Accounting & Financial Advice

Reclaiming VAT

Before you can reclaim VAT on goods and services you have bought you need to check the following:
1.The purchase was for business purposes – not for your personal needs.
2.The purchase is not a type that is 'blocked' for VAT reclaims, such as entertaining expenses.
3.You have a valid VAT invoice.

A valid VAT invoice should include all of the following details:

1. The supplier's name, address and VAT registration number.
2. Unique invoice number for that supplier.
3. The name and address of the person to whom the goods are supplied (this will be your business).
4. Date of issue of the invoice and time of supply of the goods or services (this may be the same as the date of issue).
5. A description of the goods or services supplied including: ¦The unit price
6. The rate of VAT charged
7. The amount payable excluding VAT
8. The total amount payable for the whole invoice excluding VAT.
9. Rate of any discount available.
10. Total amount of VAT charged.

Retailers can issue less detailed invoices for purchase of up to £250, but that invoice must still show key details such as the name, address and VAT number of the supplier, nature of the goods and the rate of VAT applicable.

Be careful not to mistake any of the following documents for a valid VAT invoice:
1. Supplier statement;
2. Delivery note;
3. Request for payment; or
4. Pro-forma invoice.

Ask us if you have any doubts about the documentation provided by your supplier

Compliance Is In Everyone's Best Interest

Tax related matters are often complicated, but Her Majesty's Revenue and Customs (HMRC) have set up Compliance Centres with a view to improving their service to taxpayers.

'The centres aim to handle high volumes of work accurately and efficiently by telephone and/or letter, whilst keeping the impact on the customer's time to a minimum.' (www.hmrc.gov Aug. 2011)

The centres receive third party information from a wide variety of sources, and check this information against the relative tax return. Where there are discrepancies they need to know why e.g. non-payment of tax on interest received. They aim to be open about the discrepancy and the information they hold - which has not always previously been the case.

They will start their enquiry with an opening letter which should go straight to your agent, but if it comes to you, the client, you should phone HMRC and inform them you want your agent to deal with the matter.

Once your agent is contacted with the details of the discrepancy, hopefully they will be able to offer a simple explanation by phone e.g. the wrong figure was entered, or it is a joint account and my client only declared their half. If your agent can't give an immediate explanation, they can simply say they will check with you, the client, and get back to them as soon as they have the answer.

Compliance Centres have no special powers and operate under the same legislation as the rest of HMRC, so, when the problem has been dealt with satisfactorily, HMRC are unlikely to carry out further enquiries on that tax return as they will have exhausted their enquiry opportunity.

Therefore, a prompt response is sensible as delayed cases are likely to be passed to a Technical Support Team who may choose to scrutinise the whole tax return, which may lead to the necessity of further man hours and ultimately increased costs.

If you're thinking compliance sounds in your best interest, and I strongly recommend that it is, but you need an agent to act on your behalf - contact us

A Reduced Sense of Relief?
11 March 2011

You could be affected by the Government’s latest plans to reduce the amount of tax relief available to individuals on contributions to pension schemes. The plans, announced in mid-October, are designed to replace the special annual allowance charge rules from 6 April 2011.

From 6 April 2011, the annual allowance will be reduced from £255,000 per tax year to £50,000. It will remain at this level until at least 2015/16. Several other changes are also proposed:

The rate of the annual allowance charge will move from the current flat 40% to a variable rate, pitched at a level equal to the average rate of tax relief given on the excess contribution. The rate will, therefore, normally be between 40% and 50%.

A new basis will apply for valuing the increase in benefits if you are an active member of a defined benefits scheme. This will incorporate an adjustment for inflation (as measured by the consumer prices index), but will potentially result in a higher value being placed on significant increases in pension rights.

A new three-year ‘carry forward’ of unused annual allowances will be introduced from 2011/12. Initially you will be able to carry forward unused annual allowance from 2008/09, 2009/10 and 2010/11, provided you were a member of any registered pension scheme during the relevant tax year.

The exercise will assume that a £50,000 annual allowance applied for those years (rather than the actual figure) and use a notional carry forward calculation if total contributions exceeded £50,000 during a tax year.

From 2012/13, the lifetime allowance will be cut from £1.8 million to £1.5 million, although new transitional reliefs will limit the impact of this change.

