Correcting mistakes

“One of my invoices to my customer is wrong. What should I do?”

In cases like this the easiest solution is to reverse the invoice using a credit note, and then issue a completely new invoice (and hopefully get it absolutely right). A credit note is basically a negative invoice. It should replicate the incorrect invoice in every respect, except that the heading is “Credit Note” and not “Invoice” and all the figures should be preceded by a minus sign. The date on the Credit Note is normally the date you prepared it, unless there are compelling reasons to use a different date.

Let’s say that this is the incorrect invoice . . .

201406241008inv001

Use whatever the next number is (in your normal invoice number sequence) for the credit note. If your software forces you to use a different number sequence for credit notes, then we will live with that! We prefer a single number sequence if at all possible.

201406241008inv001

When your bookkeeping is done, and when your customer does their bookkeeping, these two documents will cancel each other out.

Then use the next number in your normal invoice number sequence for the new invoice.

201406241008inv003

Make your corrections like this every time and then you, your customer and your accountant will always know exactly what is going on. Thanks!

Director shareholder payments 2014/15

There is an established working practice whereby directors of small limited companies (typically “one man” limited companies) reward themselves with a combination of small salary and big dividend. The point of doing this is to stay within the law, and to hand over the smallest possible sum of money to HM Revenue & Customs. In order to benefit from this working practice you must follow the system precisely. Failure to do so may lead to the imposition of a deduction of PAYE from your income and possibly a charge to interest and penalties if HMRC determine that any taxes are being paid late.

Most importantly, you must consider all of your personal income in order to determine the optimum level of income from your own company. This report assumes that you have no other income and are seeking the most efficient arrangement for your director shareholder payments in 2014/15 whilst still staying within the law.

You must be a director of a UK limited company to do this. Your salary is paid to you for the responsibility involved in holding the office of director.

You must also be a shareholder in the company in order to receive dividends. It follows that all shareholders shall receive dividends in direct proportion to their shareholding. Where you are the sole shareholder and have 100% of the shares, that’s relatively straightforward. Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

The company may only pay dividends if it has a profit. If you are paying yourself sums of money out of investor funding (and not out of profit) then you are borrowing from your own company. This is a bad thing! HMRC may impose financial penalties on you for doing this – twice. There is one penalty for the company and a separate one for each overdrawn director.

Hold a monthly or quarterly meeting of the shareholders and decide what dividend can be paid. Prepare minutes of that meeting.

You need to know what the profits are, what the corporation tax bill is likely to be, and what is left over to distribute to the shareholders. Dividends are paid out of post tax profits, so you must ensure that the company has an adequate tax reserve. To allow for some flexibility you may choose to describe these amounts as “drawings” until the “dividend” is calculated.

Dividends are personal income and are subject to income tax in your hands. Owing to peculiar rules about tax credits and the taxation of dividend income, you may pay no additional income tax if you are a basic rate taxpayer. If you are likely to reach the threshold for higher rate tax you may need to prepare an additional personal tax reserve as set out below.

The pattern for basic rate taxpayers is this:

622615pic20150405pic001

By combining a monthly salary of 663and a dividend of 2,543 your personal income (totalling 3,206) will be on the threshold of the 40% higher rate band for income tax. If you have sufficient funds and are prepared to suffer higher rates of income tax, then you may choose to follow this pattern.

622615pic20150405pic002

There are graduated changes for annual incomes between 100,000 and 150,00 and the 45% rate of income tax also kicks in. The personal allowance is also withdrawn after 100,000 and so if you fit this picture, this final table is for you.

622615pic20150405pic003

If you are a 40% rate or 45% rate taxpayer, then you will need to set aside a proportion of your income in order to pay your income tax bill under Self Assessment. For example, in this final table, for every secondary amount of £8,860 which you take, put 25% of that into your personal tax reserve. Then for every tertiary amount of £1,000, put 40% of that into your personal tax reserve.

Dissolve a company or put it on ice?

Hopefully, running your own business has been a good experience. When business comes to an end, we know that the double barrelled question “should I dissolve my company or put it on ice” is often asked.

