Posted in: Month: August 2014

What is the Annual Return?

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The Annual Return is a form that limited companies (only) need to send to Companies House once a year. It is a summary of the company’s non-financial information. Typically it includes the company number, the company’s registered office address, principal business activities, the directors of the company, details of the type and number of shares issued, and (optionally) the names of the shareholders.

The Annual Return has to include the above information as at a certain date, known as the ‘made-up date’. This is usually the anniversary of incorporation and is not usually the same as the year-end for the company accounts. Consequently, it is usually prepared as a separate exercise to the annual accounts and corporation tax returns.

The fee for submitting the Annual Return is included in your annual quotation and we submit it automatically so there is nothing for you to do. That said, you will need to notify us if any of the key information above changes.

Please note: Companies House issue reminder letters for the Annual Return a week or two before the date on which the return can be submitted. These letters read like ‘warning’ letters  and can cause worry and confusion. Despite this, you do not need to do anything. We will submit the return automatically before the deadline date,  but please call us if you are worried.

The tax system – an overview for individuals

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What is the self assessment system?

The UK operates a system where taxpayers are trusted to provide HMRC with accurate financial information – hence it is known as ‘self’ assessment. HMRC will usually accept the information as true but will investigate if it suspects the information is incorrect.

How is my tax calculated?

Generally speaking, your various sources of income (PAYE employment, interest, dividends, property, pensions, profits from self-employment etc) are added together to determine your ‘total income’ for the year. Your personal allowance is then deducted from this to produce your ‘taxable income’. Tax and National Insurance is then charged on this figure.

We will provide you with a tax computation each year which details your income, the taxable income and shows how the income tax and NI rates are applied to it. We will also include detailed working papers.

Profits on ‘capital gains’ are not included in the above and are taxed separately.

What is a personal allowance?

This is the amount you can earn each year without paying tax. It is set annually in the Budget by the Chancellor and is the same amount for everybody.

What is a tax code?

This is issued by HMRC to employers and pension providers (but not the state pension) telling them how much you can earn before they have to start deducting tax. They pay any tax deducted to HMRC on your behalf.

Generally speaking, the number in your tax code is the amount of income you can earn tax-free divided by ten. So, for example, a tax code of 750L tells an employer you can earn £7,500 before they start deducting tax.

If you have more than one employment then HMRC may split your personal allowance between the employments by allocating a lower tax code to each of them. The total of the tax codes should add up to your full personal allowance.

How is tax deducted?

Some income such as PAYE employment and bank interest has tax deducted ‘at source’ i.e. before you receive it. Other forms of income that do not have tax deducted at source are included on your tax return and HMRC will issue you with an assessment to pay any tax due when they receive it.

PAYE employment – tax is deducted at source by your employer, based on the tax code HMRC send them

Bank interest – for individuals, bank and building society interest has tax deducted at source so you receive the net payment. The amount should still be declared on your tax return but will not incur further tax unless you are a higher-rate taxpayer

Dividends – are received tax-free for basic-rate taxpayers, although higher-rate taxpayers will have to pay additional tax on the amount falling into the higher rate band

Pensions – the state pension is not taxed at source but receipts from other pensions usually are. The pension providers will work the tax out using a tax code that will be sent to them by HMRC (see above)

Self-employed – trading profits are included in your taxable income

Property income – profits from renting properties are also included in your taxable income.

How do National Insurance Contributions work?

There are four different ‘classes’ of NI:

  • Class 1 – charged on PAYE income
  • Class 2 – fixed weekly amount paid by the self employed (usually paid quarterly by direct debit)
  • Class 3 – additional voluntary contributions
  • Class 4 – charged on self-employed profits.

 

Self-employed only – Payments on Account?

Probably nothing causes self-employment taxpayers more trouble than payments on account. They arise because of timing differences.

