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61 Friar Gate  Derby  DE1 1DJ

 

Registered to carry out audit work Association of Chartered Certified Accountants.

www.auditregister.org.uk under number 8011438

Member of the Association of Chartered Certified Accountants
Phone

01332 202660

Blog

Director’s loan accounts – avoiding the risks

Adrian Mooy - Monday, September 30, 2019

 

HMRC produce a series of toolkits which set out common errors that they find in returns. The hope is that by being familiar with the mistakes that are routinely made, steps can be taken to avoid them. Although the toolkits are aimed primarily at agents, they are useful for anyone who has to complete a tax return. The director’s loan accounts toolkit highlights the key areas of risk in relation to directors’ loan accounts. The latest version of the toolkit was published in May 2019 and should be used for personal tax returns for 2018/19 and for company returns, for the financial year 2018.

 

Personal expenses

 

Expenses are only deductible in computing taxable profits to the extent that they are incurred wholly and exclusively for the purposes of the trade. A company is a separate legal entity to the directors and shareholders. However, many close companies meet director’s personal expenses. Where these are not part of the director’s remuneration package, the company cannot deduct the cost when computing its taxable profits. Instead, they should be charged to the director’s loan account. The director’s loan account toolkit focuses on expenses that do not form part of the director’s remuneration package.

 

Risk areas

 

1. Review of the accounts - any personal expenditure incurred by the director and paid for by the company must be allocated correctly, i.e. an allowable expense where it forms part of the director’s remuneration package and charged to the director’s loan account. Account headings should be reviewed to identify director’s personal expenditure which has not been treated correctly.

 

2. Loans to participators – under the close company rules, tax (section 455 tax) is charged at 32.5% on loans to directors who are also shareholders where the loan remains outstanding nine months and one day after the end of the accounting period. Review overdrawn loan accounts to check whether the company is liable to pay section 455 tax.

 

3. Review of expenses and benefits – where a director is provided with anything other than pay, it may need to be reported to HMRC as a benefit in kind on form P11D. Review expenses and benefits for taxable items that may have been missed. It should be noted that if the director’s loan account balance exceeds £10,000 at any point in the tax year, a benefit in kind charge will arise on the loan unless the director pays interest at a rate that is at least equal to the official rate (2.5% since 6 April 2017).

 

4. Self-assessment – check whether the director needs to send a self-assessment return. The directors’ loan accounts toolkit states that “Company directors do not need to send a tax return unless that have other taxable income that needs to be reported, or if HMRC has sent a notice to file a return”.

 

5. Record keeping – good keeping is essential. Poor records may mean expenditure is missed or allocated incorrectly.

 

Checklist

 

The toolkit features as useful checklist which can be completed to make sure that nothing is overlooked.

When is a car a pool car?

Adrian Mooy - Tuesday, September 24, 2019
 
Rather than allocating specific cars to particular employees, some employers find it preferable to operate a carpool and have a number of cars available for use by employees when they need to undertake a business journey. From a tax perspective, provided that certain conditions are met, no benefit in kind tax charge will arise where an employee makes use of a pool car.

 

The conditions

 

There are five conditions that must be met for a car to be treated as a pool car for tax purposes.

 

1. The car is made available to, and actually is used by, more than one employee.
 
2. In each case, it is made available by reason of the employee’s employment.
 
3. The car is not ordinarily used by one employee to the exclusion of the others.
 
4. In each case, any private use by the employee is merely incidental to the employee’s business use of the car.
 
5. The car is not normally kept overnight on or in the vicinity of any of the residential premises where any of the employees was residing (subject to an exception if kept overnight on premises occupied by the person making the cars available).

 

The tax exemption only applies if all five conditions are met.

 

When private use is ‘merely incidental’

 

To meet the definition of a pool car, the car should only be available for genuine business use. However, in deciding whether this test is met, private use is disregarded as long as that private use is ‘merely incidental’ to the employee’s business use of the car.

