Should my Work in Progress be classified as a Debtor (UITF40) 3

It’s a common issue and area of confusion and it has tax implications. WIP is valued at the lower of cost or net realisable value but Debtors whether invoiced or not are valued at Sales Value, uninvoiced Sales are shown as Amounts Recoverable on Contracts within Debtors.

Here is an example from HMRC

A joiner contracts to create fitted bookcases in an office for a total price of £15,000. He purchases the timber (materials cost £6,000) and builds the doors in his workshop. He also prepares the timber for the rest of the structure in his workshop. He then builds the skeleton of the bookcases on the customer’s premises and attaches thereto the timber that he has already prepared in his workshop. What is the accounts treatment if his year end occurs after he has prepared the timber and the doors but before he has gone to the customer’s premises to build the skeleton and fit them?

The contract is a single contract and the joiner should recognise revenue according to the stage of completion of the work. It is not relevant whether the work is done at his workshop or at the client’s premises. Neither is it relevant that part of the contract can be regarded as ‘goods’ and part as ‘services’: both are treated in the same way for accounting purposes.

Let us assume the joiner assesses that he has done 1/3 of the work by the year end and he has used half of the timber and other materials. The calculation would be: total price £15,000 less materials at cost (£6,000) leaves £9,000. Assuming the profit attaches only to the labour, accrued income is £3,000 (1/3 complete) plus materials at cost of £3,000 ( a half used), a total of £6,000. The remaining half of the total cost of the materials (£3,000) is work in progress. These figures should then be adjusted to reflect any likely losses, discounts, delay in payment or cost of difficulties expected to arise in completing the contract. Any progress payments received should be treated as creditors in accordance with SSAP 9.

http://www.hmrc.gov.uk/manuals/bimmanual/bim74270.htm

Also further guidance at

http://www.hmrc.gov.uk/helpsheets/hs238.pdf

http://www.icaew.com/en/technical/tax/tax-faculty/~/media/Files/Technical/Tax/Tax%20news/TaxGuides/TAXGUIDE-8-06-UITF-40-and-Taxation.ashx

So do you have Work in Progress or Amounts Recoverable on Contracts?

steve@bicknells.net

How De-pooling Short Life Assets can reduce your tax 1

In the Finance Bill 2011 the period over which expenditure on plant or machinery can be given “short life assets” (SLA) treatment was extend from 4 year to 8 years.

The change will have effect for expenditure incurred

• on or after 1 April 2011 for businesses within the charge to corporation tax (CT); and

• on or after 6 April 2011 for businesses within the charge to income tax.

If a business elects for plant or machinery to be treated as a short life asset, capital allowances are calculated individually on the asset until a “cut-off” point. This ensures that, if the asset is sold or scrapped before the cut-off point, the total allowances given over the period of ownership equal the actual net cost of the asset to the business.

An election will be beneficial if the asset depreciates faster than the rate at which capital allowances are given, and it is sold before the cut-off date.

Expenditure incurred on an asset given SLA treatment is allocated to a ‘single asset pool’ for the cut-off period. The current four-year cut-off period is four years from the end of the chargeable period in which the expenditure is incurred.

Writing-down allowances are given on the reducing-balance each year, currently at 18 per cent. If the item is scrapped or sold within a ‘four-year cut-off’ period, the remaining balance of expenditure in the pool is compared with the disposal proceeds. A further allowance, or charge, is made for the difference. This ensures that allowances given to this point match the actual net cost of the SLA.

If the Asset was placed in the Main Pool the tax relief would come through in future years through the WDA. So using the SLA will speed up Tax Allowances.

If the asset is not disposed of within the ‘four-year cut-off’ period, the remaining expenditure in the single asset pool is transferred to the main capital allowances pool, where writing-down allowances will continue to be available in the normal way.

The exceptions to SLA treatment are listed in section 84 CAA 2001 and include most cars and all expenditure on ‘long-life assets’ (assets with a useful economic life of at least 25-years) and ‘integral features’ of a building or structure.

A SLA election must be made for corporation tax within two years of the end of the relevant chargeable period in which the expenditure is incurred. For income tax the time limit is normally the anniversary of the 31 January following the tax year in which the end of the relevant chargeable period occurs.

