Contractor and Freelancer. Limited Company. Essential Guide - How to Keep Your Accounts. Made Simple!

Transcription

1 Contractor and Freelancer Limited Company Essential Guide - How to Keep Your Accounts Made Simple!

2 Contents Introduction... 5 IR What is IR What can I do to protect myself?... 6 The Rules - Essential Background Reading to Getting Started... 8 Business bank account... 8 Business and private keep it separate... 8 Business expenses paid for privately... 8 Personal credit card used for business expenses... 8 Some of my costs are part business, part private Keeping the Records... 9 Accounting Systems... 9 Paying Yourself - Salary v Dividends Salary Dividends How to work out your dividend Dividends - The Paperwork A worked example of a dividend payment Example of a board minute and a dividend voucher Income Tax on the dividends you receive as a shareholder What Costs can you Claim? Cost of Sales Other Direct Costs Employee costs Premises Repairs General administrative Travel & Subsistence Advertising Legal & Professional Interest and financing Other Expenses

3 Mobile Phone Motor Expenses - limited company Fixed Assets The Bookkeeping - Weekly / Monthly Events Business bank account - Record Income and Costs Expenses claim Pay a salary Pay PAYE and NIC Pay dividends Reconcile Bank What is profit? Budget for Corporation Tax Budget for Personal tax The Bookkeeping - Quarterly Events Prepare VAT Return Pay Vat The Bookkeeping - Annual Events An Annual Return Year End or Accounting Reference Period Annual Accounts CT 600 Corporation Tax Return Paying Corporation Tax Annual Self Assessment Annual Employer Returns Late filing Dormant Accounts Sundry Director s salary and National Minimum Wage Director s salary and Tax Investigations Director s salary and State Pension Use of home as office Prepare an invoice VAT

4 When To register Overview of VAT Invoicing whilst you wait for VAT registration confirmation Claiming for VAT on items purchased prior to registration Reclaiming VAT on goods you bought before registration Vat Schemes Do I need an accountant? Can I complete all my filing duties on time? Can you afford not to have an accountant? Getting the most from your Accountant

5 Introduction So you have decided to set up your business as a limited company. You are the sole director and shareholder in the company. Now what? This simple guide provides you with what you need to know to keep your accounts as a limited company. It doesn t make you an expert in producing accounts for limited companies. It certainly will not take the place of a suitably qualified accountant who should be used to prepare the year end accounts and corporation tax return. However it does ensure that you have the knowledge to: keep your accounts up to date determine your profit at any point in time understand how much tax you would have to pay so that you can budget for this bill know how much you can pay yourself from the business So let s get started. 5

6 IR35 The first question that many contractors and freelancers ask is what about IR35. What is IR35 In its very simplest form IR35 is the legislation designed to tax those who are in "disguised employment" at the same rate of tax as if they were employed. This means that the worker receiving gross payment from an agency should be paid as if the worker were an employee of the end client with PAYE deductions being made. The end result means that the worker receives far less pay than if they could work under a limited company arrangement. IR35 is a complicated area and there are no clearly defined criteria that can be used to determine the status of a worker. This is the issue with IR35, its implementation and its application by HMRC! This leaves an air of uncertainty with the worker as to if they fall within or outside of IR35. What can I do to protect myself? If you operate as a contractor or freelancer under a limited company and are concerned about IR35 then there are two things that you can and should do: Contract Review A detailed contract review will examine your contract and provide you with feedback on any potential IR35 issues. Whilst having an IR35 friendly contract will not stop an HMRC investigation, having the contract reviewed gives a certain level of comfort should an investigation arise. Tax investigation fee protection HMRC can turn the spotlight on your tax affairs at any time by starting an enquiry or investigation. If this happens you could easily end up paying more tax than necessary if you do not have professional representation to help you during the enquiry or investigation. HMRC enquiries are time consuming and the professional fees involved in obtaining the best result for you can be considerable. A good fee protection policy will cover the fee associated with an enquiry or investigation and eliminate that financial burden from you. 6

7 Of course HMRC can still instigate an IR35 investigation regardless of the above. However with a contract review and fee protection then the stress and worry of an investigation can be reduced and the financial burden eliminated. 7

