Help I need a loan

Peer to Peer (P2P) Lending P2P lending has only been around since 2005, it’s a virtual market place that facilitates the matching of individuals with borrowers, both business and individuals. Generally offers a better return for savers than banks, though there is more risk involved, with a lower interest rate for the borrowers than they could get elsewhere. Advantages: - Interest rates can be fixed for the duration. - Requires a lower level of security and personal guarantees than banks. When applying for P2P lending, businesses can opt out of offering security, though there is a premium for this. - Applicants with an adverse credit history have a better change of obtaining a loan with a P2P lender than from a mainstream lender. You are not relying on a banks risk-adverse credit committee. - Covered by the FCA. - The Government has announced that peer-to-peer savings will be permitted to be held within ISA’s. (for the lender). Disadvantages: - Rigorous checks, only a small percentage of applications are accepted. - Not protected by the Financial Services Compensation Scheme. - Still a relatively new market. - Returns from lending via peer-to-peer are currently paid without any tax deducted, you’ll need to declare this income to HMRC on a self-assessment return, for the lender.

There are an ever increasing number of providers in the market. A few of the more established provides include Funding circle, RateSetter Marketinvoice

Bank Loan Suited for longer term finance requirements say for capital purchases. Advantages: - The interest on business bank loans is tax deductible. - Fixed-rate loans are easy to budget for as repayment stays the same. Helps when producing a cash flow forecast or budget. - Disadvantages: - Difficult to obtain. - May be required to provide personal guarantees, or security in the form of assets. - Interest rates for small business loans can be high.

You don’t always have to go to your own bank there are a number of financial institutions that offer loans to businesses.

Enterprise Finance Guarantee scheme (EFG) Scheme brought in by the government many years ago to encourage banks to lend. The theory is if a business was turned down by conventional banks the business could if it met the criteria reapply using the EFG as security. The reality is the banks hardly ever lend against the EFG. Have a look at this HMRC link for more details on the scheme and banks that have signed up.

Bank Overdraft

Good for short-term borrowing to get over immediate cash flow requirement. Advantages: - The interest is calculated only on the amount of funds utilized. Great savings on the interest cost compared to a fixed-rate loan. Disadvantages: - Payable on demand. - There are set up costs to consider - May require guarantees against the business and the owners

Sales invoice factoring

This is where the business sells its sales invoices to a third party for an immediate inflow of cash. The factoring company gets paid when the invoice becomes due. Generally they will pay a percentage once the invoice is presented to them and the balance when customer settles their account. This could be a 70/30 split though could be negotiated down depending on the credit worthiness of the customer and their location. Advantages: - Great for cash flow - Maintains relationship with customers - Able to pay suppliers, may be negotiate better terms - Doesn’t affect your credit score Disadvantages: - Could be costly, set up fees, transaction fees, standing monthly fees - Often tied into a year contract - Factoring company has charge over the assets of the business - Could affect the business ability to get additional credit - If dealing in foreign currencies you often have to use their FX rates - They have tight credit check criteria that may exclude some of your customers. - Personal guarantees are often required.

All the high street banks offer this service as well as independent providers. Set up can be anything from a month to three months depending on circumstances.

A Business Angel

This is an individual who invests in start-up businesses and offers their expertise to help the business grow.

Advantages: - The capital investment does not require repayment unlike a bank loan. If the business takes off, then both the owner and the investor benefit. - Your chances of success increase. Angel investors typically offer years of experience and expertise when it comes to successful start-ups/SME’s. Disadvantages: - Angel investors expect a higher rate of return than borrowing funds. - Angel investors always want an exit strategy usually within five years. - The owners’ equity in the business is diluted, giving away your future net earnings. - You will lose an element of control of your business.

Business owner/ Family & Friends

The business owner reaches out to their personal network in the hope they will make an injection of cash or other resources. Funding is emotive often there is little consideration of risk. Advantages: - The motivation to invest may not be purely for financial reasons. They will allow time to build the business and may not incur the pressure to repay as urgently as other forms of finance. Disadvantages: - The finance available from family members and friends is often said to be limited. - Money is often a sensitive subject; it could cause disagreements with close relatives and friends.

Be careful when choosing somebody to approach, it may have consequences on your relations far beyond the initial request. Its advantageous to put any agreement in writing and have both parties to sign to avoid any misunderstanding down the line.

“Don’t let your mouth write no check that your tail can’t cash.” -Bo Diddley

Businesses at some point will possibly need finance for any number of reasons. Before embarking on sourcing the funds the business owners should consider the options. The cardinal rule is to match the funding requirement to funding source. If you need to raise finance for a capital project you’d probably not use your credit card!Consider the questions you’ll need to ask yourself.

1) How much finance is required? 2) Work out what you can afford, there are loan calculators on line. Decide on an interest rates (be realistic about this) and loan periods. Play around with some scenarios you’ll be able to work out some indicative repayment amounts that fit your budget and cash flow. If the numbers don’t stack up, think laterally. 3) When are the funds needed? Generally sourcing finance takes longer than expected don’t be surprised if the first lender doesn’t have the appetite for your requirements. There is always another lender out there. Before approaching a funder consider what affect the cash injection will have on your business. 1) Will this affect your gearing level? 2) What security can be provided against the finance? 3) Are you willing to give up some of your ownership to potential investors, if so how much are you prepared to give away? 4) The tax effect of the different decisions, what can you deduct as an expense against profits?