Assets that cannot be treated as SLAs are:

  • assets that were provided for some other purpose including leasing under a long funding lease before being brought into use for a qualifying activity CA23030;
  • assets received as a gift CA23040;
  • assets used for special leasing CA20040;
  • cars apart from cars hired out to people in receipt of certain disability allowances CA23510;
  • long life assets CA23700;
  • special rate expenditure assets CA20150;
  • assets provided for leasing except:
    • those used in the designated period for a qualifying purpose and for no other purpose; and
    • cars provided for disabled people in receipt of certain allowances;
  • assets leased overseas that qualify for WDAs at the 10% rate CA24200;
  • assets leased to two or more persons jointly where at least one lessee is a non- resident who does not use the asset exclusively for earning profits chargeable to tax and the leasing is not protected leasing CA24400;
  • ships CA25000;
  • assets used partly for a qualifying activity and partly for other purposes CA27000;
  • assets that receive a partial depreciation subsidy CA27100.

http://www.hmrc.gov.uk/manuals/camanual/CA23620.htm

steve@bicknells.net

RTI and the Universal Credit Reply

Under the new rules companies submitting payroll payments to BACS will need to include additional information along with the BACS transaction including the payee’s tax code, pay to date and tax to date amongst other items of information. These new rules have been named RTI or Real Time Information by HMRC.

Migration started in April 2012 with an aim to have all companies migrated by the end of 2013.

RTI will:

  • make the PAYE process simpler and less burdensome for employers and HMRC; for example by removing the need for the end of year return (P35 and P14) and simplifying the employee starting and leaving processes
  • make PAYE more accurate for individuals, over time reducing the number of bills and repayments sent after the end of the tax year
  • enable HMRC to pursue late payments more effectively
  • support the payment of Universal Credits
  • reduce Tax Credits error and fraud

http://www.hmrc.gov.uk/rti/employerfaqs.htm

To enable RTI payroll providers and BACS providers are currently rolling out new software and applications.

The Universal Tax Credit will be launched in 2013 and will replace:

  • income-based Jobseeker’s Allowance
  • income-based Employment and Support Allowance
  • Income Support
  • Child Tax Credits
  • Working Tax Credits
  • Housing Benefit.

What’s different about Universal Credit?

The main differences between Universal Credit and the current welfare system are:

  • Universal Credit will be available to people who are in work and on a low income, as well as to those who are out of work
  • most people will apply online and manage their claim through an online account
  • Universal Credit will be responsive, as people on low incomes move in and out of work, they’ll get ongoing support – giving people more incentive to work for any period of time that is available
  • most claimants on low incomes will still be paid Universal Credit when they first start a new job or increase their part-time hours
  • claimants will receive just one monthly payment, paid into a bank account in the same way as a monthly salary
  • support with housing costs will go direct to the claimant as part of their monthly payment.

http://www.dwp.gov.uk/policy/welfare-reform/universal-credit/

steve@bicknells.net

ABI to withdraw notification of Bank’s interest on Insurance Policies Reply

Since 1992, an agreement has been in place between the Association of British Insurers (‘ABI’) and the British Banking Association (‘BBA’) whereby a bank could notify its interest in relation to secured properties and the insurers would tell the bank of any cancellation or alteration in cover, with a grace period to allow the bank to arrange its own policy if the borrower had failed to maintain the required cover.

Last September the ABI announced that they were ending this agreement and that co-insured status either as Joint Insured or Composite Insured would be the only options open to Banks. These options are likely to increase insurance premiums.

Banking sources tell me that last week it was agreed that ABI would extend the agreement with BBA to December 2012, the BBA are yet to issue guidance and comment.

steve@bicknells.net

10 things you need to know about Pension Auto Enrolment 4

Almost 70% of workers in Britain have little or no knowledge of the government’s plan to automatically enrol people in their company pension scheme from 1 October 2012. The change to pensions legislation means millions of people who have so far not been saving for their retirement will begin putting money aside for the first time.

Up to 10 million people will be placed into schemes from this autumn, under government plans to tackle the pension savings crisis, beginning with larger companies.

http://www.guardian.co.uk/money/2012/may/02/workers-unaware-auto-enrolment-pensions

Here are 10 things that you need to know:

  1. A Worker may include Agency workers and Self Employed workers depending on the their contracts
  2. One Person companies are not subject to Auto Enrolment however, if the company takes on a second worker and the director and new employee have contracts of employment then both could become workers under auto enrolment.
  3. Eligible Job holders are aged between 22 and state pension age and earn over £8105 and are automatically enrolled however Non Eligible Job holders could opt to join
  4. Employer contributions will start at 1% from October 2012 till 2017 (2% total contributions), then 2% till 2018 (5% total contributions), then go to 3% (8% total contributions)
  5. The employer must register their scheme www.tpr.gov.uk/registration
  6. The scheme is being introduced over a 5 year period starting in 2012, to find out when it applies to your business click on this link http://www.thepensionsregulator.gov.uk/employers/staging-date-timeline.aspx
  7. Employees can opt out but new Employment Rights will prevent employers from offering inducements to opt out and prohibit employers from anti pension recruitment policies and unfair dismissal relating to pension enrolment
  8. If the employee opts out the employer must automatically re-enrol them every 3 years
  9. The Pensions Regulator will have powers to issue compliance notices and fixed and escalating penalties increasing on a daily basis. Employees who blow the whistle on their employer will be protected under the Public Interest Disclosure Act 1998
  10. The following types of scheme will qualify
    • Defined Benefit Schemes
    • Defined Contribution Schemes
    • Hybrid Schemes
    • Contract Based DC Schemes
    • Stakeholder Pension Schemes

steve@bicknells.net

Simpler Income Tax for the Simplest Small Businesses 1

HMRC issued a consultation paper on the 27th March inviting comments until 22nd June 2012.

