Getting things right

The last thing we want to do is to disappoint our clients and that’s why we have systems and processes in place. However, there is an established saying in accounting circles which goes:

“The information you get out

is as good as

the information that you put in.”

That’s another way of saying “give us incomplete information, and you’ll get an incomplete answer”. Nobody wants to build a jigsaw puzzle with missing pieces or with the wrong pieces and if we give you an incomplete picture of what’s happening, you’re not going to be happy.

Our systems and processes are supposed to help prevent problems! It all starts with collecting the right information at the right time and we use simple checklists like this one to do just that:

https://www.proactive.ly/news/?p=92

We have to rely on the details that you give us, because it’s your business, and you are in control. Unlike some mythical accountants of old, we cannot “invent” things.

Of course, we all sometimes make mistakes, and we know that sometimes work does need to be redone. It’s our normal policy not to charge extra for reworking things when genuine mistakes have been made. However, if we find that we have to do things twice on a regular basis you will find that we will start charging you twice.

Let’s try getting things right, first time around!

Capital allowances and depreciation

Often there’s little logic in tax law!

If you ever look closely at your accounts and tax return (you do look closely, don’t you?) you may notice that they include depreciation and/or capital allowances. And you may notice that the bottom line figure for depreciation and/or capital allowances is usually different.

That’s because depreciation is calculated based on established accounting practices, and capital allowances are based on the rules set out in the Taxes Acts. And no matter which method you are following, these rules only apply to the major items in your business, the things that last for several years. That means things like motor vehicles, furniture and significant computers.

Generally speaking, accountants will take the cost of a capital asset (like your new £5,000 super computer) and spread the cost equally over 5 years. Whether or not that truly reflects the depreciation of this item the accounts will show a depreciation figure of precisely £1,000 in each and every one of the consecutive 5 years.

HM Revenue and Customs do things differently. So at the outset, they ignore the depreciation figure in the accounts and treat the accounts as if that amount wasn’t there. They term this “adding back the depreciation”. And then they take off the capital allowances.

Ordinarily, capital allowances are calculated on an 18% reducing balance system. There are a few other special rules (as you might have guessed), but for now we’ll take that £5,000 super computer and write off 18% of it. That gives you a capital allowance in year 1 of £900 and a balance of £4,100. In year 2, the 18% allowance on £4,100 will be £738 and so on.

Under the capital allowances method, you never quite get down to NIL . With depreciation you know that the annual adjustment is a uniform figure, and that you’re going to hit a value of NIL after 5 years.

Smaller items of equipment can be written off when they are bought, as a revenue expense rather than a capital expense. You may not see these capitalised in your accounts, and hence you may have no figures for depreciation or capital allowances. These smaller assets are in your profit and loss account under “equipment expensed”.

If you ever wanted to compare the capital allowances figures to the depreciation figures, you would need to do a reconciliation every year, starting with year one of the business. The records should be there in all the copies of the accounts and the tax returns.

Why bother with depreciation then, if HMRC uses capital allowances? The bigger your business gets, the more important your balance sheet becomes. And the biggest companies want the balance sheet to truly reflect the net worth of the company, and so they need show exactly how the assets depreciate and what their residual value is.

A fixed asset register

Claiming tax relief on the big things

All businesses can claim tax relief on business expenses. That can include items that you bought before the business started! Do you have a laptop, and any other IT kit? Is your office equipped with a desk, a chair and a book case? Here’s a typical list of things that you might be introducing. There may be things on this list that you should ignore, and there may be other special things (in your line of business) that we haven’t thought about.

All of these things are “the big things”, the sorts of things that will serve the business over a number of years, and not be used up all in one go. Use this list as a guide, and please compile your own. The descriptions under “model” and “serial number” should be sufficiently clear so that one Dell laptop can be distinguished from the next Dell laptop that you buy, if you see what we mean!

If you run a limited company you should avoid having a company car. Keep you car as a private asset. If you have a self employed trade and the car is a fundamental requirement, then include it in this list.

* make * * model * * serialno* * Date Acquired * * total cost *
Car 1
Car 2
Desktop 1
Desktop 2
Printer 1
Printer 2
Laptop 1
Laptop 2
Fax machine
Copier
Shredder
Scanner
Air con
Digital camera
Video camera
Desk 1
Chair 1
Filing cabinet 1
Book case 1
Desk 2
Chair 2
Filing cabinet 2
Book case 2
Other specialist equipment


Once your list has been prepared, please let us have a copy.

