Toni Hunter's SuperBlog » Accountancy and finance

To Incorporate or not to Incorporate?

Toni — Mon, 05 Jul 2010 12:09:45 +0000

Along with the England flags and hopes of World Cup success the emergency budget is becoming a distant memory, but if you are in business you shouldn’t be so hasty.

Here at George Hay, we regularly advise on the advantages of incorporation and strongly believe that for the majority of small businesses it is the most tax efficient structure, as remuneration (profit distribution) for the owners/directors can be carefully planned to benefit their personal tax circumstances. These savings can be particularly advantageous if you are operating as a family business.

Corporation Tax reduction

One of the main headlines of the budget was the reduction in the Corporation Tax rate by 1% making the Small Companies rate 20% from April 2011. This was good news for business owners but of course it only applies to those which are incorporated. Those who operate their business as either a sole trader or partnership are subject to Income Tax and National Insurance on their business profits so will instead be hit by the rise in National Insurance rates from April 2011.

The changes in the Corporation Tax rate and National Insurance rate along with forecast reductions in the basic rate threshold for individuals poses the usual question of should those in business consider incorporating and is it beneficial for everyone to do so?

Indicators do strongly suggest that it is widely beneficial for most owner managed businesses to incorporate and when doing the sums at the new rates from April 2011 the tax savings as a result of incorporation increase even more.

Risky Strategy?

There have been many attempts to try to curb the incorporation trend in the past due to the significant tax savings that can be achieved. Gordon Brown aired his view that business owners are not paying the ‘right amount of tax’, and we are sure HMRC will continue their expensive and difficult case in the courts. But I personally have been advising on incorporation for over 10 years and it continues to be a successful strategy, so why not take advantage whilst the regulations allow it? It is not something that can not be withdrawn from if circumstances change.

Real life example

In 2007 I was recommended to a small business that was earning very handsome profits due the unique nature of its trading activity. On engagement I quickly did some sums (good old Excel!) and explained the value of Incorporating. The owner immediately understood and asked me to incoporate the business without delay. By involving his wife in the business strategy, she was able to take a ‘very nice’ Company Car and between them they saved and continue to save over £15,000 per annum in Tax and National Insurance. If only they had sought advice years before…..

It’s not all about tax

Careful consideration should be given to incorporation and expert advice sought. It is not always the right choice for everyone and other factors come into play such as legal liability, increased regulation and therefore costs, disclosure of financial information and future business plans such as sale of the business but it is always worth thinking about.

For further details on the key announcements in the ‘Emergency Budget’ download a copy of our budget summary.

Disclaimer: This article is for general guidance only. All taxation planning should only be undertaken after appropriate professional advice. George Hay Chartered Accountants are registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales.

The information provided in this blog illustrates my opinions and experiences, it does not constitute advice and I do not accept responsibility for any actions taken or refrained from as a result of reading this post.

Emergency Budget – ‘Tough but fair’

Toni — Wed, 23 Jun 2010 11:00:56 +0000

The new Chancellor, George Osborne delivered his first budget on 22 June 2010. He said his budget was ‘tough but fair’ but described it as being ‘unavoidable’ due to ‘the years of debt and spending’ by the previous labour government.

The Chancellor’s package included various tax increases and spending cuts, some measures had been widely anticipated such as the increase in the VAT rate and an increase in Capital Gains Tax. The Chancellor stressed that his measures were intended to be fair ‘Everyone will pay something but the people at the bottom of the income scale will pay proportionately less than those at the top’.

As tax is not my preferred subject (I have highly experienced colleagues for dealing with that!) I will be brief:

The key announcements included:

VAT Rate rise – As anticipated the VAT rate will increase from 17.5% to 20% with effect from 4 January 2011.

Personal Allowance increase – The personal income tax allowance is to increase by £1,000 in April 2011 to £7,475. This is worth £200 a year to a basic rate taxpayer.

Capital Gains Tax increase – The Capital Gains Tax rate for higher rate taxpayers will increased from 18% to 28% from 23 June 2010. It remains at 18% for basic rate tax payers.

Entrepreneurs Relief extended – Entrepreneurs relief has been extended to a rate of 10% on the first £5m of gains as opposed to the first £2m.

Corporation Tax Rate cut – The Corporation Tax rate will be cut by 1% each year over the next four years until it reaches 24%. The Small Companies rate is to be cut to 20%.

National Insurance rise to stay – The National Insurance rate increases announced by labour remained intact and will still take place however the threshold at which employers start to pay will rise.

No change to Cigarettes, Alcohol and Fuel – No changes were made to duty on cigarettes, alcohol or fuel and the plan to increase the duty on cider from July was scrapped.

Freeze on Child Benefits – Child benefit is to be frozen for the next three years.