 

HMRC regard the test as being a qualitative rather than a quantitative test. It does not refer to the actual private mileage, rather the private element in the context of the journey as a whole. For example, if an employee is required to make a long business journey and takes the car home the previous evening in order to get an early start, the private use comprising the journey from work to home the previous evening would be regarded as ‘merely incidental’. The car is taken home to facilitate the business journey the following day.

 

Kept overnight at employee’s homes – the 60% test

 

For a car to meet the definition of a pool car, it must not normally be kept overnight at employees’ homes. In deciding whether this test is met, HMRC apply a rule of thumb – as long as the total number of nights on which a car is taken home by employees, for whatever reason, is less than 60% of the total number of nights in the period, HMRC accept that the condition is met.

 

When a benefit in kind tax charge arises

 

If the car does not meet the definition of a pool car and is made available for the employee’s private use, a tax charge will arise under the company car tax rules.

 

Payroll – how to deal with new starters

Adrian Mooy - Monday, September 23, 2019

 

From a payroll perspective, there are various tasks that an employer has to perform when they take on a new starter.

 

For 2019/20 an employer needs to operate PAYE where the employee earns more than £118 per week (the lower earnings limit for National Insurance purposes). However, if any employees earn more than £118 per week, the employer must comply with RTI and report all payments to employees to HMRC (even those below £118 per week).

 

Work out what tax code to use

 

The tax code is fundamental to the operation of PAYE and it is important that the correct tax code is used. To ensure that a new employee is taxed correctly, the employer will need to know the correct tax code to use.

 

If the employee has a P45 and left their last job in the current tax year, the employer can simply use the code shown on the P45. If the employee left their last job in the 2018/19 tax year, the code on the P45 can be updated by adding 65 to codes ending in L, 59 for codes ending in N and 71 for codes ending in M.

 

If the employee does not have a P45, the employer will need to ask the employee to complete a new starter checklist.

 

New starter checklist

 

The new starter checklist enables the employer to gather information on the new employee. Even if the employee has a P45, it is still useful for the new starter to complete the checklist as it contains information which cannot be gleaned from the P45 (such as the type of loan where the new starter has a student loan which has not been repaid).

 

As far as establishing which tax code to use, the employee will need to select one of three statements:

 

 • A: ‘This is my first job since 6 April and I have not been receiving taxable Jobseeker’s Allowance, Employment and Support Allowance, taxable Incapacity Benefit, State or Occupational Pension’.

 • B: ‘This is now my only job but since 6 April I have has another job or received taxable Jobseeker’s Allowance, Employment and Support Allowance or taxable Incapacity Benefit. I do not receive a State or Occupational Pension.

 • C: ‘As well as my new job, I have another job or receive a State or Occupational Pension’.

 

The following table indicates what code should be used for 2019/20 depending on what statement the employee has ticked.

 

Statement ticked             Tax code to use

A                                      1250L on a cumulative basis

B                                      1250L on a Week 1/Month 1 basis

C                                      BR

 

Does the employee have a student loan?

 

The employer will also need to establish whether the employee is making student loan repayments. If the employee has a P45 and is making loan repayments, the student loan box will be ticked. However, the P45 will not provide details of the type of loan. Student loan information can be provided on the new starter checklist, enabling the employer to ascertain whether the employee has a student loan, and if so what type, and also whether the employee has a post-graduate loan.

 

Tell HMRC about the new employee

 

The employer will need to add the new employee to the payroll and also tell HMRC that the employee is now working for the employer. This is done by including the new starter details on the Full Payment Submission (FPS) the first time that the employee is paid.

Check your tax calculation

Adrian Mooy - Saturday, September 21, 2019

 

Each year HMRC undertake a PAYE reconciliation for employed individuals who are not required to submit a tax return to check that the correct amount of tax has been paid. Where it has not, HMRC will send out either a P800 tax calculation or a PA302 simple assessment.