For contributions made after 13 October 2010 there are complex rules based on the end date of each pension arrangement’s pension input period. For further advice please contact us.

The Bottom Line

Cash flow management for seasonal businesses

For all businesses and, in particular seasonal businesses, a cash flow forecast is an essential tool for identifying cash peaks and troughs in the financial year. The type of sheet can be as detailed or simple as your business requires.

From this, you can identify the periods in which you expect cash flow to be limited and whether these are cyclical or season specific. If you are able to perform this task every financial year you will be able to see trends within the figures which will be useful in forward planning for future years.

The bigger question is what can you do to combat the lean seasons? Below are some tips which may help you ride out the difficult periods:

Look at the payment terms for your sales and also from suppliers. If you can shorten your sales payment terms, you may be able to accumulate enough funds to cover a particular sticky patch. Alternatively, you may find it beneficial to see if you can extend your payment terms with your suppliers so that your payment due ties in with an expected peak.

If extending the payment terms is not possible with your suppliers, then look towards alternative purchasing strategies. Bulk buying can often prove financially beneficial as it is sometimes possible to negotiate discounts for large orders.

Is it possible to take early delivery to save your supplier valuable storage costs which in turn may earn you extra discount on your order?

If you have managed to build up a solid relationship with your suppliers and have a reputation for reliable payments then it may be worthwhile investigating whether you will be able to spread the cost over several months, thus possibly negating a large outlay at difficult times.

Staffing costs are quite frequently one of the major burdens of maintaining a seasonal business. Investigate the possibility of employing a skeleton staff for the low seasons and then supplementing this with temporary/short contract staff for the peak seasons. This can represent significant cash savings for long periods during slow or inactive periods.

Can your product or services be adapted to provide additional revenues throughout the year to keep your cash flow ticking over, thus making the highs and lows less pronounced? An example of this could be a Bridal Shop which traditionally has a peal season in spring, but has since diversified into clothing alteration which has provided an alternative income stream without unnecessary additional costs during the quieter times.

There may be times after the peak seasons that you find yourself carrying high stock levels of unsold goods. It may be beneficial from a cash flow perspective to sell these items at a discounted price. An excellent example of this is Christmas goods, which are usually sold from October through to December, but come January there is usually a surplus of stock. Selling these items in advance of next season at a discounted price can provide a welcome influx of cash.

Tax bills are one of the inevitable cash drains upon a business. Corporation Tax is payable nine months and one day after you Year End date. Investigate the possibility of amending your Year End dates to incorporate the filing or Corporation Tax submissions when your cash levels are at their highest.

Vat is another potential cash drain, which can be managed beneficially. The Annual Accounting Scheme for VAT allows you to make installment payments for nine months (or three quarters) of the year and submit an annual VAT return with you paying the difference in your final return. You can use the Annual Accounting Scheme if your estimated VAT taxable turnover for the coming year is not more than £1.35 million. Depending on your expected VAT outlay this can drastically reduce your expected return.

Finally, if at all possible, try not to withdraw funds from the business at peak times as this can potentially have a significant bearing on the off season(s). While this is not always possible, erring on the side of prudence in this respect is sure to pay dividends further down the line.

Five Top Tips:

1. Create a cash flow forecast.

2. Renegotiate payment terms, based on discounts, bulk purchasing or spreading payments.

3. Reduce staff costs by employing seasonal/temporary staff for peak seasons.

4. Diversify or adapt your products and services.

5. Offer discounted products and services in the off season(s).

Use of Home as Office

For a self employed individual, where part of the home is used by their business, they may be able to claim a deduction for the costs relating to that use.

The part of the home being used by the business must be used SOLELY for business use. If part of a room is used for business and the rest of the room is being used by the rest of the family at the same time, then there is a duality of purpose for electricity, rate, heating etc and none of those costs are allowable.

Once you are happy that a claim can be made for use of home as office, the claim needs to be quantified. You need to look at how much of the area of the property is being used and what period of time that area is being used for. This will impact on any appointment of rates, electricity, gas/heating, insurance, mortgage interest, rent, repairs, cleaning and water. Any costs directly attributable to the business assets will be completely allowable. Any costs based on usage such as internet or telephone must be apportioned on the percentage of the business and non-business use.