From April 2013, the Government proposes to introduce a voluntary cash basis for small businesses to calculate their income tax along with simplified arrangements for some business expenses.

The proposals are, that those who choose to use the new regime will be taxed on the basis of their receipts less allowable payments for expenses, rather than needing to spend their time doing accounting designed more for big business.

The Government is exploring proposals that small businesses with receipts of less than £77,000 would be eligible to use the cash basis, and that they could continue to use it until their receipts rise to more than £150,000 in any year.

Some accountants are concerned that this will mean they lose business as their services won’t be needed but others are concerned that the self employed could end up paying the wrong tax because of issues such as pre-trading expenses.

Soon we will find out the results.

steve@bicknells.net

 

 

 

Did you issue shares to Employees or Directors? Form 42 due 6th July Reply

HMRC F0rm 42 – Employment-related securities – covers most situation where you issue shares to employees or directors, however, you may not need to complete the form in some circumstances:

  1. On Company Formation
  2. Allotment of shares prior to starting to trade
  3. Shares issued to Directors before the company starts to trade
  4. Transfers of shares in the normal course of the domestic, family or personal relationships
  5. Flat Management Companies
  6. Members’ clubs (formed as companies)
  7. Share for share exchange
  8. Rights Issues
  9. Bonus Issues
  10. Scrip Dividends
  11. Dividend reinvestment plans (DRIPs)
  12. Shares acquired independently by employees

Examples of what you must report:

  • The gift or purchase of shares by employees or directors.
  • The grant or exercise of options granted to employees or directors.
  • Anything that changes the value of the shares held by employees or directors.
  • The sale of employees’ or directors’ shares for more than their market value.
  • Cash cancellation payments to employees or directors.

Penalties

Penalties are not imposed automatically, the company is warned of their failure to make a report on a minimum of two occasions before the case is referred to the tribunal. The penalties can be £300 per responsible person and £60 per day outstanding.

Here is a link to the 2012 Form 42 http://www.hmrc.gov.uk/shareschemes/form42-2012.pdf

 

steve@bicknells.net

Capital Gains Tax for Companies 1

Capital Gains can occur in many circumstances, for example, when the company:

  • sells, gives away, exchanges or otherwise disposes of (cease to own) an asset or part of an asset
  • receives money from an asset – for example compensation for a damaged asset

Sometimes it can be hard to establish the value of the gain and HMRC can carry out a post valuation check which is requested using http://www.hmrc.gov.uk/forms/cg34.pdf

Example – calculating the chargeable gain on the sale of a shop
Calculation step Result
Step 1: amount received for the asset in May 2011 £200,000
Step 2: deduct £120,000 (the cost of the asset in November 1997) £200,000 − £120,000 = £80,000
Step 3: deduct expenses on improving the asset (£10,000 spent on building an extension in June 2006) £80,000 − £10,000 = £70,000
Find the inflation factor for November 1997 0.474
Calculate the Indexation Allowance £120,000 × 0.474 = £56,880
Deduct the Indexation Allowance £70,000 − £56,880 = £13,120
Step 4: look up the appropriate inflation factor and calculate the Indexation Allowance for the extension 0.185
£10,000 × 0.185 = £1,850
Deduct the Indexation Allowance for the extension to arrive at the chargeable gain £13,120 − £1,850 = £11,270

http://www.hmrc.gov.uk/ct/managing/company-tax-return/returns/chargeable-gain.htm

You can get a full list of indexation allowances at http://www.hmrc.gov.uk/rates/cg-indexation-allowance/apr12-ct-cgains.pdf

If the losses don’t exceed the gains, put the total gains in Box 16 on your Company Tax Return and the total losses, if any, in Box 17. Deduct Box 17 from Box 16 and put the result in Box 18 – this is your ‘net chargeable gain’.

If the losses do exceed the gains, leave Box 16, Box 17 and Box 18 blank but put the amount of the net loss in Box 131. You can then ‘carry forward’ those capital losses to offset against any capital gains you make in a future Corporation Tax accounting period(s). You would include those losses in Box 17 of a future Company Tax Return. You can carry forward capital losses indefinitely.

