A grant is an amount of money given to an individual or business for a specific project or purpose.
You can apply for a grant from the government, the European Union, local councils and charities.
Advantages include:
you won’t have to pay a grant back or pay interest on it
you won’t lose any control over your business
Financial assistance in the form of grants is subject to the normal taxation rules, as supplemented by S105 Income Tax (Trading and Other Income) Act 2005 and S102 Corporation Tax Act 2009 (see BIM40465). Under normal rules the tax treatment of grants will depend on whether they are capital or revenue.
Revenue grants
Grants which meet revenue expenditure, such as interest payable, are normally trading receipts.
See also Smart v Lincolnshire Sugar Co. Ltd [1937] 20TC643 and Burman v Thorn Domestic Appliances (Electrical) Ltd [1981] 55TC493.
Capital grants
Grants which meet capital expenditure are normally not trading receipts.
Grants that may be capital in nature include those paid to acquire capital assets or to facilitate the cessation of a trade or part of a trade.
See The Seaham Harbour Dock Co. v Crook [1931] 16TC333).
A capital grant reduces any qualifying capital expenditure for capital allowance purposes, see CA14100.
Unless you have opted for Flat Rate or Cash Accounting, VAT is normally reclaimed when you get an invoice from your supplier.
However, some invoices will be disputed and the disputes can drag on for months. Its easy to spot old supplier invoices by looking at your Aged Creditors Report.
But having reclaimed the VAT you might not realise that after 6 months the VAT will need to reversed on your next VAT return. The rules are in VAT Notice 700…..
10.6A Repayment of input tax if you do not pay your supplier
For supplies received on or after 1 January 2003 you are required to repay any input tax you have reclaimed if you have not paid your supplier within 6 months of:
(a) the date of supply (usually taken as the invoice date), or if later (b) the due date for payment
Take a look at your Aged Creditors now and if you discover supplier debts older than 6 months provided the net value of errors is less than £10,000 you can simply correct it on your next return, if the error is more than £10,000 you will need to use Form VAT 652
There is a possible alternative, normally the 6 months is counted from the due date not the invoice date, so you could agree new terms on the disputed invoice and extend the due date.
Overlap Profit affects Sole Traders and Partnerships, here are a couple of examples from BIM81080
Example 1 – one overlap period
A business commences on 1 October 2010. The first accounts are made up for the 12 months to 30 September 2011 and show a profit of £45,000.
The basis periods for the first three tax years are:
2010-2011
Year 1
1 October 2010 to 5 April 2011
2011-2012
Year 2
12 months to 30 September 2011
2012-2013
Year 3
12 months to 30 September 2012
The period from 1 October 2010 to 5 April 2011 (187 days) is an `overlap period’.
Example 2 – more than one overlap period
The business in Example 1 continues. In 2015-2016 the accounting date is changed from 30 September to 30 April. The accounts for the 12 months to 30 September 2014 show a profit of £75,000. The relevant conditions for a change of basis period are met (see BIM81045).
The basis periods are:
2014-2015
Year 5
12 months to 30 September 2014
2015-2016
Year 6
12 months to 30 April 2015
2016-2017
Year 7
12 months to 30 April 2016
The period from 1 May 2014 to 30 September 2014 (153 days) is an `overlap period’.
If the taxable profit for 2015-2016 is computed using days, it includes the profits for the `overlap period’ of 153 days (£75,000 x 153/365 = £31,438).
Adding together the overlap profits for the first overlap period of 187 days in Example 1 (£23,054) and the second overlap period of 153 days (£31,438), gives total overlap profits of £54,492 over 340 days.
Why Hasn’t Everyone ‘Cashed In’ Their Overlap Relief Already?
There are two ways to gain access to your overlap relief: cease trading or change your accounting date.
Ceasing to trade is a drastic step: generally not something you are likely to do purely for tax planning purposes. However, it is worth noting that transferring your business to a company is also classed as ‘ceasing to trade’ for these purposes.
Changing your accounting date to access your overlap relief is less drastic, but the downside is that the relief only arises where you are being taxed on more than twelve months’ worth of profit. Despite this, however, there is still generally an overall saving to be made where current profits are at a lower level than the profits arising when the ‘overlap’ first arose. So, with the economy in the state it’s in, now could be a good time to ‘cash in’!
