od financial services

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.

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

Life after submitting a tax return

You’ve completed your tax returns, you think you can now breathe a sigh of relief, but can you? HMRC can inspect any taxpayer’s records under Schedule 36 by FA08, FA09 and FA10. They can check the tax records for:-

Pay as You Earn (PAYE)

Value Added Tax (VAT)

Income Tax (IT)

Capital Gains Tax (CGT)

Corporation Tax (CT)

Insurance Premium Tax (IPT)

Inheritance Tax (IHT)

Stamp Duty Land Tax (SDLT)

Stamp Duty Reserve Tax (SDRT)

Petroleum Revenue Tax (PRT)

Aggregates Levy (AGL)

Climate Change Levy (CCL)

Landfill Tax (LFT) and

Bank Payroll Tax (BPT)

 

The technical term for the inspection is a Compliance Check. They will check that the tax payer has:-

  1. Complied with their obligations
  2. Paid the correct amount of tax and at the right time
  3. Claimed the correct reliefs and allowances

 

 

 

The inspection

This can be completed by anything from a short telephone call to confirm a single fact, to a detailed investigation of a person's entire financial affairs over a period of years.

HMRC may undertake checks by either asking for information or documents or by arranging a meeting or visit.

They may:

  • Require taxpayers by notice in writing to provide information and produce documents (a “taxpayer notice”)
  • Require third parties by notice in writing (for example a supplier or bank) to provide information and produce documents (a “third party notice”)

 

The caveat being that these requirements are reasonable for the purpose of checking a tax position. The generic term for these types of notice is information notice.

 

The recipient has the protection of a right of appeal to, or prior approval by, an independent tribunal. There is no right of appeal however where the notice only refers to information or documents that form part of a taxpayer's statutory records, or any person's records that relate to:

  • The supply of goods and services
  • The acquisition of goods from another member state, or
  • The importation of goods from outside the European Union (EU) by a business

 

If the taxpayer is not forthcoming with the information, HMRC may invoke their statutory powers to obtain them.

 

They may also request assistance with aspects of a tax check from other government departments.

 

This could include a situation where there is reason to believe that a taxpayer:

  1. did not notify chargeability to tax
  2. did not register for VAT if required, or
  3. is operating in the informal economy

Restrictions on Information Powers

The taxman is not all-powerful; some safeguards have been installed, set out in the law and with guidance so that in carrying out compliance checks

  • HMRC's powers are used reasonably and proportionately
  • Taxpayers are clear about when a compliance check begins and ends
  • Officers have no right to enter any parts of premises that are used solely as a dwelling, whether to carry out an inspection or to examine documents produced under an information notice. They can, however, enter if invited
  • FA09 adds to Sch 36 FA08 a power to inspect all property for the purpose of valuation (for direct taxes purposes). This requires either the taxpayer's agreement or Tribunal approval
  • Unannounced visits will only be made where agreement has been given by an authorised officer

Other safeguards include the fact that officers can’t require certain things to be provided:

  1. Information relating to the conduct of appeals against HMRC decisions
  2. Legally privileged information
  3. Auditors or tax advisers advice to a client about their tax affairs
  4. Information about a person's medical or spiritual welfare
  5. Journalistic material

Time constraints

  • Information over six years old can only be included in a notice issued by or with the approval of an authorised officer
  • HMRC cannot give a notice in respect of the tax position of a dead person more than four years after the person's death

 

The Power to Visit Business Premises and Check Assets and Records

Inspection powers allow an officer of HMRC to enter business premises and inspect the premises, business assets and statutory records.

 

If an information notice has been issued earlier, the documents required in that notice could be inspected at the same time.

 

FA09 incorporates into Schedule 36 inspection powers in respect of the:

  • business premises of Involved third parties
  • valuation of premises for Income Tax or Corporation Tax

These inspections:

  • must only be undertaken where it is reasonably required to establish the tax position and
  • will normally be by prior arrangement, the date and time being convenient to the taxpayer

The Power to Visit Business Premises and Check Assets and Records

Inspection powers also allow any officer to enter any premises when they believe the premises are to be used in connection with taxable supplies of goods or taxable acquisition of goods from Member States, and such goods or documents relating to such goods are on the premises.

There is no right of appeal against an inspection but the occupier can refuse entry and prevent the inspection from being completed.

The occupier can be penalised for such obstruction, where the inspection has been approved by a Tribunal.

