Posts Tagged ‘Business’

Do you use your car for business purposes

Thursday, May 25th, 2017

Many employees use their own cars to undertake journeys for their employers. In most cases, employers will pay for this. Generally, they will pay a rate per mile.

HMRC consider this type of mileage payment as tax exempt as long as the rate per mile paid does not exceed a certain amount. Currently, the tax-free rates for cars are:

  • 45p per mile for the first 10,000 business miles in a tax year, and
  • 25p per mile for any additional miles in excess of 10,000.

The same rates per mile apply if you use your own van for business travel.

It is also possible to claim up to 24p per mile for the use of a motorbike and 20p per mile for the use of a bicycle. In both these cases there is no break point at 10,000 miles – you can claim these rates however many business miles you undertake.

Complications arise if you are paid more or less than these agreed rates per mile.

Are you paid more than the approved rates?

If you are paid more, any excess will be treated as a benefit and you will have to pay tax on the difference. Generally, this will be adjusted on the tax code that your employer uses to work out your weekly/monthly tax deduction from salary/wages.

Are you paid less than the approved rates?

If you are paid less than the approved rates per mile, you can claim the difference as a deduction from your taxable income. It’s called Mileage Allowance Relief (MAR).

Consider Jane, who undertook 2,000 business miles for her employer, but was only paid 35p per mile. She can claim 2,000 times 10p (45p – 35p) or £200 against her taxable income.

You will need to advise HMRC of any claim in order to get your tax reduced. If you pay no tax (if your income is below the current personal allowance – £11,000 for 2016-17) there is no tax to recover so a claim is inappropriate.

Your employer can also pay you up to 5p per mile if you carry a passenger as part of your business trip. Again, any payment in excess of this rate will be taxable, but payments of less than 5p per mile cannot be claimed as tax relief.

Simplified cash basis

Thursday, April 6th, 2017

For some time now, unincorporated businesses have been able to submit simplified accounts in order to settle their tax liabilities. The main advantage of using this system is that income and expenditure is based on money received from customers and money paid to suppliers. In other words, the accruals basis, where income and outgoings are based on the value of invoices sent and received, is not applied.

Prior to 6 April 2017, the turnover threshold for the scheme was set at the VAT registration limit, £83,000 for 2016-17. In the budget this limit was increased to £150,000.

Adopting the cash basis does simplify the recording of transactions, but there are disadvantages and complications. For example:

  • It is not possible to carry losses, accounted for using the cash basis, against previous year’s earnings or sideways against other income in which the loss was made. Losses can only be carried forwards.
  • It is not clear how VAT registered businesses using the simplified cash scheme for accounts purposes, will prepare VAT returns from April 2017. Certainly, they would be eligible to use the separate Cash Accounting Scheme for VAT purposes and this may be the best solution.
  • Interest costs are restricted to a maximum £500 per annum rather than the actual amount paid.
  • Cash basis accounts do not give a true picture of business performance and this can be problematic for supporting loan applications.
  • Flexibility in varying claims for capital allowances is lost, this can lead to wasted personal allowances in certain circumstances.

The use of the simplified cash basis does imply a saving in the time taken to record transactions for tax purposes, but as we have set out above there are possible complications and significant drawbacks.

Reduction in the dividend allowance

Tuesday, March 21st, 2017

Unless there are further political objections, one of the few remaining revenue raising changes in the recent spring budget was the reduction in the £5,000 dividend allowance from April 2018.

From this date the allowance will drop to £2,000.

This measure will increase the tax charge for investors with significant, quoted share portfolios and the director/shareholders of private companies who minimise their tax and National Insurance by taking a low proportion of their remuneration as salary and any balance as dividends.

A person with annual dividends of £5,000 may see the following amounts added to their tax bill for 2018-19, dependant on where the dividends sit in their basic, higher and additional rate income tax bands:

  • Basic rate tax payers – an increase of £225.
  • Higher rate tax payers – an increase of £975, and
  • Additional rate tax payers – an increase of £1,143.

The current average dividend yield for FTSE 100 companies is close to 3%. Based on this estimate, holders of portfolios in excess of £67,000, may see an increase in their tax bill next year. There has been speculation in the press suggesting that affected investors (in quoted companies) may be able to use ISAs to shelter some of their dividend income from an income tax charge.