Recent tax changes to rental property

Changes in allowances for rental properties  

Over the last few years the Chancellor has made some deep cuts into the benefits of a BTL landlords.

 

  1. 36 month rule reduced to 18 months effective since April 2015. Only allowable if landlord lived in the property.
  2. Capital Gains tax payable for overseas landlords on gains in the UK effective since April 2015
  3. 10% Wear & Tear allowance withdrawn for furnished properties effective from April 2016. You can only claim general wear and tear allowance based on the actual cost of any capital items.
  4. Interest relief to be capped at the basic rate for the taxpayer. Taper over 4 years from 2017
  5. Additional stamp duty payable on BTL of 3% on stamp duty rates. Plus lower threshold of £40K , when purchasing own home minimum threshold remains at £125K.

 

Only piece of good news, Rent a room allowance increased from £4,250 to £7,500 from April 2016.

 

Cloud accounting software for start up businesses

All businesses have to keep records of their income and expenditure. If the business is a limited company they have to abide by the rules of the Companies Act. Just because a business is trading as a sole trader or partnership it doesn’t preclude you from keeping proper records. HMRC require all businesses to keep proper records and will penalise if your records are not adequate.

All isn’t lost there is plenty of entry level cloud solutions. Quickfile is the simplest great for contractors or consultancy type businesses. Freeagent and Freshbooks are favoured by creative style businesses. Then we have the Kashflow, Xero and Quickbooks being the major players in the UK markets. Sage are now beginning to recognise they are losing clients to the big three. New entrant to the UK market is Exact Business solutions.

When choosing a cloud solution watch out for the apps the provider support. They may not always be compatible. [table id=21 /]

Cloud accounting software part 2

Two years ago I wrote about cloud software in the UK market. It’s now a lot more prevalent. A survey that was shared with me recently was 70% of business wanted cloud accounting but only 10% of practice accountants offer support.

There are new players operating in the UK market, Exact Business Software came to my attention earlier this year. They offer a CRM as integral part of the starter package. I think they are positioning themselves somewhere between the market leaders to SME and the ERP providers. Some of Exact’s advanced solutions I think could offer solutions if a trader is looking for a one stop shop rather than going down the app route. 

There are now apps for anything and everything, Receipt Bank are being very proactive in their marketing and interface with all the main players. It does take the hassle out of recording receipts and you no longer have to keep paper copies. 

Just concentrating on the main features for cloud accounting platforms the main new features include Auto Enrolment, though I have to say not all of them are that user friendly.  I like Brighpay as a solution but again my personal preference. The other new feature is mobile apps for the accounting platforms.  Word of warning make sure the software you choose is android friendly, not everyone has an Apple

  QuickFile Quickbooks Exact Kashflow Xero Sage 50 Professional FreeAgent Freshbooks
Sales Y Y Y Y Y Y Y Y
Sales order processing N Y Y Y Y Y N Y
Quotes Y Y Y Y Y Y Y Y
Purchases Y Y Y Y Y Y Y Y
Purchase order processing Y Y Y Y Y Y Y N
Stock N Y N N Y Y N Y
Payroll N £1 Per employee PM N Y Y £4-20 PM Y N
VAT Returns Y Y Y Y Y Y Y Y
Reporting Y Y Y Y Y Y Y Y
Annual Accounts Y Y Y Y Y Y Y N
Debtors reports Y Y Y Y Y Y Y Y
Creditors reports Y Y Y Y Y Y Y Y
Multi Currency Y Y Y only business package Y Y Y Y
Chart of accounts Y Y Y Y Y Y N Y
CRM N N Y N N N N

N

Auto Enrolment

N

Y N Only on business & payroll package Y Y Y N
Mobile App? N Y Y N Y Y Y Y

Pricing depends if the end user pays or the accountant. We generally include the price as part of the package.

 

QuickFile

Quickbooks Exact Kashflow Xero Sage 50 Professional FreeAgent Freshbooks
Customer

Free-£45 PA

£6-£25 PM £19-£29 PM £5-£15 PM £9-£25 PM £50 PM £19-£29 PM $9.95-$39.95 PM
Accountant

portal

£1.27-£297.29 PM Free Free Free

 

Practice Studio Free Free Have to login

Have to login

If you want to know more about cloud accounting solutions give us a call we provide support only for the main player in the UK. Not one solution fits all businesses.

Auto enrolment, work place pensions

Auto Enrolment is a new law stating every employer MUST enrol workers into a workplace pension scheme if they:• Aged between 22 and State Pension age • Earn more than £10,000 a year • Work in the UK

Cost of Auto Enrolment for workplace pension scheme

[table id=12 /]

Auto enrolment will affect you unless

• You’re a sole director with no staff • There are a number of directors without employment contracts • The company has ceased trading, gone into liquidation or been dissolved

A declaration must be completed and submitted to the Pension Regulator whether you want to opt in or opt out.

For employers that AE affects there are 11 complicated steps to complete.

[table id=18 /]

The cost of not complying or meeting the deadlines are:-

1. A fixed penalty notice will be issued if you don’t comply with statutory notices, or if there’s sufficient evidence of a breach of the law. This is fixed at £400. 2. Penalties ranging from a prescribed daily rate of £50 to £10,000 depending on the number of staff. 3. Civil penalty for cases where you fail to pay contributions due. This is a financial penalty of up to £5,000 for individuals and up to £50,000 for organisations. 4. Where employers fail to comply with a compliance notice or there is evidence of a breach, the regulator can issue a prohibited recruitment conduct penalty notice. This penalty has a prescribed rate of £1,000 to £5,000 depending on the number of staff the employer has.