Changes to Tax Credits – Tax credits will reduce for families earning over £40,000 next year but for low income families they will receive more Child Tax Credit with the amount per child increasing by £150 above the rate of inflation.

State Pensions – The state pension is to be linked to earnings from April 2011 and is guaranteed to rise in line with earnings or 2.5% whichever is greater. The increase in the state pension age to 66 is to be accelerated.

For further details on the key announcements download a copy of our budget summary.

Alternatively come along to one of our Budget Seminars which we are holding on the 24th and 25th June where we will be providing planning advice as a result of the changes.

A CONSISTENT APPROACH TO TAX?

Toni — Tue, 18 May 2010 16:37:02 +0000

HM Revenue and Customs have gradually been trying to standardise the tax system across all the different taxes. From the 1^st April 2010 further changes have come in to place in a bid to make the tax system more consistent.

Cross Compliance Inspections

Last year as part of the standardisation process HMRC introduced cross compliance checks enabling them to obtain information regarding various different taxes all at the same time. This meant that HMRC now have one set of powers giving them the ability to inspect records and consider the affect any information obtained has on various taxes such as Corporation Tax, VAT and PAYE, so if an error is found affecting one tax it could now have consequences across other taxes too.

From 1^st April 2010 the list of taxes which can be inspected at the same time has been extended to cover almost all taxes imaginable. The major taxes of Income Tax, Corporation Tax, Capital Gains Tax, PAYE, VAT and CIS where all covered last year but this year majority of the remaining taxes have been added to the list, it now also includes Inheritance Tax, Stamp Duty Land Tax, and many more.

Time frames aligned

The standardisation process also covered the alignment of the amount of time a taxpayer has to make a claim and the amount of time HMRC have to make an assessment. It now means that for Income Tax, Capital Gains Tax and Corporation Tax where the time limit for how far HMRC could previously go back was six years this has reduced to four years. However for VAT time limits have increased from three to four years.

The changes to time limits largely took effect from 1 April 2010 so it could be well worth considering if a previously out of time claim could now be made or if a deadline is now nearing. Anyone needing to make an Income Tax repayment claim for earlier years should check the new deadlines to ensure they do not miss out.

Consistent and fair?

The new process is supposed to make the tax system more consistent and clearer for everyone to administer, but that remains to be seen.

How do you feel about paying the wrong amount of tax?

Toni — Mon, 10 May 2010 12:45:45 +0000

PAYE notices of coding are notorious for being erroneous, but HMRC have surpassed themselves with this computer generated nightmare that not only leads to extra work and a lot of confusion but may even leave you paying too much tax.

Multiple Notices

In the last few months you may have received several Notices of Coding all showing different codes for the tax year 2010/11. There have been a number of instances where taxpayers have been receiving one tax code one day followed by a different one the next or even more than one code in one day. This has left many people bewildered and uncertain about exactly what tax code will be operated against their income and many of the codes issued are wrong anyway.

New HMRC system

The problems have occurred as a result of HM Revenue & Customs recently introducing a new system for issuing coding notices called the National Insurance and PAYE Service (NPS). The new service has brought to light various discrepancies in their records and so they have been trying to rectify the errors, hence so many codes being issued all at once. They expect to complete their review by mid April 2010 which will hopefully bring an end to all the confusion.

Resolution?

Any problems occurring as a result of an incorrect code will ultimately be resolved at the end of the tax year once a taxpayer submits their 2010/11 Tax Return to HMRC. However if serious problems are not dealt with near the beginning of the tax year it could result in a large underpayment arising for some people which it may not be possible to collect via a later year’s tax code. If you are not required to file a Tax Return, over or underpayments may go undetected for quite some time.

A careful review is necessary

In view of the problems which have occurred it is important that any codes received for 2010/11 are reviewed fully. If you believe that your code is incorrect you should either contact your advisor if you have one or HMRC as soon as possible.

Need help?

As agents we receive a copy of the majority of PAYE Coding Notices issued to our clients and therefore we are able solve many of the matters arising before problems begin to appear. We have discovered various reasons for an incorrect code but the problems particularly appear to have affected those with multiple employments. Close scrutiny of your code is therefore important.

Have you reviewed your budgets recently?

Toni — Sat, 10 Apr 2010 20:53:24 +0000

On Wednesday 24^th March the Chancellor, Alistair Darling gave what could be his last budget. Many are saying how the budget was a waste of time, being so close to an election and the lack of assistance to small businesses or real attempt to recover from the significant budget deficit certainly supports this view.

Businesses however, should consider reviewing their own budgets and make sure they are set appropriately. As someone a lot wiser than me once said ‘failing to plan is planning to fail’. Just as sinful is spending time creating a business plan and annual budget and not reviewing, updating or revising them on a regular basis.

