Archive for June, 2014

Starting Up in Business

Monday, June 30th, 2014

It is the ambition of many people to run their own business. Some may have been made redundant and find themselves with free time and financial resources. Others make the decision to start up in business to be more independent and obtain the full financial reward for their efforts.

Whatever the reason, a number of dangers exist. Probably the greatest concern is the possibility of business failure.

Read on for guidance on some of the factors which need to be considered before trading begins.

This factsheet cannot cater for every possibility and any decisions should be supported by professional advice.

 

Initial considerations

In order to make your business a success there are a number of key factors which should be considered:

  • commitment – starting a business is demanding. Determination and enthusiasm are essential
  • skills – you will need managerial, financial, technical and marketing skills. If you do not have these skills personally, they can be found in a partner or employee, or acquired through training
  • your product or service should have a proven or tested market, but must not conflict with the patent or rights of an existing business.

In addition to these general considerations there are a number of more specific matters.

The business plan

The business plan is the key to success. If you need finance, no bank manager will lend money without a sensible plan.

Your plan should provide a thorough examination of the way in which the business will commence and develop. It should describe the business, product or service, market, mode of operation, capital requirements and projected financial results.

Business structure

There are three common types of business structure:

  • Sole trader

This is the simplest form of business since it can be established without legal formality. However, the business of a sole trader is not distinguished from the proprietor’s personal affairs.

  • Partnership

A partnership is similar in nature to a sole trader but because more people are involved it is advisable to draw up a written agreement and for all partners to be aware of the terms of the partnership. Again the business and personal affairs of the partners are not legally separate. A further possibility is to use what is known as a Limited Liability Partnership (LLP).

  • Company

The business affairs are separate from the personal affairs of the owners, but there are legal regulations to comply with.

The appropriate structure will depend on a number of factors, including consideration of taxation implications, the legal entity, ownership and liability.

Business stationery

There are minimum requirements for the contents of business stationery, both paper and electronic, which will depend on the type of business structure.

Books and records

All businesses need to keep records. They can be maintained by hand or may be computerised but should contain details of payments, receipts, credit purchases and sales, assets and liabilities. If you are considering purchasing computer software to maintain your records, obtain professional advice.

Accounts

The books and records are used to produce the accounts. If the records are well kept it will be easier to put together the accounts. Accounts must be prepared for HMRC and if a company is formed there are strict legal requirements as to their layout. The accounts and company tax return must now be submitted electronically to HMRC in a specific format (iXBRL). Presently Companies House do not require annual accounts to be submitted electronically in iXBRL format, however there is software available to cater for electronic filing if preferred.

A company and a LLP may need to have an audit and will need to make the accounts publicly available by filing them at Companies House within a strict time limit.

Taxation

When starting in business, taxation aspects must be considered.

  • Taxation on profits

The type and rate of taxation will depend on the form of business structure. However, the taxable profit will normally differ from the profit shown in the accounts due to certain expenses which are not allowed for tax purposes and the timing of some tax allowances. Payment of corporation tax must be made online.

  • National insurance (NI)

The rates of NI contributions are generally lower for a sole trader or partnership than for a director of a company but the entitlements can also differ. In a company, it may be possible to avoid NI by paying dividends rather than salary.

  • Value added tax (VAT)

Correctly accounting for VAT is an essential part of any business and neglect may result in a significant loss.

When starting a business you should consider the need to register for VAT. If the value of your taxable sales or services exceeds the registration limit you will be obliged to register.

Employing others

For the business to get off the ground or to enable expansion, it may be necessary to employ staff.

It is the employer’s responsibility to advise HMRC of the wages due to employees and to deduct income tax and national insurance and to account for student loan deductions under PAYE. The deductions must then be paid over to HMRC. Payroll records should be carefully maintained.

Under Real Time Information an employer must advise HMRC of wages and deductions ‘on or before’ the time they are paid over to the employee.

You will also need to be familiar with employment law.

Premises

There are many pitfalls to be avoided in choosing a property. Consideration should be given to the following:

  • suitability for the purpose
  • compliance with legal regulations
  • local by‑laws
  • physical restrictions such as access.

Insurance

Comprehensive insurance for business motor vehicles and employer’s liability insurance are a legal requirement. Other types of insurance such as public liability, consequential loss, business assets, Keyman and bad debts should be considered.

Pensions

Putting money into a pension scheme can be a way of saving for retirement because of the favourable tax rules.

The latest reforms, under Pensions Act 2008, have brought about a new requirement on UK employers to automatically enrol all employees in a pension scheme and to make contributions to that scheme on their behalf. Enrolment may be either in to an occupational pension scheme or the National Employment Savings Trust (NEST).

Compliance with the new regulations started from 2012 for the largest employers. The deadline for being compliant (an employer’s ‘staging date’) is determined by the number of people in their PAYE scheme and for smaller employers is between 2012 and 2017.

How we can help

Whilst some generalisation can be made about starting up a business, it is always necessary to tailor the strategy to fit your situation. Any plan must take account of your circumstances and aspirations.