If you have finished with the company and no longer need it, then dissolve it. Keeping it will only add to your costs. A simple dissolution guide is here.

It is not possible to ever make a traded company become truly dormant again. There will always be things to do. A dormant company is one which has been incorporated and which has never traded. So if you want to put your traded company “on ice” you should be aware that Companies House will still want a Confirmation Statement every year, and you will still have to file statutory accounts. You cannot use the Companies House form DCA (Dormant Company Accounts) to do this, because there will be legacy figures which are carried forward each year.

So it’s up to you. Keep the company alive and do the annual submissions yourself to keep costs down. Or keep paying the accountant (a reduced fee) to stay on side with the government.

We know from experience that people who “put the company on ice” normally keep it there for about three years, keep paying professional fees, and then go and dissolve the company anyway. If that’s going to be you, then maybe you should take the easy option and just dissolve it now? You can always incorporate a new company later.

If you do want to keep the company on ice (and not use it at all) we will discount our fees by 50%. However if the company is used, even if it’s for just one project earning one fee, then normal accounts are needed and normal fees will apply. OK, if it was genuinely only one project and one fee then you may not need to pay exactly 100% of our standard costs, but it will be something nearer to 100% than to 50%.

What’s wrong with online accounting software?

Since 2005 when we were first introduced to NetSuite, we have had a look at all of the major online accounting packages. There is nothing particularly wrong with them if you’re a bookkeeper.

If you’re not a bookkeeper, then you either need to get yourself trained up as a bookkeeper before using any of the online accounting packages, or simply don’t use them!

Alternatively, you could look upon these packages as being a glorified invoice generator and then give the records to a real bookkeeper so that the job can be done properly.

The reason we say this is that (even with the best will in the world) most untrained users will categorise things wrongly in their online package. That leaves us with a jigsaw puzzle to unpick and redo. And it’s a jigsaw puzzle which comes with no picture on the box! That means that we spend twice as long on these jobs, unpicking the damage and putting it right again.

At the end of the day, an online accounting package is not going to give you a set of Statutory Accounts and as that’s what Companies House wants, then you may want to think twice about the cost/benefit analysis of going this route. If all you want is an invoice generator then you could use one of the free open source ones. Don’t take this as a recommendation, but we can tell you that some of our clients used (the now defunct) Bamboo Invoice. Currently WaveApps offers a free invoicing tool (and more “paid for” tools).

The simpler way to generate your invoices is to use a Word or Excel document or a similar tool. Make a master template and reuse it, as long as you never overwrite your original template!

If you are using some major online accounting package to give you the VAT figures and the Corporation Tax figures, you might have realised that getting some of your categorisation wrong will invariably lead to getting the tax figures wrong. Is that what you want?

Lastly, you cannot rely on any of the platforms to import all your bank statements all the time. We’ve had trouble with more than one platform, and when they go wrong it is impossible to get them back to normal. That’s why we always ask for copies of bank statements regardless!

201610181238hsbcbankfeedproblem

When they have gone wrong we know from experience that you either abandon that platform and use another (equally mediocre) platform, or you set up a new account on the same platform and start again.

What should I do about foreign currency expense receipts?

If you’re an international traveller we recommend that you use your business bank account and your business credit card for all business activity. If you really have to use personal cash or a personal credit card for business costs, then you will need to prepare a separate claim form for each currency involved. It therefore makes sense to keep business items business and personal items personal and you wouldn’t need to do this exercise.

If you wish to add your own conversion rates and show the column totals in GBP you can. When we work on theses documents we will use your GBP figures if they are present, and if not we will use the HMRC approved rates given here http://customs.hmrc.gov.uk/channelsPortalWebApp/ and log the details in GBP.

If you ever need to draw cash from foreign ATMs please remember that we will treat that as “drawings” in the same way as we treat cash drawn from UK ATMs. Getting foreign cash either at an airport or from an ATM is not an “expense”, it’s just a conversion of one form of funds into another form. It’s the receipts for expenses which are needed to substantiate any purchase of goods or services.