Budgets are an important tool for anyone in business and at least an annual review should be considered. Many businesses approach their accounting year end at this time of year so it is an ideal time to appraise how your business is doing and what you wish it to achieve in the future.

Here are a few tips to consider when reviewing your budgets for the year:-

Are you producing management accounts on a regular basis, if not, what financial information can you easily extract from your accounting system that would help you monitor the business?
Business forecasts and cash flow projections should be prepared for a minimum of twelve months giving you something to monitor performance against;
You should ensure budgets are realistic in the current climate,
Are there any costs that can be trimmed back? Do you know which of your costs are fixed and which are variable, in reality in the short term most costs are fixed, if you need to go through a cost cutting exercise you need to know which costs can be varied and when.
Is cash flow behaving as expected? Are you likely to need further banking facilities at some point in the future? Are your debtors and creditors being managed appropriately?
If you are selling a product, it is important to know at what point the business is generating a profit, following the recession with pressure on prices the break even point can be higher than you realise, you need to be aware of this.
If you are selling a service, do you know how many of hours of time you are invoicing out a month, you may feel busy but is it resulting in billable income.
How are you generating new business, and what is this costing you in terms of time and resources. Are you being realistic about how much new business can be won?

Focus your attention

Reviewing your businesses budget can be a very valuable exercise. It will focus your attention on how your business is doing and help you to keep control of costs. It should also give you a target to achieve for the future.

If you are in business on your own, it may be beneficial to speak through your budgets with someone who understands your business, like your accountant, for example as this may help you to look at the bigger picture, question your processes or brainstorm ideas.

Important payroll changes approaching

Toni — Mon, 22 Mar 2010 13:02:47 +0000

The end of the tax year is almost here, so those of you who administer the payroll function for your business are nearing a busy time and need to ensure you are prepared for a few changes which occur this year.

Online Filing

The first change affects those who have not previously filed their Employer Annual Return online. 2009/10 is the first year that online filing is mandatory for all employers regardless of the size of the business. Paper filing of forms is no longer an option. Therefore if you have not previously been registered for electronic filing you must ensure you now register with HMRC’s PAYE Online Service which can be done via the HMRC website.

Late Payment Penalties

Another change which will affect employers from May 2010 is the introduction of late payment penalties if your PAYE is paid late. Currently interest is only charged when the PAYE payment is received late at the end of the tax year.

From May 2010 your PAYE payment will need to be received on time either each month or each quarter depending upon which basis you pay. Businesses will have to ensure that HMRC always receive postal payments by the 19^th of the month or that electronic payments are received in HMRC’s bank account by 22^nd of the month to avoid a late payment penalty. The new late payment penalties will apply to all employers and contractors that do not pay on time.

Details of whether you have incurred a penalty will not be sent out until April 2011 but will apply for the whole of the 2010/11 tax year. Penalties will start at 1% of the late amount and will increase to 4% depending upon how many times you pay late. You will not have to pay a penalty if only one payment is late unless it is more than six months late. Payments that are more than six months late may attract a penalty of 5% and a further 5% if still outstanding after more than twelve months.

This is an important change for employers who should ensure they get in to the practice of paying their liability on time each month not just at the payroll year end to avoid any extra costs.

If you have any queries regarding the preparation of your payroll my colleagues at our in-house payroll bureau PayScheme will be happy to help. Contact a member of the team direct on 01767 220199.

What does DChA mean?

Toni — Thu, 11 Feb 2010 22:26:18 +0000

The designatory letters DChA are used by holders of a Diploma in Charity Accounting, a qualification awarded by The Institute of Chartered Accountants (ICAEW) who hope that it will inspire confidence that the holder of the Diploma has the knowledge to make a real difference to the prosperity of an organisation through understanding of charity accounting and financial management.

Prior to 2007 the diploma could be achieved through study and examination or by submitting evidence of experience in advising the 3rd sector. The ‘experience’ route is no longer available.

At the time of writing this post, around 700 accountants in the UK hold this diploma (listed here) and just over half of these working in practice as auditors / independant examiners and advisers. The remaining mainly being financial managers working with in the sector itself.

As a trustee, what does using an accountant with the Diploma mean to you?

Confidence to trust them to provide specialist financial care with knowledge of your sector and its inherent challenges
Reassurance that they understand the complexities of Charity Accounting
Non-financial matters such as governance are addressed with practical solutions
Information is presented in a straightforward and understandable manner
Value for Money services with fixed fees and experienced resources to keep fees to a minimum
You can get on with running your charity knowing that you are in safe hands!

In my opinion providing services to not-for-profit organisations takes additional expertise as the sector has specific accounting requirements as well as a different type environment in terms of targets, principles, reporting and management needs. Often the people working within this sector do so for low or no monetary reward and do not necessarily have the same skills of someone who has been involved in a corporate environment. Therefore the level of support and the approach taken to professional advice should be different.