Whilst business success can never be guaranteed, professional advice can help to avoid some of the problems which befall new businesses.

We would welcome the opportunity to assist you in formulating a strategy suitable for your own requirements. We can also provide key services such as bookkeeping, management accounts, VAT return and payroll preparation at an early stage.

Contact us to find out more.

Data Security – Data Protection Act

Friday, June 27th, 2014

Many businesses are totally reliant on the data stored on their PCs, laptops, networks, mobile devices and in the cloud. Some of this data is likely to contain either personal information and/or confidential company information.

Here we look at some of the key compliance issues surrounding data protection and the Data Protection Act (the Act).

Most businesses process personal data to a greater or lesser degree. If this is the case, compliance with the Act is required unless one of the exemptions applies (see below).

Complying with the Act includes a notification process, handling data according to the principles of data protection and dealing with subject access requests.

In the UK, the Information Commissioner (ICO) is responsible for the public Data Protection Register and for enforcing the Data Protection Act.

Summary of the principles of the Data Protection Act

1         Personal data must be fairly and lawfully processed;

2         Personal data must be processed for limited purposes;

3         Personal data must be adequate and not excessive;

4         Personal data must be accurate and up to date;

5         Personal data must be kept no longer than necessary;

6         Personal data must be processed in line with the data subjects’ rights;

7         Personal data must be secure;

8         Personal data must not be transferred to countries outside the European Economic Area (EEA) without adequate protection.

Exemptions

There are 5 main categories of exemption –

  • organisations that process personal data only for:
    – staff administration (including payroll)
    – advertising, marketing and public relations (in connection with their own business activity) and
    – accounts and records
  • some not-for-profit organisations
  • organisations that process personal data only for maintaining a public register
  • organisations that do not process personal information on computer and
  • individuals who process personal data only for domestic purposes.

There are a number of more specific exemptions. However, most companies find the exemptions are too narrow, and opt to notify (see below).

Notification

Notification is the method by which a company’s usage of personal data is added to the public Data Protection register maintained by the ICO. The process starts by completing the notification documentation (available from www.ico.gov.uk) and sending this back with the annual notification fee (currently £35 for the small business).

Notification needs to be performed annually (even if there are no changes).

N.B. Be wary of organisations who say they represent the ICO and who charge more than the standard £35 fee.

Subject Access Request (SAR)

Individuals have rights under the Act to find out whether you are processing their personal data, and to provide them with a copy of the data which is stored about them.

Most SARs must be responded to within 40 days.

An individual has the right to ask you to:

  • correct or delete information about them, which is inaccurate;
  • stop processing their personal data for direct marketing purposes; or
  • stop processing their data completely or in a particular way (depending upon the circumstances)

A fee can be levied for dealing with an SAR – but only up to £10 (except for health or education records).

If a fee is levied, the access request does not have to be complied with until the fee has been received.

Secondly, the Act makes it clear that the SAR must contain enough information to validate that the person making the request is the individual to whom the personal data relates. So it may be necessary and legitimate to ask for further identification from the originator of the SAR.

Data security

The Act says there should be security that is appropriate to:

  • the nature of the information in question; and
  • the harm that might result from its improper use, or from its accidental loss or destruction.

The Act does not define “appropriate” – but it does say that “an assessment of the appropriate security measures in a particular case should consider technological developments and the costs involved”.

So, there a number of key areas to concentrate on –

Management and organisational measures

Someone in the organisation should be given overall responsibility for data security.

Staff

Staff need to understand the importance of protecting personal data; that they are familiar with the organisation’s security policy; and that they put security procedures into practice.

Physical security

Technical security measures to protect computerised information are of obvious importance. However, many security incidents relate to the theft or loss of equipment, or to the disposal of old equipment and old printouts.

Computer security

As well as a comprehensive backup regime, appropriate access controls and mechanisms need to be in place. Websites, in particular, need sophisticated security measures in place.

As well as the Data Protection Act, there are various other Acts and regulations, which have a bearing on data security. These include:

  • Privacy and Electronic Communications Regulations (PECR) 2003 – which cover ‘Spam’ and mass-marketing mail shots. Regulations under the PECR are also issued from time to time. For example, regulations on the use of cookies on websites were introduced as from 2012.
  • Copyright Design and Patents Act – amended 2002 to cover software theft.

There may be other IT standards and regulations applicable to your business sector. For example, companies processing credit card transactions need to ensure compliance with the Payment Card Industry Data Security Standards (PCI DSS).

How we can help

We can provide help in the following areas:

  • performing a security/information audit
  • training staff in security principles and procedures
  • notification and/or compliance with regulations as applicable to the type of organisation.

Please do not hesitate to contact us if we can be of further assistance.

Preparing for Your Accountant

Wednesday, June 25th, 2014

Whether we are producing your accounts or carrying out your annual audit, being prepared for us will ensure our work is carried out smoothly and efficiently and with the minimum disruption to yourselves.

You may also be able to help by preparing some of the routine schedules for us. This will mean our time can be better spent advising you on the running of your business.

We highlight below many of the ways in which you can help.