VAT invoices – the fine details

All businesses need standardised documents for their correspondence and invoices. An invoice is basically a standard letterhead with the addition of a number of billing points. The examples set out here assume that your business is a limited company.

VAT invoices must show:

  1. Your address and the address of your company registered office. If your company registered office and your principal place of business are one and the same, you only need to show the address once, provided that it is clear that they are one and the same!
  2. Your company registration number.
  3. Your VAT registration number.
  4. The date of the invoice.
  5. The invoice number. Invoices must be sequentially numbered, using a plain and simple, and purely numeric system. Do not skip numbers. Invoices must run in number order and also in date order. Do not use a number on draft invoices if that results in the sequence becoming broken. Draft invoices should only be given a number when they are finalised and issued.
  6. The name and address of the person being invoiced. This is the name of your client and not necessarily the name of the individual who works there. You can for example mark the invoice “F.A.O. Mr Jones”, but it should be addressed to the client, for example “London Time Machines Ltd”.
  7. The amounts in GB Pounds. If you wish, you can show a different currency within the dialogue within the invoice, but not where it’s likely to confuse a VAT officer. In the event of a records inspection, the VAT officer must be able to clearly see the GBP figures, and especially the ones at the foot of the invoice.
  8. A sub total line, showing the net figure excluding the VAT.
  9. A VAT line, showing the applicable rate and the VAT amount in isolation.
  10. A total line, showing the sum of the net amount and the VAT.

Example Letterhead
Example Invoice (non-VAT)
Example Invoice (VAT)

Once an invoice has been issued to a client, it should never be amended. If there is anything wrong with an invoice the correction must be done in the way we have set out here https://www.proactive.ly/news/?p=353

Pre-Trade Expenses

I’ve only just registered my business. Can I claim pre-trade expenses which I’ve paid for personally? And can I claim back old VAT?

The short answer is “it depends”.

The basic principal is that “if you paid for something in the knowledge that you were starting a business, and the prime motive for buying this something was to enhance that business, then it is a business expense” and you can normally claim for it. That applies to both goods and services, and in order to claim the full cost you must satisfy both parts of this test, that (a) there was a business prime motive and (b) the purchase was within the three years preceding day one of the business.

Alternatively, if (for example) you bought your desktop computer and printer four years ago, and you introduced them into the business on day one, then you can claim their “fair market value” on day one as an allowable expense. This applies to goods only. If you cannot claim them under the three year rule mentioned above, then claim them under the fair market value rule, and use eBay or GumTree to work out what a fair market value for your something is. You can also claim for (for example) a CamCorder which you bought for the family two years ago, but then introduced into the business – it may fail the “business prime motive” test at the date of purchase, but it could still qualify under the “fair market value” rule as long as it is now a business asset and is not a family asset!

In either case, you need to submit a claim form to your business and have the precise amount reimbursed from the business account to your personal account. This applies, even if you are the only director/employee/worker. Documentation and adequate evidence are required in support of all claims.

If you’re thinking of introducing your car into your new limited company, you probably shouldn’t. The costs of tax and national insurance, on the benefit in kind of having a company car, usually mean that it’s actually more cost effective to run the car personally and to claim a business mileage allowance from your company.

Before doing the claim form, any VAT registered businesses should consider these additional rules. You can claim for the VAT on goods (and in limited circumstances on services too) provided that they:

• were purchased within the three years preceding the date of your VAT registration
• are still in the possession of the business on the date of your VAT registration
• are actually used in the course of the business; and
• satisfy the business prime motive test

Note that three years preceding the date of your VAT registration is only the same as three years preceding the commencement of the business if you were VAT registered from day one. There’s a subtle difference for businesses which waited a few months (or a few years) before applying for their VAT registration!

There are further guides on this site which may help you:

What is a business expense?
A Pre-Trade Expenses Flowchart
The mechanics of how to claim back expenses (current & pre-trade)

Keeping proper business records

Foreword

You don’t want a set of a set of accounts and a tax return!

What you want is a decent standard of living, and complete peace of mind.

That’s what Proactive provides, but only for proactive clients, ones who are willing to put in a bit of time and effort. It’s all about good systems and good habits. And, there are milestones along the way, like “accounts” and “tax returns”.