At ODA we can assist with the registration and compliance, just call us on 020 3137 9887

10 expenses that will trip up PAYE workers

  1. Mobile telephone – if the contract is in your personal name you can only claim business related call costs.
  2.  The £8,500 trap - if an employee earns below this amount but receives benefits in kind taking them over the limit, A P9D has to be submitted.
  3.  A director has to submit a P11D no matter what they earn and complete a self-assessment.
  4.  Pensions - pension contributions are limited to a maximum of £50,000. This will reduce to £40,000 next year subject to an employee’s pay exceeding this amount. Watch out for the 3 year rule.
  5.  Pension pots - the fund will be reduced by £250,000 to £1,250,000 from the 6th April 2014
  6.  All expenses claims must be wholly and exclusively incurred in the performance of their duties, otherwise not allowable.
  7.  Working lunches – are only allowable if all the company get fed.
  8.  Watch out for the Christmas party - an employer is only allowed to claim £150 per annum for entertaining staff and their families.
  9.  Tax free mileage allowances - most people know the limits and allowances. Don’t forget to keep records of journeys made.
  10.  If your employer buys clothing for work it must display the company logo, even if it’s an Armani suit

12 really quick and easy tax tips for PAYE workers

 

  1. Child care vouchers -  if you have children attending a nursery or looked after by a professional childminder, your employer can join a Childcare voucher scheme. This allows for £55 of the weekly cost to be deducted free of tax and NI if you are a basic tax rate payer, or £28 if you are a higher rate tax payer.
  2. Pensions – if you pay into a work pension scheme, 20% tax is automatically deducted. For high rate tax payers, you can claim additional relief either by declaring it on your Self-Assessment or calling the taxman.
  3.  Company cars – are a pain and the tax is huge BUT if you have a company van, the benefit in kind is capped at £3,000 so for a basic rate tax payer the cost of driving is only £600 or £1,200 for a higher rate payer.
  4.  Professional membership fees - your membership to a recognised trade or professional body it is a deductible expense, but not for your hobbies.
  5.  Share incentive schemes - there are loads of schemes that allow either NI or Capital Gains Tax to be saved, you don’t have work for a listed company either.
  6.  Giving your work colleagues a lift to work - if your employer encourages car pooling you can claim 5p a mile for the passenger without incurring any additional tax charge.
  7.  Cycle to work - get your employer to provides a bike both for travel to work and play, it’s not considered as a benefit in kind.
  8. Then after a time you can buy it off them at market value.
  9.  Season ticket loans - your company can advance the cost of an annual season ticket up to £5,000, much cheaper than buying a ticket weekly.
  10. From April 2014 this increases to £10,000 (not really sure if that’s a blessing?)
  11. Electric Cars – from April 2015 there’s no benefit in kind.
  12.  Working from home – it is becoming increasingly more common for staff to work from home. You can claim £4 a week allowance without having to produce receipts.

 

Cloud Accounting Software

Over the last few years, the way businesses record their data and keep their books has changed considerably. In the good old days they would have a server in a dedicated room with AC and miles of cables, with computer screens taking up half your desk, but no more. In a relatively short time, the accounting software houses have gone virtual. All the software packages still have desktop versions, but frankly why bother? You can be on the beach drinking pina coladas and still keep your finger on the pulse running the business. Better still, with cloud software if there’s a problem your accountant or IT person can go straight in and have a poke around.

But with loads of solutions out there (most of which I’ve used), how do you make a decision?

Taking the top sellers in the UK market, I have broken down their main attributes based on functionality, feel and price. I’ve also tried not to be biased. A lot of the software is you will see does the same thing. Which software to choose comes down to personal preference and the needs of the business at the time. Luckily the software is generally quite portable, so if a solution is no longer adequate you can easily move on.

Industry / Sector

All the software I’ve reviewed will work across most sectors from retail to the service industry. I have a couple of online retailers who obviously use various versions. They wouldn’t be suitable though for construction, manufacturing or tourism and hotel businesses.

Modules

So what can they do?

On a first view they all pretty much do the same thing. To try and find some differences one has to look at the GUI.  They all say they are intuitive, but my view is that some are more so than others.

FreeAgent, Freshbooks, Kashflow and Xero all look the same; they have very similar colour schemes (what’s the thing about the blue?) and layouts. It can be confusing switching between them. Quickfile uses a white background. Both Quickbooks and Sage 50 have the traditional look you find on the desktop versions which unless you’re an accountant is awful to navigate.

Quickfile

FreeAgent

Freshbooks

Kashflow

Xero

Quickbooks

Sage 50 Professional

Sales

Y

Y

Y

Y

Y

Y

Y

Sales Order processing

Y

N

N

Y

Y

Y

Y

Quotes

Y

Y

Y

Y

Y

Y

Y

Purchases

Y

Y

Y

Y

Y

Y

Y

Purchase Order Processing

N

Y

N

Y

Y

Y

Y

Stock

N

N

Y

from AUS$10

Y

Y

Y

Payroll

N

N

N

+ £420 p.a

Y

£42 p.m package

N

VAT returns

Y

Y

Y

Y

Y

Y

Y

Reporting

Y

Y

Y

Y

Y

Y

Y

Annual accounts

Y

N

N

Y

Y

Y

N

Platforms

Interestingly, they all have versions for iPhones and iPads as well as android except Quickfile and FreeAgent.