Director/shareholders who have adopted to the low salary high dividend approach will suffer a tax increase, but it is likely that the benefits of this strategy will still outweigh the tax and NIC cost of being self-employed.

 

More funding available to rural businesses

Tuesday, January 10th, 2017

£120 million of funding is to be made available to support farmers, grow businesses, and generate thousands of jobs in rural communities. This announcement was made by the Environment Secretary, Andrea Leadsom, earlier this month at the Oxford Farming Conference. Funding to be released will include further support for the following types of project:

  • Rural and farm businesses will soon be able to apply for the next round of the Rural Development Programme for England (RDPE) Growth Programme, which will help new businesses get off the ground and support existing companies to grow, develop new products and access new export markets.
  • Funding has already benefited dozens of businesses across England, including the Biddenden fruit handling company in Kent, which received £70,000 to install new equipment – leading to two new products and three new jobs – and Carvannel Free Range Dairy Ltd in Cornwall, which received over £80,000 to diversify their business and develop a new milk processing factory.

Speaking after the Oxford Farming Conference, Environment Secretary Andrea Leadsom said:

A quarter of England’s businesses are based in the countryside and this funding will give rural start-ups, family-run businesses and farmers looking to diversify the boost they need.

The RDPE has already supported a range of projects, from installing cutting-edge equipment to restoring flood plains, and the next round will help create more jobs, sell more products and help us access new markets.

As well as boosting businesses and creating jobs, past RDPE projects have benefited the natural environment – with money granted to Dovecote Farm in Northants helping restore flood-plain meadows and grassland along the Nene Valley, while supporting species like otters.

Confirmation of next steps for the RDPE follows the Chancellor’s recent guarantee on supporting projects signed before we leave the EU, providing they are good value for money and are in line with domestic strategic priorities.

The £120 million fund will sit alongside recently announced funding for other RDPE projects, including woodland creation and a flood action facilitation fund.

What taxes are payable if you set up in business

Tuesday, December 20th, 2016

The answer to this question depends, in the first instance, on the business structure you select.

If you run your business as a sole trader, or in partnership with another person, you are deemed to be self-employed. Partnerships also include Limited Liability Partnerships where the partners’ personal assets are protected from business risks.

The alternative to the above self-employed options is to incorporate your business, to be a limited company. In this case the company legally owns the business and you are an employee of the company, and in most cases, a shareholder too.

Sole traders and partners

As defined above, tax payers in this group are self-employed and subject to self-assessment for income tax purposes. Profits of your business, adjusted for tax purposes, are included in your annual self-assessment tax return and provide the basis (together with any other income you earn) of your half yearly income tax payments under self-assessment.

Additionally, there are National Insurance considerations. Presently, you will pay Class 2 and Class 4 contributions and these are collected with your income tax payments. Class 2 is a fixed weekly amount, and Class 4 contributions are graduated, based on the amount of profit you make. The government is to phase out Class 2 contributions shortly and adjust Class 4 contributions to provide for basic State benefits such as the State Pension.

Limited companies

Companies do not pay income tax, instead, they are subject to corporation tax.

Corporation tax is based on a fixed percentage of adjusted profits plus any chargeable capital gains the company makes.

Directors are treated as employees by the company. Any salary taken is taxed under the PAYE system and forms part of the allowable costs of the company. The amount of any income tax or National Insurance due will depend on the amount of salary taken.

Directors, who are also shareholders, may also choose to take part of their remuneration as a dividend. This is a distribution of taxed profits by the company and so no further tax consequences apply to the company. Dividends received by shareholders are subject to personal tax if they exceed £5,000 in a tax year. The rate of tax payable depends where the dividends sit in the tax payer’s basic, higher or additional rate income tax bands.

As you can see, business structure determines tax treatment, and the selection of the most appropriate structure is of paramount importance, both to ensure you minimise taxes due and protect your personal assets.

The season to be merry

Thursday, November 17th, 2016

If you are involved in planning the staff Christmas party for your firm don’t forget to consider the income tax consequences. Here’s a short reminder of the points you should add to your check list.

The cost of an annual staff party or similar function is allowed as a deduction for tax purposes. However, the cost is only deductible if it relates to employees and their guests, which would include directors in the case of a company, but not sole traders and business partners in the case of unincorporated organisations.