If you intend to replace the asset you may be able to apply Business Asset Rollover Relief, this is most commonly use for Land and Buildings.

steve@bicknells.net

 

 

 

 

 

HMRC launched six new task forces in May – here are some tips on handling enquiries Reply

The taskforces will target traders who do not pay the right amount of tax in:

 

  • Indoor and outdoor markets in London
  • Taxi firms in Yorkshire and East Midlands
  • Property rentals in East Anglia, London, Yorkshire and the North East
  • Restaurants in the Midlands

 

Taskforces are specialist teams that undertake intensive bursts of activity in specific high risk trade sectors and locations in the UK. The teams will visit traders to examine their records and carry out other investigations.

http://hmrc.presscentre.com/Press-Releases/Six-taskforces-to-tackle-tax-dodgers-launched-67ac1.aspx

HMRC anticipate recovering more than £23m from these new task forces launched on 31st May 2012.

12 taskforces were launched in 2011/12 looking at restaurants (London, North West, Scotland) fast food outlets (London, Scotland), scrap metal dealers (Scotland), fraudulent repayments (London), landlords (North West, Scotland), construction (North West), property transactions (London) and overdue returns (South East).

Here are 10 top enquiry tips from PFP:

1. Establish Enquiry Type

It is important that the type of enquiry is established. If it is an Aspect Enquiry make sure it is fully dealt with. Remember HMRC needs a reason to extend an enquiry from aspect to full – challenge any extension where necessary.

2. Best Adviser

The best person to deal with an enquiry is not necessarily the most technically brilliant. Technical knowledge is vital, but equally important is knowledge of how the system works and the ability to negotiate effectively.

3. Taxpayers Rights

This is a fundamental point. Anyone dealing with the Revenue should be aware of the taxpayer’s rights, e.g. when personal bank statements need to be provided, if meetings are necessary etc.

The client should be informed of their rights and the way the enquiry can be expected to run so that they do not say or do anything rash or unhelpful.

4. Take Out Insurance

At a Chartered Institute of Taxation Conference a presenter said that he had found the Revenue were dealing more efficiently with cases where they knew the clients had cover. This insurance can save money and strengthen a client relationship.

5. Revenue Manuals

These manuals are a good source of information – particularly if the HMRC asks for something and you are wondering whether this should be allowed. We have seen the enquiry manual being quoted successfully to HMRC a number of times.

6. Prevention v Cure

We know that various events such as late returns or a poor compliance record can increase the likelihood of an investigation. A number of accountants are now informing their clients of this fact when chasing up tax return information.

Once the investigation has started the standard of record keeping becomes important. Many accountants are telling clients to improve record keeping where necessary, some are even asking clients to annotate personal bank statements to avoid difficulties with remembering what deposits relate to some 2-3 years later. One accountant said that he knew full well not all of his clients were doing this but as least they had been told.

7. Establish Facts

This is an obvious point. Many of our accountants at the outset of an enquiry will ask the client in a positive and polite way if he/she is aware of any areas with which HMRC may have a problem e.g. undeclared sales. This gives out a clear message – if you tell us now we will do our best to help you; if not then there may be little we can do.

8. Seek Advice

If you don’t know or are unsure, just ask! We can always be asked for a second opinion – sometimes accountants know the answer but telephone just to bounce ideas off of someone. We are here to help, so if you are in doubt, just ask!

9. Be Accurate

Or “tell the truth”. Be sensible in what the Inspector is told. Do not be tempted to say the first thing that comes to mind just to satisfy HMRC.

For example, on one occasion HMRC asked why the accountancy fees were so high compared to previous years. The answer came back “because the records are very complicated and extensive”. HMRC replied he had all the records and they fitted in a shoe-box! In the eyes of the Revenue, the accountant’s credibility had been undermined and as a result, written proof of everything was requested.

10. Negotiate

This speaks for itself and must be remembered at all times. Self Assessment enquiries feature necessary negotiation in many cases. With targets of over 83%, HMRC may not be particularly interested in assessing the right amount of tax – just more tax.

http://www.pfponline.com/top10taxtips/692

steve@bicknells.net

 

 

HMRC – The odd case of Coffey Builders – Employment Status Reply

I was reading Tips & Advice Tax – Issue 17 and they highlight an unusual piece of new case law T Coffey/Dr Selvarajan and HMRC.

TC was a retired builder who was asked by S to manage and supervise the refurbishment of his medical clinic, the project lasted over 2 years. No substitutes were allowed, S guaranteed payment, there was no contract, TC worked regular hours and he was paid a rate of £500 per week. Sounds a lot like employment doesn’t it?

But HMRC decided to argue that he was self employed and undermined the importance of the factors that would make him employed.

Very interesting.

Steve@bicknells.net