Interfacing

They all have interfaces with banks allowing CSV files to be downloaded and by tagging can allocate to invoices, be that customers or suppliers. In fact if there isn’t a matching invoice they will set it up, brilliant!

Another handy function is the customer receipts. They all will allow you to take payments from PayPal and often other platforms including Sagepay. Just like the bank download these can be tagged.

What I really like is that you can file returns with HMRC. Why is that great? Audit trails: you can download or refer back later.

Dashboards

This for me is the best reporting tool. It’s the home screen when you go into the software, so sometime needs to ensure that only the pertinent information is shown. I like to see bank balances, debtors and creditors, and key dates for tax returns. Most will do this to a greater or less extent but my least favourite has to be Sage.

Pricing

I know that’s what it’s about but don’t be fooled. Are you’re getting what you pay? Watch the cost of add-ons these can be expensive.

Quickfile Freeagent Freshbooks Kashflow Xero Quickbooks Sage 50 Professional
Customer Free £15-£25 $0 to $39.95 p.m. £18 p.m. + VAT £12, £19 or £24 p.m. +VAT £9 -£29 pm £1,400 p.a
(£117 p.m.)
Accountant "Affinity" dashboard  £94.90 p.a. per client +VAT (from 10% to 40% volume discount, if you register 80 clients) Has to log on as user Has to log on as user "Orbit" client manager - free "Practice Studio" - free "QuickBooks Online Accountant" - free N

I really like Quickfile for its simplicity but have a problem with their pricing module, why charge the accountant for passing business their way. The competition often pay us accountants to introduce, oops, did I let that slip.

From FreeAgent to Quickbooks, there’s not much in it. Although FreeAgent, Freshbooks and Sage don’t have Accountants’ portals.

The drumroll goes to Sage: it’s not even web based, it’s a hosted service.

Payroll costs seem to be wildly different. Some providers have in-house solutions others have partnerships.

Finally

We’ve helped loads of businesses migrate to the cloud. It’s not just about price but what is right for the business.

When making the move, don’t try doing it without professional assistance. If you mess it up it can be extremely costly to fix.

Testimonial from one of our clients, Carl Hughes of IT Hound

ODFS really has the knowledge in the cloud accountancy sector. I manage my business completely online and I wanted a product that could compliment this so I could do all my invoicing, sales and accounting in a browser and not have to install a program on my computer.

ODFS recommended Quickfile and helped me setup invoicing templates and a way of working so that I could manage outstanding invoices, use reports to give me a picture of how my business was doing and at the same time understand the various accountancy terms with ease.

I don’t feel the above could have been done as quickly using a traditional desktop accountancy program and the fact that ODFS could log in to my online account saved the endless emailing of reports and spreadsheets.

Its unusual to find an accountant who has such a vast knowledge of how to do finances in the cloud; so if you are looking for an efficient company to help you manage your accounts I highly recommend ODFS.

xerosageQuickFile-invoicingquickbookskashflowdownload

Double taxation agreements part 2

Your UK tax liability depends on where you are 'resident' and 'domiciled' in a tax year.  

Up to 5 April 2013, your tax position could be affected if you were ordinarily resident in the UK. However, from 6 April 2013, the concept of ordinary residence has largely been abolished for tax purposes.

 

Since 6 April 2013 the rules that determine if someone is resident in the UK for tax purposes have been put on a statutory basis. These rules are known as the Statutory Residence Test (SRT). For the majority of people whether or not they are resident for tax purposes is quite straightforward under the test and their position will not change. For those with complex circumstances the SRT will provide more certainty about their residence status.

To help you understand your tax residence status HM Revenue & Customs (HMRC) will be launching an on-line tax residence indicator. This residence indicator gives an indication of your tax residence status after answering a few straightforward questions such as how many days you spent in the UK, where you have a home and if you have family ties. The first version was launched in June 2013 follow this link to see how it affects you

 

IR35 business entity tests – the questions

The 12 online questions and scores that make up HMRC’s business entity tests are as follows:

Test #

Area

Question

Score

1 Business Premises test Does your business own/rent separate business premises which are separate from your home and client’s premises? Yes = 10
2 PII test Do you need professional indemnity insurance? Yes = 2
3 Efficiency test Has your business had the opportunity in the last 24 months to increase your business income by working more efficiently e.g. by finishing the work/project earlier than projected but still receiving the full agreed payment? For example you originally agreed with the client/engager that the work would take 3 months and cost 10,000 but you finished in 2 months and still received the full 10,000 at the end of the 2 month period. Yes = 10
4 Assistance test Does your business engage one or more workers who generate at least 25% of your business turnover annually? Yes = 35
5 Previous PAYE test Have you been engaged on PAYE employment terms by your current client/end user within the last financial year with no significant changes to your working arrangements? If you are doing the same work you should answer yes to this question. Current engager also includes working at a different location owned by your engager or working at a different company but which is connected e.g. part of the same group. Yes = (minus) -15
6 Advertising test Has your business invested over £1,200 on advertising, excluding entertainment in the last 12 months? Yes = 2
7 Business Plan test Does your business have a business plan with cash flow forecast, that is regularly updated, and a business bank account which is separate from your personal account and identified as a business bank account by the bank? Yes = 1
8 Repair At Own Expense test Would your business have to bear the cost of having to rectify any mistakes? Yes = 4
9 Client Risk test Has your business been unable to recover payment for work done during the last 24 months in excess of 10% of annual turnover? Yes = 10
10 Billing test Do you invoice for work carried out prior to being paid and negotiate payment terms? Yes = 2
11 Personal Service test Does your business have the right to send a substitute? Yes = 2
12 Substitution test Has your business hired anyone in the last 24 months to do the contracted work you have taken on? This could be demonstrated by sending a substitute in your place or by sub-contracting, but in both cases your business remains responsible for the work and for paying the substitute or sub-contractor. You can still pass this test if you had to notify the end client of the name of the individual you sent as a substitute. Yes = 20

 

  • High Risk = 0 – 10 points
  • Medium Risk = 11 – 20 points
  • Low Risk = 21 points and above.