Certain expenses need to be reviewed before any apportionment can be made such as repairs (only repairs which have some link to the business use can be apportioned, so redecoration of a room not used for business is not allowable), cleaning (again this must include the business area) and water (water must be used by the business before any apportionment is allowable).

Where the business use is small, HMRC will not require further details for what they call a reasonable estimate of the associated costs. A reasonable estimate is likely to be £104 a year (£2 a week). Once you exceed this figure, further analysis is required.

HMRC give the following example:
A sole trader uses a room in their house between 8am and midday on weekdays. The room is also used between 6pm and 10pm by the family. The room represents 10% of the total area of the house.

Cleaning, insurance, rates and mortgage interest (fixed costs) total £6,600 per annum. One tenth of this cost would be £660. Only 4 hours a day are used in the room so 4 hours / 24 hours of the £660 is allowable (£660 x 4/24) = £110

Total electricity (a variable cost) for the year is £1,500. Part of this is for heating, lighting and power to the computer. Again 1/10 of this cost is £150 but this cost is apportioned by usage so 4 hours / 8 hours are allowable (£150 x ½) = £75

In addition the sole trader uses the telephone to connect to the internet for research purposes. If the internet costs are on a fixed monthly charge then the proportion of the business time over the total time used in the month could be claimed. If the internet costs are based on actual usage, then the actual cost relating to the business use can be claimed.

Additionally, the itemised phone bill shows that a third of calls made are business calls. Therefore the cost of those calls plus one third of the standing charge can be claimed.

The rules for claiming use of home for employed individuals are much stricter and a claim is more difficult as, in addition to wholly and exclusively, the expenses must be incurred necessarily in the performance of duties.

Finally, it should be remembered that if a room in a home is set aside exclusively for business use (a claim above for a room used 100% of the time for business would imply exclusive business use) then principal private residence relief for capital gains tax is likely to be denied on that proportion of the property.

For the amounts involved, it is not recommended that any VAT be reclaimed on any home costs unless those costs are exclusive to the business ( such as a separate internet or phone line).

Travelling from home to work.

If you are employed:
There are numerous legal cases establishing the principle that employees cannot claim the cost of travel between home and their normal place of work. H M Revenue & Customs consider this cost merely puts the employee in a position to perform their duties. The definition of employee in the examples that follow includes salaried directors of private limited companies.

Exceptions to this general principle, that home to work travel costs cannot be claimed, are outlined below:

Travel costs from home to a temporary workplace can be claimed - a temporary workplace can be a place of continuous work for up to 24 months, if this period is likely to be exceeded from the start, then the workplace would be considered permanent from the start and no relief would be due. (Note: If it isn't known that the contract will exceed 24 months, then relief will be due up to the 24 month point, or up to the point when it is known that the 24 months will be exceeded if earlier.) A temporary workplace is one where less than 40% of working time is spent; if this is the case, the 24 month rule doesn't apply and relief will be available in full.

Travel between two places of work required by the same employer.

Travel to attend an appointment required by an employer. This cost is allowed even if the journey starts at home.

Travel between home and work where home is a workplace and the location of home is dictated by the requirements of the job.

If you are self-employed:
Many self-employed business people have set up their businesses to run from their home address. If you are self-employed you can claim for any travel expense which is required by your trade as long as the business element can be separated from any private element. For instance you may use your car for a trip into town to bank your business cheques and call at the supermarket on the way home.

To meet the HM Revenue & Custom's requirement of reasonable care in apportioning such costs, you must keep appropriate records. For car users this would normally be a written log of business miles and a record of the vehicles recorded mileage at the beginning and end of each trading year. In this way an accurate assessment of average business use can be calculated and applied to total running costs.

And don't forget, if you run your business through a limited company you are not self-employed. The comments in the first section of this article would apply to your business.

What happens to your pension fund when you die?

The quick, or perhaps not so quick answer to this question can be found in the small print of your pension fund rules and regulations. The tax position and the practical answers tend to fall into the following broad headings.

Up to age 75 you will have a degree of flexibility in the way in which you choose to take benefits from your fund. After age 75 you will be required to crystallise your fund - draw an income from your fund or buy an annuity. Interestingly after age 75 you also lose the right to take a tax free lump sum.