It is however important for you to discuss these ideas with us since all of the suggestions may not be applicable.

 

Setting the scene

Keeping us informed

We will be better prepared ourselves if we know of any changes within your business which could affect our work. These could include changes in your:

  • product or market
  • business strategy eg pricing policy
  • bookkeeping system
  • key personnel.

What we need

If you know what information we need to be able to complete our work you can make sure it is available.

We can decide together what you can prepare for us and what we will need to prepare for ourselves.

Better communication between us will help to minimise misunderstandings and avoid unnecessary work.

Timetable

We need to agree a suitable timetable in advance. This gives us both a chance to be properly prepared.

However, if you find yourself behind schedule let us know as soon as possible so that the timetable can be rearranged if necessary.

 

How you can help

Books and records

Setting up and maintaining your books in an organised manner will help us to extract quickly and easily the information needed to prepare or audit your accounts. It will also enable you to see at a glance the state of your business.

Consideration of the following points may improve the organisation of your records:

  • totalling and balancing your books at regular intervals will help you spot and correct any mistakes
  • analysing your payments and receipts so that information can be easily extracted
  • filing your invoices in a logical order (numerical, alphabetical or date) to make it easy to find any one of them.

Procedures

By establishing and maintaining certain procedures you will be able to keep a better control over your records and your business. It will also mean we can cut down on the work we need to do which may save you some money.

We can help you set up these procedures initially and once established you will be able to carry them out yourself. These procedures will include control accounts, reconciliations and stocktaking.

Control accounts

Control accounts record the movements of cash, debtors and creditors by using the monthly totals from your cash book and sales and purchases summaries.

The cash control account will show how much cash the business has at the end of each month.

The debtors or sales ledger control account will show how much your customers owe you at the end of each month.

The creditors or purchase ledger control account will show how much you owe your suppliers at the end of each month.

Reconciliations

Reconciliations help to ensure that the figures in your books are complete and accurate. Therefore if produced on a regular basis they will help you spot any errors which can then be corrected before we examine your records. Some of the records which will need reconciling are:

  • bank accounts
  • control accounts
  • suppliers’ statements.

Stocktake

If your business carries any stock you will need to count it at least once a year. To ensure that the count is carried out efficiently and accurately you should consider the following points:

  • stock items should be stored neatly and logically to make counting easier
  • all staff involved in counting should be given clear instructions
  • try to minimise the movement of stock during the count. If possible deliveries in and out should be withheld until the counting has finished
  • spot checks should be performed during the count.

If you hold large amounts of stock we may need to attend the stocktake and perform our own checks.

Schedules

There are a number of schedules which have to be produced in order that the accounts can be prepared and/or audited. We can prepare all of these schedules ourselves but obviously if you were to produce them it would save time and money.

You may wish to consider the preparation of some of the following schedules:

  • a detailed list of additions and disposals of fixed assets with a copy of the appropriate sales and purchase invoices attached
  • schedules showing each item of stock held, the quantity, unit value and total value. Indicate any stock items which are old or damaged
  • a list of your debtors at the year end including how much they owe you and how long they have been outstanding. Indicate any which are unlikely to pay you
  • a schedule of all bank and cash balances at the year end, together with all the bank statements for each bank account
  • a list of creditors which should include HMRC as well as the usual business suppliers.

Not all of these schedules will be applicable to your business and therefore before doing anything you may wish to discuss this with us.

 

How we can help

There are undoubtedly many advantages to be gained if you are better prepared before we commence our work.

We will be able to complete our work in less time. This will mean less disruption to you and your staff. In addition we will be better placed to provide you with useful and constructive advice regarding the development of your business.

However, perhaps the most rewarding of all these advantages will be the fact that your books and records will provide you with more useful information which will help you make better informed business decisions.

If you would like to discuss these procedures any further or would like us to provide further assistance with your monthly or quarterly accounts please contact us.

Avoid and report internet scams and phishing

Tuesday, June 24th, 2014

Internet fraudsters are using ever more intricate messages to trick you to part with private information. For example: your bank details and passwords. They may also hide viruses in email attachments that will give them access to your personal computer files. The viruses will usually be activated if you open the attached files.

The best way to combat this activity is to adopt a rigorous system for opening emails. We suggest:

  1. Never open attachments on an email from an unrecognised source.
  2. Government departments should never ask for personal information in an email. Follow their guidance, see below.
  3. It is never wise to send personal information by email. If you get a request from your bank or other, ostensibly genuine source call them to confirm the approach is authentic.
  4. If an email is obviously from an unknown or unreliable source add the sender address to your “Junk mail” filter in Outlook or similar software.
  5. Scan your PC on a regular basis to make sure that any suspicious files are quarantined.

A summary of advice from GOV.UK follows:

Misleading websites

Some websites can look like they’re part of an official government service or that they provide more help than they actually do. This might mean you pay for services that you could get cheaper or for free if you used the official government service.

