Author Archives: Jean Calas-Hathaway

Self Employed – Cash Accounting Vs Traditional Accounting?

Which method to choose?

When you are self-employed or a partnership you can calculate your profits on two bases.

From the 2013–14 tax year, you can choose to start using the cash basis. Cash accounting, like the name implies on the basis of cash received and expenditure made. Traditional accounting (accruals basis) is on the basis of invoices sent and invoices received regardless of whether payment has been made or not.

Cash Accounting

This is a simpler way of working out your business profit or loss as you record money when it actually comes in and goes out of your business.

But the treatment of certain items is different, unlike traditional accounting;

payments for equipment, including vans, are allowable expenses.
there is a maximum of £500 allowable as an expense for interest paid on cash borrowings.
any losses you make can’t be set off against your other income
you can’t claim capital allowances for anything except cars.

To use cash accounting your turnover must be £79,000 or less for the year. This increases to £158,000 if you claim Universal Credit.

Traditional Accounting (accruals basis)

Traditional accounting is not the same as cash basis accounting. Cash basis records money when it actually comes in and goes out of your business, traditional accounting records income and expenses when you invoice your customers or receive a bill.

Records you must keep under traditional accounting:

all your sales and takings (income)
all your purchases and expenses.

This might include:

business assets you’ve bought (for example, stock or equipment)
value of stock and work in progress at the end of your accounting period
details of payments to employees (for example, wages, expenses or benefits)
business vehicle and travel costs
interest from any bank or building society accounts
other money coming in, such as; money you invest in your business.

If you are using traditional accounting, only include business expenses in your accounts if they belong to that accounting period. If you make a payment which covers more than one accounting period, you need to spread the cost over the periods that they belong to. For example, if you pay 12 months’ rent in advance halfway through a year; only include half of the payment in that year’s accounts. Include the other half in the next accounting period.

If you need advice on which accounting to method to choose for your small business, please get in touch.

Can I reclaim pre-registration VAT?

Many businesses are not aware that it is possible to reclaim VAT on goods and services received before the business was VAT registered.

The rules are different for both goods and services but these are as follows:

You can reclaim VAT on goods you bought or imported no more than four years before you were registered for VAT if all the following applies:

the goods were bought by you as the entity that is now registered for VAT (for example, the individual, business or organisation)
the goods are for your VAT taxable business purposes, which means they must relate to VAT taxable goods or services that you supply
the goods are still held by you or they have been used to make other goods you still hold

You can’t reclaim VAT on any of these goods:

goods that you’ve completely used up before you registered for VAT (such as petrol, electricity or gas)
goods that you have already sold or supplied before being registered, or have used to make goods you have sold or supplied before being registered
goods that relate to supplies you make that are exempt from VAT

The word ‘goods’ means goods that are intended for resale, and also goods that you keep as assets, such as computer systems, shop fittings, office equipment and furniture, tills, vans and other equipment. It also covers anything else you’ve bought that isn’t a service, so it includes consumables such as stationery.

To reclaim VAT on goods bought before you registered for VAT, you will need to carry out a careful stock check and record the quantities of goods and the dates when you obtained them. This will form the basis of the records you need to keep to validate your claim.

You will also need to check that you still have evidence that you paid VAT on those goods. You need VAT invoices from suppliers in the UK or the EU, and import VAT certificates (form C79) for imports from outside the EU.

You can reclaim VAT on services you bought during the six months before you registered for VAT if both the following apply:

the services were bought by you as the entity (for example, the individual, business or organisation) that is now registered for VAT
the services are for your VAT taxable business purposes, which means they must relate to VAT taxable goods or services that you supply

You cannot reclaim VAT on any of these services:

services that relate to goods you disposed of before you were registered for VAT – for example, repairs to a machine you sold before you were registered
services that relate to goods or services you supply that are exempt from VAT

Examples of services you might have paid for when starting your business are legal and accountancy fees, services relating to setting up your computer and other equipment, and fees and services relating to your premises. You can reclaim the VAT on these and other services assuming all the conditions listed here are met.

To reclaim VAT on services bought before you registered for VAT, you will first have to compile an account of these services. This must describe the services and the dates when you received them. You will also need to have the evidence that you have paid the VAT on those services.

Read my blog for more information on VAT registration and when you need to register.

Should I register for VAT?

You must register for VAT if you’re taxable turnover is over £81,000 in the past 12 months, but you can voluntarily register for VAT before then if it is beneficial to do so.

If your business offers goods or services to other businesses as a general rule of thumb these are more likely to register for VAT voluntarily and there are a number of reasons for doing so:

As their clients are other businesses they are more likely to be VAT registered and therefore are able to reclaim any VAT charged.
Being VAT registered can give the impression to potential clients that the business is larger or more well established than it is.
If you are buying lots of goods and services that have VAT added you may wish to recover the VAT, (but also read about reclaiming pre-registration VAT)

If your business mainly offers goods or services to individuals adding VAT can make your costs more expensive than your competitors, so it may not be advantageous to do so.