Dispensations

A dispensation is a notice from HMRC that removes the requirement for the employer to report certain expenses and benefits at the end of the tax year on forms P11D or P9D. There is also no need to pay any tax or National Insurance contributions on items covered by a dispensation.

Once granted, dispensations last indefinitely. However, HMRC can review them to make sure that the conditions under which they were issued still apply.

A dispensation includes routine business expenses and benefits. There is no defined list, though the main expenses routinely covered by a dispensation are:

  • travel, including subsistence costs associated with business travel
  • fuel for company cars
  • hire car costs
  • telephones
  • business entertainment expenses
  • credit cards used for business
  • fees and subscriptions

For a company to apply for a dispensation, there must be some basic systems in place. At a minimum this means someone, other than the employee who is claiming the expenses, has to check that the:

  • amount claimed isn’t excessive
  • the claim doesn’t include disallowable items

If it is not possible for you to operate an independent system for checking and authorising expenses claims – for example, because you are the sole director of your company and you have no other employees – you will only be able to obtain a dispensation if you:

  • ensure all expenses claims are supported by receipts for the expenditure
  • demonstrate that the claim relates to expenditure that can be covered by a dispensation – your receipts may be sufficient for this purpose, but if not you must retain additional information

Dispensations can be applied for either in writing or online

Business entertainment, business gifts and benefits

Tax on business entertainment and expenses is an area that can be really confusing for business owners and staff. In general VAT can’t be claimed, though if related to employees’ travel, subsistence or entertainment it’s allowed but with many caveats. If there is a third party (i.e. a prospective client), the VAT can only be claimed on the employee’s portion; and then only if the expenses are incidental.

Confused?

VAT can only be claimed on business gifts up to £50 per recipient per year.

If a business organises employee-only events, the VAT can be reclaimed as long as no third parties attend. If the event is only for directors, the VAT is not reclaimable.

From an income tax and corporation tax perspective, expenses have to be wholly and exclusively for the benefit of the business, otherwise they are disallowed. If such expenses relate to non-staff entertainment they are not allowable.

Gifts are strange, if they relate to some charitable or noble cause then they can be allowable. If it’s taking a client to the races, you have no chance.

Generally alcohol, cigarettes and music are not covered at all, including for staff, so give them a very wide berth. That includes a case of wine for the Chairman, who might then be taxed as a benefit in kind on their P11D or P9D.

NB:

P11D or P9D are end of tax year returns of expenses paid to employees and directors. Companies can get a dispensation from HMRC in some circumstances, see separate blog on this topic.

Employee expenses

When the tax year finishes your employer is obligated to give you a P60 by the 31 May and P11D or P9D if you earn less than £8,500pa by the 6 July for all benefits in kind or expenses that are taxable. Employers can get a dispensation from HMRC in which case you will only get a P11D for items not covered by this.

 

So what next?

A P60 is a statement of earnings for the year showing how much you’ve been paid for the whole tax year, separating your current employer from previous employments, tax paid and your final tax code. It also includes National Insurance paid by you and your employers with your NIC coding; which may change during the year, depending on your circumstances.

Don’t ever lose this, it can’t be replaced and is a permanent record of earnings, tax paid and coding.

It is the employee’s responsibility to ensure all the information is correct including the tax coding. If it is wrong and not enough tax has been collected, HMRC will want it.

The P11D or P9D states the amount of benefits or expenses paid to an employee. If you received taxable benefits your tax free earnings will be reduced by the amount of the benefit received. Again check if they are reflected in your tax coding, if not HMRC will be after you too.

 

So what expenses can be claimed?

The overriding term is “Expenses incurred wholly exclusively and necessarily in the performance of the duties of the employment” s336 ITEPA 2003)

If your employer reimburses your expenses you can’t make any claims.

Travel

To start off you can’t claim travel from home to work. Only from your work place to another work related location. Watch out for home working, even a tax inspector got that wrong. Rules for temporary staff are more complex and there is a 24 month rule to be considered s337 and s338 ITEPA 2003.

If you use your personal vehicle you can claim for expenses not reimbursed by your employer although it depends on the mileage and rate paid.

Subsistence

You can only claim what is not reclaimed from your employer. Note there are some rules on temporary accommodation of which you could fall foul.

Fees and Subscriptions

 

Always a favourite, there has been loads of debate and there is case law and precedent to be careful of.

Subscriptions to named professional bodies are allowed as are examination fees. Training costs are not, even if they are part of your contract of employment; but continued membership of a professional body as a condition of employment is allowed. Confused? Claims are made under s336 ITEPA.

 

Another area to watch out for is where you apportion an expense. This will be disallowed as it is not exclusively incurred. (For the self-employed this criteria does not have to be met).