 

P800 tax calculation

 

A P800 tax calculation may be issued if an employee has paid too much tax, or if they have paid too little and the tax underpayment can be collected automatically through an adjustment to their PAYE tax code. There are various reasons why a person who pays tax under PAYE may have paid the wrong amount of tax. This may be because:

 

• they finished one job and started a new one and were paid for both jobs in the same tax month;

• they started receiving a pension at work; or

• they received Employment and Support Allowance or Jobseeker’s Allowance (which are taxable).

 

P800 calculations for 2018/19 are being sent out by HMRC from June to November 2019.

 

If the P800 shows that tax has been overpaid, it will say whether a refund can be claimed online. If so, this can be done through the personal tax account. Where a claim is made online, the money should be sent to the claimant’s bank account within 5 working days. In the event a claim is not made within 45 days of the date on the P800, HMRC will send out a cheque. If an online claim is not possible, HMRC will also send out a cheque.

 

PA302 simple assessment

 

Instead of a P800 tax calculation, an individual may instead receive a PA302 simple assessment. This is effectively a bill for tax that has been underpaid. HMRC may issue a simple assessment if:

 

• the tax that is owed cannot be taken automatically from the individual’s income;

• the individual owes HMRC tax of more than £3,000; or

• they have to pay tax on the State Pension.

 

A simple assessment bill can be paid online.

 

Check your calculation

 

If you receive a tax calculation or simple assessment from HMRC, do not simply assume that it is correct – HMRC can and do make mistakes. It is prudent to check that their figures are correct. When checking the calculation, check HMRC’s figures against your records, such as your P60, your bank statements and letters from the DWP. Check that employment income and any pension income is correct, and that relief has been given for expenses and allowances. HMRC have produced a tax checker tool (available on the Gov.uk website at www.gov.uk/check-income-tax) which can be used to check the amount of tax that should have been paid.

 

If you think that your tax calculation is incorrect, you will need to contact HMRC. This can be done by phone by calling 0800 200 3300. If you do not agree with your simple assessment, you have 60 days to query this with HMRC by phone or in writing. The simple assessment letter explains how to do this.

Tax-free childcare update

Adrian Mooy - Thursday, September 19, 2019

 

HMRC have recently run a campaign to remind people that they could be missing out on up to £2,000 per child, per year, towards the cost of childcare.

 

Working parents and guardians may be eligible to receive government top-ups of £2 for every £8 that they pay into a tax-free childcare account, up to a maximum of £2,000 per child (or £4,000 for disabled children), although there is an overall maximum limit of £10,000.

 

The scheme is open to all working parents across the UK with children under 12, or under 17 if disabled.

 

Under the scheme, the parent/guardian opens an online account via the government’s Childcare Choices website and decides how much to pay in and how often. The flexible nature of the accounts mean that accountholders can pay in more in some months, and less at other times, depending on how much they have spare to invest. The account holder’s circumstances are re-confirmed online every three months. Money can be withdrawn at any time but the government contribution will be lost.

 

Again, the flexible nature of tax-free childcare allows anyone to pay into the account, including grandparents, other family members or employers.

 

To qualify for the government contribution, account holders will usually have to be in work, expecting to earn at least the National Minimum Wage (NMW) or National Living Wage (NLW) for 16 hours a week on average, over the next 3 months. This currently equates to at least £1,707.68, which is equivalent to the NLW for people over 25.

 

Where an individual is not working, they may still be eligible for tax-free childcare if their partner is working, and they receive Incapacity Benefit, Severe Disablement Allowance, Carer’s Allowance or Employment and Support Allowance. It is also possible to apply where the claimant is starting or re-starting work within the next 31 days.

 

Self-employed people who do not expect to make enough profit in the next three months can use an average of how much they expect to make over the current tax year. Additionally, the earnings limit does not apply to self-employed individuals who started their business less than twelve months ago.

