Income Tax & Corporation Tax Payments

There are four methods for paying a tax bill

We recommend making payments by bank transfer as this is the best way to prove that the amount was paid and was paid on that date!

Method 1 – Internet Banking

If HMRC sent you a payslip it will state whether you need to pay Shipley or Cumbernauld.

If you have no payslip then the default position is to make personal tax payments to Shipley and company tax payments to Cumbernauld. There are a lot of cases which do not follow this pattern, but don’t worry about it. HMRC sometimes moves cases around to even out the workload.

Depending on your bank, they may already have HMRC Shipley or HMRC Cumbernauld set up on their system. If the bank does not have the precise account details already, then you will need to specify one of these two:

account name HMRC Shipley
sort code 08-32-10
account no. 12001020
ref – your unique taxpayer reference number (the UTR)

account name HMRC Cumbernauld
sort code 08-32-10
account no. 12001039
ref – your unique taxpayer reference number (the UTR)

These bank accounts do not work with the modern “faster payments” system which we are all now used to. It normally takes at least 24 hours for a payment to arrive. Do not pay on the last possible date, it will not arrive until the next banking day and that will make your payment late!

If it’s a personal tax payment add a capital letter K to the end of your 10 digit UTR.

12345 67890 K

If it’s a company tax payment, the 10 digit UTR needs to be followed by the “accounting period”. Please try to follow this format as HMRC is prone to getting payments, putting them in the wrong place, and then claiming that they didn’t receive it in the first place! Replace the letters NN here with the numbers which we provide in our email.

12345 67890 A001 NN A

If your tax liability is more than £10,000 you may find that you will exceed your bank’s limit on internet transfers. Two smaller amounts paid on two separate days should enable you to work around that problem.

Method 2 – Traditional Cheque and Payslip

Companies are compelled to pay corporation tax electronically with effect from 1 April 2011. You can still use cheques to pay personal taxes.

If you have a recent reminder, payslip and prepaid envelope, please use that when making your payment. Write out a cheque for “H M Revenue & Customs” and put your unique taxpayer reference number on the front and on the back! Post it in good time so that it arrives by the due date! Thanks.

Method 3 – Debit Card

Use a debit card and pay by phone. Call the Collector of Taxes on 0845 305 1000 and quote your 10 digit unique taxpayer reference number. Then ask for a payment reference number or authorisation code for this payment.

Method 4 – Covering Letter and Cheque

Companies are compelled to pay corporation tax electronically with effect from 1 April 2011. You can still use cheques to pay other taxes.

If you cannot use any of the above methods, please use the dialogue below as the basis for a covering letter (using your normal business letter headed paper) and send it with a cheque, to the Collector. Write out a cheque for “H M Revenue & Customs” and put your unique taxpayer reference number on the front and on the back!

The Collector of Taxes
Accounts Office B
Shipley
W Yorkshire
BD98 8AADear SirsI enclose a cheque in the sum of AMOUNT which represents tax due on DATE for the period ended YEAREND, under your ref REFNO.

Yours faithfully

 

Should I register for VAT?

VAT is a tax on the end consumer. It is not normally a tax on the businesses through which the VAT passes. In effect, a VAT registered business becomes an unpaid tax collector for the government. End consumers are normally households and shoppers, but any businesses which are not VAT registered and which cannot reclaim any VAT are also end consumers.

There are three main categories of business in the UK . . .

  1. The small businesses who would rather not register for VAT and thus steer clear of its complexity.
  2. The small businesses who voluntarily register for VAT, for one of two reasons (see below).
  3. The businesses who are compelled to VAT register, because their turnover exceeds the threshold.

There are also a few more rules which allow people like freelance doctors and freelance teachers, in the right circumstances, to exceed the VAT threshold and to not have to become VAT registered. However, once you pass the current threshold (see below) you either have to register, or you have to apply to HMRC for exemption from registering (for doctors and teachers).

The VAT registration threshold became

• £79,000 on 1 Apr 2013
• £81,000 on 1 Apr 2014
• £82,000 on 1 Apr 2015
• £83,000 on 1 Apr 2016
• £85,000 on 1 Apr 2017

The standard rate of VAT has been 20% since 4 Jan 2011.