New company reference numbers

When a new company is incorporated, both Companies House and HMRC will issue reference numbers. This may take between 14 and 28 days. In order to submit documents electronically, we need to ask you to let us know the reference in each case.

HM Revenue & Customs call it a Unique Taxpayer Reference or a UTR. Companies House talks about an authentication code. Examples of the tax office form and the Companies House letter are shown below. In each case, please let us know the reference or the code. We don’t need the letter, just a simple email with the reference or the code, thanks.

Once we have the reference number from HMRC we will complete the form CT41G for you using our own electronic proforma. You do not need to do anything with the original paper form. File it in your system just in case you need the UTR later.

We will check that the Companies House authentication code works on their  web site, and then we’ll keep it safe pending the submission of various forms in future.

The VAT Controller postal address

We send correspondence to the Revenue and the VAT office by Special Delivery. Even when we do that, Royal Mail can still sometimes fail to deliver.

Whilst most VAT returns are submitted by us electronically, some still have to go in on paper. We posted 4 VAT returns by Special Delivery on 30 Jul 2009 within a guaranteed delivery date of 31 July 2009. If you were affected, the tracking number was ZW 2614 4011 7GB. The letter apparently arrived at the VAT Central Unit on 3 Aug 2009. We are still trying to resolve the fallout from that, and Royal Mail have refused the claim for the refund of the Special Delivery fee as (they say) the post code was wrong!

Having raised this with the VAT central unit, we will no longer use the address on the envelopes:

  • VAT Controller
  • VAT Central Unit
  • BX5 5AT

And, instead we will be using the full postal address (and recommend that you do the same):

  • HM Revenue & Customs VAT Controller
  • Accounts Office
  • Salts Mill Rd
  • Shipley
  • Bradford, BD98 1YY

Let’s see if that helps Royal Mail to do things properly.

When do I have to charge VAT?

VAT is a complex area of law, and it revolves around a “person” as a legal entity and not a “business”. Generally, a “person” can be:

• an individual
• a limited company
• a partnership

If you are not VAT registered, then you cannot charge customers VAT. This earlier report discusses the question of registration.

Once registered, the VAT registration number is allocated to only one “person” and can be used by only that “person”. If you are both a self employed individual, and you are also running a limited company, the VAT number is not interchangeable. The question of registration has to be asked by each “person” and you may need (or want) to have separate VAT registrations for each separate entity.

Once a “person” is VAT registered, then ordinarily, all goods and services supplied by that “person” should carry VAT. There are very few exceptions to the VAT rule, and they are mainly relevant to any customers you have who reside outside the European Union.

So for example, if you are VAT registered and you’re a self employed individual who (a) does website design as your main trade and (b) offers guitar lessons as a sideline, then you are one and the same “person” in a legal sense. All of your business activities are “VATable” sales and all of your EU resident customers are liable to pay VAT – whether that’s for a web site or for a guitar lesson.

Conversely (for example), if you have a VAT registered company which offers management consultancy, and you also do a bit of “marketing” work as a sideline, in partnership with a friend, then the company and the partnership function as two totally separate entities. They cannot share a VAT number and any business done between the two entities should be done on a commercial basis and at “arm’s length”. The management consultancy fees from the company will charge VAT to the partnership, whereas the marketing fees from the partnership cannot.

If in doubt about who charges VAT to whom in any specific business relationship, simply establish which entity is the supplier and which entity is the customer. Which letterhead are you using to do the billing? If the position is still unclear, then it would be best to check with your accountant.

Claiming back expenses from your own Limited Company

You may be familiar with this process if you have ever been employed and had to submit an expense claim. As a director of your own limited company the process is the same, and it applies where directors and employees have used personal cash or a personal bank card to pay for a business cost.

It’s better to have all your suppliers invoice your company directly, and have the company pay them directly. If that could be done, you would never have to fill out a personal expense claim form.

Do not prepare employee expenses claims for items which the company has paid for directly from the company bank account or with the company credit card.