Calculating your taxable turnover

Your VAT taxable turnover includes the value of any goods or services you supply within the UK, unless they are exempt from VAT. This means you must also include any supplies you make that would be zero-rated for VAT.

When calculating your VAT taxable turnover you will of course include your sales, but for VAT purposes, you should also include the value of certain other types of supply:

goods or services that you exchange or barter – see the link below
supplies of certain services that you receive from suppliers in other countries that you have to ‘reverse charge’
where you use your own labour to construct certain building or civil engineering works for your own business use with an open market value of £100,000 or more

You must not attempt to avoid registration by artificially separating business activities to reduce your turnover.

Who can register for VAT

You can register for VAT if you’re in business and you are one of these:

an individual (sole trader)
a partnership
a company
a club
an association
a charity
any other organisation or group of people acting together under a particular name, such as an educational or health institution, exhibition, conference, etc
a trust
a Local Authority

For VAT purposes, the individual or organisation that is in business is known as a ‘taxable person’.

Who can’t register for VAT

You can’t register for VAT if either of these is true:

you sell only goods or services that are exempt from VAT
you aren’t in business according to the definition that HM Revenue & Customs (HMRC) uses for VAT purposes

Once you’re made the decision to register for VAT you need to decide which VAT scheme to use.

Cash accounting
Annual accounting
Flat rate scheme
Or the normal accruals basis

For more information on the different VAT schemes available and how they work, read my “VAT – A Guide for Small Businesses” blog.

Cycle to Work Scheme – are you eligible?

The Cycle to Work Scheme allows an employee to get a bike tax free. The scheme is open to any size employer and is operated via a salary sacrifice scheme.

To be eligible the bike must be used at least 50% for business purposes but can be used for non-business purposes too.

Here’s an example of how the savings work during the hire period, assuming the following:

Employee is paid monthly;
Employee is a standard rate tax payer requesting a £500 Certificate;
The hire period is 12 months;
The Employee’s monthly gross salary is £1,666.67 (£20,000 per annum).

	Salary before scheme participation	Salary during scheme participation
Monthly Gross Salary	£1,666.67	£1,666.67
Bike value including VAT Gross salary sacrifice total		£500.00 £500.00
MONTHLY GROSS SALARY SACRIFICE = £500 / 12 months (this amount appears on the hire agreement)		£41.66
Monthly Gross Salary after salary sacrifice Monthly NIC contribution (12%) Monthly income tax contribution (20%) Net Salary	£1,666.67 £120.48 £189.00 £1,357.19	£1,625.01 £115.68 £180.60 £1,328.73
MONTHLY NET SALARY REDUCTION	£1,357.19 minus £1,328.73 =	£28.46
MONTHLY SAVING	£41.66 minus £28.46 =	£13.20

So, because the participants pay less income tax and NIC their NET salary reduction is less than the GROSS salary reduction, and this is how savings are achieved. In this example, the employee makes a £41.66 contribution to the employer, but it only costs them £28.46, resulting in a saving of £13.20 per month.

Typical savings for employees are between 32% for basic rate taxpayers and 42% for high rate taxpayers.
Employers can typically save 13.8% of the total value of salary sacrifice, due to reductions in Employers’ National Insurance Contributions (NICs) due.
The Office of Fair Trading (OFT) has issued a group consumer credit licence to cover Employers implementing Cycle to Work Schemes that are limited at £1,000 inc. VAT per Certificate.
During the hire period the bike is the property of the Employer.
In order to preserve the tax benefits of the scheme, there can be no guarantee or obligation to transfer ownership to the employee immediately after the hire period has ended. However, employers generally choose to offer this option in addition to others, either directly or via the Cycle Scheme provider.

If you want advice on the Cycle to Work Scheme, please get in touch.

Employment Allowance – does your business qualify?

The Employment Allowance is available from 6 April 2014 and allows eligible employers to reduce your employer Class 1 NICs by up to £2,000 each tax year.

You can claim the Employment Allowance if you are a business or charity (including Community Amateur Sports Clubs) that pays employer Class 1 NICs on your employees’ or directors’ earnings.

If your company belongs to a group of companies or your charity is part of a charities structure, only one company or charity can claim the allowance. It is up to you to decide which company or charity will claim the allowance.

You can only claim the £2,000 Employment Allowance against one PAYE scheme – even if your business runs multiple schemes.