8 The Rules - Essential Background Reading to Getting Started Let s start with a few basic rules for your limited company. Business bank account If you operate as a limited company then you must keep a separate business bank account for the company, because it is a separate legal entity. So make sure that you have set one up or do it now. Business and private keep it separate Don't mix private and business expenditure. Your bookkeeping will be quicker and easier if you only put business transactions through your business account. In fact, paying private costs out of the business can create serious tax problems and should be avoided. Don't be tempted to pay for non-business things out of the business just because that is where the money is and it is convenient. Business expenses paid for privately If you pay business expenses personally you are, of course, entitled to reclaim them back from the business. Try to avoid this as much as possible by using a debit card on your business account. Where it is unavoidable take the same approach as if you were claiming expenses from an employer. Detail the claim on a sheet of paper; don't forget to attach supporting receipts (and the mileage log if relevant); and file it. Finally, try to do it at least once every month so you don't forget any costs or lose receipts and so miss out on claiming a legitimate expense against tax. Personal credit card used for business expenses If you are using a credit card for business expenses, use it exclusively for the business (don't put private expenditure on it) and pay it off in full at the end of every month. You will need to analyse the amounts spent on the credit card across the business expense items (see below), because credit card transactions will often fall into different categories. 8

9 Claim the costs back in the same way as you have for expenses paid privately. Some of my costs are part business, part private. This often causes confusion, but you can simply look at it as your private expenditure and make an expense claim for the business part. You will need to have a sensible method of assessing how much the business part is. A common example is the cost of running your business from home see chapter on Use of Home as Office. Keeping the Records To comply with the tax laws you must keep all of your accounting records, bank statements, invoices, receipts etc for six years plus the current accounting year. So buy some files and archive boxes and set up a filing system from the start. Accounting Systems You can use a simple spread sheet to keep your accounts. However we do suggest that you use an on line system as this will give you a view of your profit at any point of time, as well as your position at the bank. Running a business is hard and it is essential to know how much you are making (profit) and how much you have in the bank (cash flow) so that you can monitor your progress. Knowing this several months after the year end will not allow you to effectively manage your business. We suggest that you look at: Our free on line system available to all clients Kashflow Clear Books Free Agent Sage Quick Books Xero There are other systems available of course! 9

10 Paying Yourself - Salary v Dividends One of the many reasons for setting up a Limited Company is to benefit from the tax advantages of paying yourself a mixture of a salary and dividends. Dividends attract no National Insurance payments. So these are seen as a tax efficient method of the distribution of the profit from your limited company. However unless you have income from other sources, then it could be advantageous to pay yourself a salary that utilises your personal allowance - the amount you can earn before you pay tax. To pay yourself a salary you may need to ensure that the company is registered as an employer. We suggest that you agree your final payment structure with your accountant before you implement it and the following should be used for guidance only. Salary The amount you pay in a salary will depend on your circumstances. In the majority of cases this will be set at a level equivalent to the amount you can earn before you pay tax or national insurance. The most appropriate salary for you to pay is something you should discuss with your accountant. There are three options which should be considered: A salary below the lower earnings limit (LEL). The LEL is the amount you can earn before you pay national insurance. If a salary is set at this level the company does not need to register as an employer, does not need to run a payroll and does not need to complete the employer annual returns. However this does mean that you do not receive national insurance credits towards a state pension, some benefits etc A salary equivalent to the 'earnings limit' (EL). 10

11 This is the amount you can earn before paying national insurance. At this level no tax or national insurance is due and you do receive national insurance credits towards your state pension and some other benefits. However at this level the company does need to register as an employer, run a payroll and complete the employer end of year returns. To ensure that you do not receive demands from HMRC for underpaid PAYE when no amounts would be due, you must file a nil return. This is a really easy thing to do (2 second job). Around the 10 th of each month follow this link and enter your Accounts Office Reference Number in the box at the bottom of the screen: The Accounts Office Reference Number can be found on your paper work from HMRC when you registered as an employer. Above the earnings limit. At this level tax and national insurance will be due. Again the company does need to register as an employer, run a payroll and complete the employer end of year returns. The salary paid can be recorded as a cost and can reduce your profit. This in turn will decrease your corporation tax. In many cases this will obviously not be enough to live off. Dividends You can declare a dividend that, together with the salary will be your income from the limited company. Dividends can be declared when you want. Generally it is suggested that they are paid on a quarterly or half yearly basis but there is no law to prevent you paying them monthly. 11

