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 employers taxable profits.
However, many smaller limited companies pay personal expenses on behalf of directors. These personal expenses do not form part of the directors remuneration package and should not be included as an expense in the companys 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 companys accounts? Unless reimbursed by the director, such personal expenses are debited to the directors 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 directors 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 directors loan account at the end of the companys 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 hed 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 Johns 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.
for directors loan transactions can be complicated especially if the
company makes an interest charge to the director. Please call if you
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.
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.
Rather than the apportionment method (2 above) it is possible to use HMRCs 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).
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 dont 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).
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...
tax payers and Companies
Holiday Let Property
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.
The supplier's name, address and VAT registration number.
us if you have any doubts about the documentation provided by your
Is In Everyone's Best Interest
You could be affected by the Governments 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 arrangements pension input period. For further advice please contact us.
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.
Offer discounted products and services in the off season(s).
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.
give the following example:
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.
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.
you are employed:
Exceptions to this general principle, that home to work travel costs cannot be claimed, are outlined below:
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.
to attend an appointment required by an employer. This cost is allowed
even if the journey starts at home.
between home and work where home is a workplace and the location of
home is dictated by the requirements of the job.
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.
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.
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.
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.
(These notes apply whether or not your company or LLP is trading)
Accounts & Annual Returns
On 1st February 2009 the Late Filing Penalty regime changed. The man
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
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.
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.
further advice call 0161 655 2000 & ask for the tax department or
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.
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 childs 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 years 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.
Michael Brookes & Co is a trading name of Arch Accounting & Payroll Agency Ltd
Company number 6147512 (England)
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