Search on GOV.UK to find official government services – e.g. if you want to apply for a driving licence or a European Health Insurance Card (EHIC). Use the GOV.UK contact form to report misleading websites. You must include:

  • the website address or URL
  • how you found the website
  • why you thought it was an official government website

HMRC phishing emails and tax scams

HM Revenue and Customs (HMRC) will never use texts or emails to:

  • tell you about a tax rebate or penalty
  • ask for personal or payment information

Forward any suspicious emails to phishing@hmrc.gsi.gov.uk or call one of the help lines.

Report a disclosure of personal details to HMRC

Contact HMRC at security.custcon@hmrc.gsi.gov.uk if you think you’ve given any personal information in response to a suspicious email or text. Include brief details of what you disclosed (e.g. name, address, HMRC User ID, password) but don’t give your personal details in the email.

Visas and immigration

You’ll never be asked to pay for a visa using:

  • cash
  • money transfer

Use the GOV.UK contact form to report visa and immigration scams. You should include:

  • a copy of the suspicious email you received, the sender’s email address and the date and time it was received
  • details of what you sent in a reply, if you replied – e.g. whether you sent your bank details, address or password

Contact Action Fraud

You can also report suspicious emails, letters or telephone calls to the police through Action Fraud.

Sources of Finance

Monday, June 23rd, 2014

The financing of your business is the most fundamental aspect of its management. Get the financing right and you will have a healthy business, positive cash flows and ultimately a profitable enterprise. The financing can happen at any stage of a business’s development. On commencement of your enterprise you will need finance to start up and, later on, finance to expand.

Finance can be obtained from many different sources. Some are more obvious and well-known than others. The following are just some of the means of finance that are open to you and with which we can help.

 

Bank loans and overdrafts

The first port of call that most people think about when trying to obtain finance is their own bank. Banks are very active in this market and seek out businesses to whom they can lend money. Of the two methods of giving you finance, the banks, especially in small and start-up situations, invariably prefer to give you an overdraft or extend your limit rather than make a formal loan. Overdrafts are a very flexible form of finance which, with a healthy income in your business, can be paid off more quickly than a formal loan. If, during the period you are financing the overdraft, an investment opportunity arises, then you could look to extend the options on your overdraft facility to finance the project.

Many businesses appreciate the advantages of a fixed term loan. They have the comforting knowledge that the regular payments to be made on the loan make cash flow forecasting and budgeting more certain. They also feel that, with a term loan, the bank is more committed to their business for the whole term of the loan. An overdraft can be called in but, unless you are failing to make payments on your loan, the banks cannot take the finance away from you.

Many smaller loans will not require any security but, if more substantial amounts of money are required, then the bank will certainly ask for some form of security. It is common for business owners to offer their own homes as security although more risk-averse borrowers may prefer not to do this. Anyone offering their house as security should consult with any co-owners so that they are fully aware of the situation and of any possible consequences. Another source of security may be the Enterprise Finance Guarantee Scheme. Start-up business unable to provide any other form of security may be able to get a guarantee for loans up to £1,000,000. Under the scheme, you pay a 2% premium on the outstanding balance of the loan, and in return, the government guarantees to repay the bank (or other lender) up to 75% of the loan if you default.

 

Savings and friends

When commencing a new business, very often the initial monies invested will come from the individual’s personal savings. The tendency of business start-ups to approach relatives and friends to help finance the venture is also a widespread practice. You should make it clear to them that they should only invest amounts they can afford to lose. Show them your business plan and give them time to think it over. If they decide to invest in your business, always put the terms of any agreement in writing.

 

Issue of shares

Another way of introducing funds to your corporate business is to issue more shares. This is always a welcome addition to business funds and is also helpful in giving additional strength to the company’s balance sheet. However, you need to consider where the finance is coming from to subscribe for the new shares. If the original proprietor of the business wishes to subscribe for these shares, then he or she may have to borrow money in a similar way to that discussed above. Typically, however, shareholders in this position are often at the limit of funds that they can borrow. Therefore, it may be necessary to have a third party buy those shares. This may mean a loss of either control or influence on how the business is run. An issue of shares in this situation can be a very difficult decision to make.

 

Venture capital

Approaching venture capital houses for finance will also mean an issue of new shares. The advantage of going to such institutions is the amount of capital they can introduce into the business. The British Private Equity and Venture Capital Association offers useful free publications (www.bvca.co.uk). Because of the size of their investment, you can expect them to want a seat on your Board. They will also make available their business expertise which will help to strengthen your business, although inevitably this will come with an additional pressure for growth and profits.

On a smaller scale, the government has introduced various tax-efficient schemes for entrepreneurs to invest in growing businesses. The current schemes available are called the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCT). We have separate factsheets providing detail in these areas.

The new SEIS scheme is designed to help small, early-stage companies to raise equity finance by offering a range of tax reliefs to individual investors who purchase new shares in those companies. It complements the existing EIS which will continue to offer tax reliefs to investors in higher-risk small companies. SEIS is intended to recognise the particular difficulties which very early stage companies face in attracting investment, by offering tax relief at a higher rate than that offered by the existing EIS.