Also, as long as the criteria below are followed there will be no taxable benefit charged to employees:

1.      The event must be open to all employees at a particular location.

2.      An annual Christmas party or other annual event offered to staff generally is not taxable on those attending provided that the overall average cost per head of the functions does not exceed £150 p.a. (inc VAT). The guests of staff attending are included in the head count when computing the cost per head attending.

3.      All costs must be taken into account, including the costs of transport paid to and from the event, accommodation provided, and VAT. The total cost of the event is merely divided by the number attending to find the average cost. If the limit is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring.

4.      VAT input tax can be recovered on staff entertaining expenditure. If the guests of staff are also invited to the event the input tax has to be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contribution.

 

If these limits are breached employers can pick up the tax cost by using a PAYE settlement agreement.

Claiming back pre-registration VAT

Wednesday, October 5th, 2016

The good news is you can reclaim VAT added to certain expenditure that was paid out prior to your business registration for VAT. HMRC’s instructions on this issue confirm:

There is a time limit for backdating claims for VAT paid before registration. From your date of registration, the time limit is: 4 years for goods you still have, or that were used to make other goods you still have, and 6 months for services. It may also be possible to improve matters by backdating registration in some cases – although you would need to take into account potential output tax liability on sales not previously liable to VAT.

You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.

You should reclaim them on your first VAT Return (add them to your Box 4 figure) and keep records including: invoices and receipts, a description and purchase dates and information about how they relate to your business now.

You can’t reclaim VAT for:

  • anything that’s only for private use
  • goods and services your business uses to make VAT-exempt supplies
  • business entertainment costs
  • anything you’ve bought from other EU countries (you may be able to reclaim VAT charged under the electronic cross-border refund system)
  • goods sold to you under one of the VAT second-hand margin schemes

You will need to reduce your claim if goods or services have a mix of business and private use. There are also special rules for reclaiming VAT on single pieces of computer equipment, aircraft, ships and boats costing more than £50,000; or land and buildings costing £250,000 or more (before VAT).

Claiming back pre-trading costs

Wednesday, October 5th, 2016

Generally speaking, any business expenditure that you make up to seven years before you actually start trading, is treated for tax purposes as if it was incurred on the first day of trading.

This expenditure includes rent, rates, insurance, wages and other costs that you have had to pay.

You can also claim capital allowances for qualifying assets. Again, they are treated as being made on the first day of trading. However, assets that you have previously owned, that you introduce into your new business, will need to be valued at market value at the same date. These might include your car or personal computer.

Repairs can be a tricky item, as HMRC may want to treat them as improvements to your business property that were incurred to bring them to a working standard prior to commencement of trade. If they succeed in their argument HMRC would not allow a deduction as a revenue expense.

Repairs undertaken before commencement of trade should be allowed if the following three points apply:

1.    The costs are regular maintenance rather than improvements.

2.    The repairs were not incurred to make premises fit for trade.

3.    The price paid for premises was not reduced to account for repairs to be made.

Directors responsibilities, legal, signs and stationery

Thursday, September 22nd, 2016

Legal responsibilities

We are often asked to clarify the responsibilities that directors take on when they agree to become directors of limited companies. A summary of directors’ duties published on the GOV.UK website are reproduced below.

As a director of a limited company, you must:

  • try to make the company a success, using your skills, experience and judgment
  • follow the company’s rules, shown in its articles of association
  • make decisions for the benefit of the company, not yourself
  • tell other shareholders if you might personally benefit from a transaction the company makes
  • keep company records and report changes to Companies House and HM Revenue and Customs (HMRC)
  • make sure the company’s accounts are a ‘true and fair view’ of the business’ finances
  • file your accounts with Companies House and your Company Tax Return with HMRC
  • pay Corporation Tax
  • register yourself for Self-Assessment and send a personal Self-Assessment tax return every year – unless it’s a non-profit organisation (e.g. a charity) and you didn’t get any pay or benefits, like a company car

You can hire other people to manage some of these things day-to-day (e.g. an accountant) but you’re still legally responsible for your company’s records, accounts and performance.

