Category: Accounting

Is there a way that Buy to Let Landlords can reclaim VAT? possibly!

for rent black blue glossy web icon

Residential letting of property is exempt from VAT, so can’t charge VAT on the Rent.

The VAT rules say, if you only sell or otherwise supply goods or services that are exempt from VAT then yours is an exempt business and:

  • you cannot register for VAT
  • you cannot recover any VAT you incur on your purchases or expenses

However, if an Individual (Sole Trader), Partnership or Company has other vatable supplies, it could register for VAT and be partly exempt.

Partly exempt business

Your business is partly exempt if your business has incurred VAT on purchases that relate to exempt supplies. This is known as exempt input tax.

Generally, you won’t be able to reclaim exempt input tax. However, provided the amount of exempt input tax is below a certain amount, it can be recovered in full.

Non-business use in a partly exempt business

You can’t reclaim VAT you pay on goods and services that aren’t for business purposes. If your business is partly exempt and you buy goods or services that you use partly for business and partly for non-business purposes you must split the VAT accordingly. You then use your partial exemption method to work out how much of the business VAT you can reclaim.

Keeping records if your business is partly exempt

If you make both taxable and exempt supplies, you must keep a separate record of your exempt sales and details of how you’ve worked out how much VAT to reclaim.

De Minimis Limits

To stay below the de minimis limits, the following two conditions must both be met:

  • the input VAT attributed to exempt supplies must not exceed £1,875 for the quarter (£625 for a monthly return and £7,500 for an annual calculation); and
  • the input VAT attributed to exempt supplies must not exceed 50% of the total input VAT incurred in that quarter.

Effectively, this allows up to £7,500 of input VAT, relating to exempt supplies which would not otherwise be recoverable, to be recovered each year by a partially exempt business.

Vatable Business Activity

You could

  1. Provide Freelance Services
  2. Rent out vatable commercial property
  3. Let property as holiday accomodation
  4. Or provide other business services

Generally, my recommendation would be to keep your business activities in separate businesses so you need to be careful not to focus on a small VAT saving for the sake of the overall business structure.

 

steve@bicknells.net

Don’t mix up your property investments with your main business

Entrepreneur startup business model

There are lots of good reasons to keep property investments in their own companies rather than mix them up with your main business activity.

We have a blog explaining why residential investments should be in a company https://stevejbicknell.com/2015/08/24/5-reasons-why-you-need-a-property-investment-company/

Entrepreneurs Relief when you sell your business is one of the major reasons not to have property in your trading business as significant Non Trading Activity will be a problem, if a business contains investments and if these were more than 20% in terms of turnover, net assets, time spent by directors or profit it could mean that your business is not counted as a trading business.

What is Entrepreneurs Relief

Entrepreneurs Tax Relief applies if you sell or close your business and means that you only pay 10% Capital Gains Tax on any qualifying profits.

There’s no limit to how many times you can claim Entrepreneurs’ Relief, and you can claim up to £10 million of relief in total during your lifetime.

Companies

To claim Entrepreneurs’ Relief you must:

  • own at least 5% of the shares in the business for a year
  • be a director, partner or employee of the business

Sole traders

To claim Entrepreneurs’ Relief you must have been trading for at least a year.

Full details are on the HMRC Helpsheet HS275

steve@bicknells.net

HMRC Directors Loan 2016 Rules

Young woman with checklist over shoulder shot

The latest version of the Directors Loan Tool Kit for 2015-16 was published in May 2016, official the guidance is voluntary, but I am not sure that tax inspectors will consider as voluntary!

Here is a link to the full tool kit

Click to access 2015-16_DLA_Toolkit_rev.pdf

Here are some things to watch out for when preparation your accounts

DLA 3

DLA 1

DLA 2

 

steve@bicknells.net

Space Accounting – Are you ready for take off?

Space shuttle taking off on a mission. Elements of this image furnished by NASA

Space flights could soon become available to everyone.

According to Virgin Galatic

…..The roughly 700 Virgin Galactic future astronauts who have already paid deposits for their flights on SpaceShipTwo come from more than 50 different countries, about half of which have never before sent a human to space. They span in age from under 10 to over 90 years of age. They practice many professions and speak many languages.