Consider the following: a self-employed trader starting business on 1st May 2010 will include their taxable profits on their tax return covering the period 6 April 2010 to 5 April 2011. This needs to be submitted and any tax paid by 31st January 2012. Consequently money earned in May 2010 does not need to have the tax paid until 31st January 2012 – effectively 20 months later! HMRC claim that this is unfair on PAYE taxpayers who have to pay their tax and NI at the end of each month.

To remedy this HMRC make the self-employed also pay the tax for the following year in advance (‘on account’). They base this figure on the current year’s tax, so effectively this is doubled. The total amount of tax is then reduced by any payment made ‘on account’ last year for this year.

So each year you have to pay: the tax for the current year plus the same amount in advance for next year less any tax paid in advance last year for this year’s tax. As we say, nothing causes self-employment taxpayers more frustration.

However, payments on account do not need to be made if the tax for the current year is less than £1,000.

When is the tax payable?

Individuals have to pay the tax for their tax year ending on 5 April each year by the following 31 January.

How do I pay my tax?

HMRC will accept payment in almost any way. Details are at www.hmrc.gov.uk/payinghmrc/selfassessment.

If you wish to pay by cheque HMRC will have sent you a payslip when they wrote to you reminding you that you have to complete a tax return for the year.

If you do not have a payslip but want to post a cheque then make the cheque payable to ‘HM Revenue & Customs only’ and write your tax reference number immediately after this (it will not stop the cheque being cashed) followed by the letter ‘K’ (this ensures HMRC allocate it to your self assessment tax account and not a PAYE or VAT account.

Send the cheque to HM Revenue & Customs, Bradford, BD98 1YY. NOT a local tax office.

What information do you need to give us at year-end?

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Individuals

  • Trading summary – if your only income is from trading then the minimum we need for your tax return is your sales and expenses in the period – broken down by their main headings. If you require separate business accounts preparing please see the section on Business Accounts below
  • Employments – please provide a P60 for each employment (this is the annual summary covering the tax year which employers are required by law to provide). If you don’t have one you should contact your employer and ask for a copy
  • Bank interest – this will be on your statements. if the amount is negligible you can usually ignore this as basic rate tax is deducted at source
  • Dividends – preferably we would like to see the dividend statement. But if this is not available let us know the amount you received – it should show on your bank statement
  • State pension – please let us know the amount you received each week/month. Please note it is the payments received in the tax year up to the last 5 April – the payments may have gone up since then
  • Other pensions – please let us have a copy of the annual statement – your pension provider should send you one of these. If you do not have one you should contact your pension provider for a copy
  • Other income – please let us know details.

Business accounts

If you want business accounts preparing we will need more detailed information:

  • Bank statements – preferably with a breakdown of what the individual items are. If you have online banking you can download a summary of your transactions into a spreadsheet or as a pdf
  • Cash payments or receipts – a breakdown of what these are
  • Sales – a list of your sales invoices
  • Year-end debtors – any sales invoices issued in the year but unpaid at the year-end (the company’s debtors)
  • Year-end creditors – any purchase invoices that relating to the year but had not paid at the year-end (the company’s creditors)
  • Mileage – There are 2 ways of claiming for your mileage. You can either claim for the actual expenditure, so the payments will be in the expenses above. Or, you can claim the official mileage rate in which case you will need to let us know how many business miles you drove in the year
  • Fixed assets – details of any fixed assets purchased or sold in the period. Fixed assets are purchases that you expect to last for several years i.e. vehicles, plant and machinery, computer equipment. This does not include minor or consumable items such as computer equipment or sundry tools.
  • Computer-based accounts – if you keep your records on a computer-based accounting system then please send us a copy of your trial balance, profit and loss account, balance sheet, and a copy of the nominal ledger. If you are not sure the figures are accurate then we can check them if you send us your bank statements

Limited companies

We will need details of:

  • Directors who joined or left in the year
  • Changes to any company or directors details: address, names, nationality
  • Loans to/from directors
  • Copies of HP or finance contracts.

And don’t worry – just give us a call if you get stuck!