 

Where the individual, or their partner, has an ‘adjusted net income’ over £100,000 in the current tax year they will not be eligible for tax-free childcare.

Broadly, ‘adjusted net income’ is total taxable income before any personal allowances and minus certain payments, such as those made under Gift Aid. It is also worth noting that the £100,000 limit includes any expected bonuses.

 

It is not possible to receive tax-free childcare at the same time as claiming Working Tax Credit , Child Tax Credit , Universal Credit (UC) or childcare vouchers. Which scheme the individual is better off with depends on their situation. The Childcare Choices website includes a childcare calculator for parents to compare all the government’s childcare schemes on offer and check which works best for their families, including the 30-hour free childcare offer, tax-free childcare or universal credit.

 

Employer-provided childcare

 

Tax-free childcare effectively replaces HMRC’s employer-supported childcare scheme. However, parents who joined an employer-childcare voucher scheme before 4 October 2018 have the option of remaining in that scheme for as long as the employer offers it, or for as long as they stay with the employer. The employer-provided voucher scheme closed to new entrants from 4 October 2018.

 

Where an individual decides to switch from childcare vouchers or directly contracted childcare, they must tell their employer within 90 days of applying for tax-free childcare.

 

Finally, with regards to UC, HMRC recommend that the claimant waits until a decision on a tax-free childcare application is received before cancelling a UC claim.

 

Anyone who pays for childcare would be wise to check their eligibility for tax-free childcare as they could be missing out on considerable financial support.

Director’s salary or bonus?

Adrian Mooy - Wednesday, September 18, 2019
 
Given current tax rates, paying a dividend rather than a salary will often be a more cost-effective way of withdrawing profits from a company. Tax is currently payable on any dividend income received over the £2,000 annual dividend allowance at the following rates:

 

• 7.5% on dividend income within the basic rate band (up to £37,500 in 2019-20)

 

• 32.5% on dividend income within the higher rate band (£37,501 to £150,000 in 2019-20)

 

• 38.1% on dividend income within the additional rate band (over £150,000 in 2019-20)

 

However, if the company is loss-making and has no retained profits, it will not be possible to declare a dividend, and an alternative will need to be considered. This often involves an increased salary or a one-off bonus payment.

 

From a tax perspective, the position will be the same whether a salary or bonus is paid. Both types of payment attract income tax at the recipient’s relevant rate of tax (20%, 40% or 45% as appropriate).

 

However, from a National Insurance Contributions (NICs) perspective, the position, and any potential cost savings, will depend on whether or not the payment is made to a director.

 

Directors have an annual earnings period for NIC purposes. Broadly, this means that NICs payable will be the same regardless of whether the payment is made in regular instalments or as a single lump sum bonus. In addition, since there is no upper limit of employer (secondary) NICs, the company’s position will be the same regardless of whether the payment is made by way of a salary or a bonus.

 

Where a bonus or salary payment is to be made to another family member who is not a director, the earnings period rules mean that it may be possible to save employees’ NICs by paying a one-off bonus rather than a regular salary.

 

Example - Henry is the sole director of a company and an equal 50% shareholder with his wife Susan. In 2019/20 they each receive a salary of £720 per month.

 

In the year ended 31 March 2020, the company makes profits of £24,000 (after paying the salaries). The profits are to be shared equally between Henry and Susan. They want to know whether it will be more cost effective to extract the profits as an additional salary – each receiving an additional £1,000 per month for the next twelve months - or as a one-off bonus payment with each receiving £12,000.
 
The income tax position will be the same regardless of which method is used.
 
As Henry is a director, his NIC position will be the same regardless of which route is taken as he has an annual earnings period for NIC purposes.
 
Susan is not a director, so the normal earnings period for NIC in a month will be the interval in which her existing salary is paid.
 