In the near future, our astronauts will share their version of the Overview Effect with audiences who have never dreamed of hearing it and who will go on to be the innovators, inventors, and entrepreneurs of tomorrow. Some of them may even earn the scholarships offered by the Virgin Galactic Future Astronaut community through Galactic Unite.

 

Space flights are an emerging industry and are expected to become dominate in the coming decades.

Many other opportunities are also under consideration including manufacturing in space! and possible mining work taking place on the Moon and Mars

What tax jurisdiction do space activities fall under? What accounting standards do we use in space? Which accountant are we going to send to audit the mining operation on the moon?

It will take time to develop Internationally Accepted Accounting Standards for Space. It will take time to solve the accounting problems of space travel. And it will take time to train the next group of auditors to be astronauts. I encourage my fellow CPAs to get involved in the commercialization of space and start a space department at your firm. We should be working together now to develop solutions to these problems and enable the exploration of a new frontier. [accounting today Article By Zach De Gregorio ]

http://www.sciencespacerobots.com/extras/asteroid_mining_trillion_dollar_industry.jpg

 

steve@bicknells.net

Things an accountant should do every day

junge frau lernt für eine prüfung

Things are changing fast, we now live in a cloud based technology driven world.

https://sage-exchange.co.uk/image/52a7209e36a0c_business-confidence-ig1.png

Accountants are changing too, clients now:

  • Use cloud based systems to enter transactions
  • Raise invoices online and get paid online
  • Connect their bank accounts to their software
  • Attach copies of receipts to transactions

Accountants should be working on a daily basis with their clients in areas such as…

Business Strategy

Your accountant should be a trusted advisor to your business. Accountants are often aware of business trends, legislation and new technologies so they can work with you to find the best ways to achieve your goals.

Tax Planning

Just processing the numbers isn’t enough, your accountant should be exploring the tax consequences of your proposed decisions, for example

  • the tax payable on an overdrawn Directors Loan Account
  • the benefits of low CO2 emission cars
  • the tax differences between buying and leasing equipment
  • owning investment property personally or in a company
  • Business Acquisition and Disposal tax issues

Regular Calls, E Mails and Meetings

Accountants haven’t been good at this in the past but they need to become accessible to clients. Its no good just having contact once a year to sign off the accounts. For accountants to become business partners clients need to be free to ask them anything whenever they need help or advice. Providing a personal tailored service is a priority and clients now expect it.

Accountants need to respond quickly to clients requests, waiting days for a reply won’t do!

 

steve@bicknells.net

Who should get your tips? or should we stop tipping?

Tip jar

Over 150,000 business are in the Hospitality Sector and they employ over £2m staff, tipping is common place, so the government launched a consultation on 2nd May 2016 which will run till 27th June 2016 to seek opinions on tipping, gratuities, cover and services charges.

The Government wants everyone to be paid fairly so the proposals focus on:

Option 1:
Ensure transparency to consumers that discretionary payment for service is just that – ‘discretionary’.
Option 2:
Ensure workers receive a fair share from discretionary payments for service.
Option 3:
Increase transparency for consumers and workers regarding the treatment of discretionary payments for service.
Troncs can save you Tax

If your employees receive tips directly from your customers and are allowed to keep them, then you do not need to do anything for PAYE tax or NICs. There are no NICs due on the money, and the tax due is the employee’s responsibility. Your employees should declare the money to HMRC, who will usually adjust their tax code to collect any tax due.

A tronc is an arrangement for pooling and distributing tips and service charges and the person who operates the tronc is known as a troncmaster. If your employees use a tronc you must tell HMRC who the troncmaster is so that they can set up a PAYE scheme for the tronc.

http://www.hmrc.gov.uk/helpsheets/e24.pdf

Tips are outside the scope of VAT when genuinely freely given. This is so regardless of whether:

• the customer requires the amount to be included on the bill
• payment is made by cheque or credit/debit card
• or not the amount is passed to employees.