To get the most value from your professional advisers, it is essential that they have carried out adequate and relevant professional development (CPD) and have experience in your industry.

Are you prepared for compulsory online VAT?

Toni — Thu, 04 Feb 2010 21:30:12 +0000

The new ‘VAT online service’ (VOS) was launched by H M Revenue & Customs (HMRC) in November in prepartion for the compulsory online filing of VAT returns and electronic payment of liabiliies for VAT periods commencing 1st April 2010.

These new regulations will be enforced and effect all

existing VAT registered businesses with a turnover (excluding VAT) of £100,000 or more (taken from the previous four returns submitted)
businesses that register for VAT on or after 1st April 2010, regardless of turnover.

Once your business has been required to file online once, it must continue to do so. The only exemptions are businesses involved in an insolvency procedure or those who have satisfied HMRC that the religious beliefs are incompatible with the requirement to use electronic communications!

If your business is VAT registered, you can expect to receive a letter from HMRC during February 2010 notifying you of your obligations.

There are proposals for this to be just the first step of the process and that all VAT registered businesses should manage their VAT returns and payments electronically from 1st April 2011.

The new VOS will enable users to

Register for VAT
Enrol for electronic filing
View previously submitted electronic returns
Set up email alerts to remind business owners of when returns should be submitted

Of course, if you do not want to be burdened with this, your accountant will be able to act as your agent in the same way as they can file payroll and self-assessment returns. They will ask you to an authority to act (HMRC form 64-8 is not adequate for VOS) and may re-issue their letter of engagement to clarify the terms of this service.

More information can be sought from your accountant or HMRC’s online services website

Fraud Indicators

Toni — Sun, 10 Jan 2010 22:41:31 +0000

During an economic downturn both individuals and organisations can suffer from adverse pressure, increasing the motivation for fraudulent behaviour.

Organisations are at risk from fraud both internally from employees and shareholders, and externally from suppliers, contractors and other organisations.

According to KPMG (data: July 2009) more than 160 cases of serious fraud, worth in aggregate £636million came to UK courts in the first half of 2009, the highest number of cases in the 21 year history of the KMPG Fraud Barometer.

Research from BDO Stoy Haward suggests fraud cost UK companies nearly £2.1bn last year, an increase of 76% from the previous year.

Fraud has many guises such as ineligible claimants of state benefit, money laundering and unauthorised sharing of databases.

Internal Fraud: Warning signs might include

Staff who have personal financial problems or have lifestyles not commensurate with their remuneration
Employees who work late or appear to be under stress without a heavy workload
Staff under pressure from unrealistic targets set by management or heavy emphasis on performance related pay.
Internal and/or external complaints about certain people/teams
Unwillingness to delegate and/or reluctance to take holidays
Over-friendly relationships with external stakeholders
New staff resigning quickly as they are uncomfortable with ‘unusual behaviour’ but do not wish to report it

External Fraud: Warning signs might include

Insistance on dealing with one individual
Cash only or high volume, low value transactions
Unusual/sporadic payment behaviour
Increased prices without explanation
High staff turnover and/or lack of management control

Obviously, these are only indicators and you should not accuse anyone just because their behaviours fit one of these points!

In a future post I will provide ideas on how to reduce the risk of fraud to your organisation.

are you aged 50-55?

Toni — Fri, 27 Nov 2009 22:32:02 +0000

Are you aware that the minimum retirement age is increasing to 55 from 6th April 2010?

This will mean that you will no longer be able to obtain an income or draw tax-free cash from your private pension before your 55th birthday except on the grounds of ill-health.

If you are aged 50 to 54 on 5th April 2010, you need to speak to your IFA as soon as possible to discuss your retirement plan as you will lose access to pension funds until you are 55 if you don’t act before 5th April 2010. Please give your adviser time to administer your plans, there’s little point in approaching them at the end of March.

You have three options:

Buy an annuity
Transfer to an income drawdown scheme
Do nothing and wait until your 55!

Did you know that you do not need to physically retire to start taking income from your pension plan? This means you could take your tax-free cash drawdown and reinvest it while you continue to work, giving you increased flexibility and control over your future.

Obviously taking cash from your fund will reduce its value so you need to talk to an adviser about the effect of this on the long term income you will derive from the plan.

The message here is clear, if you are 50 -54 years old and haven’t spoken to your IFA for some time, now is the time to do. Don’t procrastinate, it could cost you dearly.

If you don’t have an IFA, I can recommend through personal and client experience, the advice of Chris Langdon at RHG 01438 345734.

Please bear in mind that while accountants have a good working knowledge of retirement planning, most are not regulated or insured to give advice. Make sure you are getting good quality advice bespoke to your needs from a professionally qualified financial adviser.