Usually you can crystallise your pension fund from age 50 (until 5 April 2010), 55 after 5 April 2010. Once you have crystallised your fund, then in the event of your death before age 75 your dependents have two choices:

. your spouse, civil partner or other dependants can use your fund to provide a pension. Any pension received would be taxed as earned income in the usual way, or

. your beneficiaries could elect to take the entire fund less a tax charge of 35%. (If you die before you have crystallised your fund, there would be no tax charge.)

Once you have taken an annuity (i.e. you have purchased the right to a guaranteed income for the rest of your life) when you do die the right to the income ceases unless:

. the annuity provides for a guaranteed minimum period of payment and part of that minimum period is unexpired, or

. the annuity provides for a spouse or civil partner's pension.

In all cases once an annuity is purchased the right to recover any of the pension fund surrendered is lost.

After age 75 the situation is a little more complex!

If an annuity is purchased the above comments still apply. However it is possible to take an alternatively secured pension, an ASP, This provides for an income, a pension, but does not require you to part company with your pension fund. If you die whilst taking an ASP the following choices apply:

. the fund may be used to provide a pension for a spouse, civil partner or other dependent, subject to tax.

. on the subsequent death of the spouse, civil partner or other dependent the fund can be passed to a charity with no tax charge.

. if the fund is not passed to a charity it is subject to inheritance tax (at 40%). The residual 60% then remains unallocated. The legislation is unclear on how the unallocated fund can be used or indeed how long it remains unallocated. However if the pension scheme rules allow, it may be possible to add additional members and benefit them accordingly.

So the answer to the question, what happens to your pension fund when you die, is complicated. If you need clarification regarding your own scheme have a word with an Independent Financial Advisor, who we can recommend. If you need advice on the tax consequences we would be happy to take a look for you.

Important Information for company & LLP officer

(These notes apply whether or not your company or LLP is trading)

Accounts & Annual Returns

1. On 1st February 2009 the Late Filing Penalty regime changed. The man changes are:

All penalties to be increased to take account of inflation since 1992
Penalties for companies/LLPs who file more than one month late to increase at a faster rate
Any company/LLP which files late having also filed late in the previous year to attract a double penalty

For late filing penalties levied from 1st February 2009 the new penalty table is:

How late are the accounts Private Co/LLP Public Co

< 1 month £150 £750
1 Month - 3 Months £375 £1500
3 months - 6 months £750 £3000
6 Months < £1500 £7500

Currently when accounts are filed just prior to a filing deadline, but are found to be unacceptable, companies & LLPs get a 14 day concession from the date of rejection to re-submit acceptable accounts without incurring a penalty. Please note that from 1 October 2009 this concession will be removed.

2. All limited companies & LLPs must deliver accounts to the Registrar of Companies for each individual accounting period. Filing periods for account beginning on or after 6 April 2008 have been reduced to 9 months for private companies & LLPs & 6 months for a public company. The filing period for first accounts also changes accordingly - 21 months from incorporation for a private company & LLP & 18 months for a public company.

3. Directors & Designated Members risk a criminal record, fine & disqualification if they do not ensure that documents are delivered on time.

4. In addition, each company must also deliver an annual return to the Registrar each year. The safest & most secure way is to use the Companies House online filing service.

For further advice call 0161 655 2000 & ask for the tax department or
contact us via the website.

Paternity leave extension deferred

The UK Government had planned to give fathers the right to claim up to 6 months paternity leave from April 2010. Because of the economic slowdown, they have decided not to bring the changes in that soon. As a result fathers are still only entitled to two weeks leave which is usually taken immediately after the baby is born.

The legislation is already in place to give the extra leave but it will not be implemented until the economy can cope.

Mothers and adopters were also going to have the right to additional statutory pay (up from 9 to 12 months) but it looks as though this is also on hold.

The legislation in more detail:

The Work and Families Act 2006 already allows regulations to be made that would permit working fathers to take up to 26 weeks of paternity leave, some of which can be paid, if the mother returns to work before the end of the one-year maternity leave period to which she is entitled.

The new provision would be available during the second six months of the child’s life, so in effect, fathers would be able to ‘share’ some of the maternity leave which is currently only preserved for the mother. The entitlement would also extend to couples who are adopting and to partners and civil partners of mothers.