 

Working from Home

 

You can only claim additional household expenses if the following conditions are met:

  • Substantive duties performed at home
  • Cannot be performed without use of facilities
  • Facilities not available at employer’s premises or job requires
  • Employee has no choice

 

You can claim up to £3 a week without keeping records, or more if justified. It includes all utilities and any business calls. Again no apportionments are allowed eg rent, mortgages or council tax.

Rental property declarations

Do you own property or land that is rented out, or are you intending to “buy to let”? You’ll need to complete a Self Assessment if you receive any of the following:

  • Rental income and other receipts from UK land and/or property
  • Income from letting furnished holiday accommodation in the UK or European Economic Area (EEA), you may also have to complete the equivalent return in the country where the property is; the rules here are a bit more complicated so watch out
  • Premiums arising from leases of UK land
  • An inducement to take an interest in any property for letting

Accounts should be completed to the 5 April. On the basis that it’s not a huge income generator, complete the income statement on a receipts and payments basis, known as cash accounting.

If a property is let jointly, the income can be split between each of the partners, everyone needs to complete a Self Assessment. If the partners are married or in a civil relationship, it is assumed the split is 50/50. If this is not the case complete a “Declaration of beneficial interest in joint property and income".

What can be claimed?

If you rent a room in your home you are able to claim “Rent a Room” relief up to £4,250 without having to retain any receipts.

 If the total income from this sort of letting is more than £4,250 you can choose between:

  •  
  • paying tax just on the excess over £4,250 (or £2,125 if let jointly) without taking off any expenses
  •  
  • calculating your profit from letting in the usual way. You may want to do this if, for instance, you have made a loss. In which case these are the expenses that are allowable.

 

Types of allowable expenses

1.Property expenses

  • Any rents you pay under a lease of a property
  • Rates
  • Council Tax
  • Water charges, not paid by tenants
  • Ground rents
  • Insurance for both the property and its contents
  • Costs of services you provide such as gardening, porterage, cleaning, communal hot water, etc.
  • Insurance against loss of rents is also an allowable cost, if you claim under your insurance policy any money you receive should be included as income

 

 

2.Loan interest and other financial costs

  • The costs of obtaining a loan or an alternative finance arrangement to buy a property that you let
  • Any interest on such a loan or alternative finance payments.

 

3.Expenses that prevent the property from deteriorating

 

4.If you are not claiming capital allowances see below, you can claim the costs of replacing furniture, furnishings and machinery supplied with your property.

 

5.Legal, management and other professional fees:  management fees paid to an agent to cover rent collection, advertising and similar administrative expenses can be deducted.

 

6.Other allowable property expenses such as stationery, phone, business travelling and other miscellaneous costs.

 

7.Capital allowances: You can claim tax allowances, called capital allowances, for the cost of purchasing and improvements see my separate blog on this

 

8.10% writing down allowance on furnished lets

 

9.You may also be entitled to a 100% first year allowance if you have bought certain energy-saving technologies used in the property rental business. They are available for the purchase of designated energy-saving and water-efficient technologies

 

10.You may also be able to claim 100% allowances for converting empty or underused space above shops and other commercial premises to flats for renting.

 

 

A couple of final points:

 

Private use adjustment – if expenses include any amounts for non-business purposes

Personal expenses are not allowable as a deduction

 

For furnished holiday lets and EEA lets, the rules are more complicated.

Do you need to complete a Self Assessment?

All income is taxable, it maybe a revelation but true. Many times I’ve heard people say they don’t think they have to submit a self assessment and quote numbers, these are the rules from HMRC. “If you are an employee or a pensioner and already pay tax through a PAYE code, you can sometimes ask for tax that you owe on income, such as savings and property, to be collected through your code number. You'll need to complete a tax return instead if the income you receive is:

  • £10,000 or more from taxed savings and investments
  • £2,500 or more from untaxed savings and investments
  • £10,000 or more from property (before deducting allowable expenses)
  • £2,500 or more from property (after deducting allowable expenses)

If you don't pay tax through a PAYE code you’ll need to complete a tax return if all of the following apply:

  • you have income to declare, for example income from savings, trusts or abroad, rental income from land or property
  • your total income exceeds your total allowances and reliefs
  • you have tax to pay on this income”

So who or when do you need to submit a self assessment?

  •    Self-employed
  •   Company director, minister, Lloyd's name or member
  •   Annual income is £100,000 or more
  •   Income from savings, investment or property
  •   Claim for expenses or reliefs
  •   You or your partner receive Child Benefit and your income is over £50,000

The new High Income Child Benefit tax charge, introduced on 7 January 2013, may mean you need to complete a Self Assessment tax return for the first time. You must complete a tax return if all of the following apply:

  1. your income is over £50,000 a year
  2. you live with a partner and your income is higher than theirs
  3. you or your partner are entitled to receive Child Benefit (or get an equivalent amount from someone who claims Child Benefit for a child who lives with you)
  4. you jointly decide to keep receiving Child Benefit and pay the new tax charge
  •   Over 65 and receive a reduced age-related allowance
  •   Receive get income from overseas
  •   Income from trusts, settlements and estates
  •   Capital Gains Tax to pay
  •   Lived or worked abroad or aren't domiciled in the UK
  •   Trustee

Don’t forget that if you are submitting a paper self assessment it must be received by HMRC by midnight on the 31 October. There is talk this is being phased out, so watch the press for updates.