12 Certain rules must be followed when a dividend is paid so as not to make the payment an 'illegal distribution' of profit. Follow these and you won't go far wrong. How to work out your dividend Start by establishing the Company's profits. From the profit take off: any dividends already paid in this financial year an estimate of the corporation tax due on the profit Then add the profit or loss brought forward from last year you will find this in your accounts. The total is the amount you have available to pay as a dividend - known as 'declaring a dividend'. A dividend is the distribution of 'after tax profits' so it is essential that the company has made a profit and has made sufficient provision to cover its corporation tax bill. If this rule is not followed then the dividend could be viewed as an unlawful distribution of the company's funds. Note if this is a negative figure then there are no profits available to declare a dividend. To take money from the company would be a loan and there are serious tax implications of loans to directors. You should discuss this with your accountant before you loan yourself money from the company. As corporation tax is not payable until 9 months after the year end, cash should build up in the company. On the day that the corporation tax is payable you should have in reserve not just the money to pay the tax due but also 9 months worth of the tax that won t be payable for another year. 12

13 Don t pay last year s tax out of this year s income. Ask your accountant if you don t understand this! 13

14 Dividends - The Paperwork At the time of declaring the dividend, a Board Minute and Dividend Voucher should also be prepared. When the dividend is paid by the company to its shareholders it is given an associated tax credit of 10% - see below to see how this is calculated. This tax credit is a notional amount only. Nothing is due to HMRC and no further tax needs to be paid on this dividend unless you are a higher rate tax payer - see below. It is essential that whenever your company pays a dividend to you as a shareholder, it must be formally declared at a director's meeting. HMRC can ask for proof of the declaration of dividends and it is recommended that these documents are kept up to date. 14

15 A worked example of a dividend payment Company Name: XYZ Limited Company Address: 1 Any Street, Anytown, Postcode Company Year End: 31 December John Smith is the sole director and Jane Smith is the secretary The company has ten shares of 1 each, all owned by John Pay a dividend of 100 per share in total Companies pay you dividends out of profits on which they have already paid (or are due to pay) corporation tax. The tax credit takes account of this and is available to the shareholder to offset against any Income Tax that may be due on their 'dividend income'. The tax credit on a dividend is calculated as follows: Dividend paid = 90% Tax credit = dividend paid / 90 *10 The total of these two is the 'dividend income' which is entered onto your self assessment In the above example Dividend paid = 1000 Tax credit = 1000 / 90 *10 = Dividend Income =

16 Example of a board minute and a dividend voucher Board Minute Minutes of a meeting of directors of XYZ Limited Held at 1 Any Street, Anytown, Postcode On 1 August 2007 Present: John Smith Director It was resolved that the company pay a dividend of 100 per 1 ordinary share on 1 August 2007 to the shareholders registered on 1 August J Smith Director

17 Dividend Voucher Example XYZ Limited 1 Any Street Anytown Postcode 1 August 2007 To Mr J Smith 1 Any Street Anytown Postcode Interim Dividend of paid per 1 share for the year ended 30 June 2008 to shareholders registered on 1 August 2007 J Smith - Director Number of Shares Dividend Payment Tax Credit

18 Income Tax on the dividends you receive as a shareholder Dividends that you receive as a shareholder are subject to income tax. However if you are a basic rate tax payer you will pay no further income tax as the dividend paid has an associated tax credit (see example dividend voucher). If you are a higher rate tax payer you will pay a total of 32.5% tax on dividend income that falls above the basic rate Income Tax limit but because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit, in practice you owe only 22.5%. 18

19 What Costs can you Claim? To be allowable, costs must be incurred for the sole purpose of the business. You cannot claim for personal expenses (eg suits or general clothing). The following gives some hints on what costs you can include in your accounts. You may not have costs for all the headings - don't worry about that. Just use this as a checklist for items that you can record as costs for your business. Cost of Sales The cost of the goods you have acquired to make your sales. For example Subcontractors in the construction industry should include here the cost of any materials supplied Taxi drivers, minicab drivers etc. and those in the road haulage industry should enter fuel costs in this box rather than elsewhere unless they are claiming mileage rate Hairdressers should enter shampoo and hair product costs here At the end of the year you will need to make an adjustment for the stock you have left So the value for cost of sales will be: Value of opening stock brought forward from last year Plus Purchases made during the year Less value of closing stock at the end of the year Other Direct Costs Discounts Commissions payable Carriage Research Costs Employee costs For permanent, temporary and casual employees include 19