There is also some useful advice in Helpsheet HS222
What this might mean is that as a sole trader you waste your personal allowance because your profits are offset to zero by losses, however, if you had a company that paid you £10,600 you would keep your personal tax free allowance and be able to use the losses against the remaining profit.
The rules for company losses are noted below.
Trading losses that you’ve not used in any other way will be offset against profits from the same trade in future accounting periods. You don’t have to make any claim for this to happen. It’s done automatically if you fill in your Company Tax Return.
Corporation Tax Act 2010, Section 45
Carry forward of trade loss against subsequent trade profits
(1)This section applies if, in an accounting period, a company carrying on a trade makes a loss in the trade.
(2)Relief for the loss is given to the company under this section.
(3)The relief is given for that part of the loss for which no relief is given under section 37 or 42 (“the unrelieved loss”).
(4)For this purpose—
(a)the unrelieved loss is carried forward to subsequent accounting periods (so long as the company continues to carry on the trade), and
(b)the profits of the trade of any such period are reduced by the unrelieved loss so far as that loss cannot be used under this paragraph to reduce the profits of an earlier period.
(5)In this section and section 46 references to profits of the trade are references to profits of the trade chargeable to corporation tax.
(6)Relief under this section is subject to restriction or modification in accordance with provisions of the Corporation Tax Acts.
It is not necessary to claim the maximum capital allowances available or even claim them at all, crazy as it might sound there are situations when not claiming capital allowances can reduce your tax bill!
Sole Trader Example
The personal tax allowance is currently £10,600 (2015/16)
Lets assume profits are £15,000 and Capital Allowances available are £5,000, so that would reduce taxable profits to £10,000 which would waste £600 of the personal tax allowance.
It would therefore be better to only claim £4,400 in capital allowances and claim the remaining £600 in the following year.
Company Example
Companies within a Group can only offset losses in corresponding tax periods, so if the the capital allowances increase the loss in one part of the group beyond the profits of the rest of the group then there would be no benefit to claiming them in that period.
Companies can claim capital allowances in any of the following 3 tax years.
I have just signed up to the Premium Pro Debitoor Account, I wanted to have online access and did a comparison to Xero, Sage, Kashflow and Free Agent. I thought Debitoor was excellent value for money (£9/mth for Premium Pro) and I have long been a fan of their online invoicing.
Debitoor is an easy-to-use invoicing and accounting software which helps freelancers and small businesses produce nice-looking, professional invoices in a matter of seconds and assists them in their accounting.
Debitoor is designed for straight forward businesses so if your business is complicated then its probably not the best option for you.
So this is how you get started:
Create your contacts – Clients and Suppliers
Create your Products
Enter the opening balances on the balance sheet (reports) – Debitoor currently only works in calendar years (Jan to Dec) so if like me your year end falls on a different date you will need to enter the balances in the previous year, in my case my year end is March so I entered the balances in 2014 I will then do a year end and they will become the 2015 opening balances and I started entering invoices and expenses in April. I know that’s not ideal and Debitoor are constantly working on improvements, so its compromise for now.
I then created multiple bank accounts – Lloyds, Directors, PayPal
For expenses that I had an invoice for I uploaded the PDF of the expense
I then uploaded the bank statements for Lloyds and PayPal and reconciled and posted them
I think the priority for all businesses should be issuing and tracking sales invoices and that’s what Debitoor does best.
High Volume Agents (HVAs) deal with large numbers of clients, often for a short time only, and make repayment claims or submit returns that generate repayments.
HVAs usually
provide services on a commission or ‘no repayment no fee’ basis
target clients in a specific trade or industry, for example the construction industry
submit high numbers of repayment claims relating to expenses incurred in their clients’ employment or trade
receive the tax repayment as a nominee for their client
are not members of a professional taxation accountancy body, although some of their staff may hold professional qualifications
have little or no face to face contact with their clients as much of their business is carried out electronically.
A repayment claim can be made using any of the following
P87
stand alone claim by correspondence
Self Assessment tax return
unsolicited return.
The range of expenses claimed that results in a repayment usually include
HMRC have targeted firms with as few as 30 clients! so don’t think it only applies to large scale operations
HMRC are particularly interested in claims where the expenses are more that 10% higher than the income.