Keep the receipts for all of the things that you buy personally, on behalf of your business. Then once a month (or perhaps at some different interval) fill out a claim form and ask your company to reimburse you. If there is ever a records inspection by the tax office, they will want to see the claim forms with supporting receipts, and they will also check that the reimbursements on the company bank statements match the amounts claimed on the expense forms.

Motor expenses

Mileage on business journeys should be claimed at the HMRC approved rate. These have been the same since 6 Apr 2011.

• 45p per mile – first 10,000 miles per year
• 25p per mile – additional miles

No other motoring costs are to be claimed. The FPCS rates from HMRC are calculated by the AA so as to cover all the conceivable running costs of having a car! That means that you have to keep a log of all of your business journeys in your own car.

Foreign Currencies

Separate out any expense receipts which are in foreign currencies and prepare an individual claim form in each separate currency. That way the sub-totals do not end up with mixed currencies.

Non-VAT Registered Businesses

Use two forms, one form for mileage and just one form for all other business expenses. Separate the receipts by category and claim back the gross amount including VAT. Use the non-VAT form in the samples below, and just put all the figures on that.

VAT Registered Businesses

Separate your personal expense items according to whether they have VAT on them or not. VAT receipts for motor fuel belong in another separate pile. VAT on fuel can be reclaimed, but only to the extent that it is vouched for on actual VAT receipts.

Use three forms, one form for mileage and two separate forms covering expenses with VAT and expenses without VAT.  As a director/employee you are claiming back all of the gross amounts including all the VAT. The bookkeeper needs to know which items include VAT and which ones don’t. That’s why there are three different forms for a VAT registered business.

Book keeping and sample forms

If you are doing your own book keeping, use the totals at the foot of each column and post them into your software. To download a sample form (MS Excel) right click on the link and select “save as” . . .

• Mileage Claim
• Non-VAT Expenses
• VAT Expenses

Expenses in the first month or two

Normally a new business, will lead to cash expenses which you want to reclaim, before you have any funds to pay them. There are two ways to handle this dilemma.

• Wait until the business can afford to make the reimbursement.
• Introduce working capital (use a round sum) into the business, and then reimburse yourself!

Over the course of the financial year movements in capital introduced and capital withdrawn accumulate and may be shown in the annual accounts as a loan from the director to the company. Take care, because capital movements can sometimes work the other way. If you take too much capital out of the company, the loan is the other way around and there can be adverse tax consequences.

Recharging Costs to customers

Company’s do not claim from customers, they invoice.

Company’s are not reimbursed by customers, the customer pays the bill. Your company has a receipt in the bank account.

Reserve the expressions claim and reimburse for activities that occur between you (or your staff) and your company.

If your company recharges costs to a customer it is done on an invoice. The amounts recharged are usually liable to VAT. See the Disbursement or Expense report for more details of what may and may not be liable to VAT.

In a legal sense transactions between you and your company, and transactions between your company and your customers are entirely different obligations.

The terminology matters. This is one of the few situations where all accountants, bookkeepers and VAT officers need you to understand this concept fully.

Staff claim and staff are reimbursed.

Company’s do not claim from customers, they invoice.

Company’s are not reimbursed by customers, they have a receipt.

The mechanics of processing an expenses claim

It’s your business, and it’s up to you how you run it. We are just the accountants that do the bookkeeping, the VAT returns, the year end accounts and tax returns. We do not run your internal systems for you. Ordinarily we expect you and your staff to prepare your claims on a regular basis, not once per year, and definitely not one week before the Companies House accounts deadline. This is how we do it at Proactive, our staff can submit one claim per month, which is due in by the last day of the month and is then paid by the 14th of the following month. If they miss a month end deadline then they have to wait a further month for any claim to be accepted and reimbursed.

Your claims are subject to the approval of one of your internal staff who will scrutinise them with care. If approved, one of your internal staff will then implement a reimbursement, normally by bank transfer. Do not wait for the next VAT quarter to end, do not wait for Proactive to check things, it’s not our job to micro manage what you do. However, we do require copies of all personal expenses claims handled within your business. If our checks identify areas of concern we will discuss the problem and the remedies which are open to you.

Finally, if you are the only person in your business, you still have to follow this process. Imagine you are wearing two hats! And do this task with some rigour. Later, when your business is big and successful you will thank us for putting The Senior Manager Test on this web site.