 

Retained earnings and drawings

Since ultimately the well-being of a business is connected with the cash flow of that enterprise, if a proprietor would like more liquidity, then it is sometimes necessary to re-examine the amount of money they are withdrawing from the business for their personal needs. In this way, additional funds earned by the business can be retained for future use.

 

Other finance

Other possible sources of finance are outlined below.

 

Factoring

Factoring provides you with finance against invoices that your customers have not yet paid. Typically you can receive up to 85% of the value of the invoice immediately and the balance (less costs) when the customer pays.

 

Hire Purchase (HP)

This is used to finance the purchase of equipment. Your business buys the equipment but payments of capital and interest are spread over an agreed period.

 

Leasing

This is a method of financing equipment you do not need to own. It is often used for vehicle finance. The equipment is rented rather than owned and the rental payments spread over several years. There can also be the option to fix maintenance costs as part of the agreement (contract hire).

 

Matching

It makes sense to match the finance you are seeking to the purpose for which it will be used.

Working capital                            à        overdraft or factoring

Equipment and vehicles               à        fixed-term loan, HP or leasing

Property                                      à        long-term mortgage

Development / start up                à        investment finance.

 

How we can help

We have the expertise and the contacts to help you at all stages of your business development and to help you finance the business along the way. If you have any questions or proposals, please contact us as we would be happy to discuss them with you.

Business rates exemptions

Friday, June 20th, 2014

Certain property, whether occupied or out of use for a period, may be eligible for exemption from payment of business rates. The GOV.UK website lists the following as potentially eligible:

Exempted buildings – certain properties are exempt from business rates. Exemptions include:

  • agricultural land and buildings, including fish farms

  • buildings used for training or welfare of disabled people

  • buildings registered for public religious worship or church halls

Empty properties – you don’t have to pay business rates on empty buildings for 3 months. After this time, most businesses must pay full business rates. Some properties can get extended empty property relief:

  • industrial premises (e.g. warehouses) are exempt for a further 3 months

  • listed buildings – until they are reoccupied

  • buildings with a rateable value under £2,600 – until they are reoccupied

  • properties owned by charities – only if the property’s next use will be mostly for charitable purposes

  • community amateur sports clubs buildings – only if the next use will be mostly as a sports club

If you are concerned that you may be missing on these exemptions contact your local council to find out more.

Non-Domiciled Individuals

Wednesday, June 18th, 2014

This factsheet sets out the rules which deal with the taxation in the UK of income arising outside the UK, for non UK domiciled individuals. The rules changed significantly from April 2008.

 

What was the position?

Until 5 April 2008 an individual who was resident in the UK but was either not domiciled (referred to as ‘non-dom’) here or was not ordinarily resident here enjoyed what is termed the ‘remittance basis’ in respect of income and capital gains arising outside the UK. What this meant in practice was that instead of being taxed on the actual income/gain arising in the year they were taxed on the amount of that income/gain actually brought into the UK in the tax year.

Example

Jan, who is domiciled in Poland but who has been living in the UK for a number of years, has rental income arising from the letting of property in Poland. In 2007/08 the income amounted to £5,000 but Jan only brought £1,000 of that into the UK leaving the remainder in Poland. He was taxed in 2007/08 only on the £1,000 remitted.

The advantages of non-domiciled status were further enhanced by the very narrow definition of what constituted a remittance – essentially limited to the transmission of cash or cash equivalents. If, the overseas income/gains were converted into other assets, and those assets were then brought into the UK, they did not constitute a remittance. Other planning routes could be exploited to ensure that the UK tax liability of the non-dom was kept to a minimum.

 

So what has changed?

In essence two major changes have taken place with effect from 6 April 2008. Firstly, the remittance basis is no longer given automatically to those who are non-doms or not ordinarily resident and secondly, the rules which determine what constitutes a remittance have been considerably tightened. These changes mean that every non-dom must now give very careful consideration to their UK tax position and take extreme care in planning their overseas income and capital gains.

 

Claiming the remittance basis – all taxpayers

The starting point of liability for all non-doms is that overseas income/gains are taxable on the arising basis just as they are for any UK domiciled individual. The non-dom will have the option of making a claim for the remittance basis to apply, but if they make this claim, they will automatically forfeit their personal allowance for income tax purposes and their annual exemption for CGT. This will obviously impact on their total tax liability including any UK income/ gains.

The main situation where a non-dom will be able to benefit from the remittance basis without making a claim and will therefore retain their allowances is when they remit to the UK all but a maximum of £2,000 of their income and gains arising abroad in the year.

Example

Let’s take Jan again as our example and pose two different scenarios for 2013/14 assuming his overseas income is still £5,000.

Scenario 1: He remits £1,000 to the UK – he can pay tax on the full £5,000 as it arises and he will retain his personal allowance against that and any UK source income. If he claims the remittance basis he will pay tax on £1,000 but will lose his personal allowance against that and any UK source income.

Scenario 2: He remits £3,000 to the UK. He can have the benefit of the remittance basis and pay tax on only £3,000 because he has left no more than £2,000 unremitted. He will retain his personal allowance.

Claiming the remittance basis – long term residents

What is a long term resident?