An agent’s poor technical ability that puts tax at risk will generally fall into one or more of the following categories
bookkeeping or accounting errors
computational errors
lack of tax knowledge or expertise
unreasonable or untenable technical views.
HVA’s are asked to enter into a memorandum of understanding agreements which are designed to check clients are paying the correct tax, in general this is likely to result in higher tax payments.
So be careful who you ask to be you agent! your tax saving might be short lived.
You should be able to withdraw 25% of your pension tax free, but your pension provider will tax you on payments above this level.
If they don’t hold a current P45, the pension provider will apply an emergency tax code on a month 1/week 1 basis, which could mean you pay too much tax.
You will need these forms to reclaim the tax
Form P50Z – if the client has chosen to empty all their pension pot in one go and they have no other PAYE or pension income (other than the state pension);
Form P53Z – if the client has chosen to empty all their pension pot in one go and they do have other PAYE or pension income other than the state pension;
Form P55 – where the client has taken a lump sum payment which doesn’t use up all of their pension pot, they have only taken a single payment and don’t intend to take further payments in that tax year.
The s660 rules (or settlements legislation) have been around since the 1930s.
The rules stop you passing income to someone else in the family, or giving income or assets to someone else in an effort to reduce your overall tax bill. This is called a “settlement”, and the aim of the legislation is to stop people settling their income on another person who pays tax at a lower rate. (Contractor UK)
There are some interesting cases where business owners have tried to pass shares to their children unsuccessfully
Copeman v Coleman [1939] 22 TC 594
A company had been formed to take over the taxpayer’s business. He held the shares equally with his wife. Later the company created a class of preference shares of £200 each carrying a fixed preferential dividend, the right to vote if such dividend were in arrear for three years or more and the right in a winding up to a return of capital paid up. Some of the shares were taken up by his children on which they paid £10 per share. Dividends substantially in excess of the amounts paid up were then declared and the taxpayer, on behalf of his children claimed repayment of the tax paid in respect of the dividend to the extent of that child’s personal allowance. (http://swarb.co.uk/copeman-v-coleman-1939/)
Crossland v Hawkins [1961] 39 TC 493
The taxpayer, a well known film actor, agreed to work through a company for three years being paid £50 per week. The shares were transferred to his wife and accountant. His father in law set up a £100 settlement for the benefit of his children of which his wife and accountant were the trustees. The fund was used to subscribe for the remaining 98 shares. He appeared in a film for which the company was paid £25,000. The company paid a dividend which was applied by the trustees for the benefit of the children. Jack Hawkins then applied on behalf of his children for a repayment of tax to give effect to their personal allowances. The repayment claim was rejected on the grounds that the whole arrangement was a settlement of which Jack Hawkins was a settlor because he had provided the funds for it. (http://swarb.co.uk/crossland-v-hawkins-ca-1961/)
Butler v. Wildin [1989] STC 22
A company was formed by two brothers who acted as unpaid directors. Shares in the company were initially held by their infant children, which were paid out of gifts from their grandparents. The company acquired a development site using a bank loan, which was guaranteed by the brothers. The company subsequently became profitable, and dividends were subsequently paid to the infant shareholders. The High Court held that the children’s investment of ‘trifling sums’ in the shares and the parent’s provision of services to the company constituted an arrangement. An element of bounty was given by the parents in the free provision of their skill and services, and by adopting any financial risk in the company’s venture. Dividends paid to those children born before the arrangements were made (but not dividends in respect of shares transferred to children born afterwards, as there was no apparent arrangement to benefit future children) were taxable on the parents, under what is now section 660B.(http://www.taxationweb.co.uk/tax-articles/business-tax/is-that-settled-then.html)
Jeremy Vine
Which brings us to the new case of Jeremy Vine
Mr Vine appears to have been using his ten-year-old daughter Martha to avoid tax payments.
The presenter of the Jeremy Vine Show and the TV quiz Eggheads, has been funnelling cash through a limited company, Jelly Vine Productions, of which she is a shareholder.
Jelly Vine Productions had almost £810,000 in cash on its books in 2013 – the last accounts available, and £1million in 2012.