Another issue that is frequently asked is what information about the company should be displayed on business signs and stationery. From the same source these are:

Signs

You must display a sign showing your company name at your registered company address and wherever your business operates. If you’re running your business from home, you don’t need to display a sign there. For example, if you are running 3 shops and an office that’s not at your home, you must display a sign at each of them.

The sign must be easy to read and to see at any time, not just when you’re open.

Stationery and promotional material

You must include your company’s name on all company documents, publicity and letters.

On business letters, order forms and websites, you must show:

  • the company’s registered number
  • its registered office address
  • where the company is registered (England and Wales, Scotland or Northern Ireland)
  • the fact that it’s a limited company (usually by spelling out the company’s full name including ‘Limited’ or ‘Ltd’)

If you want to include directors’ names, you must list all of them.

If you want to show your company’s share capital (how much the shares were worth when you issued them), you must say how much is ‘paid up’ (owned by shareholders).

Time to retire? Business Exit Strategies

Friday, September 16th, 2016

Developing an exit plan
At some point you will want to stop working in your business and either sell up – in which case business exit planning is a crucial element part of your financial strategy, and could make all the difference to your long-term personal finances – or hand over the reins to your successors, in which case good planning will also help to ensure a smooth transition.

Important issues to consider include:

  • Passing on your business to your children or other family members, or to a family trust
  • Selling your share in the business to your co-owners or partners
  • Selling your business to some or all of the workforce
  • Selling the business to a third party
  • Public flotation or sale to a public company
  • Winding up
  • Minimising your tax liability
  • What you will do when you no longer own the business.

Selling the business
If your business has a market value, or if you are looking to your business to provide you with a lump sum on sale, it is important to start planning in advance, especially if you envisage realising the value of your business in the next 20 years. Selling your business is a major personal decision and it is very important to plan now if you want to maximise the net proceeds from its sale.

You will need to consider:

  • The timing of the sale
  • The prospective purchasers
  • The opportunities for reducing the tax due following a sale. We can help with these considerations.

Getting the best price
Up-to-date management accounts and forecasts for the next 12 months and beyond will be close to the top of the list
of the information which you will need to make available to prospective purchasers. 
Anyone who is considering buying your business will want to be clear about the underlying profitability trends. Are profits on the increase or declining? Historical profits drive the value attributable to many businesses, and therefore a rising trend in profitability should result in an increase in the business’s value. 
This means that profitability planning is particularly important in the years leading up to the sale. So, what is the range of values for your business? 
A professional valuation will put you on more solid ground than educated guesswork. We can work with you to determine how you can add value to your business.

Valuing a business
When considering business valuations, some of the key questions to ask are:

  • Are sales declining, flat, growing only at the rate of inflation, or exceeding it?
  • Are stock and equipment a large part of your business’s value, or is yours a service business with limited fixed assets?
  • To what extent does your business depend on the health of other industries?
  • To what extent does your business depend on the health of the economy in general?
  • What is the outlook for your line of business as a whole? • Are your business’s products and services diversified?
• How up-to-date is your technology?
• Do you have an effective research and development programme?
  • How competitive is the market for your business’s goods or services?
  • Does your business have to contend with extensive regulation?
  • What are your competitors doing that you should be doing, or could do better?
  • How strong is the business’s staff base that would remain after the sale?
  • Have you conducted a thorough review of your overheads, to identify areas where costs can be reduced?
  • Have contracts with your suppliers and customers been formalised?

When is the best time to sell?
It is important to consider a number of factors when deciding on the best time to sell your business. These could be factors that may influence potential buyers as well as your own personal circumstances.
Personal factors to consider might include:

  • When are you planning to retire?
  • Do you have any health issues?
  • Do you still relish the challenges of running your business?
  • Does your business have an heir apparent?
  • Will your income stream and wealth be adequate, post-sale?
  • Meanwhile, business questions might be:
  • What are the current trends in the stock market?
  • To what extent is your business ‘trendy’ or at the leading edge?
  • Is your business forecasting increases to the top and bottom lines?

If you have any questions regarding your exit strategy from your business, contact us here today at Botting & Co Certified Chartered Accountants in Littlehampton on 01903 713508. Your initial consultation is free!

Want to read more? This article is an excerpt from our free tax and financial strategies report for 2016/17. Click here to download your free copy.

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