Capital Allowances

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HMRC (‘the taxman’) does not allow businesses to claim depreciation of their fixed assets as an expense against taxable profits. Instead, they allow businesses to claim Capital Allowances. The principle is similar but Capital Allowances are computed according to strict HMRC rules whereas depreciation is more subjective.

You will usually see the effect of this on the tax computation, which will start with ‘Profit per the accounts’. The depreciation amount is then added back and the Capital Allowances deducted. This is one of several changes which may be made to the ‘accounting profit’ to adjust it to the ‘taxable profit’.

The good news is that the Capital Allowance rates can be generous. There are two rates: an Annual Investment Allowance (AIA) which is given in the year of purchase, and a Writing Down Allowance (WDA) for subsequent years.

At present there is a 100% AIA for capital expenditure of £100,000. So up to this amount you can claim the full amount of the cost in the first year. Expenditure is generally treated as arising on the day that the title to the asset passes – usually on the day of delivery. However, there are special rules if the date of payment is more than 4 months after the date the title passes. If buying via a hire-purchase agreement it is vital that the asset is actually brought into use.

WDA’s are given on the balance of the asset not yet written off. The Chancellor sets the rate but it is usually around 18% to 20% in 2012.

Where the life of an asset is expected to be less than 8 years it can be classed as a ‘short life asset’ which has a faster write off rate than WDA’s. This treatment is not available for cars and certain other assets.

Leasing is an alternative to purchasing assets outright. The full rental costs can be deducted against profits over the life of the lease. However, there is a 15% disallowance for cars where the CO2 emissions are above 160gm/km.

Disclaimer
The above is general advice and individual treatments may vary. The information should not be relied upon without contacting one of our tax advisers.

Getting the stationery right

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Sole traders

A sole trader operating under a business name must state on letters, orders, invoices, and receipts his or her own name and business address.

If the business is VAT registered then invoices must state the VAT registration number.

Whenever an email is used where its paper equivalent would be caught by the business stationery requirements, then that email is also subject to the requirements.

Limited companies

Whether in hard copy, electronic or any other form, the company must state its name, in legible lettering, on the following:

  • All its business letters and order forms
  • All its notices and other official publications
  • All its bills of exchange, promissory notes, endorsements, cheques and orders for money or goods purporting to be signed by, or on behalf of, the company
  • All its invoices, receipts and letters of credit. (Invoices must also state the VAT number where applicable)
  • All its websites.

On all of its business letters, order forms or any of its websites, the company must show in legible lettering its:

  • Place of registration
  • Registered number
  • Registered office address
  • And if it is being wound up, that fact.

Premises

  • Every company or must paint or affix its name on the outside of every office or place in which its business is carried on – even if it is a director’s or member’s home. The name must be kept painted or affixed and it must be both conspicuous and legible
  • The address of the registered office has to be displayed prominently within the premises.

    • Please call us if you would like further help or advice on this subject.

Expenses Checklist

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What you can include

We recommend that you look at everything you spend and and ask whether there is a business related element to it. If there is, then it is likely that you can claim all or a proportion of it to reduce your tax bill. If in doubt include it in your expenses along with a note for us and we will review it at year end.

Compare your expenses to the following checklist to see if there is anything else you can claim for:

  • Purchases – of goods and materials for resale
  • Subcontractor costs – people who you sub-contract work to
  • Employee costs – people who work for you on a PAYE basis
  • Premises costs – rent and rates paid
  • Working from home expenses – if you do any work from home (or store business-related things there) you can claim a percentage of your household costs including mortgage interest
  • Repairs and renewals – if this is for property you own and relates to new build or new features (rather than upgrades or replacements) then it may need to be added to fixed assets. Please let us know details
  • General administration expenses – don’t forget to claim for any cash items you pay for personally such as postage, computer consumables, stationery etc.
  • Motor expenses – you can either claim the actual costs (petrol, repairs, MoT, insurance etc.) or a mileage allowance. If you haven’t kept all your petrol and repair receipts then you will need to let us have a note of your mileage
  • Other travelling costs – include a proportion of long-distance trips and holidays if they contain any work related element such as attending business meeting, exhibitions, networking, or doing market research. Don’t forget to make an assessment of parking charges etc.
  • Subsistence – costs for accommodation, food, and and general expenses incurred whilst working away from home
  • Advertising and marketing – don’t forget any networking costs, even social meetings can have a claimable element if it may lead to business
  • Entertaining – there are strict rules on this and we will need to go through this with you. You cannot claim for business meals held within 3 miles of your home
  • Accountancy – all accountancy and bookkeeping costs are fully claimable
  • Staff party – if you have employees you can spend up to £150 per head on one annual staff event such as a Christmas party
  • Other legal and professional costs – these can be claimed if they relate to the business but you cannot claim fines or penalties as expenses
  • Bad debts – you can deduct any unpaid sales invoices if the likelihood is they will not be paid
  • Interest payments – these are allowable and will be shown on the bank statements
  • Bank charges – these are allowable and will be shown on the bank statements
  • Other finance charges – if you have any Hire Purchases or finance leases then you will need to let us see the contracts as we have to separate the interest and capital repayment elements
  • Fees and subscriptions – to professional and work-related bodies
  • Books and periodicals – if these are work-related then you can claim for them
  • Workwear – ordinary clothing is not allowed, but if they display the company name or logo then it will be allowed
  • Safety/protective clothing – high visibility jackets or steel-toed boots are allowable but not ordinary clothing, even if it is bright. If it can be worn socially then it is usually not allowed
  • Staff training and development – technically, this includes upgrading existing skills but not learning unrelated or completely new ones (barmy, but that’s the rule)
  • Mobile phone costs – we usually allow 100% of mobile phone costs used by the business
  • Director’s salary – if paid by a limited company through a PAYE scheme. Ordinary ‘drawings’ are not allowed
  • Capital equipment – such as computer equipment. If you have a camera, iPad, laptop or video does it have a business usage? If so let us know.

Additional first year expenses

Additionally, in the first year of trading you can claim a ‘fair value’ for any plant, equipment, or tools that you already own and introduce into the business, particularly:

  • Computer equipment and software
  • Machinery
  • Tools and equipment
  • Raw materials
  • Other related goods

You can also claim for:

  • Company formation costs
  • Pre-trading expenses – for market research, building prototypes, preparing business plans etc.

What you can’t include:

  • Payments for your own time
  • Your personal drawings – businesses are taxed on their profits, irrespective of whether they are left in or taken out of the business
  • Ordinary clothing – unless it falls into one of the categories above
  • Travel to a single place of work
  • Depreciation – instead HMRC allow you to claim Capital Allowances (we have a separate article on this). We will work this out for you.

The above is a general guide only. Detailed rules apply in many cases and we will guide you on the specifics when we prepare your accounts and tax return.

Self-employment – the basics

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Overview

The trading profits of self-employed businesses are added into the owners ‘total income’ for the year along with any other income they may have and this figure is then subject to the normal tax rules. (see our article The Tax System: An Overview for Individuals.)

What expenses can I claim?

The HMRC definition includes all expenses incurred ‘wholly, necessarily and exclusively’ for the business. We recommend you look at all your expenditure and ask yourself if there is a business element. If so all, or a proportion, of it may be claimable. If in doubt, include the amount in your expenses and tell us the details at the year end.

We have a comprehensive list of the expenses that businesses are usually able to claim on this website in our Expenses Checklist article.

How are my profits taxed?

The profit shown in the accounts sometimes has to be adjusted to determine the ‘taxable profit’. This might include disallowing part of the expenses paid by the business if there is a personal (non-business) element. Another common adjustment is for depreciation (not allowed against tax) and capital allowances (allowed – see our article Capital Allowances for a brief explanation). You do not need to worry about these – we will work them out and provide you with a computation detailing the adjustments.