Assuming NIC rates and thresholds remain the same in 2020/21, if Susan receives an additional salary of £1,000 a month, she will pay Class 1 NIC of £120 (£1,000 x 12%) a month on that additional salary. Her annual NIC bill on the additional salary of £12,000 will be £1,440.
 
However, if she receives a lump sum bonus of £12,000 in one month (in addition to her normal monthly salary of £720), she will pay NIC on the bonus of £585 ((£3,450 x 12%) + (£8,550 x 2%)).
 
Paying a bonus instead of a salary reduces Susan’s NIC bill by £855.

 

Finally, it is important to note that in determining an effective company profit extraction strategy, tax should never be the only consideration. Any profit extraction strategy should be consistent with the wider goals and aims of the company.

VAT registration – sooner or later?

Adrian Mooy - Monday, September 16, 2019
 
Once a business is up and running, the next major administrative area to be faced often concerns the subject of VAT. At first glance, it looks complicated - not to mention time-consuming - particularly for small businesses. However, taken one step at a time, the rules governing VAT registration and invoicing are generally quite straight-forward and relatively easy to navigate.
 
The law states that all traders – whether sole traders, partnerships, or limited companies – are obliged to register to charge and pay VAT once their taxable turnover reaches a pre-set annual threshold, which is currently £85,000. Broadly, a business must register for VAT if:
 
 • its taxable outputs, including zero-rates sales (but not exempt, non-business, or ‘outside the scope’ supplies), have exceeded the registration threshold in the previous 12 calendar months – unless the business can satisfy HMRC that its taxable supplies in the next 12 months will not exceed a figure £2,000 below the registration threshold (so currently £83,000); or

 

 • there are reasonable grounds for believing that the business’s taxable outputs in the next 30 days will exceed the registration threshold; or

 

 • the business takes over another business as a going concern, to which the two bullet points above apply.
 
A business can register for VAT voluntarily if its turnover is below the threshold and it may actually save tax by doing so, particularly if its main clients or customers are organisations that can reclaim VAT themselves.
 
Example
 
Sandra is a non-VAT registered carpenter and a basic rate taxpayer. She buys a new saw to use in her business, which cost £100 plus VAT, so she pays a total of £120 (£100 plus VAT at 20%), which can be set against her business profits for income tax purposes. As Sandra is a basic rate (20%) taxpayer, she will save tax of £24 (20% of £120), so the saw actually costs her £96. However, if the business is VAT-registered, the £20 VAT paid on the item (the input tax) can be reclaimed and £100 is set against business profits for income tax. The tax reduction is therefore £20 (20% of £100) and the saw actually costs him £80 – saving £16 by being registered for VAT.

 

Is non-registration preferable?

 

VAT-registered businesses supplying goods and services to private individuals often feel dis-advantaged compared with their non-registered counterparts because they have to charge an additional 20% on every bill issued.
A trader who does not want to have to register for VAT, may be able to stay below the annual VAT registration threshold by supplying labour-only services and getting customers to buy any goods needed themselves.

 

Example

 

Bob is a non-VAT registered plumber, but his turnover is creeping up towards the VAT registration threshold. He could ask his customers to buy materials for a job directly from a DIY shop. Although the customers will have to pay the VAT on these items, they won’t have to pay VAT on Bob’s invoice for labour services. This will also have the additional advantage of reducing Bob’s annual turnover for VAT registration purposes.

 

Registration benefits

 

Deciding whether to register for VAT voluntarily before the registration threshold is reached is a big decision that can have lasting implications for the financial health of the business. It is vital therefore, that the matter is given careful consideration. There are several positive reasons supporting voluntary registration, including:

 

 • ReclaimingVAT - although a registered business will have to charge VAT on goods and services (known as charging ‘output tax’), it will also be able to reclaim VAT that it is charged by other businesses (known as ‘input tax’). Where input tax exceeds output tax in a given period, the business will generally be able to reclaim the difference from HMRC.

