Month: June 2015

Would you use P2P Currency Exchange?

Currencies

A P2P platform simply brings together people with complementary currency exchange requirements. So if User A wants to exchange dollars for euros and User B is looking to exchange euros for dollars, they can do so over a P2P currency exchange. By harnessing the power of the crowd, users are thus able to obtain much better exchange rates than they would get through traditional currency exchange mechanisms.

CurrencyFair Ltd, for instance, claims that it can save up to 90% on international currency transfer fees. While £2,000 transferred through a typical bank could cost as much as £100 (£40 in international transfer fees and £60 in exchange rate margin), the same amount sent through CurrencyFair would only cost about £9 (a fixed £3 transfer fee plus £6 exchange rate margin). CurrencyFair charges an average of 0.35% of the amount exchanged as its margin, while TransferWise Ltd charges 0.5%.

The mechanism for P2P currency exchange is straightforward. A client opens an account with a P2P exchange and deposits money into the account. He or she then converts the money into the desired currency by “matching” with other clients on the P2P exchange. The foreign currency is then transferred to an overseas bank account nominated by the client.

Some P2P companies are controlled by FCA rules for example Midpoint and Transferwise whilst other are covered by EU rules such as Currency Fair, so you might want to check who regulates the P2P that you choose.

It can take up to 48 hours to match a deal which could be an issue in some cases.

The cost is definitely cheaper but in addition on large deals you may be able to negotiate further savings.

steve@bicknells.net

Preregistration VAT confusion

tax refund

When you register for VAT, there’s a time limit for backdating claims for VAT paid before registration. From your date of registration the time limit is:

  • 4 years for goods you still have, or that were used to make other goods you still have
  • 6 months for services

Accountingweb reported on 12th June that the goal posts seem to have moved, here is their example..

Ken has been a self-employed pest controller for many years. He registered for VAT with effect from 1 May 2015, at which point he held a van that cost him £24,000 on 1 May 2013, and equipment that he bought for £9,000 on 1 May 2012, both inclusive of VAT. He expects to use the van for eight years and the tools for five years.

Previously most VAT advisers would advise Ken to reclaim VAT of £4,000 in respect of the van and £1,500 paid on the equipment.

The new HMRC interpretation of EC VAT Directive 2006/112 article 289 (set out in VAT Input Tax Manual para 32000) is that as the van has been used for 2/8th of its life, just £3,000 (6/8 x 4000) of the input VAT can be reclaimed. For the equipment a similar calculation reduces the VAT reclaim to £600 (2/5 x1500).

Ken is obviously losing out by £1,900 of unrecoverable VAT.

Taxation Magazine also have an article pointing out the goal posts have moved

What is worrying is that as so many tax advisers will have given potentially incorrect advice based on the new interpretation by HMRC (which HMRC say isn’t a change), will this mean that we will see backdated enquiries and penalties for clients?

steve@bicknells.net

 

When should you recognise revenue on services provided?

Profitability

The International Accounting Standard IAS 18 states

‘where the outcome of a transaction involving the rendering of services can be estimated reliably, associated revenue should be recognised by reference to the stage of completion of the transaction at the end of the reporting period’ . In other words, the revenue is recognised gradually, rather than all at one ‘critical point’, as is the case for revenue from the sale of goods. IAS 18 further states that the outcome of a transaction can be estimated reliably when all the following conditions are satisfied:

(a) The amount of revenue can be measured reliably.
(b) It is probable that the economic benefits associated with the transaction will flow to the seller.
(c) The stage of completion of the transaction at the end of the reporting period can be measured reliably.
(d) The costs incurred to date for the transaction and the costs to complete the transaction can be measured reliably.

IAS 18 does not prescribe one single method that should be used for determining the stage of completion of a service transaction. However the standard does provide some examples of suitable methods:
(a) Surveys of work performed.
(b) Services performed to date as a percentage of total services to be performed.
(c) The proportion that costs incurred to date bear to the estimated total costs of the transaction.

If it is not possible to reliably measure the outcome of a transaction involving the provision of services (perhaps because the transaction is in its very early stages) then revenue should be recognised only to the extent of costs incurred by the seller, assuming these costs are recoverable from the buyer.