20 Salaries Wages Bonuses Pensions Benefits Employer's NICs Canteen expenses Recruitment agency fees Subcontract labour costs Premises Rent Business rates Water rates Heat, light & power Property insurance Security Use of home as office Repairs Repairs and renewals General maintenance of business premises General maintenance of machinery General administrative Telephone Broadband / Network Postage Stationery Printing costs Courier services General office expenses Professional journals and subscriptions Insurance e.g. public liability etc 20

21 Travel & Subsistence Car Insurance (if car owned by business and not claiming mileage) Car Servicing (if car owned by business and not claiming mileage) Car Repairs (if car owned by business and not claiming mileage) Vehicle Licence (if car owned by business and not claiming mileage) Petrol or diesel - or mileage claimed at approved rates Rail Air Taxi fares Hotel accommodation costs Subsistence or similar costs but note that lunch is generally not an allowable expense (get specific advice from your accountant) Advertising Advertising Promotional costs Marketing Legal & Professional Accountant Solicitor Surveyor Architect Stock taker Professional Indemnity Insurance Interest and financing Interest and alternative finance payments on bank and other loans (including overdrafts) and alternative finance arrangements Bank charges Credit card charges Hire purchase interest charges Similar costs not included elsewhere 21

22 Other Expenses Any expenses not included elsewhere this should be a short list though! Mobile Phone If you use a mobile phone it is recommended that you put the bill in the name of the company. Then you can claim all of the costs in your accounts (rental, business and personal calls). Otherwise you will just be able to claim for the business calls made from the phone. Each employee can have the total cost for one mobile phone met by the company as long as the bill is in the company name. Motor Expenses - limited company Directors and employees can claim 45p per mile for business miles travelled in their own vehicles for the first 10,000 per tax year (6 April to 5 April). Thereafter they can claim 25p per mile. If the car is owned by the company, the director or employee will be taxed on the benefit in kind for the car and the fuel. In most cases the tax suffered makes this unattractive. Fixed Assets Fixed assets are items which have a useful life or more than one year e.g. a computer, a machine, van etc. The asset is recorded in the accounts in the balance sheet item and the cost of the assets is written off against profit by making a depreciation charge in the profit and loss account. There are two types of fixed assets: Tangible e.g. machinery, vans, computers, land and buildings Intangible e.g. goodwill, patents, trade marks 22

23 For tax purposes the depreciation charge is not an allowable item but you can claim capital allowances. This is a complicated area and often the services of an accountant are needed to work out the tax and accounting treatment of fixed assets. You should post your assets during the year to REPAIRS and then give your accountant a list of the items which you think should be FIXED ASSETS as the year end. 23

24 The Bookkeeping - Weekly / Monthly Events Business bank account - Record Income and Costs The basis of your accounting records will be your income and your costs paid through your business bank account. As you raise a sales invoice or have sales receipts, these should be recorded in to your accounting system. As you incur allowable business costs, these should also be recorded into your accounting system, see the chapter on what costs you can claim. Expenses claim In addition to items paid from your business bank account you are likely to have paid for items from your own funds e.g. your cash, your private bank account or credit cards. You may also have some items that are partly related to your business and partly private costs e.g. broadband. To account for these in your records, you should complete an expenses claim form. Your accountant should be able to provide an example of such a form to complete. The receipts for the items or your calculations for working out the business related part of your expenses should be attached to each expenses claim form. The claim should be entered into your accounting system and the total of the claim should be reimbursed to you from your business bank account. Important Note your dividend payments, salary payments and expenses should be paid as individual amounts and NOT made together in one amount. Pay a salary As you pay it, enter the amount of your salary into your accounting system. This will be a straight forward single entry if you are paying yourself a salary at or below the earnings limit. If you are paying more than the earnings limit, see section on salary, then you will have deductions such as tax and national insurance to account for. 24