It all starts with a good record keeping system.

1. Business records

1.1. This is a tried and tested system. It is based on Einstein’s comment that everything should be kept as simple as possible and no simpler than that. It’s also designed to keep you on side with government, so there are quite a number of steps, but rest assured that each step has been simplified as far as possible. In order to have dates always line up in date order we use scientific notation so (for example) Christmas Day in 2020 is 20201225.

1.2. You should not buy bookkeeping software unless you are employing an in-house bookkeeper who works on your premises. Or, if you yourself are a trained bookkeeper.

1.3 Likewise, you should not buy into an online accounting system. They get things wrong a lot of the time, and they need to be trained to get things right. A fully fledged online accounting system is complex like a 10,000 piece jigsaw puzzle with no picture on the box. Moreover, these systems don’t do statutory accounts. Invariably, if you’re not a trained bookkeeper then the online system will not be trained properly, and it will not be giving you accounts which meet the requirements of HMRC and Companies House. Simply avoid them. We do not unpick incorrect jigsaw puzzles in systems like FreeAgent, Quickbooks and Xero, etc. Save yourself the aggravation (and the money) and do not touch the solutions which promise you an easy life. Our system takes less time, there’s no extra cost, and it involves less heartache. A human bookkeeper is a lot better than a computer, as steps 3.5 to 3.7 will demonstrate.

1.4 If you want to, you can use online invoicing tools like WaveApps or InvoiceNinja for a lot less money than the big online accounting systems. Please use these only for invoicing your customers and nothing else. Alternatively, you can generate your invoices using Word or Excel or a similar application.

1.5. Store all your invoices on DropBox and then we can both find what we need, when we need it.

1.6. We use specialist software which only accountants would want to buy. We want a proper set of prime records from our clients and that enables us to do the books and the accounts professionally, using professional software and professional staff. We have 35 years of experience in this field.

1.7. Our system requires all records to be stored as PDF documents. This ensures that the data is readable by all users on all systems. It’s easy to print files to PDF and if your business computers do not already have PDF printers installed, visit www.cutepdf.com and download their basic package called CutePDF Writer (Freeware).

1.8. HEIC image files (used by modern iPhones) take up a ridiculous amount of storage space, and cannot be opened on a Windows PC. Please do not fill your DropBox space with these files. You do not need extra high definition images of accounting records, and in any case we cannot open them. They will be deleted from DropBox in order that better use of the storage space can be made.

1.9. Above all, please keep corporate matters corporate and personal matters personal.

2. Invoicing and Sales

2.1. All businesses want to make sales and so we use a “Sales” folder on Dropbox to keep track of your trading income.

2.2. You need to generate an invoice for every sale you make. The invoice is addressed to your customer, and that means the person who will pay you. In order to comply with the relevant law, please show the correct name and full postal address of your customer. If Fred Flintstone is personally liable to pay the bill, then it’s OK to address it to him. However, if it’s legally payable by Slate Stone & Co, The Quarry, Bedrock, then please address it to them. In law a “person” can be a company, a partnership, etc, as well as an individual. So, in order for your invoice to be legally binding it must show the name of your actual customer. You can add the line FAO Fred Flintstone if that helps get the invoice to the right member of staff at Slate Stone & Co. The only exception to this rule is for businesses that operate cash registers in retail shops. We don’t look after any businesses like that! So, you will need a system which generates an invoice every time you want a customer to pay you for something. That includes:

2.2.1. Fees for services

2.2.2. Fees for goods sold

2.2.3. Commissions received

2.2.4. Costs which you want to recover from your customer

2.3. If you want money from your customer then it is always done on invoice. The expression “expense claim” is something that employers and employees use. On a business to business level you do not claim, you invoice.