The onus is on the taxpayer to inform HMRC, it’s not when they’re caught. If HMRC catches up with a taxpayer they are less likely to be sympathetic to their plight

10 questions answering everything you want to know about transfer pricing

1. What is it? Transfer pricing is the charges made by one enterprise to another within the same group, (they don’t need to be legal entities)

2. Why is it important?

It is often used by businesses (enterprises) to move profits to low tax jurisdictions

3. What does it cover?

Sale of goods

Provision of services, including management fees

License of intangibles, patents

Use of money, interest rates and thin capitalised businesses

Use of tangible property

Or the non-charge for these

4. How does HMRC confirm the pricing is correct?

By using an “at arms lengths” test know as Comparable Uncontrolled Price (CUP). Of course this isn’t always available so the HMRC can also use

Resale price

Cost plus

Profit split

Residual profit split

Transactional net margin

5. Burden of proof

Is with HMRC, although governed by the OECD. Article 9 of the Model Tax Convention

forms the basis of bilateral tax treaties involving OECD member countries

Taxpayers are only expected to provide documentation which would be reasonable for them to have in their possession.

From the taxpayer’s point of view, the OECD guidance only requires documentation to be kept which would be consistent with the evaluation of any other business decision.

6. What records need to be kept?

Only the records that would normally be expected to be kept by a business. HMRC can’t ask for anything else.

Documentation must exist at latest by the time the Corporation Tax return is filed.

7.  What can be done to mitigate?

Entering into an Advance Pricing Agreement (APA) with HMRC, it’s preferable to a retrospective examination of the enterprise’s transfer pricing policies

It is binding on HMRC and the company over an agreed period, usually 3 to 5 years

8. Who needs to be worried?

Obviously all large organisations, medium enterprises are subject to power of direction, which means they don’t have to self-assess. The HM Revenue and Customs would only make a power of direction against one of these companies in exceptional circumstances.

A small enterprise is completely exempt from the transfer pricing rules, unless the other party is a related party in a country without a non-discrimination clause typically, a tax haven.

9.  So what’s the definition?

Enterprise Category

Headcount

Turnover

Balance Sheet Value

Medium

<250

Not to exceeding €50m

Not exceeding €43m

Small

<50

Not to exceeding €10m

Not exceeding €10m

Macro

<50

Not to exceeding €2m

Not exceeding €2m

10. To encourage UK businesses to not park their patents overseas HMRC introduced the Patent Box 10% CT rule.

The Patent Box enables companies to apply a lower rate of Corporation Tax to profits earned after 1 April 2013 from its patented inventions and certain other innovations. The relief will be phased in from 1 April 2013 and the lower rate of Corporation Tax to be applied will be 10 per cent.

Patent Box

The Patent Box enables companies to apply a lower rate of Corporation Tax to profits earned after 1 April 2013 from its patented inventions and certain other innovations. The relief will be phased in from 1 April 2013 and the lower rate of Corporation Tax to be applied will be 10 per cent. The company can only benefit from the Patent Box if the company is liable for Corporation Tax and makes a profit from exploiting patented inventions.

The company must also own or exclusively license-in the patents and must have undertaken qualifying development on them.

An enterprise can benefit from the Patent Box if the company owns or exclusively licenses-in patents granted by:

  • UK Intellectual Property Office
  • European Patent Office

The company or another group company must have also undertaken qualifying development for the patent by making a significant contribution to either:

  • the creation or development of the patented invention
  • a product incorporating the patented invention

Watch out for transfer pricing issues, see my blog on this.

Patent holders may wish to license their inventions for further development. If the company holds licenses to use others' technology it may still be able to benefit from the Patent Box. But to do so it must meet all of the following conditions:

  • Rights to develop, exploit and defend rights in the patented invention
  • One or more rights to the exclusion of all other persons (including the licensor)
  • Exclusivity throughout at least an entire national territory - rights to manufacture or sell within part of a country, for example, would not qualify as exclusive
  • The licensee must either be able to bring infringement proceedings to defend its rights or be entitled to most of the damages awarded in successful proceedings relating to its rights.

The exclusive licensing conditions are relaxed for groups of companies. This recognises that one company in the group may own a portfolio of patents while another exploits them.

The company has to make an election to benefit from the reduced rate of Corporation Tax that applies to the Patent Box.

The election must be made within two years after the end of the accounting period in which the relevant profits and income arose.

The full benefit of the regime will be phased in from 1 April 2013. You will need to apply an appropriate percentage to the profits your company earns from its patented inventions.

The appropriate percentages for each financial year are:

  • 1 April 2013 to 31 March 2014: 60 per cent
  • 1 April 2014 to 31 March 2015: 70 per cent
  • 1 April 2015 to 31 March 2016: 80 per cent
  • 1 April 2016 to 31 March 2017: 90 per cent
  • from 1 April 2017: 100 per cent

Just for the nerds, there is no box on the Company Tax Return for making the election. Instead apply the reduced 10 per cent rate by subtracting an additional trading deduction from your Corporation Tax profits.

Examples

 

If a company has trade Corporation Tax profits of £1,000 in the financial year from 1 April 2015 which qualify in full for the Patent Box, and the main rate of tax is 22 per cent, then instead of arriving at a tax charge of £100 by multiplying £1000 by 10 per cent, the calculation is:

 

Calculation Amount
Profits chargeable to Corporation Tax £1,000
Patent Box deduction = £1000 × 80% x ((22 - 10) ÷ 22) £436
Profits chargeable to Corporation Tax £564
Tax payable = £564 × 22% £124

Capital Allowances on Cars

If a business provides a company car, (not a van as this is treated through the general pool) the rules are dependent on when the car was purchased. On cars bought before April 2009, the allowances were restricted to the first £12,000 over 4 years, so £3,000 a year and adjusted for personal use.