In the UK UITF40 and SSAP9 defined the way we report revenue and profit in relation to Services, although accountants and lawyers were among the most high profile casualties of the new regime back in 2005, which forced them to re-catagorise WIP and Revenue, many other service providers  also had to consider how they accounted for income. Professionals such as surveyors, architects, doctors and dentists all had to consider the impact of the new rules on their tax liabilities.

FRS102 has not changed the rules.

Revenue Recognition

steve@bicknells.net

Do you know how FRS102 is changing Currency Conversion?

Currencies

FRS102 affects many things and Section 30 sets out the rules on Currency Conversion.

FRS 102 states that

An entity can conduct foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. In addition, an entity may present its financial statements in a foreign currency

Entities will have a Functional Currency (a concept also used in IFRS) and it allows translation into a Presentation Currency

Reporting at the end of the subsequent reporting periods
30.9 At the end of each reporting period, an entity shall:
(a) translate foreign currency monetary items using the closing rate;
(b) translate non-monetary items that are measured in terms of historical cost in a foreign currency using the exchange rate at the date of the transaction; and
(c) translate non-monetary items that are measured at fair value in a foreign currency using the exchange rates at the date when the fair value was determined.

30.10 An entity shall recognise, in profit or loss in the period in which they arise, exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous periods

That all sounds pretty familiar, however, as pointed out by Grant Thornton

Under SSAP 20 Foreign currency translation in current UK GAAP, where matching forward contracts are in place for a transaction, the contracted rate can be used for translation of the matched transaction. This option is not permitted under FRS 102. Instead, a foreign exchange forward contract will be recognised on the balance sheet as a financial instrument at fair value and the associated debtor or creditor will be retranslated at the year-end rate.
There are also changes to Goodwill valuation
A key difference (FRS102) to note in comparison to SSAP 20 Foreign Currency Translation is that SSAP 20 regards consolidated goodwill as an asset of the parent company and not the subsidiary. [Steve Collings Blog]
steve@bicknells.net

Online traders targeted by HMRC

Online Shopping

The Revenue has sent 14,000 letters to traders suspected of running a business and failing to declare this on their tax returns.

Of these, 1,000 letters are being sent to people where the taxman has already identified a shortfall on their self-assessment forms.

Some of those targeted make as little as £100 profit online.

It was reported in the Telegraph that eBay, Etsy, Amazon and Gumtree are being forced to hand over customer account details, including their selling activity, as part of the taxman’s legal powers that were extended last year.

The criteria used to assess if an activity is a hobby or a business are:

  • The size and commerciality of the activity.
  • The frequency of the activity and transactions
  • The application of business principles.
  • Whether there is a genuine profit motive.
  • The amount of time devoted to the activities.
  • The existence of arm’s-length customers (as opposed to just selling your wares to family and friends).

HMRC have some great examples to help you decided, for example

Gail is a full-time employee working for a stationery company. She pays her PAYE tax on this employment every month.

In her free time Gail makes cushions and uses most of them in her home. Occasionally she sells them to friends and work colleagues for an amount that just covers the cost of materials of £15. Sometimes she makes a loss. Any money she does make goes towards her holiday fund.

She decides to make extra cash by selling cushions on an Internet auction site and starts auctioning three or four to see how they go. They all sell for more than £50, a profit of at least £35 each.

She uses this money to buy more materials and within a month she is selling around ten cushions a week, always at a profit, and is considering setting up her own website.

Gail’s initial sales of cushions to friends are not classed as trading. It lacks commerciality and she does not set out to make a profit. The occasional sales are a by-product of her hobby. Once she begins to auction her cushions, she has moved into the realms of commerciality.

She is systematically selling her goods to make a profit. She will need to inform HMRC about her trade, and keep records of all her transactions. On the level of sales shown in the example the potential turnover of around £26,000 is well below the VAT annual threshold so Gail does not need to register for VAT.

Many traders start off in a small way and don’t realise that they need to register with HMRC, they assume their activity will be treated as a hobby, but things can grow quickly.

You should register as Self Employed as soon as your hobby becomes a commercial venture, even if you are losing money!