2.4. You must prepare an invoice each time you make a sale, and you must give each invoice a unique and consecutive number. Even if your customer doesn’t want an invoice, you do! Even if your customer works with time sheets and gives you a self billing invoice, you still need to prepare a proper invoice which will stand up to scrutiny from HMRC! If you are in business on your own account then you need to do all the normal things that normal businesses do, and that starts with issuing proper invoices to clients. It helps establish cases when you are outside IR35, and it is still necessary when your work is inside IR35. After all, you could end up with concurrent work both in and out of IR35. You need (and HMRC requires) one contiguous invoice number sequence anchored across all your invoicing no matter which customer is billed next. Different customers do not get a bespoke invoice number sequence – your business gets one contiguous invoice number sequence because that is how accounting works.

2.5. Use a simple number system for invoices numbers. Choose any number to start with and then just keeping adding 1 to it! Don’t skip numbers, nor use them out of sequence, and never use the same number twice.

2.6. Never use alphanumeric numbers. Invoice numbers must always be purely numeric. If you want to show a customer reference on your documents you can, but it goes in the “our ref” box and it is not a part of the invoice number. Any client that persists is using alphanumeric numbers will soon find that they are no longer a client. Along with most other systems, our professional software requires purely numeric invoice numbers. If you want to include the year of issue within your invoice number, don’t! You already have the date on the invoice!

2.7. Keep it as simple as possible and no simpler than that. Unique, consecutive numeric values only.

2.8. Make sure that the invoice date and the invoice number stand out clearly by keeping them near the top right of your document, and by keeping them clear of any surrounding clutter. If you are not VAT registered, then your invoice should make no mention of VAT whatsoever.

2.9. As you generate them, add a copy of each of your invoice PDFs to the pending > sales folder on DropBox.

2.10. There is more information here giving details of how a formal invoice is normally set out. If you are VAT registered, please, please follow the rules about setting out VAT invoices correctly, and completing the “VAT at” line accurately.

3. Purchases

3.1. Purchases are business things that the business buys with business money. Expenses are the business things that you personally buy with your own personal money.

3.2 We use the word “Purchases” to describe all the things that your business buys via all the business bank accounts.

3.3. If you could get every business transaction to go through a business bank account then Step 5 below would not be needed!

3.4. The “Purchases” folder on DropBox is for all the things, and only for the things, which you bought for the business using any of the business bank accounts. Put PDF copies of receipts and supplier invoices into the purchases folder.

3.5. We do not check every single purchase, but you need to have them all just in case HMRC ever does a records inspection. We sample check lots of the files. The bigger the figure on the bank statement, the more likely it is that we will check for the supporting document. If we don’t recognise a supplier name on your bank statement, then we will look for the supporting document, check what you bought, and categorise it correctly in the books. If it’s a very big figure then it will always be checked, because VAT can only be reclaimed when you have a proper VAT receipt showing that UK VAT has been paid.

3.6. If you do not provide a proper VAT receipt then you should assume that the item will be logged as a non-VAT purchase and we will not recover any VAT for you.

3.7. And we also know the names of nearly all the pubs and restaurants in London (and Kent, and loads of other places). If your business spends money on entertaining we will log it and then it gets disallowed in the tax computation, see this report. If your entertaining costs are out of character with the norm we will remind you of the HMRC system called “Connect” and the ratio analysis that they do. We do some ratio analysis too, in order to help you keep things under control before HMRC starts asking you awkward questions.

3.8. Add all of your supplier invoice PDFs to the pending > purchases folder on DropBox. So that’s things like hardware and software purchases, advertising costs and phone bills (assuming that all these things are bought in the name of the business and not in your own name).

3.9. You may find that as you work through your business purchases, that you pick out a few personal purchases for the business (for example, cash paid to taxi drivers). Put these “expense” items to one side for the moment. They are not “purchases” and they will be dealt with at Step 5 below.

3.10. Whether your business is VAT registered or not, you are required by law to keep all of your business records for six years. You may be selected by HMRC for a records inspection at any time.

4. Bank Accounts

4.1. The most critical part of your records system is your business bank account. This is always our starting point when we log your records. We can read a set of bank statements like a life story. So can HMRC. It says an awful lot about you and your business.