What are Payments on Account?

Probably nothing causes self-employed taxpayers more trouble and frustration than payments on account. They arise because of timing differences.

Consider the following: a self-employed trader starts business on 1st May 2010. They will include their taxable profits on their tax return covering the period 6 April 2010 to 5 April 2011. This needs to be submitted and the tax paid by 31st January 2012. Consequently money earned in May 2010 does not need to have the tax paid until 31st January 2012 – effectively 20 months later! HMRC claim that this is unfair on PAYE taxpayers who have to pay their tax and NI at the end of each month.

To remedy this HMRC make the self-employed pay the tax on any trading profits for the following year in advance (‘on account’). They base this figure on the current year’s tax, so effectively this is doubled. The total amount of tax is then reduced by any payment made ‘on account’ last year in advance for this year.

So each year you have to pay: the tax for the current year plus the same amount in advance for next year, less any tax paid in advance last year on account of this year’s tax. As we say, nothing causes self-employed taxpayers more frustration.

However, payments on account do not need to be made if the tax for the current year is less than £1,000.

The big question – Should I be a limited company?

There are advantages as trading a limited company rather than as self-employed.

The company can pay dividends out of taxed profits. The benefit is that dividend income does not attract National Insurance. As such it is a much more tax-effective way of being paid as compared to PAYE income or being self-employed.

Rough figures: a self-employed trader earning taxable profits of £15,000 would pay 8% of this (£1,200) in Class 4 National Insurance – for which they get no benefit, it is effectively just another tax. If they converted to a limited company they would save this amount. However, the accountancy fees would usually be around £250-350 higher – but certainly not £1,200!

Additionally, if the company is sued then this is not the personal responsibility of the directors or shareholders. A limited company is a wholly separate legal entity – and if it goes bust then any debts are not the liability of the director or shareholder. For many businesses this is a significant benefit, and may justify converting to a limited company on its own.

How do I pay my tax?

HMRC will accept payment in almost any way. Details are at www.hmrc.gov.uk/payinghmrc/selfassessment.

If you wish to pay by cheque then HMRC will have sent you a payslip when they wrote to you reminding you that you have to complete a tax return for the year.

If you do not have a payslip but want to post a cheque then make the cheque payable to ‘HM Revenue & Customs only’ and write your tax reference number immediately after this (it will not stop the cheque being cashed) followed by the letter ‘K’ (this ensures HMRC allocate it to your self assessment tax account and not a PAYE or VAT account.

Send the cheque (we recommend by recorded delivery) to HM Revenue & Customs, Bradford, BD98 1YY. NOT a local tax office.

Limited companies – the basics

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Some general guidance

A limited company is a completely separate legal entity to that of the directors, employees and shareholders. It can sue and be sued in its own right. Its debts are not personal debts of the owners.

Limited companies pay ‘corporation tax’ on their profits. This is based on the accounting profits of the period which we adjust as required by HMRC.

What documents have to be submitted?

Each year you need to send HMRC:

  • A full copy of your accounts
  • A corporation tax computation
  • A corporation tax return.

These must be sent to HMRC within 12 months from the period end or penalties will be charged. Note: any tax payable must be paid within 9 months or interest will be charged.

Also, an ‘abbreviated’ set of accounts must be supplied to Companies House within 9 months of the period end or penalties will be charged. These are made publicly available. The abbreviated accounts contain a copy of the balance sheet but not the trading details for the period. They do not contain details the company profits or your personal earnings from the business.

And finally, the company must send an Annual Return to Companies House within 28 days of the ‘made up date’. This date is usually on the anniversary of incorporation. It is usually a different date from when the accounts are prepared and submitted.

Why be a limited company?

If the company is sued then this is not the personal responsibility of the directors, employees or shareholders – and your personal assets are not at risk. However, in certain circumstances a Court can overrule this and clients should always seek specific guidance before relying on this.