A Government spokesman has now said that the Department for Business Enterprise and Regulatory Reform is continuing to review the appropriateness of all new regulations due to come into force in the current economic climate and as a result, a date has not yet been announced for extending paternity rights.

At the same time, the Government had proposed to extend statutory maternity pay and statutory adoption pay from nine to 12 months (to coincide with the period of maternity and adoption leave) and it looks as if this is also on hold

Buy or lease to equip your business?

Should you buy or lease the major items of equipment and vehicles you require for your business? There are pros & cons to both. This year’s reform of capital allowances, which give tax relief for equipment purchases, may alter your decision.

From April 2008, you can claim immediate tax relief on up to £50,000 a year that your business spends on buying any type of plant and machinery, including many fixtures in buildings and vans, though not motor cars.

The £50,000 annual investment allowance (AIA) is proportionately reduced if your accounting period started before April 2008. For example, a company with an accounting year starting on 1 January can claim the AIA on up to £37,500 in 2008 (9/12 x £50,000). Purchases in the two years before April 2008 qualify for the old first-year allowances of 50% for a small business and 40% if your business is medium-sized.

The AIA favours the purchase of equipment. However, if you do spend more than the AIA, the excess will only qualify for writing down allowances at 20%, instead of 25% before April 2008. A hybrid rate of writing down allowance will be applied for accounting periods straddling 1 April 2008. 20% is also the current rate for most cars. Tax relief for purchases will therefore take longer.

If you lease, you cannot normally claim capital allowances unless the agreement is effectively a hire purchase contract. But the lease rentals are an allowable expense, though relief is restricted on leasing payments for a car costing more than £12,000.

Of course, tax is not the only consideration. If you buy outright, you will usually pay less overall than on a leasing agreement, but you may need to borrow the money to make the purchase, which could be costly in itself. Leasing could tie you into long-term agreements that might be difficult to terminate, but buying could leave you with equipment that you might not need in the future.

If you are planning to buy or lease major equipment, please talk to us, and let us help you understand the costs.

Unfair Dismissal - Don't Get It Wrong

You may have had to cope with a whole host of personnel-related issues over the years, and almost certainly played it by the book. However, even experienced employers can get it wrong. Here is a case in point.

Pushing the boundaries

An employee's performance and attitude were deteriorating and so she was spoken to by her manager. Six months prior she had suffered a miscarriage and although distressed had returned to work and appeared her usual self. Another 'pull your socks up' chat ensued three days prior to her announcing she was pregnant again.

Now, not only was her work rate particularly slow, but her punctuality was wanting.
She worked part time on Friday, Saturday & Sunday but booked all her ante-natal appointments for Fridays. This was apparently the only time her midwife was available. She would arrive at work at 9am, and then leave at 10am for her appointment and not return until lunch. At the time there were eight people working at various times, so her absence at such short notice caused significant issues. Furthermore, when she had time off due to sickness, she failed to produce a sick note, maintaining that her doctor refused to until she had recovered!

She was written to by her employer on numerous occasions but never responded and even when disciplined failed to react.

After yet another bout of sickness, she was asked to attend a 'return-to-work' meeting. This was not a disciplinary hearing and was never described as such. When questioned by her boss regarding her behaviour, she simply sat smirking and produced a letter for her manager to read. Although reluctant her boss finally agreed and left the office to read this letter. On returning she told her employee that she did not appreciate her accusatory tone and then sacked her!

In the letter the employee made several allegations professing that she had been discriminated against because of her sex and pregnancy. Her boss had been pushed to the limit and on returning to the meeting was unable to think rationally. But by dismissing her without following a procedure, the damage had already been done.

The employee as expected claimed unfair dismissal and discrimination. With regard to the unfair dismissal the employer was guilty as charged and acknowledged this. However they strongly denied any discrimination or victimisation. Sadly, they were confronted with a real issue here as they had stated that they never intended to dismiss her at the meeting and it was the allegations towards them that pushed the boss to do so. The tribunal considered the letter to be the reason for her dismissal and she won.

TIP: This above case proves how vital it is to not allow emotions to impede decision making. Always stick to the correct procedures, even if it pains you to do so!