4.2. “Business bank account” means every account that your business has with a finance house. It includes credit card accounts (they are just business bank accounts with negative numbers) so all together it includes:

4.2.1. Bank accounts

4.2.2. Credit cards

4.2.3. Loan accounts

4.2.4. PayPal

4.2.5. Stripe

4.2.6. Any other payment processor including WorldPay, StreamLine,  NetBanx, etc!

4.3. When we ask for business bank statements we want them all, on every single business account that you have. Without them we cannot do proper bookkeeping and accounts, because we need to know what goes in and out, and we need to know what assets and liabilities the business has.

4.4. Monzo! We do not recommend having a business account at Monzo. Their business model is in disarray, and as a loss making bank they may not be trading within a short space of time. In Oct 2021 it became clear that their application for a US banking licence was going to fail. If you do have a UK Monzo account, and some of the money disappears into Pots, we need to know how much is in each Pot. Currently, Monzo does not provide this level of detail. Please ask Monzo on the last day of every month to give you a separate statement showing all of the transactions on all of your separate Pots. They have a mechanism to do this, but they fail to do it routinely and they won’t do it unless you ask them to. Monzo also mixes up the IN column and the OUT column on the bank statement. We have asked them to be normal, but we’re still waiting.

4.5. Tide! The only place worse than Monzo is Tide. Tide is not a bank, it’s an app. Do not use Tide, use a bank! Coconut is an app, not a bank. Mettle is an app, not a bank. If you cannot log in on a desktop, and download a PDF  bank statement for your accountant, then you do not have a proper business bank account! If you appoint a second director/shareholder and the new codirector cannot use the bank account because it’s tied to your mobile devices, then you do not have a proper business bank account!

4.6. Revolut! No, don’t go there either!

4.7. This process of logging your business activity from your bank statements also means that we do not want personal credit card statements, only business ones. If you use a personal credit card on the basis that “it’s only for business costs” it doesn’t matter, we only want business accounts. The business is not responsible for your personal assets and your personal liabilities, and so your personal credit card does not feature in the business records.  If an account is not in the business name, then it is not a business account.

4.8. We need bank statements from you once per quarter, however you might find it easier to collate them once per month. When preparing your records, you must ensure that your bank statements cover the whole period in question. If your statements are issued on paper on (say) the 25th of every month, you may want to get that changed. We need everything right up to and including the last day of the quarter.

4.9. It’s easier to do this using internet banking, and take a summary from the web once per month. Follow this process and it won’t matter when the paper statements are issued. We recommend that you use this process on the first business day of every calendar month. Log in to your online banking service . . .

4.10. Set the dates so that you can see an online statement covering the whole of last month. Then print that to PDF. Do not give us the CSV file from the bank, there are 16 different ways that banks in the UK do that. Please give us PDFs.

4.11. Save your bank statements using meaningful file names. Repeat that for each business current account, savings account, PayPal account etc. Make sure that all of the PDFs that you create include a Balance column.

4.12. If there is no balance column then we cannot log your records accurately. We need the balance column for our quality control processes.

4.13. Add these PDFs to the pending > bank folder on DropBox. Even if there are no transactions on any given account in any given month, we still need a statement which shows that. A copy of a “NIL” document tells us that there were no transactions as opposed to us thinking that there is a missing document! The same thing goes for HMRC on records inspection day!

5. Expense Receipts

5.1. Purchases are business things that the business buys with business money. Expenses are the business things that you personally buy with your own personal money.

5.2 More specifically “expenses” means personal expenditure on business activity, incurred by a member of staff. If you are a director of a limited company then in this situation you are treated in the same way as a regular employee.

5.3. The starting point for Step 5.3 is the pile of expense receipts which you had left over from Step 3.8 above.

Example Expenses Claim form

5.4. In the old days, you needed to fill out an expenses claim form and staple supporting receipts to the back of it. Then get it authorised by your boss, submit it to the person in accounts, and then if you were lucky and (a) your form was correctly filled out and (b) your items were genuinely work related, your employer would reimburse you for the exact amount of your claim. This system is for things like taxi receipts, the book of postage stamps from the newsagent, or the coffee on the train. As much as we would like to get these suppliers to invoice your business directly, they tend to expect instant payment with cash or card or contactless phone.

