes on to say that all the records you do keep must:-

• be complete and up to date
• allow you to work out correctly the amount of Corporation Tax you owe to HM Revenue & Customs (HMRC), or can reclaim from HMRC
• allow you to file an accurate Company Tax Return
• be easily accessible if HMRC asks to see them during an enquiry into your Corporation Tax affairs

And then goes on to ‘suggest’ records that you may ‘find useful’ to keep, these are:-

• annual accounts, including your profit and loss statement and balance sheet
• bank statements and paying-in slips
• a cash book and any other account books you keep
• purchases and sales books or ledgers
• invoices and any record of daily takings such as till rolls
• order records and delivery notes
• a petty cash book

About the author: Nigel Dack FATT is responsible for providing A&M clients with ad hoc advise and support, and on their behalf, oversees the delivery of the entire portfolio of compliance and advisory services delivered by A&M specialist teams. For more information email him on nigel@adamsandmoore.co.uk

2011 Budget Summary

CHANCELLOR GEORGE OSBORNE presented his second budget on Wednesday 23 March 2011.

In his statement, Mr Osborne began by saying,

” this budget is about reforming the nation’s economy so that we have enduring growth and jobs in the future.”

The Budget updates previous announcements and also proposes further measures. Some of these changes apply from April 2011 and some take effect at a later date, so the timing must be factored into any tax planning that must now reflect these changes.

Main Budget proposals

• A 2% cut in the main rate of corporation tax to 26%
• Enhanced tax incentives for investment in higher risk companies and for SMEs investing in research and development
• Reintroduction of Enterprise Zones
• Entrepreneurs Relief doubled to £10m
• An increase in the mileage rate payable to own car drivers
• Consultation on integrating income tax and national insurance contributions
• Reduced inheritance tax rates for those giving one tenth of their estate to charity

Our summary focuses on the issues likely to affect you, your family and your business. We have included our own comments to help you understand how what was said could impact you.

Click here to read our summary of the Budget 2011

Please do not hesitate to contact us for advice.

2011 Budget: Our verdict and initial reactions

CHANCELLOR GEORGE OSBORNE announced today that public borrowing figures will be down to £29bn by 2015/16 compared with £146bn for 2010/11.

The budget was received with ‘cautious optimism’ from the city, as the Chancellor set out policies that could see Britain simplify the tax system, return the lowest corporation tax in Europe by the end of this parliament, and deliver a package of initiatives to boost jobs and youth employability.

Labour Leader Ed Miliband ridiculed government claims that its budget is about growth and recovery. Citing the Chancellor’s downgraded forecast for economic growth from 2.1% to 1.7% this year, the leader of the opposition said:

“Growth is down this year and next year. It’s the same old Tories. It’s hurting not working.”

Miliband said the slowdown was because the government was going “too far, too fast” in its plan to eradicate the budget deficit by 2015.

The Chancellor began his speech by saying the government does not intend to increase taxes.

Indeed, Osborne increased the personal tax allowance by £1,000 – the highest annual increase in history, which will lift millions out of paying taxes altogether. The Chancellor of the Exchequer also announced plans to create 250,000 apprenticeships over the next 4 years, extended the Business Rate relief till October 2012, and surprisingly reduced fuel duty by 1p a litre, where Labour had planned an increase of 4p.

Over the next week, we will be examining the detail behind the announcements and advising our clients accordingly.

New Junior ISA to replace child trust fund (CTF)

The Government is to introduce a new Junior ISA to replace the child trust fund (CTF) account which has been discontinued.

Vouchers at birth will no longer be issued for children born on or after 3 January 2011. However, any existing vouchers which have not yet been used to open an account remain valid. See http://www.childtrustfund.gov.uk for more information.

The new arrangements will provide parents with a simple and new tax-free way to save for their children but without any contributions from the Government. The features of the new account will be:

• All returns will be tax-free
• Funds placed in the account will be owned by the child and will be locked in until the child reaches 18
• Funds can then be withdrawn without losing any of the tax benefits
• Investments will be available in cash or stocks and shares
• Annual contributions will be capped, although the limit has not yet been set

The new accounts should be available in autumn 2011. Eligibility will be backdated from then to ensure that no child born after the withdrawal of the child trust fund vouchers will miss out on a tax-free savings opportunity.

“The key advantage of parents making contributions into a Junior ISA is the combination of tax-free status and capital growth. If a parent instead provides capital in an ordinary bank account or makes share investments for their child, annual income in excess of £100 will be treated as taxable income of the parent. It therefore follows that significant tax savings could accrue over the life of a Junior ISA account.” – Richard Jepson ACCA (Tax Manager at Adams & Moore Chartered Certified Accountants)

HMRC to clamp down on poor record keeping

HMRC in a recently issued consultation document report that poor record keeping may be a problem in around 40% of all SME sized businesses.

To tackle this, HMRC have announced they are planning to check up to 50,000 SME business records annually in a new initiative that will take effect from the second half of 2011.

According to HMRC, 

“the loss of tax through poor record keeping, particularly in the current economic climate, cannot continue and HMRC is therefore, determined to use the powers at its disposal to improve business record keeping and so reduce the losses to the Exchequer that stems from poor business records”

To address this, HMRC intend to impose penalties for significant record keeping failures as a means of driving improvements in record keeping and increasing tax receipts to the Exchequer.

“There are so many things you need to think about when you’re running a business; getting your price point right so that you attract the right number and sort of customers to turn a profit. You need to stay ahead of the competition, manage staff and suppliers, understand your client needs as they evolve and act quickly to resolve problems when they arise. We advice you avoid unnecessary fines and leave us to take on the hassle of making sure you are up to date with your records. It is what we do.” - Daniel Tabiri ACCA (Manager, A&M Bookkeeping and Management Accounts division)

Contact us for further advice if you would like to discuss the nature and extent of the record keeping requirements for your business.

New government tax proposals may impact those with unearned income

CHANCELLOR GEORGE OSBORNE is expected to outline how he will merge income tax and national insurance contributions (NICs), and phase out differences between the tax and what is technically a contribution towards welfare and pension provision, in tomorrows budget speech.

In 2011, income tax and NICs are forecast to raise c£250billion, or approximately 45% of tax revenues. If the recommendations of the Office of Tax Simplification (OTS) created  in July 2010 by the Chancellor of the Exchequer to review small business taxation are fully implemented, the Chancellor could announce a timeline for the unification of income tax and NICs in the House of Commons tomorrow.

This is not a new issue. HM Treasury last publicly commented on this in the 2007 paper Income Tax and National Insurance Alignment: An Evidence Based Assessment. Since then, the Mirrless Review  produced by the Institute of Fiscal Studies has come out in favour of integrating the two systems into a single tax.

In a move Sir Humphrey from the 1980s hit satirical sitcom ’Yes Minister’ would describe as ‘courageous’; if this goes ahead, there are bound to be winners and losers.

The approach will make it easier to deal with the outstanding issue of IR35 and the fairly complicated taxation of the self-employed; but with different thresholds and rules to be aligned, it is likely that attention will concentrate on those who will lose out, including those with unearned income such as pensioners who at present pay no NICs and higher earners, such as company directors who try to ‘disguise’ some of their earnings.

“We will carefully study the Chancellor’s proposals in order to be in a position to advice our clients on how they may be impacted by the proposed changes”                                                                                                                                - Richard Jepson ACCA (Tax Manager at Adams & Moore Chartered Certified Accountants)