Accounting & Financial Advice
Payments to Directors

Any payment made to a director as part of their remuneration package is generally subject to tax that is usually collected via the PAYE system. The payments made by the employer are allowable expenditure and reduce the employer’s taxable profits.

However, many smaller limited companies pay personal expenses on behalf of directors. These personal expenses do not form part of the director’s remuneration package and should not be included as an expense in the company’s accounts - a company may not deduct expenditure unless it is incurred wholly and exclusively for the purposes of its trade.

Which begs the question, how are these personal expenses of the director treated in the company’s accounts? Unless reimbursed by the director, such personal expenses are debited to the director’s loan account.

Of course the director may have introduced funds into the company at some time in the past in which case the debiting of personal expenses will simply reduce the amount owing to the director. Problems only arise when the director’s loan is overdrawn, in which case the director owes money to the company. Two tax complications arise:

1. Company liable to additional Corporation Tax charge.

If the director is also a shareholder in a “close” company, any overdrawn balance on a director’s loan account at the end of the company’s accounting year will create a potential Corporation Tax charge based on 25% of the amount overdrawn at the year end. For example, if John, a director and shareholder of A Ltd, has an overdrawn loan account with the company at their year end, 31 March 2012, amounting to £10,000 then a potential liability to Corporation Tax will arise of £2,500. This liability will be reduced or cancelled if the loan is reduced or repaid in full before 31 December 2012 (9 months after the accounting year end). Even if the loan is repaid after the nine month deadline, the company can apply to have the additional tax repaid although there may be a significant delay. Quite often the overdrawn balances are cleared by paying dividends which are credited to the loan account within the nine month period.

2. Director may face a personal tax charge.

If A Ltd in the example quoted above, had made no interest charge to John for the loan of the £10,000 then HMRC would seek to tax John as if he’d received a benefit (the interest forgone). If John had owed more than £5,000 at any time during the year to 5 April 2012 he would be assessed to a benefit in kind charge. HMRC currently use a 4% rate to calculate the benefit which means John would pay tax on a benefit in kind charge of £400. Additionally, A Ltd would be liable to a Class 1A National Insurance charge on the same amount, i.e. on £400 assuming £10,000 was owed for a full year.

To avoid the personal tax and Class 1A charge, A Ltd could charge John for the statutory interest by crediting interest received in its accounts and debiting John’s loan account with the same amount of £400. John would then need to repay £10,400 before 31 December 2012 in order to ensure HMRC would withdraw the additional Corporation Tax charge.

Accounting for directors loan transactions can be complicated especially if the company makes an interest charge to the director. Please call if you need advice.

Motor expenses and VAT

Most VAT registered traders will be aware that you cannot reclaim the VAT when you buy a car. The only exceptions are businesses that use cars directly to generate income: for example a taxi firm.

The VAT position of motor expenses for cars owned by the business is slightly more complex.

Fuel
As most business cars are used for private as well as business purposes you are only entitled to effectively claim back the VAT on the business use. Registered traders therefore have four choices:

Reclaim all the input tax on fuel purchases and pay a car scale charge as output tax to HMRC to cover private use. The amount of the scale charge depends on the CO2 emissions of the vehicle.
Keep mileage records that show business and private use and apportion your claim for input tax on fuel.

Rather than the apportionment method (2 above) it is possible to use HMRC’s published fuel rates per mile to calculate the VAT input tax included in fuel costs. To do this multiply business mileage by the appropriate fuel mileage rate and apply the VAT fraction (1/6).

Elect to make no claim to recover input tax on all fuel for mixed use vehicles. You would do this if the output tax scale charge at 1 above is more than the input tax recoverable or if you don’t keep the mileage records as set out in 2 above. Please note that if you choose this option you must apply it to all vehicles (including commercial vehicles).
Car repairs and servicing
As long as the car is owned by the business and the costs are paid for by the business all the input tax can be recovered. The only exception if is a car is never used for business purposes in which case no VAT can be reclaimed.

Ideas for reducing your taxable income 2011-12

Before we describe a few basic ideas for reducing your taxable income this year it is worth pointing out that you only have until 5 April 2012 to take action...

Deferring income
If you receive bonuses this month or a dividend from your company you should estimate your earnings for the next tax year, 2012-13, and if next year’s earnings are likely to be lower than the current year’s earnings consider deferring the voting of a dividend or bonus until after 5 April 2012. In this way you can defer any liability and possibly reduce your overall tax bill.

Gift Aid Payments
Any Gift Aid payments you make in 2011-12 will effectively increase the amount of income you can earn at basic rate. For a higher rate tax payer (especially those with earnings of £100,000 to £114,950) this can significantly reduce the net cash cost of your donation. This strategy is particularly useful as, unlike the other ideas in this article, the deadline for making gift aid payments for 2011-12 is the date you file your 2012 self-assessment tax return – this is because such gift aid payments can be ‘carried back’ a year.

Self-employed tax payers and Companies
As we mentioned in our newsletter last month, don’t forget that from 6 April 2012 (1 April 2012 for companies) the Annual Investment Allowance (AIA) is dropping from £100,000 to £25,000. If you are contemplating a significant, capital purchase this summer that qualifies for the AIA, crunch the numbers and see if it would make sense to bring forward the expenditure, to before 6 April 2012 (1 April 2012 if a limited company).

Furnished Holiday Let Property
If part of your income for 2011-12 arises from the letting of furnished holiday let property it may be possible to reduce or eliminate this income by taking advantage of the Annual Investment Allowance mentioned above. This type of property letting is considered to be a trade so qualifying expenditure on refitting or refurbishing your property could be brought forward to this month and used to eliminate higher rate tax.

Pension payments
Have you maximised the amount you can pay into qualifying pension schemes this year? Although basic rate tax relief is generally deducted before you pay your contributions you can claim for the higher rate tax element on your tax return. Talk to your pension’s advisor about a possible top up.

Hopefully you will already have given serious consideration to these and other ideas to minimise your tax position for the current tax year. You still have a few weeks to fine tune your planning. As soon as midnight passes on 5 April 2012 these options, apart from the gift aid strategy, will cease to be effective. The clock is ticking.

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?

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.