Company Dissolution

Once you have decided that a company is no longer needed, it can easily be dissolved. You must first ensure that the accounts and corporation tax return for the final period of trading have been submitted and that any tax liability has been paid.

If there is a tax repayment for the final year, you will want to have received that before you close the bank account and dissolve the company. If a company still has money in a bank account on the date of dissolution, you will forfeit that money and it is sent to the government’s Solicitor General. It is a nightmare to get a company reinstated and then recover money from the Solicitor General. So we recommend that you complete your finances first and only then, dissolve your company.

Do not close the company bank account until your tax affairs are settled!

Do close the company bank account before the dissolution form goes in!

If Proactive has prepared the accounts and tax return for the final period of trading then we will be in position to work on the dissolution for you. This normally involves a fee which might be waived in the simplest of cases.

If you want to do this yourself and have an account with Companies House then you can start the process here:

https://guidedfiling.companieshouse.gov.uk/start?t=DS01

The procedure has to allow for legal notices to be published in the London Gazette over a 2 or 3 month period. It normally takes around 3 to 4 months to have a company dissolved. Once the process has been started, no more forms should be sent to Companies House for this particular company, none whatsoever. If that happens, the dissolution process will be cancelled. You will need to start the whole thing again!

If you need further advice, please contact us.

Dealing with bad debts

Any business with a bad debt will naturally try to take steps to try to recover it. However, eventually you have to take a view on these things and perhaps write it off. If you go about this the right way you can claim bad debt relief and your tax bill may be reduced. And, if you’re VAT registered you can also claim back the VAT.

Go about it the wrong way and there is a risk that you will lose out even more. I’ve seen that happen and I’ve seen the VAT office recover VAT which was reclaimed in good faith, but which was reclaimed incorrectly.

Firstly, be commercial! Make an effort to recover the debt. Send reminders to the client, or to the administrator or to the receiver. Be persistent. If after 6 months you are getting nowhere, then you can consider bad debt relief. No tax relief will be allowed until 6 months after the invoice date.

Assuming that writing off the debt is your only option, you then have to generate a document (a copy of the original invoice will do) and mark it “Bad Debt”. This “expense” is then shown in your books as though you had bought something. It is not a negative invoice, nor is it a credit note, it is simply an expense and there is a special “bad debt” category for this type of expense.

Like any other expense, it goes through the books, leads to a reduced profit, and in turn to a reduced tax bill. And if there was VAT on the original document, then there is VAT relief on the corresponding bad debt. Treat it as you would any other expense from a VAT registered supplier.

Just be sure to try 6 times over 6 months to recover the debt. At the point where you write it off as a bad debt you must inform the client that you consider this to be a bad debt and, accordingly, you are claiming bad debt relief. That way, the tax man and the VAT man will be content that you have followed the rules.

Employed and self employed at the same time

Will I pay tax twice?

In this article self employment means just that. A person is self employed if they run their business for themselves and takes personal responsibility for its success or failure. A self employed person can also be sued, and risks losing everything they own.

Self employment does not mean running a limited company which offers freelance services and which has limited liability protection, for example “send in the bailiffs to seize this pen and this laptop, sell them at auction and see what you get”. In a legal sense a freelancer running a limited company is special type of employee.

So, if you’re both employed and self employed at the same time, this is what you need to know.  For tax purposes, all of your income in a single tax year is lumped together and the tax calculation is a single exercise. Nobody should have to pay tax twice.

However, with National Insurance Contributions, the system is peculiar and there is often a risk of paying too much.

Having said that, both the Revenue and the Contributions Agency have been know to make mistakes, lots of mistakes. So it’s worthwhile having an accountant check the position.

If you are one of those people who dips in and out of employment, and in and out of self employment, then it’s worthwhile keeping very close tabs on start dates and end dates with your different engagements, and records of all income and expenses. When you have a major project (and are working under PAYE) it does not mean that your self employment ceases. The best thing is to keep your status as self employed until such time as you know that there is not going to be any more self employed work.

That saves you from having to register and de-register as self employed on a regular basis. It also means that in lean times, any loss you make on the self employed business can be set against your PAYE income. So if you still spend money on prospecting, phone calls and advertising (in the course of your self employment) your losses can sometimes result in a repayment of PAYE taxes.