5.5. Even if you are are the only person in your business, this traditional process is basically the same process that you must follow now! If you paid for things with personal cash or with a personal card, then you have to keep a record in order to claim back things which are allowable expenses of the business. Take the pile of expense receipts which you had left over from Step 3.9 above. Is your business VAT registered? If it is, then divide this pile of personal expense receipts into two, the ones which make no mention of VAT and the ones which are proper VAT receipts. If some of these things are “information slips” from a PDQ machine, they are not the same thing as a proper VAT receipt – a VAT receipt has an indisputable comment about VAT on it – the information slip does not. Prepare separate expense claims for non-VAT items and for VAT items.

5.6. If you do not provide a proper VAT receipt then you should assume that the item will be logged as a non-VAT purchase and we will not recover any VAT for you.

5.7. You can prepare your claims using electronic means if you wish. For example Expensify will give you a summary in PDF form. If you sign up for an account like Expensify please do not give them our email address, we do not want weekly or daily emails from them! What we want is for you to collate your records so that we can work on them once per quarter.

5.8. Alternatively use our standard proformas from the links at section 8 below and prepare a PDF of your completed form. Some of our clients do this on paper and then scan the completed form. Others work the XLS file and then pass it back to us. If it’s our original proforma XLS file then we can waive our PDF rule for this.

5.9. Add all of your expense claim PDFs to your personal folder under the pending > expenses folder on DropBox. Principally, we need the claim forms, and you need all of the supporting receipts. However, it makes sense to put all of the supporting receipts on DropBox too. By having everything correctly stored on DropBox, it’s easy to give HMRC 6 years of records in a single ZIP file. We also do sample checking of expense receipts in the same way as the purchases mentioned above.

5.10. We know that some people prefer to keep small fiddly paper receipts as “paper only”. That’s fine by us, as long as you can find it when it’s needed. As we said, records have to be kept for 6 years. Do you have a copy of that £30 black cab receipt from 5 years ago? If not, and if your system is deficient, do something about it now and make it bullet proof!

Example Mileage Claim form

5.11. You can also claim for motor expenses in accordance with the HMRC approved FPCS rates, which apply to business miles done in your personal car. Once you’re happy that your claim is complete, reimburse it from your business account to your personal account. That’s the way that mainstream businesses do it.

5.12. You don’t have to wait for the accountant to see it.

5.13. And don’t worry, if there is something in the expenses that the accountant doesn’t like, you’ll be told, and you’ll simply be asked to reverse the incorrect figure and improve your claims process for the future.

6. Payroll

6.1. In April 2013 HMRC introduced Real Time Information (RTI) for payrolls. You can no longer seek to engineer an artificial reality, especially when it comes to payroll. Whatever happens in the company and on the company bank statement happens. And (as far as salaries go) anything that did not happen on the company bank statement simply did not happen.

6.2. We maintain payrolls for some clients and we store the PDFs on DropBox for them. If we run a simple payroll for you (following the small salary and big dividend method) it is your responsibility to make the correct bank transfers at the correct time. Every April, when the new tax year starts, we update our advice and we notify our clients. It’s up to you to implement that advice before the April pay day.

6.3. If you look after your own payroll, then we need monthly payroll summaries from you. Please add P32 reports and a detailed analysis of all staff and their pay and deductions figures to DropBox. Your bookkeeper or your payroll bureau will know what that means.

7. The quarterly reports

7.1. We provide you with regular quarterly updates in order to show an early forecast of your profits and what your future tax bills might be. Steadily, as the trading year progresses, these forecasts become more and more accurate and that enables you to prepare a suitable tax reserve and to avoid any nasty shocks!

7.2. The quarterly reports in detail

8. Expense Proformas

8.1. To download a sample form (MS Excel) right click on the link and select “save as” . . .

8.2. Mileage Claim

8.3. Non-VAT Expenses

8.4. VAT Expenses

9. Warning

9.1. You may have heard that we have a reputation for deliberately losing some of our clients. It’s true! Every year we lose the people that cannot give us proper records. It usually starts with missing bank statements. And there are some cases where invoicing is not done properly. Others fail to provide adequate supplier receipts. If you cannot keep a full set of bank statements, a full set of invoices, and adequate evidence of business costs, then should you really be trying to run your own business?