Matters become more complex and serious when an individual falls within the definition of a long term UK resident. This will arise when the individual has been resident in the UK in seven out of the nine UK tax years preceding the one for which liability is being considered. For these purposes a part year of residence counts as a full year. In considering the position for 2013/14 it is necessary to look at the individual’s UK residence position going back as far as 2004/05 (ie to 6 April 2004). If they have been UK resident for at least seven of those years then they will be classed as a long term resident for the purpose of the remittance basis.

Example

Jan first came to the UK in July 2006. He will be classed as resident here from 2006/07 which will mean that he meets the seven year rule and will therefore be treated as a long term resident in 2013/14. If his residence had not commenced until July 2007 he would only have six years of residence and would not become a long term resident until 2014/15.

What are the implications of being a long term resident?

Essentially the long term resident (who must be 18 years of age or over at some time in the tax year concerned) can only claim the benefit of the remittance basis if they pay an additional £30,000 in addition to the tax on any income or gains remitted. This sum is known as the ‘remittance basis charge’ (RBC).

The rules surrounding this charge are complex but the ‘bare bones’ are as follows:

  • the charge effectively represents tax on unremitted income or gains
  • the non-dom nominates specific income/gains to represent this charge
  • the sums nominated cannot then be charged to UK tax even if they are subsequently remitted to the UK in a later year
  • the nominated income/gains are deemed to be remitted only after all other unremitted income/gains have come into the UK
  • tax on the sums nominated may be eligible for relief under a double tax agreement (DTA).

The RBC is not avoided where there is a failure to nominate specific income/gains and such failure may result in duplicate or higher taxation in future years.

Example

Let us assume that Jan is a long term resident. He can only secure the remittance basis for 2013/14 if he pays the RBC. Clearly it would be nonsensical for him to pay that charge to avoid tax on say £4,000 of income which was unremitted. He will therefore not elect for the remittance basis and will pay UK tax on the full £5,000 of income arising in Poland. If that income has been subject to tax in Poland he may be entitled to set any Polish tax against his UK liability.

Example

Sergio is a very wealthy Spaniard who has been living in the UK for seven years. He is a higher rate UK tax payer. In 2013/14 he has income of £150,000 arising in Spain and also makes a capital gain of £200,000 on the sale of a Spanish property. He remits none of this to the UK in 2013/14.

He claims the remittance basis and obviously has no liability on remitted income because there is none. He will have to pay the RBC of £30,000 and must nominate income or gains to represent this sum. He could nominate just over £107,000 of the capital gain which, taxed at 28%, would represent a liability of £30,000.

That would satisfy the RBC and would mean that £107,000 of the gains would not be taxed if it is subsequently remitted. It would also mean, subject to the terms of the UK / Spanish DTA, that he may be eligible for relief in respect of any Spanish tax on this sum.

 

Higher RBC charges for some

New rules were introduced in 2012 which increase the amount of the RBC in certain situations. From 2012/13 where an individual has been resident in the UK for 12 out of the previous 14 years, the RBC increases to £50,000. Some individuals may decide that the increased RBC is too high a price to pay for the favourable remittance basis.

Example

If Sergio (from the previous example) has been living in the UK for say 15 years then given the same circumstances he may decide that £50,000 is too high a price to pay.

If he did decide to claim the remittance basis there is still no liability on remitted income because there is none. He would have to pay the increased RBC of £50,000 and must nominate income or gains to represent this sum. He could nominate just over £178,500 of the capital gain which, taxed at 28%, would represent a liability of £50,000.

That would satisfy the RBC and would mean that £178,500 of the gains would not be taxed if it is subsequently remitted. It would also mean, subject to the terms of the UK / Spanish DTA, that he may be eligible for relief in respect of any Spanish tax on this sum.

 

What is a remittance?

The rules to determine a remittance have been widened and HMRC take the view that whatever method an individual may use to bring income or gains into the UK will be caught. Again these new rules are very detailed and it is only possible here to give a brief outline.

Relevant person

Essentially a remittance can be caught if it is for the benefit of any person who, in relation to the taxpayer (ie the non-dom with overseas income/gains), is within the definition of a relevant person. That list includes:

  • the taxpayer
  • their spouse or civil partner
  • a partner with whom they are living as a spouse or civil partner
  • any child or grandchild under 18 years of age
  • a close company in which any relevant person is a shareholder
  • a trust in which any relevant person is a beneficiary.

Basic concept of a remittance

Two conditions must be in place for a remittance to arise. Firstly property, money, or consideration for a service, must be brought into the UK for the benefit of a relevant person and secondly, the funds for that property etc must be derived directly or indirectly from the overseas income and gains. These rules are much wider than the old rules. Some examples will help to explain the scope.

Example

Alex, a wealthy Canadian lives in the UK with his wife and young children. He has a significant bank deposit in Jersey which generates a large amount of income each year. Any of the following uses of that income would constitute a remittance for UK tax purposes:

  • he buys an expensive car in Germany and brings it into the UK
  • he opens a bank account in the UK for each of his children with funds from Jersey
  • he sends his wife on an expensive weekend at a spa and the bill for the break is sent direct to Jersey for settlement
  • he uses a credit card in the UK which is settled on a monthly basis out of the Jersey income.