The default position

When you start a business in the UK, the default position is that you are not registered for VAT and you must not charge VAT on your sales. In the case of most new start up businesses, we recommend that they stay this way unless any of the following apply:

  1. Your new business is clearly going to be a big mainstream business with annual sales above the VAT threshold. If your sales are going to be heading that way within a few weeks or months of starting, you might as well have your business VAT registered from the outset.
  2. You want your customers to think that you’re bigger than you really are. I know that if one of my UK suppliers sends me a bill, and the bill does not mention VAT, then my supplier is a small business with annual sales of less than the threshold. In spite of the added administration, some businesses will register for VAT voluntarily so that they look like a bigger mainstream business.
  3. You have lots of expenses which suffer VAT, and you’d really like to be able to reclaim those amounts. There are two sides to this argument. Yes, if you are VAT registered, you can reclaim relevant VAT, but you will also have to add VAT onto all of your sales and charge it to your customers. That won’t bother your customers if they are also VAT registered businesses, but if your customers are end users then they will suddenly see your bill shoot up by the VAT rate. If you feel compelled, you can register voluntarily and then reclaim VAT on your costs.
  4. Your sales creep up to the threshold over time. It’s up to you to keep tabs on your sales as there is a penalty for failing to VAT register on time if you hit the threshold. The whole system of registration hinges on sometime as imprecise as your “expectation”. And, you have to allow for fluctuations in sales over the year.

In all probability you will have to VAT register as you reach the threshold. Basically, if your monthly sales are getting near 7,000 that’s the time to ask us for more advice. Don’t wait until your monthly sales exceed 7,000 consistently, because then it’s too late.

Issuing more shares

Diluting your shareholding?

There may be good reasons for issuing more shares in your UK limited company, but you may unwittingly be running the risk of a capital gains tax bill. Read on . . .

The typical situation is a small company headed by Fred Flintstone and Barney Rubble who each own 50 Ordinary shares. Fred and Barney then decide to admit Mr Stone as a third director to Dinosaur Ltd and want to give him a small share of the company. The aim is to split the shares in a 40:40:20 ratio. There are two ways to do this:

  • The simplest thing would be for Fred and Barney to sell or transfer 10 shares each.
  • Or, Dinosaur Ltd could issue a further 25 Ordinary shares from the unissued share capital.

In either case the desired ratio of 40:40:20 is achieved, and in either case a potential gain arises in the hands of Fred and Barney. This happens whether or not money (or other consideration) changes hands. The gain arises, because Fred and Barney have given up a chargeable asset. Whichever way you look at it, they have surrendered 10% each of Dinosaur Ltd to Mr Stone.

The capital gains tax calculation depends on many factors, particularly in the case of small, close companies (and you should take professional advice)! In it’s simplest form, look at it this way . . .

Let’s say that Dinosaur Ltd is worth £1M. That was the value of the company on the balance sheet when last year’s accounts were done. Let’s also assume that the year end was yesterday and that the accounts were completed this morning, and so that figure is a valid current market value. Let’s also assume that Mr Stone paid nothing for the shares and was given them only on account of his important status.

Fred put in £50 on day one of the company and has just given away shares which originally cost him just £10. Because Dinosaur Ltd is now worth £1M he has made a disposal to the value of £100,000. His capital gain is £99,990 and he has and annual exemption of (say) £9,990. That leaves £90,000 chargeable to tax at the prevailing rate.

  • In 2009/10 the CGT rate is 18%
  • So 90,000 x 18% = 16,200

Amazing isn’t it? Fred has to pay a tax bill of £16,200 even though he received nothing but Mr Stone’s important status in exchange for a 10% share of Dinosaur Ltd. Ditto Barney! There are narrow, specialised rules which may allow some form of tax relief from that gain. However, does this story have implications for any share transactions you are considering? If your proposed arrangement means that your percentage holding in a company is going to change then you should seek professional advice.

And even if your holding is going up, there are implications for (a) your next share transaction and for (b) whoever has a diluted share in the company as a result.

Statutory Maternity Pay

The rules on SMP are subject to change every year and this article sets out only the general principles. The timing of notifications and claims is critical. For a precise overview of the current rules and rates, please refer to the HMRC Guide.

Generally, in order to qualify for SMP an employee must have been with the employer for at least 26 weeks and have been paid a minimum level of salary during that time – that’s usually at the threshold for tax or NI, so it’s not particularly high.