Also, dividend income does not attract National Insurance. As such it can be a much more tax-effective way of being paid as compared to PAYE income or being self-employed. People tend to roll their eyes at the mention of National Insurance – but on a taxable profit of £15,000 it can be a saving of £1,200!

How is corporation tax calculated?

The ‘trading profits’ of the company are adjusted to give the ‘taxable profits’ which are then charged at the prevailing rate of corporation tax. The main tax adjustment for small companies is usually for capital allowances (see below).

How can I make sense of the figures and tax computations?

The place to start is with the trading profit shown in the accounts. This is the starting point on the Trading profit computation which details the tax adjustments leading to the taxable profit. The taxable profit is then the starting point on the Corporation tax computation which details how the tax is calculated.

How do I pay the corporation tax?

Shortly after the end company’s year-end HMRC will write to you reminding you of your obligation to pay Corporation Tax. The bottom part of the letter will include a payslip. You can also pay online or at a post office.

New start-ups – the basics

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Nearly all small businesses hate administration. If you are a small business you will be working out what you have to offer, who will want it, and then working flat out to market your product to them.

And more often than not it’s the admin gets put to one side whilst you’ve got more urgent and pressing things to do.

But there are some things you need to get right at the start, or they will come back to haunt you. In this article we examine some of the basic questions you should be asking.

Do you actually have a business?

Some people who buy and sell might argue that their activities are ‘just a hobby’ and not a ‘proper business’. This frequently arises where people sell online and claim it is not a business because they are doing it outside of their normal working hours, or there are ‘not many’ transactions.

Unfortunately, the taxman frequently disagrees, and is devoting ever more resources to discover these ‘businesses’ – and the lost tax revenues. In deciding whether a business exists the taxman will ask:

  • Does the person use the products themselves?
  • Are there more transactions than necessary for personal use?
  • Are the goods sold on?
  • Has a payment or e-payment service been set up?
  • Are the products advertised?

Generally, if it looks as if the goods are being bought with the expectation of selling them on for profit, then the taxman will argue it is a business. And if the business has not been registered with them this can raise the possibility of several years backdated fines and penalties. Ouch!

So, what sort of businesses are there?

The main types are:

  • Self-employment (sometimes called sole-traders) – these are ‘unincorporated’ businesses in which the business owner is effectively the business, and is personally liable for its debts. This includes insurance and negligence claims – even if caused by other members of staff or sub-contractors
  • Partnerships – these are also ‘unincorporated’ businesses where several people are, effectively, the business. Each partner is personally liable for the debts of the business – including mistakes made by their fellow partners. For this reason they are not a popular choice these days
  • Limited companies – known as ‘incorporated’ businesses, which are separate legal entities from their owner(s). The debts belong to the company and the owners cannot be personally sued, unless there is evidence of illegality
  • Charities and voluntary groups – individuals can take salaries for work done but profits cannot be distributed and must remain in the business.

Should I convert from being a sole trader or partnership to a limited company?

Some of the main considerations are:

  • As the owner of a limited company you are not personally liable for its debts. If the company gets in financial trouble or is sued because of an accident or mistake, then you are not personally responsible. Your own assets are not at risk
  • You do not pay national insurance on the profits. This may seem a minor point, but if you are self-employed you will pay 8% of the profits which can soon amount to well over the costs of becoming limited. For example, on profits of £15,000 the national insurance savings alone will be £1,200, compared to additional admin costs of around £300
  • It has greater kudos and may look more professional to some clients or funders.

Do I need to fill in a tax return?

The answer is ‘yes’ if you are buying and selling goods for profit or providing your services on a commercial basis.

And it’s a ‘yes’ too if you are a director of a limited company – even if no tax is due.

Confused? Hopefully not. But if you are our role in life is to take away the problems of accountancy and tax, and let you get on with what you do best – running your business.

Disclaimer
Please note that we cannot be legally responsible for general advice. This information is provided on a general basis and professional advice should always be taken by individuals.