Not all businesses can claim the Employment Allowance…

Excluded employers:

employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener, care support worker
already claim the allowance through a connected company or charity
are a public authority, this includes; local, district, town and parish councils

Carry out functions either wholly or mainly of a public nature (unless you have charitable status), for example:

NHS services
General Practitioner services
the managing of housing stock owned by or for a local council
providing a meals on wheels service for a local council
refuse collection for a local council
prison services
collecting debt for a government department

You do not carry out a function of a public nature, if you are:

providing security and cleaning services for a public building, such as government or local council offices.
supplying IT services for a government department or local council.

Personal and Managed Service Companies who pay contract fees instead of a wage or salary, may not be able to claim the Employment Allowance, as you cannot claim the allowance for any deemed payments of employment income.

Service companies can only claim the allowance, if you pay earnings and have an employer Class 1 NIC’s.

How to claim your Employment Allowance

You can use your own 2014 to 2015 payroll software (see your software provider’s instructions), or HM Revenue and Customs’ (HMRC’s) Basic PAYE Tools for 2014 to 2015 to claim the Employment Allowance.

When you make your claim (using the software of your choice), you must reduce your employer Class 1 NICs payment by an amount of Employment Allowance equal to your employer Class 1 NICs due, but not more than £2,000 per year.

For example, if your employer Class 1 NICs are £1,300 each month, in April your Employment Allowance used will be £1,300 and in May £700, as the maximum is capped at £2,000.

Once made, HMRC will automatically carry your claim forward each tax year. So at the beginning of each year you should check your circumstances haven’t changed.

Childcare Vouchers – can you claim them?

The process of receiving and paying with childcare vouchers is designed to be simple and straightforward for both employers and employees.

Most employers who provide childcare vouchers do so through a salary sacrifice scheme. This means you agree to reduce your salary by a certain value, and receive childcare vouchers to the same value but pay no tax or National Insurance on these vouchers.

To join your employer’s childcare vouchers scheme you first of all need to complete a salary sacrifice agreement. Your employer will give you directions on how to do this.

After your agreement has been submitted to your employer, they will reduce your salary by the requested amount and arrange for vouchers to be provided to you.

Status	Annual Tax exempt amount*	Savings*
Basic rate (contracted out) 20% tax 10.6% NI	£2,916	£892
Basic rate (contracted in) 20% tax 12% NI	£2,916	£933
Higher rate category 40% tax 2% NI	£1,484	£623
Additional rate category 45% tax 2% NI	£1,325	£623

If you are found to fall into the higher rate category (as a rough guide this is likely to be those earning between £44,781 and £151,484) you will be able to get £124 a month tax and NI exempt (£28 a week).

An example for someone earning £20,000 per annum, £1,666.67 per month.

	Salary before scheme participation	Salary during scheme participation
Monthly Gross Salary	£1,666.67	£1,666.67
Childcare vouchers per monthGross salary sacrifice total		£243.00 £243.00
MONTHLY GROSS SALARY SACRIFICE		£243
Monthly Gross Salary after salary sacrifice Monthly NIC contribution (12%) Monthly income tax contribution (20%) Net Salary	£1,666.67 £120.48 £189.00 £1,357.19	£1,423.67 £91.20 £140.40 £1,192.07
MONTHLY NET SALARY REDUCTION	£1,357.19 minus £1,192.07 =	£165.12
MONTHLY SAVING	£243.00 minus £165.12 =	£77.88
ANNUAL SAVING	£77.88 x 12 =	£934.56

If you want advice on claiming childcare vouchers and what may be best for you, please get in touch.

The 3 P’s for a Successful Business Start-up

When you start up your own business it can be a very exciting time, but it can also be daunting. Many business owners start their new business venture because they have a good idea or a great product and they are passionate about what they do. But very few have all the skills needed for a successful business simply due to experience. A new business dictates that you need to know about all aspects of running a business, from marketing, HR, legal and financial.

So here are my 3 P’s to a Successful Start-up:

1. Your Product (or Service)

You can’t have a great business without a great product, whether it’s goods or services you offer, you need a great product, something that sets you apart in the market place. This doesn’t mean that you have an exclusive offering but something that sets your business apart, meaning a well-defined product (or service) that differentiates itself in some way.

You need something that sets you apart from your competitors and the power to influence people to work with you or buy your product. This could be your approach, the way you physically present or/deliver a product, your after-care service, or how you package and price your product or service. Or a unique combination of these factors.

2. Your Plan

To quote from Benjamin Franklin “If you fail to plan, you are planning to fail!”

When starting your business make sure you have a plan. At least something that puts into writing what you want to achieve and how you intend to go about it, this will help in so many ways not least keeping you on track when times are tough but also informing others of your vision.It will help to get finance from banks and highlight areas where help is needed.