Restaurant service charges are part of the consideration for the underlying supply of the meals if customers are required to pay them and are therefore standard rated.
If customers have a genuine option as to whether to pay the service charges, it is accepted that they are not consideration (even if the amounts appear on the invoice) and therefore fall outside the scope of VAT.
Further information is available from: Notices 700 The VAT guide and 709/1 Catering and takeaway food

steve@bicknells.net

Is your tax code correct? millions are wrong!

Tax Refund Green Blue Horizontal

Money Saving Expert reported last week

Revealed: 3.2m tax codes WRONG – check if you’re owed £1,000s

The National Audit Office found a huge number of tax code errors – our unique calc can check if you’re a victim

You’ll find your tax code on:

  • your pay slip
  • your PAYE Coding Notice – you usually get this a couple of months before the start of the tax year and you may also get one if something has changed but not everyone needs to get one
  • form P60 – you get this at the end of each tax year
  • form P45 – you get this when you leave a job

You can check your tax using this HMRC link

https://www.gov.uk/check-income-tax

If you think you code is wrong you can inform HMRC using this online form

https://online.hmrc.gov.uk/shortforms/form/P2

Check the following carefully:

  1. P60 – you get this at the end of each tax year
  2. P45 – you get this when you leave a job
  3. PAYE Coding Notice
  4. P11D Expenses and benefits
  5. P9D Expenses payments and income from which tax cannot be deducted
  6. Bank and Building society statements
  7. Pension Tax Deductions

Is your National Insurance correct?

Unlike Income Tax which is cumulative and assessed across all earnings, National Insurance starts from zero on each individual employment and you also pay National Insurance on Self Employed earnings.

So if you are a Director of multiple businesses paid as an employee its easy to see how you could over pay and you might not even realise because National Insurance is not shown on your Self Assessment Return.

You can also over pay National Insurance if you are a part time employee with multiple employers and irratic earnings, this because National Insurance is calculated on a weekly/monthly basis, not a cumulative basis and its by employer.

What you need to do

Write to HM Revenue and Customs confirming:

  • your National Insurance number
  • why you’ve overpaid
  • the tax year(s) you’ve overpaid

You should include your P60 or a statement from your employer showing the tax and National Insurance for each year you’re claiming for.

You should apply within 6 years of the tax year you’re claiming for.

HM Revenue and Customs
Payment Reconciliation
National Insurance Contributions Office
Benton Park View
Newcastle upon Tyne
NE98 1ZZ

steve@bicknells.net

How can you avoid being taxed on a directors loan?

tax free icon, red round glossy metallic button, web and mobile app design illustration

Directors loans are common particularly in a small limited company. Loans over £10,000 require an ordinary resolution and there are additional rules for loans over £50,000.

In general, the directors take a small salary, generally at £11,000 the tax free level for 2016/17 or £8,060 the NI and Tax free level, they then take dividends.

During the year the directors take out payments as they need them and periodically a dividend is repaid to offset the directors loan.

However, if the Directors Loan Account is not repaid within 9 months of year end then 32.5% tax will be charged as part of the corporation tax.

Section 455 CTA 2010 liabilities must be included in a company’s CT600 tax return. The S455 tax forms part of the calculation of tax payable by the company under Paragraph 8 Schedule 18 FA 1998.

When the loan is repaid the company can reclaim the tax.

A claim to relief under Section 458 is a claim for relief against the original tax charge for the AP in which the loan was made. The time limit for the claim is four years from the end of the financial year in which the loan is repaid, released or written off. COM53120

32.5% is a lot of tax to pay!! even if you can reclaim it later on

On top of that any interest free loan over £10,000 will be a benefit in kind! so you will get taxed on the notional interest set by HMRC.

What can you do to avoid this tax?

Dividends

Provided you have distributable reserves, paying a dividend might solve the problem.

Companies Act 2006 Section 830 – Distributions to be made only out of profits available for the purpose

(1)A company may only make a distribution out of profits available for the purpose.

(2)A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

(3)Subsection (2) has effect subject to sections 832 and 835 (investment companies etc: distributions out of accumulated revenue profits).

A distribution must be justified by

  1. The Company’s last published accounts
  2. Interim Accounts
  3. Initial Accounts

The problem with using this approach is that the directors loans may not match the share ownership so you might have to pay more dividends than you intended to or use you end up trying to justify the use of dividend waivers.