The claim for SMP can only be prepared after a form MAT B1 is received, and the GP is not permitted to issue that until week 20 of a pregnancy.

An SMP claim to HMRC must be submitted no later than 6 weeks before the expected due date.

Do not wait for week 20, notify us as soon as you are aware of a pregnancy. There are planning opportunities that can only be implemented in the period spanning week 4 to week 16 of a pregnancy. Talk to us about this at the earliest opportunity.

Once an employer has a copy of the form MAT B1, and is satisfied that the conditions have been met, SMP can be paid. The full amounts of SMP and a degree of compensation can be recovered from the Government. Normally this is done by restricting the monthly PAYE remittance of all income tax and NI arising from the other employees. Where there are no other employees, then this recovery has to be made by a funding application to HMRC.

If you are a small employer and need the funding up front, we can complete the relevant claim for you, for a small fee. That’s normally £350 plus VAT. A separate fee may also be charged if week 4/16 planning can be implemented. The SMP compensation paid to an employer is usually enough to cover the professional fees charged by Proactive, and sometimes it’s much more.

Lettings Accounts Checklist

We prepare individual summaries for each rental property. In the case of multiple properties the figures are combined for inclusion on a self assessment tax return. Please therefore prepare a separate set of records for each of your rental properties.

Where you have a mortgage on a property it is crucial that we have accurate details. All UK lenders issue a 5 April certificate or a 5 April mortgage statement precisely for the reason that your accountant will ask you for one. They know that these figures are required for self assessment.

If this information cannot be obtained, then we cannot prepare your lettings accounts and we cannot prepare your self assessment tax return. It’s as simple as that, no ifs, no buts, in the past we have lost clients over this issue, and that’s fine by us. You need a lender who is going to help you keep onside with tax law. If you’re not happy with your lender, complain to them, and then (if you have to) refer them to the Financial Ombudsman.

Please follow this guide carefully and let us have the information and the documentation detailed below. For self assessment purposes the tax year started on 6 April (more than one year ago) and ended on the 5 April which has recently passed.

Bank/Finance House items

• A copy of a loan interest paid certificate for the whole tax year.
• If the lender cannot provide a certificate, please let us a copy of a detailed analysis from your lender showing actual loan repayments made, stating clearly how much represents a repayment of capital and how much is a payment of interest.

Income items

Records of all rents received. That could be any one of the following:

• Copies of all rental invoices issued.
• Copies of all statements from your lettings agent.
• Other records which clearly show all monies received.

Expense items

Any combination of the following:

• All supplier invoices addressed to you as a landlord.
• Copies of all statements from your lettings agent.
• Other receipts and expense vouchers which support your other rental outgoings.
• Where documents are not available please let us have a note of the nature of the expense and the amounts paid. This should apply only in exceptional cases where (for example) the tenant has left and has taken the council tax bill, and you have had to pay some later instalments of council tax yourself.

If you are unsure about any of these points please feel free to call us.

Agreement at an end

If you have received an email from us with a link to this report, then these notes set out a number of things to be considered as our agreement comes to an end. Some of them, but perhaps not all of them, may apply in your case.

Business Affairs

Companies House, the Tax Office and the VAT Office will be notified that Proactive is no longer acting for the business. If we perform the role of company secretary for your company, then the company secretary has resigned today having already submitted the appropriate form to Companies House.

If your registered office is located at one of our premises, we shall continue to handle mail for a period of 21 days. After that time, any mail we receive addressed to your company will be marked “gone away” and will be returned to the sender.

If your business is VAT registered, then the VAT office needs to know where to send future correspondence, and needs to know where the records of your business are to be kept.

If your business has a payroll account (a PAYE scheme) with the Tax Office, then you will need to arrange to carry out the payroll work yourself or to appoint a bureau to do it for you. Payrolls are now subject to Real Time reporting (RTI) and you need to take steps promptly to ensure that the month end reports are correctly filed. There are penalties for late filing.

All Cases – Business and Personal Affairs

Please ask your new accountants to notify the Tax Office that they are now acting. As soon as the new accountants approach Proactive we will let them have all of the “professional etiquette” information they require. It is customary for the new accountants immediately to take on responsibility for all work. No further work will be undertaken by Proactive.