Overdrawn directors loan accounts

If you are a director it is contrary to the Companies Acts, except in specific circumstances, for you to borrow money from your company. Ironically there are no fines payable if you break this particular aspect of company law! However there are a number of tax consequences, two of which are outlined below.

Benefit in kind
If a director's loan is overdrawn by more than £5,000 (you owe the company money) you will be deemed to benefit from this arrangement and suffer a benefit in kind charge as a result. This charge can be avoided if you allow the company to charge you interest on the overdrawn position. The rate of interest charged needs to be at the official HMRC rate or higher. This will of course increase the amount you owe if simply charged to your loan account and will potentially increase the company's taxable profits.

Corporation tax
If the overdrawn position continues for more than 9 months after the end of a relevant accounting period your company's corporation tax bill will be increased by 25% of the loan amount. For instance if the company year end was 31 December 2007 and at that time the overdrawn director's loan amounted to £20,000, and this amount was still outstanding at 1 October 2008, you would have to pay over an extra £5,000 in corporation tax at that later date. This Section 419 liability could be reclaimed if the loan was subsequently repaid - the tax paid would actually be repaid 9 months after the accounting year end, during which the loan repayment occurs.

Beating recession and the credit crunch

We seem to be coming to a break point in a long, sustained period of growth in the UK. It's as if someone had pushed a button and notched up the incline on the running machine - all of a sudden more effort is required to sustain forward momentum. We need to get financially fitter!

Part of this fitness regime needs to be a fresh look at the tax and VAT strategies that are available to slow down payments to the taxman.

It's beyond the scope of this article to give detailed advice, as each business will have different needs. What we have done is outline in general terms some of the strategies that are available - if we have not reviewed your tax affairs recently do call and make an appointment.

VAT
The legislation that sets out the way in which you calculate the VAT to pay each quarter offers a number of opportunities to ease cash flow.

• Cash Accounting - if your VATable turnover is under £1.35m and you are not using cash accounting, now would be a good time to switch. A few companies will not benefit, especially if you are paid for the goods or services you sell at point of sale, a retailer for instance. If you sell goods on credit and you are usually owed more than you owe (to suppliers etc) cash accounting would probably reduce at least the first payment you make when you join the scheme. Essentially you only pay VAT when it is collected from customers. Outputs and inputs are based on monies received and paid, rather than amounts invoiced.
  
  
• Flat rate scheme - another of the special schemes offered to small businesses is the flat rate scheme. If your turnover is under £150,000 and you have small amounts of input tax to reclaim each month, this scheme may increase your retained profits. Each business sector suffers a different rate of VAT so the only way to see if this scheme would be beneficial is to crunch the numbers.
  Even if you don't qualify for a special scheme, don't forget to claim bad debt relief. Any debt that is over 6 months old qualifies as a bad debt and you can reclaim the output tax you will have paid. (Note: the flip side also applies. If you have invoices unpaid from your suppliers more than 6 months old, you should repay any input tax you have claimed!)

It is also worth filing your VAT return online. You are given an extra 7 days to file the return and if you pay your VAT by direct debit the payment will not appear on your bank account for a further three days.

Making losses, or less profit.

One of the more obvious effects of recession is a downward trend in profit creation, and if your business is badly affected, making losses. The notes that follow set out a few ideas for capitalising on the tax planning opportunities this affords.

• Self assessment payments on account - if your current years profit is likely to be lower than the previous year, you may be able to elect to reduce the payments on account for the current year. The claim should be based on realistic trading results.
  
  
• Losses - if your business is currently making losses it may be possible to carry these losses back to previous years, when you may have paid significant tax. Any tax overpaid as a result can be reclaimed.
  
  
• Change of accounting date - in some circumstances it may be beneficial to either extend or reduce a company's accounting period end to make use of a fall off in profitability. There are limitations to this type of planning so careful consideration of the facts is required.

Need more time to pay

Generally speaking if you are late paying your tax or VAT, interest and in some cases penalties will be applied. If you can justify the reasons for your inability to pay it is usually advisable to contact HMRC and agree a payment timetable that your cash flow can afford. Burying your head in the sand is not a useful strategy!

If your business is starting to feel the pinch, pressure on profits and cash flow, do keep in touch. As mentioned at the beginning of this article each business is unique and there are a number of strategies we have not had the space to showcase in this article. Please call if you need help.