 

 • Marketplace perceptions - some businesses choose to register for VAT in order to appear larger than they are. Customers are likely to be aware of the £85,000 registration threshold and where a business is not registered, its customers will know that the business turnover is lower than this. A business may therefore consider registration as a way of increasing its standing amongst competitors, and in the eyes of clients.

Government’s draft IR35 legislation contains important changes

Adrian Mooy - Thursday, August 29, 2019
 
After much anticipation, the Government has now published its draft legislation for the off-payroll working (IR35) rules, which will be enforced in the private sector from 6 April 2020.

 

The latest policy document for the private sector shares a number of similarities with that already in force in the public sector.

 

However, it does introduce a few new changes which contractors and businesses should be aware of as they begin to prepare for the changes ahead.

 

It was already known that the Government intended to introduce some form of exemption for small businesses, but this has now been confirmed in the draft legislation.

 

This means that contractors engaged by a company classed as ‘small’ in a tax year according to the Companies Act 2006 will need to continue operating IR35 as they currently do.

 

The new legislation will also introduce a new term for hiring organisations to provide IR35 decisions, referred to as a ‘status determination statement’ (SDS), which must be provided by businesses to contractors.

 

This must include both a decision on IR35 and the reasoning behind it. Not providing an SDS will be seen as a business failing to fulfil its obligations, and thus the liability will sit with it until a suitable SDS is submitted to HM Revenue & Customs (HMRC).

 

To reduce the number of conflicts, the draft legislation has also confirmed that businesses will only have 45 days to consider and respond to any disagreements of a status decision with the reasoning behind their decision.

 

This differs drastically from the current system which allows a contractor to challenge the decision at any point via HMRC or through an appeal heard at Alternative Dispute Resolution (ADR) and/or judge at a tribunal hearing.

HMRC advises VAT-registered businesses to plan for potential no-deal Brexit

Adrian Mooy - Tuesday, August 27, 2019
 
HMRC has written to 145,000 VAT-registered businesses that only trade with the EU, advising them to plan ahead for a potential no-deal Brexit.

 

The letters outline changes to customs, excise and VAT in the event that the UK leaves the EU without a Brexit deal. UK firms are advised to register for a UK Economic Operator Registration and Identification (EORI) number.
 
Without this, businesses will not be able to move goods in and out of the UK. HMRC also recommends giving couriers EORI numbers so that they can clear goods.

 

Additionally, firms will need an EU EORI number in order to 'deal with the customs processes of EU Member States'.

 

Commenting on the matter, Dr Adam Marshall, Director General of the British Chambers of Commerce (BCC), said: 'Businesses still need clarity on many other cross-border trade issues, such as customs procedures at borders following a no-deal exit and when the government will launch an official database to provide ease of access to information on tariffs and quotas.'

 

The government has started to automatically enrol UK firms into a customs system in order to simplify trade with the EU post-Brexit. HMRC stated that it will 'continue to engage with businesses, representative organisations, intermediaries and infrastructure providers to ensure they have the information and support they need'.

Changes in VAT for Contractors and Subcontractors

Adrian Mooy - Saturday, August 24, 2019
 
Confused by the new CIS reverse charge VAT rules that come into effect from 1 October 2019?

 

HMRC have issued further guidance at:
 
https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services#overview
 
The basics are that as from 1 October 2019 if you are a VAT registered subcontractor working for a contractor you will no longer be paid for the VAT element of your invoice and pay it over to HMRC. The customer will need to do this for you.
 
You will need to verify your customer is VAT registered and make a note on the invoice to make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT.
 
Practically the software you are using should account for this for you with a different tax code.
 
If you are working on Zero rate new builds the rules will not apply.
 
Worried about how your cash flow will be affected when the new rules come in? HMRC are suggesting you change to monthly VAT returns or contact their business support services.
 
Still confused?  Get in contact with us and we can help you be ready for the change.

 



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