25 The amount of these deductions will be determined from running your payroll. Your accountant should advise on getting this set up, along with how to enter the payroll amounts into the your accounting system. Important Note your dividends payment, salary payments and expenses should be paid as individual amounts and NOT made together in one amount. Pay PAYE and NIC If you are paying a salary that is equivalent to the earning limit, see chapter on salary v dividends, then there will be no PAYE or NIC to record in your accounts. Most small limited companies will be in this position. However if you are paying above this limit or have other staff then you will need to record the salaries paid and the PAYE and NIC deductions on the salaries. As you pay the PAYE and NIC to HMRC on a monthly or quarterly basis then you will need to record the amount paid from your bank account in your accounting system. Pay dividends As a director and shareholder of a limited company you will pay yourself by way of a salary and dividends. See the chapter on how to work out the funds available to take as a dividend. The amounts paid as dividends from the business bank account need to be recorded in the accounts as they are taken. Important Note your dividend payments, salary payments and expenses should be paid as individual amounts and NOT made together in one amount. Reconcile Bank Having recorded all of your income and expenditure transactions in your accounts you need to check that you have got it right. This is where bank reconciliation helps. A bank reconciliation is just a posh name for you making sure that the balance on the bank statement is the same as the balance in your accounting system, assuming that you are using accounting software. Most likely it isn t. 25

26 So what do you do? You need to check that each item on the bank statement appears on your accounting system and each item on the accounting system appears on the bank statement tick them off! If there are items on the statement that are not on the system then investigate them and add them if they should be there. Equally if there are items on your accounting system but not on the statement this could be: An entry error on your part so you will need to correct it in your accounting system The item has not yet appeared on your bank statement in which case this is referred to as an outstanding item and will be carried forward to the next statement Having checked that the entries on the bank statement are the same as the entries in your accounting system it should be possible to agree the two balances the bank reconciliation. An example of this would be laid out as follows: Balance at bank per accounting system x Balance per bank per statement x Difference x Explained by: Items not yet on the bank statements x Note any other differences should have been investigated and corrected. What is profit? Profit = Income less allowable costs Is your business making a profit? Do you know what it is? Now at this point in time? If not why not? Surely you don t have to wait until the year end for your accountant to work their magic and produce your accounts? That can take several weeks if not months after the year end. By which time the information is out of date. 26

27 How do you effectively manage your business if you do not know how much profit you are making or even if you are making a profit? How can a business operate without essential information such as gross profit, net profit, money in bank, cash flow etc. All of this should be available in a timely fashion e.g. weekly or at least monthly. Without having key information available to run your business you could end up bailing it out from your personal funds. So make sure that you have a way of ascertaining your profit regularly and use this to make key decisions about your business, including if you have funds available to take a dividend. Budget for Corporation Tax Based on the calculated profit you should set aside an amount for corporation tax which will be due out of the profits for the year. Try not to think of this as being your money. The best thing to do is to have a separate bank account for the corporation tax funds and move an amount to this account each month or quarter. Setting aside an amount of 20% of profits should be in the ball park of the corporation tax due at the end of the year. In that way there will be no surprises at the end of the year then the corporation tax demand is received. As corporation tax is not payable until 9 months after the year end, cash should build up in the company. On the day that the corporation tax is payable you should have in reserve not just the money to pay the tax due but also 9 months worth of the tax that won t be payable for another year. Don t pay last year s tax out of this year s income. Ask your accountant if you don t understand this! Budget for Personal tax If you have paid a salary and dividends then you may not have any additional income tax to pay. 27

28 However if the following applies then you may need to budget for income tax: You have other income e.g. rental income, interest, other dividends If the total of all income received exceeds the higher rate threshold The higher rate threshold changes each year and you should check with your accountant for the up to date rates. Remember that the amount of dividends paid from the company is the net amount. For income tax purposes this needs to be grossed up take the dividend figure from the limited company divide by 90 and multiple by 100 for the gross figure. 28

29 The Bookkeeping - Quarterly Events Prepare VAT Return If you are VAT registered then you will need to do a quarterly VAT return. Pay Vat Once the VAT return is completed you will need to pay the VAT due. Remember to enter the amount paid into your accounting system. 29