There may be occasions when a pre-arranged visit will be inappropriate, for example where there is a strong risk that the taxpayer would move the business or remove stock or other assets. In such cases, an unannounced visit may be undertaken subject to prior agreement by an authorised officer.

If a formal statutory approach is needed, and it has not been possible to agree the time of inspection and give written confirmation, the inspection must be approved by a Tribunal and 7 days written notice of the time of the inspection given. The application for approval must be made by, or with the approval of, an authorised officer.

When a Penalty can be charged where a person:

  • Fails to comply with an information notice
  • Conceals, destroys or otherwise disposes of documents required by an information notice
  • Conceals, destroys or otherwise disposes of documents that they have been notified are, or are likely to be, required by an information notice
  • Deliberately obstructs an inspection that has been approved by the Tribunal.
  • In complying with an information notice provides inaccurate information or produces a document that contains an inaccuracy,
  • Fails to comply with a notice requiring contact details of a tax/duty debtor to HMRC.

These rights are covered in sections 38 FA 08 and 09

 

Types of Penalties

There are four types and amounts of penalty:

  • An initial penalty of £300
  • A daily penalty of up to £60 for every day that the failure or obstruction continues after the date the initial penalty is assessed
  • A tax-related penalty
  • A penalty not exceeding £3000 for providing inaccurate information or documents in response to an information notice

A tax-related penalty is in addition to the initial penalty and any daily penalties. The amount of the penalty is decided by the Upper Tribunal having regard to the amount of tax which either has not, or is unlikely to be, paid by that person.

 

A person is not liable to a penalty if they have a reasonable excuse for:

  • Failing to comply with an information notice, or
  • Providing inaccurate details or documents, or
  • Deliberately obstructing a tribunal approved inspection

If they correct their failure as soon as the excuse ends, the excuse will then be treated as continuing until the correction is made.

Normally, daily penalties will not be assessed after the failure has been remedied.

Record Keeping

Schedule 37 of FA08 amended existing record keeping legislation in respect of PAYE, VAT, IT, CGT and CT, whilst Schedule 50 to FA2009 extends this approach to IPT, SDLT, AGL, CCL, and LFT with BPT being included from 8 April 2010. Following consultation it was accepted that SDRT and PRT did not require separate statutory provisions, whilst IHT will be addressed through guidance.

These provisions are aimed at alignment and clarification.

This approach is designed to be flexible across a range of business and non-business taxpayers.

There are penalties for failure to keep adequate records.

The basic requirements in relation to record keeping have not changed but rules have been aligned on how long records are kept.

 

How long to keep your records

As a general rule, you should keep your records for a minimum of six years. However, if you are:

• an employer, you need to keep Pay As You Earn (PAYE) records for 3 years

(in addition to your current year)

• a contractor in the Construction Industry Scheme (CIS), you need to keep your CIS

records for 3 years (in addition to your current year)

• keeping records to complete a personal (non business) tax return, you only need to

keep them for 22 months from the end of the tax year to which they relate.

If you need to keep records for other reasons, for example the Companies’ Act

requires limited companies to keep specific records and you also use those records

for tax purposes, you need to be aware that there may be different time limits for

retaining them. Be careful not to destroy any records you also use for tax purposes

too soon.

 

Investment appraisal

In business, a manager should always look at opportunities from the perspective of the return.  All opportunities should be assessed with a view to the venture making a profit. When an opportunity is presented, an investor wants to be sure that there will be a profit on their investment.

However, not all opportunities have a positive outcome and it is better to assess the risk before making any commitments. Not everyone has the same view of risk.

There are many factors to consider from an individual’s perspective: some people are more risk adverse than others; some may be better informed, that’ not insider dealing either.

The accepted ways of assessing risk can be categorised as follows:-

Expected values

This is the probability of the outcome being achieved, generally worked with a range of values.

Risk adjusted discount factor

This is the subjective approach where an inherent risk factor is built into the calculation. Any project which has a negative value after applying the calculation is automatically disregarded.

 Payback

Not to be used in isolation, but the shorter the payback period, the lower the risk.

 Simulations

This involves using all the factors to complete a scenario analysis. This is often too complex to be undertaken without the use of specialist programmes.

Sensitivity analysis

Where each factor, sales, volumes, direct costs, fixed costs and profits are assessed and calculated to show how wrong the estimates in percentage terms has to move before profits go negative.

If the investment opportunity has a high profit margin then sales can fall or costs rise by acceptable percentages and still the project can be profitable. Conversely if profit margins are low then the acceptable margin of error is reduced and increasing risk.