Protocol

Approximately two weeks after sending out the relevant email, we will archive our records. Digital records on DropBox will then no longer be accessible. They will be kept safely (elsewhere) until the end of the sixth tax year following the most recent set of accounts. It is our policy to destroy all records after that six year period has elapsed.

Please take a back up of your records now. After a period of 21 days has elapsed we will charge an admin fee if you or your new accountants require us to access old records. In the case of multiple files denoted by our reference numbers (one per director and one per company or rental property, etc) multiple admin fees are charged as set out on our prices page. Under the “professional etiquette” rules we will provide one new accountant with all relevant information without charge. In the event that we have completed the “professional etiquette” process with your new accountant, and we are then approached at a later date by a second (or a subsequent) accountant asking for the same information, admin fees will be charged. It happens!

A Paperless System

The File Naming Convention

Proactive operates a paperless system and that means we need a strict file naming convention. Every file name is unique and the various collections of numbers each serve a different purpose.

1234567890 622700 20120405 20121031 1700
tax return
Client reference number Document code Tax year or
Trading year
Creation date and time
Narrative

We have over one million documents; and by using this system we can (normally) find any document within a few seconds. A number of our clients have asked for more details and so here’s a basic summary:

Every client has a 10 digit reference number.

Every document type has a 6 digit number code.

All dates are shown as 8 digits, in scientific notation – yyyymmdd.

If a document has more than one date, generally the first date is the tax year or the trading year, and the second date is the date the document was created. Occasionally, the rules are adjusted, and extra numbers may appear for a variety of reasons. It’s the first 10 digits that link the file to a client, and the next 6 that tell us what the document is about. At the end of the file name a short narrative is usually added to make things clearer. That might be your narrative for files you placed in DropBox, or our narrative if we are the originator of the document.

    • 100XXX – correspondence
    • 200XXX – bank
    • 300XXX – bookkeeping and related VAT
    • 422XXX – accounts – self employed
    • 444XXX – accounts – partnership
    • 488XXX – accounts – limited company
    • 500XXX – One off activities
    • 622XXX – tax matters – personal
    • 644XXX – tax matters – partnership
    • 655XXX – other VAT matters
    • 666XXX – Companies House
    • 677XXX – PAYE
    • 688XXX – tax matters – corporate

On DropBox you may see lots of documents with recognisable file extentions like PDF and XLS. We also have some specialist files which work with our accounts and tax software. Anything with a TCS or VTR extention will not work without the right software and may be corrupted if handled incorrectly.

DropBox Folders

When working with DropBox we ask that clients add records to the pending folder for the relevant year. When we work on them we move them into a separate workspace and then afterwards we file them in the processed folder for that year. Reports that we generate (a set of accounts, or a self assessment tax return, etc) are added to the reports folder. Occasionally, documents with an enduring relevance (like a share history) are stored in a PN (permanent notes) folder.

We are trying to strike a balance and fine tune the system, so that both humans and computers can cope with the demands and complexities that accounting involves.

Annual Accounts Checklist

This is a checklist for annual accounts work on companies and on self employed businesses. If we perform the quarterly bookkeeping for you, then this checklist is not needed.

Please let us have the following documents covering the whole trading year.

Bank/Finance House Items

• Copies of all business statements on current accounts, deposit accounts and loan accounts. Copies of all business statements on credit cards, commercial cards and PayPal accounts etc.
• Loan agreements for any new loans taken out during the year, showing (a) a simple analysis between the loan capital and the interest due and (b) a schedule of payment dates including any variations in the first or the last payment.

Bookkeeper’s Reports

• Trial Balance
• Draft Profit & Loss Account
• Draft Balance Sheet
• A detailed analysis of all debtors and all creditors on the Balance Sheet

VAT Reports (if registered)

• Copies of all VAT returns for the quarters spanning that whole trading year
• If the VAT quarters are not aligned with the trading year end, then copies of returns for 5 quarters will be needed so that we can see the picture for the whole trading year.

Year End Planning

Can I reduce my tax bill?

Can you reduce your tax bill? It depends! What does your business plan say? Ultimately you want to be paying lots of tax, more than you can imagine, because if you were, then just think how much profit you’d be making!

So before we examine how to reduce tax, you should examine how to make more profit in the medium to long term. How is business going? How much impact do your regular planning sessions make? Do you leave things just until the year end, and only review them once a year? And if so why?