It will also helps you understand what turnover or number of sales you need to cover your costs (pay your mortgage!) or pay your staff/office overheads. It really helps to have that level of granularity – I need to sell X or have Y number of clients spending £Z per month to hit turnover target of and my overheads are ABC, etc.

Lastly, remember the opportunity cost of running your own business, if you were working for someone else, how much could you expect to earn? This question often puts the profit level into perspective.

3. Get Professional Advice

Professional advice is invaluable at the start of any business. This will help prevent costly mistakes made simply because you’re not aware of certain aspects, particularly when it comes to accounting. You can miss out on tax allowances and advantages simply by getting the timing wrong.

For example, one client missed out on the temporary increase in the Annual Investment Allowance (AIA) by buying a large piece of equipment costing over £200,000 by not seeking my accounting advice before the purchase. They bought the equipment in December 2012 when the AIA was £25,000, if they had delayed the purchase slightly they would have been able to claim the whole cost of the equipment against tax as the AIA temporarily increased to £250,000 from January 2013. So instead of a deduction of £200,000 against profits they got a deduction of £56,500, the remaining £143,500 would be carried forward for use against future profits at a rate of 18% per annum.

Starting up in business?

If you are in the process of starting up your new business, it’s a great time to seek professional advice. Get in touch for a no obligation chat about your business plan, cash flow forecasting, and accounting requirements, I’d love to talk to you.

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.

It also removes the requirement for employees to submit claims for deductions against expenses previously reported on forms P11D or P9D.

Once granted, dispensations last indefinitely. However, HMRC reviews them regularly (usually at intervals of five years or less) to make sure that the conditions under which they were issued still apply.

What items can and can’t be covered by a dispensation?

You can apply to HMRC for a dispensation to cover expenses or benefits for which your employee gets a full tax deduction.

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

Systems you must have in place

You must have an independent system in place for checking and authorising expenses claims. At a minimum, this means having someone other than the employee claiming the expenses check that the:

amount claimed isn’t excessive
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

Getting tax relief for expenses

If you don’t have to fill in a tax return, you can get tax relief for your allowable expenses by:

Filling in form P87 Tax Relief for Expenses of Employment
By Phone

The first time you ask for tax relief for your expenses you’ll have to contact HMRC in writing. To do this you should complete a form P87.

The form asks for details about your expenses and how you worked out the amount you want to claim.

If you have more than one job, or if you change jobs during the tax year, you’ll need to fill in a separate form P87 for each job.

Go to form P87
By phone

If you phone HMRC to ask for relief for your expenses they will only be able to give you tax relief if all of the following conditions are met:

your expenses are less than £1,000 (or £2,500 for professional fees and subscriptions)
you’ve claimed them in a previous tax year for the same employment
HMRC has accepted your earlier claim
you haven’t already been sent a P87 to complete

If you meet the conditions, HMRC will give you tax relief right away and repay any tax you’ve overpaid. Otherwise, you’ll have to fill in form P87 before they can allow your claim.

Mileage Payments – Allowable Expenses

Most people are aware that you can claim a mileage allowance when using your own car for business purposes.

For Business Owners

The approved mileage allowance for cars is 45p per mile for the first 10,000 miles and 25p per mile thereafter. But did you know that you can also claim an additional 5p per mile for each passenger travelling with you for business?

If you use the approved mileage allowance then there is no need to complete these details on the P11D at the end of the year.

For Employees

Also, the approved mileage allowance doesn’t just apply to those claiming for their own business but also applies to employees.

An example, if your employer only pays you 30p per mile for business, the approved amount is higher so you’re entitled to Mileage Allowance Relief on the difference.

For example: if you use your own car for 900 business miles and your employer pays you 30p per mile. The approved amount is £405 (900 x 45p). The allowance you get from your employer is £270 (900 x 30p). Your Mileage Allowance Relief is £135 (£405 less £270).

The Mileage Allowance Relief will reduce the amount of income you pay tax on, so your tax bill will reduce by £135 at 20% (if you’re a basic rate taxpayer) or at 40% (if you’re a higher rate taxpayer) and at 45% (if you’re an additional rate taxpayer)

You are only entitled to Mileage Allowance Relief if your employer pays you:

no mileage allowance
less than the approved amount. If your employer pays you more than the approved amount, you’ll have to pay tax on the extra.

The mileage allowance also applies to motorcycles and bicycles

For a motorcycle you can claim 24p per mile and there is no upper limit as with cars.
For a bicycle you can claim 20p per mile.

What records you must keep?

You need to keep records of dates, mileage and details of all work journeys. Your employer needs this information to make expenses payments to you. You also need them to get any Mileage Allowance Relief.

If you use different vehicles

If you use more than one vehicle of the same kind add all your business miles together in one calculation.

If you use vehicles of different kinds make separate calculations for each one.