If you are thinking of waiving dividends, bare the following in mind:

  1. A formal Deed of Waiver is required, the Deed will say that the Dividend is Irrevocably Waived, it must be dated before the right to dividend arises, it must be signed and witnessed and filed with the company statutory records
  2. You should have a good commercial reason for the Waiver which could be to retain funds for a specific purpose and this could be stated in the Deed
  3. Don’t make a habit of waiving dividends as it will increase the risk of questions from HMRC
  4. Don’t give inducements to encourage Dividend Waivers
  5. Make sure your dividends are legal

The other point to note is that you will be taxed on the Dividends https://stevejbicknell.com/tax-calculators/

Bonus

You could choose to pay yourself a bonus but salaries will generally be the most expensive option because:

  • PAYE is 20%, 40% or even 45%
  • Employee NI is 12% then 2% (over £827 per week)
  • Employers NI is 13.8%

Write Off the Loan

Writing off the loan is expensive.

It is treated as a distribution for Income Tax Purposes and subject to NI and Class 1 NIC will be charged to company.

The write off will be disallowed for Corporation Tax purposes.

On the positive side the s455 tax will be released.

Get a external loan

If the directors loan is likely to be repaid and is relatively short term, it might be better to get a loan and repay the debt.

A small amount of interest could be cheaper than paying 32.5% and then waiting to claim it back.

But make sure you don’t get caught by the ‘Bed and Breakfast’ rules

HMRC were concerned that some participators were avoiding this tax by raising funds short term to repay an outstanding loan.  They would then draw a new loan very shortly afterwards – HMRC refer to this as “bed and breakfasting”. New anti-avoidance rules were therefore  introduced in 2013.

These new rules incorporate two provisions – the “30-day rule” and the “intentions and arrangements” rule.

30-day rule

This applies where within a 30-day period:

  • a shareholder makes repayments of their s455 loan; and
  • in a subsequent accounting period, new loans or advances are made to the same shareholder or their associate.

So basically prevents the use of ‘Bed & Breakfasting’

‘intentions and arrangements’ Rule

Relief is denied regardless of the 30 day rule, if prior to repayment there is an outstanding amount of at least £15,000 and at the time the amount is repaid to the company, any person intended to redraw any of that amount or had made arrangements to make a new withdrawal; and a new withdrawal is made.

The relief denied is the lower of the amount repaid and the amount redrawn.

 

steve@bicknells.net

What do you expect from an accountant!

Time for the Expert!

The world of accountancy is changing quickly and the days of the dull lion tamer are running out fast

We aren’t all as extreme as the ‘The Accountant 2016’, we definitely don’t work for criminal gangs!

This is the image that I think a modern accountant should have, someone who can solve your problems

There are 2 key reasons why small businesses expect more from their accountant.

  1. In recent years we have seen a huge growth in Cloud Accounting Systems such as Sage One and Xero and automation of payments and bank feeds, its no longer enough for accountants just to provide book keeping or year end accounts and tax.
  2. Business owners want personalised, tailored partnerships with their accountant who need to be true business experts

As Paul Surtees MD of Capitalise says…

Rather than simply easing their professional burden, leading accountants are using technology to go beyond their core proficiency and provide value-added services to their clients.

“Technology is shaping the future of the profession”

This is particularly pertinent to those practitioners with SME clients, where technology is really shaping the future of the profession.
Previously technology had simply increased efficiency and decreased the margin of error.  Now, however, rather than just creating more time in the day to concentrate on value-add services, technology is also helping to actually deliver these new service areas.

For example, accountants are taking on the challenge of SME finance and using online funding comparison services to offer advice and funding matches for clients.

Not only do online marketplaces make it easier to find finance, they also allow accountants to give more thorough counsel on a full range of choices, from indepencent to alternative sources.

Suddenly a business, that would have otherwise just gone to their bank, is now turning to their accountant for advice on suitable peer-to-peer lending platforms.

Another great example of this shift is the use of collaborative software.  As accountants become more like an ‘acting CFO’ for a SME, so too must they become more integrated into the business.