A pragmatic business will consider things more often. Anyway, here’s a “once a year” guide for those who need it. These measures may help reduce or postpone profits (and therefore taxes), but you still need to bear in mind whether this is appropriate commercially. If you are going to talk to the bank about a loan, then you might want to increase profits and not reduce them!

In order to make the accounts look good and minimise any tax liability, you can consider the following:

Chase debtors in order to get payments into the bank account now. A good bank balance on the year end date helps.

Is there enough money in the bank to cover the tax forecast you have? Consider how much money you have taken out of the company. Ignore salary and reimbursed expenses for the moment, and just think about additional drawings. If the additional drawings exceed your net profit, then you may have taken out too much. HMRC charges income tax on a personal “benefit in kind” if your company is providing you with (what is in effect) an interest free overdraft. If this is likely to be a problem, you may want to consider injecting some cash into the company bank account before the year end date. The important thing is to have a healthy balance sheet on the year end date.

If you can legitimately delay issuing invoices to clients this month then do that. Issue them in the first month of the next trading year. Depending on the accounting treatment, that may put potential taxable profit into the later trading year and delay the tax liability for a further twelve months.

Ensure that you, and any of your staff, prepare expense claim forms for all expenses incurred by the end of this trading year.

Bring forward any anticipated expenditure on major purchases. For example, if you were planning to buy a new computer early in the next trading year, buy it this month so that tax relief can be claimed sooner. This can be beneficial, even with more mundane items of expenditure. If you are about to replenish anything, incur the expenditure now, before the year end! Each item on its own may not be much, but they soon add up and they make a difference.

Tax relief cannot be claimed for holding stock. Do not buy more stock this month, wait until next month. If you sell goods as opposed to services, or if your business is a mix of goods and services, then you need to plan a stock take for the last day in the trading year. A stock take is going to be easier if you aim to have as little stock as possible around the year end date. Tax relief can only be claimed for stock which has been sold so there is no point holding onto any more stock than you really need to!

Look at the bad debts that have arisen during the year. If any of these debts are more than 6 months old, write them off now and claim bad debt relief. Prepare a further copy of the original invoice and (in red ink) write across it “Bad debt relief claimed” and write the date that you made the decision. You have to make that decision before the year end date. In order to qualify for bad debt relief for both corporation tax and for VAT, you must write to the debtor stating that you consider the debt to be irrecoverable and you are claiming bad debt relief.

Consider any invoices that have been issued which may give rise to a credit note. To the extent that you can predict the need to raise a credit note, do it now before the year end.

Do a ratio analysis. Ratio analysis is exactly what HMRC does, so it’s a good idea if you do it before they do. Compare your own profit and loss forecast for this current year with the formal accounts for last year. Think along the lines of “are my travel costs this year in line with last year”? If expenses in the current year are significantly higher than the year before, you need to be ready to explain that extra cost in the event of a tax office enquiry.

Likewise, if one expense category in the current year is significantly lower than last year you might have missed some expenses. Think about anything that could have been overlooked and which needs to be put through the books . . . in these last few weeks . . . before your year end.

All these things should already be in the “plan, do, review” section of your business plan. What does your business plan actually say?

Tax Returns and IR Marks

These days, both personal tax returns and corporation tax returns are generated by us using software which has been approved by HMRC. The process includes the creation of a unique IR Mark which is established by applying a formula to the data in the return. This means that every tax return has a totally unique IR Mark.

We ask clients to check tax returns carefully to ensure that all income has been declared and that all allowances have been claimed. When you are satisfied that the return is correct and complete, HM Revenue & Customs will accept authorisation electronically.

We are permitted to file electronic tax returns only when we are satisfied that the IR Mark on our digital file is the same as the one on the document that you have approved. If any amendment is required to a tax return, then a fresh document needs to be prepared and sent out again for approval. That’s because the IR Mark changes after even the most elementary revision.

The Self Assessment tax return deadline normally falls ten months after the tax year ended, and you need to ensure it is submitted by 31 Jan. Please remember that in law, the responsibility for filing a tax return on time and for paying tax lies with you the taxpayer.

There are automatic penalties for late tax returns, so we encourage clients to approve them as soon as possible. Once submitted, we can provide details of the electronic proof of receipt.