30 The Bookkeeping - Annual Events An Annual Return This is a snap shot of information about the Company at a point in time eg. who are the shareholders, directors etc. This if often confused with the accounts but is very different. This must be filed at Companies House along with a fee of 14 if electronic or 30 if paper. Year End or Accounting Reference Period Your accounting date is also known as your accounting reference date or year end date It is the date up to which your accounts are prepared and is generally the end of a calendar month. For example 31 December or 31 March. The year end of the limited company will have been allocated on set up of the company by Companies House. The year end will be the end of the month in which the company was set up. For example if the company was set up on 5 March 2009 then the year end will be 31 March and the first accounts will be due at 31 March HMRC will not know this date as Companies House and HMRC do not work together! So you also have to inform HMRC of the year end date. This is done on a form called a CT41 G which will be automatically sent from HMRC to the registered office address of the limited company shortly after it has been set up. The year end date can be changed but this has to be communicated to Companies House on a special form and also to HMRC. You will find that it is likely that the company has a different year end to the tax year end which is 5 April. This is fine but there are deadlines for both the company year end and the tax year end. As regards filing your accounts then the following are important: 30

31 File the accounts at Companies House within 9 months from the end of the accounting reference period Corporation tax has to be paid within 9 months and one day from the end of the accounting reference period The corporation tax return has to be filed within 12 months from the end of the accounting reference period Annual Accounts Although Companies House only require an abbreviated set of accounts to be filed, which look easy to prepare, HMRC do require a full set of accounts including a detailed profit and loss account and directors report. Companies House and HMRC are very different government departments and do not work together. So do not assume that just because you have filed some with one of them, the other gets it as well. From 1 April 2011 the accounts filed at HMRC need to be in ixbrl format. ixbrl stands for inline extensible Business Reporting Language fancy speak for a special kind of text file which enables data to be read both by humans and computers. What it means for those currently filing CT600 returns is essentially as follows: Your CT600 return(s) can no longer be filed on paper but will have to be submitted online. If you have been filing online and are used to attaching final accounts in Word or Excel as a PDF document you will need to be able to convert those same final accounts into ixbrl or (better still) create them as an ixbrl document using a suitable final accounts product. If you have been used to filing online using the HMRC Gateway you may well need to consider switching to third party software There are a number of tagging and conversion solutions currently being offered but be careful. HMRC advise that you will remain responsible for the accuracy of any return you submit. 31

32 So if (for example) you pay to get your final accounts converted from Word to ixbrl, you will need to be confident that this is going to be done with total accuracy. CT 600 Corporation Tax Return Along with the full set of accounts, HMRC will require a CT 600 to be completed. This is not a straight forward form and, unless you have experience, it is best left to professionals to complete. Paying Corporation Tax Your corporation tax needs to be paid within 9 months of the end of your accounting period. Don t forget to enter the amount paid in to your accounting system. Annual Self Assessment Regardless of how much they earn, each director of the Company may have to complete a self assessment which should show all of their income from every source, not just from the company. Annual Employer Returns Any business which employs staff has a number of reporting requirements eg. P35, P14, P11D etc. Employing a member of staff includes yourself as a director if you pay over the Lower Earnings Limit. Late filing Late filing of any of the above returns will result in a fine, penalties and interest. In the case of your accounts you can be fined by both Companies House and HMRC. The fines start at 100 and increase from there up to the possibility of a criminal conviction for significant late filing of documents. Dormant Accounts It doesn't end there of course. Even when you have stopped trading you have to file dormant accounts each year or if you decide to close the company down there is even a long winded process to follow for that. 32

33 Sundry Director s salary and National Minimum Wage As things currently stand, a director of a limited company does not have to be paid the NMW provided that he or she does not have a formal contract of employment with the limited company The following link to the Direct.gov website contains relevant information. Director s salary and Tax Investigations It is a common contention that a company director being paid below the NMW is risking unnecessary attention from HM Revenue & Customs which could provoke a tax investigation. It is not really practical to comment on the accuracy or otherwise of this contention: what can be said, however, is that many factors (including straight random selection) can trigger a tax investigation. But if a company s affairs are in order, then there is little to fear from such an investigation. And, as an additional comfort, the annual tax and National Insurance savings by paying a salary based on the Lower Earnings Limit would more than cover a good tax investigation insurance policy. Director s salary and State Pension There can be more complex issues relating to the second tier earnings related state pension. The following link provides useful information: If this is of concern, advice should be taken from a competent Independent Financial Adviser ( IFA ). Additionally, a forecast pension entitlement can be obtained from the State Pension Forecasting Team at the following link: ast 33