“Changes are being made in real time”

The use of collaborative software allows accountants, and SME owners, joint access to the likes of balance sheets and sales pipelines, for example.  Not only does this allow changes to be made in real time, it also increases transparency for both parties.

Many businesses require the skills of professionals to oversee and direct financial operations. These professionals are referred to CFOs, chief financial officers, or financial directors (FD).

So what should your Chief Financial Officer be doing for your business…..

  1. The CFO should be able to look into to future to see what the future financial needs of the business will be
  2. He/She should negotiate funding facilities to ensure the business can manage its cash flow needs
  3. The CFO should be able to foresee the future tax consequences and risks of decisions
  4. He/She should help the business to achieve the best possible credit scores
  5. Identify ways to reduce costs and improve profitability
  6. Understand the business owners objective and focus the business on achieving those objectives
  7. Ensure financial and regulatory compliance
  8. Ensure accurate and timely reporting of management information
  9. Evaluate growth opportunities
  10. Apply corporate governance

What key questions should you regularly ask your CFO…..

  1. What is our cash cycle and how can we improve it – Cash Cycle Blog
  2. What Key Performance Indicators should we use and what are they telling us – KPI Blog
  3. How can we improve profitability – 15 ways to improve profitability Blog
  4. What is our Business Plan and is it the right plan – Business Plan Blog
  5. Can we reduce Overheads – 10 creative ways to reduce overheads Blog

Picture 1

Many smaller businesses and SME’s can’t afford a Full Time (or even in some cases a Part Time CFO or FD) but they need help with:

  • Business Plans
  • Budgeting and Forecasting
  • Cash Flow Management
  • Buy or Rent decisions
  • Capital Investment Appraisal
  • Accounting Procedures and Systems
  • Business Strategy
  • Busines Funding and Investment
  • KPI’s

Virtual FD’s fill this gap because:

  1. You only pay for what you need
  2. There is no employment contract
  3. It provides access to higher level of expertise (in theory)

But be careful who you choose. There is no law preventing anyone from calling themselves an accountant, and that as a result small businesses could be unknowingly paying someone without the necessary skills to handle their finances and help their business grow, who isn’t regulated or insured against risk.

So what experience does your accountant have to show that they have the skills to be your Virtual FD?

I am sure that in theory they have the technical skills but is that enough?

With the exception of CGMA (CIMA) accountants many accountants in practice have never worked in business let alone been a Finance Director!

The ACCA issued a warning back in 2014 after research from cloud accounting software provider ClearBooks showed just 8 per cent of small businesses considered an accountant’s qualifications when choosing one.

CIMA (Chartered Institute of Management Accountants) Members in Practice are monitored by CIMA for:

  1. Continuous Professional Development
  2. Anti Money Laundering Compliance
  3. Professional Indemnity Insurance
  4. Continuity Agreements
  5. Letters of engagement
  6. Ethical conduct

CIMA operates a Masters degree standard scheme of qualifying examinations for prospective members. It is active in promoting local education, training and management development operations, the promotion of new techniques through its research foundation and the dissemination of management accounting practices through publications and other media related activities. WIKIPEDIA

So what do you expect from your accountant!

steve@bicknells.net

Where can you find a trusted professional?

An overworked office worker

The internet is full of sites that allow you to search a list of ‘trusted’ experts and get quotes.

But you are choosing from a select few who have decided to pay for leads, that doesn’t necessarily mean they are the best choice.

Most organisations will have google recommendations and feedback which does help although some sites only show positive feedback.

I have recently came across http://www.bark.com

The Association of UK Accountants has recently partnered with Bark.

“People turn to Bark every day to find pros to help them with everything from lawn mowing to legal representation,” says Bark cofounder Kai Feller. “We’re committed to finding the highest quality professionals for our users, and this new partnership with the Association of UK Accountants will make it even easier for us to help entrepreneurs throughout the UK find quality business accountants.”

Bark How it works

 

There are lots of great things about Bark

  1. It shows Google Reviews
  2. Its not limited just to a select few who have paid to be on the list
  3. You get multiple quotes and a price guide

Bark BBA

steve@bicknells.net