If you don’t register, HMRC will be looking for you and if you have an online business it won’t be hard for them to find you.

steve@bicknells.net

Overhead allocation using ABC

Allocations. Clavier

CIMA Official Terminology describes activity-based costing as an approach to the costing and monitoring of activities, which involves tracing resource consumption and costing final outputs. Resources are assigned to activities and activities to cost objects. The latter use cost drivers to attach activity costs to outputs.

ABC

What are Activity Pools and Cost Drivers?

Activity Pools

  • Purchase Orders
  • Machine Set Ups
  • Packaging

Cost Drivers

  • Number of Purchase Orders
  • Number of Machine Set Ups
  • Number of items to package

What would the traditional methods of allocation have been?

  • Direct Labour Hours
  • Machine Hours
  • Floor Area

Using Activity Based Costing can produce very different results to Traditional Methods, click here for an example

steve@bicknells.net

Goodbye to Corporate Directors….

dreamstimefree_75244

Corporate Directors have been particularly useful to Groups, its easier and more flexible to show the parent company as the director than to name a specific person, but as a result of the Small Business, Enterprise and Employment Act 2015, companies will no longer be allowed to have corporate directors.

The ban will come into effect in October 2015 and companies that have Corporate Directors have until October 2016 to remove their corporate directors.

However, the government may have a change of heart following its consultation on whether Corporate Directors could be allowed if the Corporate Director Company has a board of fully disclosed individual directors.

steve@bicknells.net

HMRC update the Employment Status Tool

Determining whether a worker is Employed or Self Employed isn’t always easy.

HMRC updated and improved their tool in April 2015.

The Employment Status Indicator (ESI) tool enables you to check the employment status of an individual or group of workers – that is whether they are employed or self-employed for tax, National Insurance contributions (NICs) or VAT purposes.

The ESI tool is essential for anyone who takes on workers, such as employers and contractors. (The tool refers to anyone in this position as an engager.) Individual workers can also use the tool to check their own employment status.

The tool cannot, however, be used to check the employment status of certain workers:

  1. company directors or other individuals who hold office
  2. agency workers
  3. anyone providing services through an intermediary (sometimes referred to as IR35 arrangements)

The ESI tool is completely anonymous, so no personal details about the worker or engager are requested.

Click here to use the HMRC Tool

https://stevejbicknell.com/wp-content/uploads/2014/05/workers.jpg

steve@bicknells.net

Have you accrued for Holiday Pay correctly? Section 28 FRS102

Flugzeug fliegend

Most larger businesses, especially if they are audited probably already accrue for Holiday Pay but not every business has been accruing the cost. FRS102 Section 28.1 will require that holiday pay is accrued. Here is an example from the FRC.
Holiday Pay

Holiday pay isn’t always easy to calculate for example if you have part time employees or casual workers, Gov.uk have a calculator to help work out the entitlement – GOV.UK Holiday Calculator

The next issue is the rate of pay, for some employees with regular hours its easy but for those with fluctuating rates, bonuses etc a 12 week average is used as explained by ACAS

On 4 November, the Employment Appeal Tribunal (EAT) ruled that holiday pay should reflect non-guaranteed overtime. Non-guaranteed overtime is where there is no obligation by the employer to offer overtime but if they do then the worker is obliged by their contract to work that overtime.

The Government set up a taskforce to consider the possible impact of the EAT’s ruling on holiday pay. Regulations were laid out on 18th December 2014 to limit claims for unlawful deductions from wages to two years. The rules apply to Employment Tribunal claims made on or after 1 July 2015.

Further details at ACAS Calculating Holiday Pay

steve@bicknells.net

 

When can you make a Prior Year Adjustment?

Accounting Standards

Until FRS102 basically an error had to be Fundamental for a Prior Year adjustment to be justified

‘Fundamental’ is defined in paragraph 63 of FRS 3 as an error of such significance as to destroy the truth and fairness and hence validity of a set of financial statements
Or you could make a change as a result of a change in Accounting Policy.
This position is about to change with arrival of FRS 102. Paragraph 10.21 states that ‘an entity shall correct a material prior period error retrospectively in the first financial statements authorised for issue after its discovery’. This means that, on adoption of FRS 102, the threshold for correcting an error by use of a prior period adjustment has reduced from fundamental to material (ICAEW)
The ACCA have a useful factsheet on prior year adjustments – Factsheet 188
steve@bicknells.net