34 Use of home as office Do you work at home? - Rent a room to your company! If you operate a limited company and work at home, why not rent a room to your business? Then you can offset the rental against your business profits and reduce your overall tax bill. So how does this work? Well there are just a couple of things you need to do to put this in place. Rental Agreement You would need to put a rental agreement in place between you, the home owner and your limited company. Your accountant should have a standard agreement available for you to use. So this will not be an onerous task. Calculate the rent The rent that you charge should be equal to the amount that the room in the house costs you. That means that the income received is equal to the costs and there is no personal profit on the rent. So you do not have to pay any income tax on the rent received, although the income and costs will need to be shown on your self assessment tax return - just a couple more boxes to complete. Let's take an example to show how this works. Sam runs her business from home. She works in one of the bedrooms. The bedroom is used exclusively for business during the week but serves as a guest room at the weekends. Her house has a total of 6 rooms, all of equal size. Sam has added up her mortgage interest, council tax, utilities, insurance and broadband costs and they amount to 12,000 for the year. She calculates the rental charge as follows: Cost per room = 12,000 divided by 6 rooms = 2,

35 She uses the office 5 out of 7 days, so charges 5/7th of the room cost to the business. The rental charge is 1,428 for the year. Sam is paid this rental from the business. The business records this as a cost in the company accounts, which reduces its tax bill. Sam enters the figures onto her self assessment tax return but has no further tax to pay on the amount received from the company. What Next? The rent charged will be based upon your own circumstances. For example if you rent your property you can use the rent paid instead of the mortgage interest in the calculation. So you will need to do your own specific calculation. Have a chat to your accountant about how to get this in place. They should be able to help you with the figures and the rental agreement to ensure that you are claiming this tax deduction for your business. 35

36 Prepare an invoice A VAT invoice must generally show: an invoice number which is unique and follows on from the number of the previous invoice the seller's name or trading name and address the seller's VAT registration number the invoice date the tax point - the time when a sale is treated by HM Revenue & Customs (HMRC) as taking place - if this is different from the invoice date the customer's name or trading name and address a description of the goods or services For each different type of item you sell, you must show the: unit price or rate, excluding VAT quantity of goods or the extent of the services rate of VAT that applies to the items being sold total amount payable, excluding VAT rate of any cash discount total amount of VAT charged 36

37 VAT When To register Any business, not just companies, whose turnover exceeds the VAT threshold in the previous 12 months has to register and account for VAT. The most common mistake made here is assuming that the need to register relates to the accounting year rather than the previous 12 months from the current date. You must also register for VAT if: you think your turnover may go over the threshold in the next 30 days you take over a VAT registered business as a going concern you are selling goods into the UK from another country in the EU and exceed the 'distance selling threshold' you acquire goods from other countries in the EU totalling more than the vat threshold in a year Registering for VAT means the completion of a quarterly VAT return. This is due at the end of the month following the quarter end date. So it is essential that the accounts are kept up to date so that this can be completed on time. Overview of VAT VAT is a tax charged on most transactions in the UK. When your business reaches a certain threshold then it will have to register for VAT. This means from the date of registration you: must charge vat on all your relevant sales you can reclaim vat where you have been charged it on your purchases Basically you become an unpaid tax collector for HMRC as you pay to HMRC the VAT that you have charged on your goods or services less the VAT you have paid on your purchases. The issue at the point of registration is can you pass the VAT onto your customers? If your customers are vat registered then this is simply a matter of informing them that you are now vat registered, adding the vat to their sales and of course showing this on their invoice. Your customer will be able to claim the vat back so the net effect of this is nil. 37

38 If your customers are not vat registered then they will not be able to claim the vat back and the vat has to be absorbed either by them through a price increase or by you through a reduction in your profit. The vat will also need to be shown on the invoice but as they cannot claim it back effectively they have to pay the increased price. This could mean that your price is no longer competitive in the market and you may have to absorb some / all of the VAT into your profit margin. Invoicing whilst you wait for VAT registration confirmation The HMRC guidance on how to do this is here: Guide on Invoicing This must be adhered to otherwise the vat could end up coming from your sales value. Claiming for VAT on items purchased prior to registration When you register you can look back over your purchases and in some circumstances you can reclaim vat: for goods: you can reclaim VAT up to four years before you registered for VAT for services: you can reclaim VAT up to six months before you registered for VAT There are certain conditions which need to be met to be able to do this your accountant will advise on these. Note these conditions in particular: Reclaiming VAT on goods you bought before registration You can reclaim VAT on goods you bought or imported no more than four years before you were registered for VAT if the goods: were bought by you as the 'person' who is now registered for VAT are for your VATable business purposes, eg they do not relate to any exempt items that you sell 38