After that date, the Capital Allowance was restricted to the CO2 omissions as stated on the V5 registration document of the car.

The table below only applies to cars with 100 per cent business use.

CO2 emissions Capital allowances treatment of expenditure
Over 160 grams per kilometre (g/km) Goes into the special rate pool and qualifies for writing-down allowances at the rate for the special rate pool, currently 8 per cent per annum.
160g/km or less but more than 110g/km Goes into the main pool and qualifies for writing-down allowances at the rate for the main pool, currently 18 per cent.
110g/km or less (but note that the first-year allowance for cars in this category is due to expire in 2013) You can claim up to 100 per cent allowance in the accounting period when they were bought, the balance (which may be nil) goes into the main pool in the next year. For detailed guidance, see the guide First-year allowances: the basics

The amount a business can claim for providing a company cars has always been complicated and many hours have been spent figuring out if it’s really worthwhile for an employee to have one. There are benefits and costs for both.  Sometimes it may be advantageous for all concerned to pay a mileage allowance which shortcuts the debates.

HMRC has approved allowances for using an employee’s vehicle for business purposes. It should be noted that the employee should confirm they are appropriately insured otherwise they could be in breach of their insurance.

Employee vehicles: mileage payments for business travel

Type of vehicle Rate per business mile 2012-13
Car For tax purposes: 45p for the first 10,000 business miles in a tax year, then 25p for each subsequent mile

For NICs purposes: 45p for all business miles

Motorcycle 24p for both tax and NICs purposes and for all business miles
Cycle 20p for both tax and NICs purposes and for all business miles

If an employee is given a company vehicle they must pay benefit in kind on the use. This includes PAYE usually in the form of reducing the tax free allowance and Class 1 NIC. The rules are constantly changing, but suffice to say they are getting more restrictive.

Two final notes:

Pooled vehicles are cars that are used by any member of staff and stay at the company’s premises overnight; and where any personal mileage is incidental. Under these circumstances no employee pays any benefit in kind.

The benefit in kind for vans is £3,000 to the employee.

Depreciation for tax purposes

In the language of the taxman, depreciation is called “Capital Allowances” or sometimes ”wear and tear allowances”  and how we accountants report it differs in the management reports of businesses be they internal management accounts or for statutory reporting. So what purchases are covered by Capital Allowances? Not always an easy question to answer, but if you buy or make something either physical or intangible (for example software, although not internally generated intellectual property “IP” ), and it is used to produce economic benefit to the business or, put simply, kept long term for the benefit of the business then that will be considered an applicable purchase.

In accountants’ terms, we define Fixed Assets using various headings, for example Buildings, Motor Vehicles, Computers, Plant & Machinery and Fixtures and Fittings. Depending on the type of asset, the business may apply different rates of depreciation.

The taxman’s treatment of Fixed Assets is totally different. There is not a relationship at all, giving rise to a heading in a business’ statutory accounts as “Deferred Tax” being a timing difference between the accountant and the tax treatment.

HMRC starts with two headings, the main pool where most assets are classified and the special rate pool.

Once the purchase or construction has passed the test of being suitable to claim Capital Allowances, the asset is placed in the general pool, unless it qualifies as being classified elsewhere.

The special rate pool covers all assets that are integral to the business’ properties, (not the building itself though, that rule was phased out in 2006).

The assets which are now classed as integral features are:

* Electrical systems (including lighting systems)

* Cold water systems

* Space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such systems

* Lifts, escalators and moving walkways

* External solar shading

Over the years a number of exceptional pools were created, ostensibly to make the system more user friendly:

Small Pool Allowance

Two considerations.  If capital expenditure in either the general pool or special rate pool is less than £1,000 then it can be written off in the current year.

New expenditure of £1,000 or less, recorded separately in its own pool and written off in full in the current year.  Just in case you were thing of it, you can’t write off the first £1,000 of expenditure in this manner

 Annual investment allowance (AIA)

This was introduced in 2008 and covers plant and machinery, but not cars. The allowance has been a bit of a yoyo. When it was introduced in 2008, the allowance was £50,000, in 2010 this was increased to £100,000, then in April 2012 reduced to £25,000. It was announced in the Autumn statement that from the 1 January 2013 for two year only this allowance has been increased to £250,000

The AIA replaced the first year allowances which ceased to be allowable from 2008. Although there was a special first year allowance which was applied temporarily in 2009 to energy-saving and water-efficient equipment, cars with very low carbon dioxide emissions and goods vehicles with zero carbon emissions.

Type

Capital Allowance

Includes

1

Main Pool 18%  per annum since 6 April 2012 Until 2008 this was 25%, was previously 20% All assets not included elsewhere

2

Special Rate Pool 8% per annum Until 2008 this was 10% Long life assets

3

Annual Investment Allowance (AIA) £250,000 per annum since 1 January 2013 for 2 years When introduced in 2008 was £50K increased to £100K in in 2010. Down to £25,000 in April 2012 On plant and machinery only

4

First year allowance SME 50%, Medium sized businesses 40% Not  long life assets or leased equipment On plant and machinery only

Capital Allowances on motor vehicles rules are more complicated and are on a separate blog