There are some exceptions for example clothes, watches and jewellery for personal use and other goods up to a value of £1,000.

A more indirect route is also caught

In the past it had been possible to use a route known as ‘alienation’ to avoid the remittance basis. This would involve an individual giving someone else their overseas income and then that individual bringing the money into the UK. In the recipient’s hands it would have represented capital and the remittance would have been avoided. Now such a route is not possible. Any attempt at ‘alienation’ which involves the funds ultimately being brought into the UK for the benefit of a relevant person will be caught as a remittance by the taxpayer. This rule is likely to cause some difficult situations.

Example

Alex gifts some of the Jersey income to an adult son. He uses the money to pay for a UK school trip for his own son. The grandson is a relevant person as far as Alex is concerned and this payment will constitute a remittance on which Alex is taxable in the UK.

Other issues

There are a number of other issues covered by the rules such as:

  • transitional arrangements to deal with property acquired before 6 April 2008
  • transitional arrangements to deal with payment of interest on overseas loans used to fund the purchase of a UK property
  • the identification of remittances from mixed funds
  • dealing with gains arising in offshore trusts.

A new relief

New rules were introduced in 2012 which provide some relief from the remittance basis where a non-dom remits funds to the UK which are then invested in a qualifying business in the UK. In this situation those funds are not treated as a remittance so the remittance basis may be more attractive. It should be noted, however, that a claim for the remittance basis still involves paying the appropriate RBC which may be due.

The rules for this relief are detailed but the key elements are:

  • the investment must be in shares or loans to a trading company or a company which will invest in trading companies
  • the company must be unquoted
  • the non-dom (or any relevant person in relation to the non-dom) must not receive any benefit from the company
  • when the investment is subsequently realised the non-dom will have 45 days to either reinvest in another qualifying company or remove the funds from the UK otherwise they will be treated as a remittance in that later year.

As can be seen from this brief review, the rules are wide ranging and complex. The non-dom now needs to take great care in how they organise their overseas assets and in particular cash funds. Ideally pure capital funds should be kept clear of any income so that they can still be used as a means of tax free remittance.

 

How we can help

Each individual’s situation is going to have different problems. Please contact us if you would like to discuss how the rules impact on you and the steps you can take to mitigate their impact.

Do you need to fill in a tax return?

Tuesday, June 17th, 2014

HMRC have determined that you must complete a self assessment tax return if any of the following circumstances apply to your personal, financial circumstances:

 

     1.    You're a company director, minister, Lloyd's name or member.

  1. Your annual income is £100,000 or more.
  1. You have income from savings, investment or property. 

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 
  1. You need to claim expenses or reliefs.
  1. If you or your partner or spouse receives Child Benefit and either of you has income over £50,000.
  1. You get income from overseas.
  1. You have income from trusts, settlements or estates.
  1. You have Capital Gains Tax to pay.
  1. You’ve lived or worked abroad or aren’t domiciled in the UK.
  1. You’re a trustee.

 Quite a list…

 One benefit of submitting a return is an automatic reconciliation of your overall tax position for the tax years affected.

For those tax payers that are not required to submit a tax return, and who have a number of income streams – all taxed at source – HMRC should send you a tax calculation at least once a year, showing your various income sources, tax paid and any balance of tax owing or due back to you.

Whichever situation applies to your circumstances take care to check HMRC’s calculations, either yourself or by seeking professional advice, HMRC do not always get it right.

 

National Insurance

Monday, June 16th, 2014

National insurance contributions (NICs) are essentially a tax on earned income. The NICs regime divides income into different classes: Class 1 contributions are payable on earnings from employment, while the profits of the self-employed are liable to Class 2 and 4 contributions.

National insurance is often overlooked yet it is the largest source of government revenue after income tax.

We highlight below the areas you need to consider and identify some of the potential problems. Please contact us for further specific advice.

 

Scope of NICs

Employees

Employees are liable to pay Class 1 NIC on their earnings. In addition a further secondary contribution is due from the employer.

For 2013/14 employee contributions are only due when earnings exceed a ‘primary threshold’ of £149 per week. The amount payable is 12% of the earnings above £149 up to earnings of £797 a week. In addition there is a further 2% charge on weekly earnings above £797.

Secondary contributions are due from the employer of 13.8% of earnings above the ‘secondary threshold’ of £148 per week for 2013/14. There is no upper limit on the employer’s payments.

Benefits in kind

Employers providing benefits such as company cars for employees have a further NIC liability under Class 1A. Contributions are payable on the amount charged to income tax as a taxable benefit.

Most benefits are subject to employer’s NI. The current rate of Class 1A is the same as the employer’s secondary contribution rate of 13.8% for benefits provided for 2013/14.

The self-employed

NICs are due from the self-employed as follows:

  • flat rate contribution (Class 2)
  • variable amount based on the taxable profits of the business (Class 4).