39 are still held by you or they have been used to make other goods you still hold You can't reclaim VAT on goods that you've completely used up before you registered for VAT such as petrol, electricity or gas. So for items already sold onto customers you cannot claim the vat. Vat Schemes Vat is a complicated tax and to make it even worse there are a number of special schemes in operation which you can use if you are vat registered. Briefly some the schemes are as follows: Annual Accounting Cash Accounting Flat Rate VAT retail VAT margin schemes It is suggested that you seek expert advice in the vat scheme to ensure that it is right for your business. Do I need an accountant? This is a frequently asked question for any new business. The question really should be: Can I complete all my filing duties on time? Now if your reply to that is that you do not know what your filing duties are, do not understand the forms etc then you have answered the question: You do need an accountant. There is a lot to running a business and your time could be better spent securing new customers and sales, negotiating with suppliers, managing staff etc. Expert help in this area can save time and money. 39

40 For example making sure that you claim all allowable expenses ensuring all the forms and accounts are filed on time - late filing can result in huge penalties and fines ensuring that correct accounting records are kept which is a statutory duty Often we hear that new businesses cannot afford an accountant. Again we ask: Can you afford not to have an accountant? With fines starting at 100 and up to 1500 it could be money well spent. Our advice would be that as a sole trader you could do your accounts and tax returns yourself - if you have the time and experience. If you don't then get an accountant. However for a limited company we think an accountant is essential. 40

41 Getting the most from your Accountant Small businesses often feel they don t get value from their accountancy fees, but it is a two way street. All too often these businesses: don t keep their records properly, and don t respond to requests for information, have to be chased to meet deadlines and insist work is done at the last minute don t pay their bills on time don t listen or respond to the advice that is given Too often, small businesses are paying professional hourly rates simply for someone to file their paperwork or make a list of transactions. The biggest thing the average small business can do to reduce their accountancy fee is to do the bookkeeping yourself if you do it, you don t have to pay your accountant significant amounts of money to do it for you. Be aware of the deadlines that apply to you and let your accountant have your paperwork within 2 to 3 months after your year end. Leaving things to the last minute may be natural, but it will certainly mean that you pay more and leaves no room for an unexpected delay or to deal with issues arising from the work done. It also means that such things as tax planning can t be done properly, and the need for advice cannot properly be addressed. The truth is that most deadlines are generous enough to give sufficient time to complete everything, and your accountant won t be impressed if you turn up on Christmas Eve with your records to sort out your self assessment tax return. You might believe the accountant has a month to complete the work, but the accountant will be focusing on the Christmas break and all those clients in the queue before you. He will also wonder where you have been since last April?! 41

42 What information does your accountant need? Make sure you know what your accountant needs from you, so he doesn t have to keep asking for missing information. Ask your accountant for a list of what is needed. As a guide in addition to your bookkeeping records you should also provide: all bank statements for all bank accounts filed in order details of new business loans; HP agreements; vehicle purchases and part exchange information, business credit card statements, interest on savings, confirmation of pension contributions Make sure you understand what is included in the fee your accountant has quoted, and what isn t. How much tax planning is done, and what about a review of PAYE and VAT? Money laundering You also need to understand your accountants Money Laundering obligations. The definition is very wide and includes tax evasion. All professional advisers have a legal duty to report suspected money laundering offences. In the context of accounts and tax, this could include: Not declaring all takings or sources of income Passing off personal expenses as business 42

43 Failing to correct known VAT errors Having unusual, undocumented, unexplained and significant cash deposits and withdrawals Advice If you need advice on a complex area, make sure your accountant is aware of all the circumstances and consider asking for such advice in writing. It will reduce the risks of misunderstanding, but expect to pay a fee for it. How much should I pay? It is not possible to generalise about how much you should pay your accountant. It depends on your own circumstances. As a guide, a small sole trader with good bookkeeping should be able to find online Qualified Accountants from a month or for a limited company from a month. 43