9.2. And, if there are a few too many indiscretions with a crossover between personal and business bank accounts, then you’ll soon find yourself needing a new accountant. Trying to disguise personal expenditure as business expenditure is fraud.

9.3. Each year, we identify the bottom 5% of our client base and we let them go. The best gardeners in the world do not keep a patch for the weeds. We apply that same philosophy to our business. You might like to adopt it too! It certainly makes business a lot more rewarding.

9.4. The good news is that we have a great relationship with our clients, they receive regular reports and regular tax updates, they are almost always on top of things and they rarely get nasty shocks from the taxman. Plan to look after your business, and plan to keep proper records.

Sir John Harvey Jones (chairman of the CBI):

“The only good thing about not planning, is that failure comes as a complete surprise, and is not preceded by a period of anguish and fear.”

Afterword

It’s all about good systems and good habits. Does the process above seem a bit too heavy? Well, getting it right the first time around is a lot less work and aggravation than to have to deal with HMRC enquiries, or having to suffer the indignation of a failing business.

What do you want, do you really, really want?

A decent standard of living? Complete peace of mind?

Red Adair  (oil well firefighter):

“If you think using a pro­fes­sional to do the job
makes life complicated, wait until you hire an amateur.”

Child Benefit is now a Tax Return issue

New rules governing the entitlement to child benefit come into force on 7 Jan 2013.

Until now, child benefit has never been means tested and has always been paid to the mother of the child. If your household income exceeds £50,000 then the chances are that the child benefit will be clawed back from you, in stages, so that by the time your household income exceeds £60,000 the whole amount of your child benefit may be reduced to Nil.

The rules (as you might expect) are not quite as simple as that, and what is going to happen in some cases is that a man may have to repay child benefit which their spouse/partner has received, even if the child in question is not his child. That also means that as accountants we will have to ask you a few searching personal questions after 5 Apr 2013 in order to be able to work out which figures go into which box on your tax return. And your spouse/partner may need to give you the details so that you can give them to us!

The Senior Manager Test

When judging whether you can reclaim an expense from your own limited company use the Senior Manager Test. It assumes that you have already understood what is a business expense.

Let’s assume that you are now the CEO of a really big organisation with over 1,000 imaginary people and you have about 10 mythical senior managers to help. And they all have expense accounts like you, and they all like to claim the same sorts of things that you might claim. If all ten of these senior managers submitted dodgy reimbursement claims to you would you allow the claims? Ten sets of golf clubs? Ten exercise bicycles? Surely you would strike out the items that look like mickey taking?

After all, it’s your business, you built it up, and the more you pay out to others, the less profit you have for yourself. You are effectively handing them your own money, so you will want to be absolutely sure that the expense is allowable and was incurred for sound business reasons!

You know what looks right and you know what looks wrong. If you would deny a particular item on a claim from the mythical ten senior managers (a £3,000 bill from the vet) then you cannot equitably allow yourself to make a claim for that same sort of thing just because you’re the CEO! Use a degree of judgement and common sense.

If you do put an item through as an expense when you shouldn’t, we’re not going to spend a lot of time evaluating it. We’re not close enough to the action to know all the circumstances relating to that one expense. And there are simply too many claims for us to look at, so we do not (and we will not) inspect every single line item, nor will we engage in long discussions of ethics. Unless it’s outrageous (like a wedding in Ibiza) then your questionable claim will simply go through the books regardless. And if you get picked up for enquiry, then you will presumably have a convincing explanation for the tax man.

Yes, one of our client’s once included a bill for her wedding in Ibiza. It had not been billed to her company, and not even to her, but to the groom. Anyway, she’s not a client any more!

We no longer argue with clients over what is authentic and what is not. However, may we please remind you that as a profession we are required to prepare a true and fair picture of where your business stands. And we also have a policy of deliberately losing some of our clients. See item 9.1 here.

Is it an allowable expense? It’s your call.