Class 2 contributions are currently paid by direct debit at a rate of £2.70 per week from April 2013. Class 4 contributions are collected with the income tax liability payable on the profits of the business.

For 2013/14 Class 4 is payable at 9% on profits between £7,755 and £41,450. In addition there is a further 2% on profits above £41,450.

Voluntary contributions

Flat rate voluntary contributions are payable under Class 3 of £13.55 per week 2013/14. They give an entitlement to basic retirement pension and may be paid by someone not liable for other contributions in order to maintain a full NICs record.

Forthcoming changes

National Insurance – £2,000 employment allowance

The Government will introduce an allowance of up to £2,000 per year for many employers to be offset against their employer Class 1 NIC liability from April 2014. The legislation is contained in the National Insurance Contributions Bill 2013.

There will be some exceptions for employer Class 1 liabilities including liabilities arising from:

  • a person who is employed (wholly or partly) for purposes connected with the employer’s personal, family or household affairs
  • employer contributions deemed to arise under IR35 for personal service companies.

There are also rules to limit the employment allowance to a total of £2,000 where there are ‘connected’ employers. For example, two companies are connected with each other if one company controls the other company.

The allowance is limited to the employer Class 1 NIC liability if that is less than £2,000.

It is expected that the allowance will be claimed as part of the normal payroll process. Employer’s payment of PAYE and NIC will be reduced each month to the extent it includes an employer Class 1 NIC liability until the £2,000 limit has been reached.

Employer NIC for the under 21s

From April 2015 the Government will abolish employer NIC for those under the age of 21. This exemption will not apply to those earning more than the Upper Earnings Limit, which is expected to be £42,285 per annum for 2015/16. Employer NIC will be liable as normal beyond this limit.

Class 3A Voluntary National Insurance

From October 2015 a new class of voluntary NIC (Class 3A) will be introduced that gives those who reach State Pension age before 6 April 2016 an opportunity to boost their Additional State Pension.

The Government expects that Class 3A will give pensioners an option to top up their pension in a way that will protect them from inflation and offer protection to surviving spouses. In particular, it could help women, and those who have been self-employed, who tend to have low Additional Pension entitlement.

 

Potential problems

Time of payment of contributions

Class 1 contributions are payable at the same time as PAYE ie monthly. Class 1A contributions are not due until 19 July after the tax year in which the benefits were provided.

It is therefore important to distinguish between earnings and benefits.

Earnings

Class 1 earnings will not always be the same as those for income tax. Earnings for NI purposes include:

  • salaries and wages
  • bonuses, commissions and fees
  • holiday pay
  • certain termination payments.

Problems may be encountered in relation to the treatment of:

  • expense payments
  • benefits.

Expense payments will generally be outside the scope of NI where they are specific payments in relation to identifiable business expenses. Round sum allowances give rise to a NI liability.

In general benefits are not liable to Class 1 NICs. There are however some important exceptions including:

  • most vouchers
  • stocks and shares
  • other assets which can be readily converted into cash
  • the payment of an employee’s liability by an employer.

Directors

Directors are employees and must pay Class 1 NICs. However directorships can give rise to specific NIC problems. For example:

  • directors may have more than one directorship
  • fees and bonuses are subject to NICs when they are voted or paid whichever is the earlier
  • directors’ loan accounts where overdrawn can give rise to a NIC liability.

We can advise on the position in any specific circumstances.

Employed or self-employed

The NICs liability for an employee is higher than for a self-employed individual with profits of an equivalent amount. Hence there is an incentive to claim to be self-employed rather than employed.

Are you employed or self-employed? How can you tell? In practice it can be a complex area and there may be some situations where the answer is not clear.

In general terms the existence of the following factors would tend to suggest employment rather than self-employment:

  • the ‘employer’ is obliged to offer work and the ‘employee’ is obliged to accept it
  • a ‘master/servant’ relationship exists
  • the job performed is an integral part of the business
  • there is no financial risk for the ‘employee’.

It is important to seek professional advice at an early stage and in any case prior to obtaining a written ruling from HMRC.

If HMRC discover that someone has been wrongly treated as self-employed, they will re-categorise them as employed and are likely to seek to recover arrears of contributions from the employer.

Enforcement

HMRC carry out compliance visits an attempt to identify and collect arrears of NICs. They may ask to see the records supporting any payments made.

HMRC have the power to collect any additional NICs that may be due for both current and prior years. Any arrears may be subject to interest and penalties.

Please contact us for advice on NICs compliance and ways to minimise the effect of a HMRC visit.

How we can help

Whether you are an employer or employee, employed or self-employed, awareness of NICs matters is vital.

HMRC have wide enforcement powers and anti-avoidance legislation available to them. Consequently it is important to ensure that professional advice is sought so that all compliance matters are properly dealt with.

We would be delighted to advise on any compliance matters relevant to your own circumstances so please contact us.

VAT Flat Rate Scheme

Friday, June 13th, 2014

The flat rate scheme for small businesses was introduced to reduce the administrative burden imposed when operating VAT.

Under the scheme a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase you make.

 

Who can join?

The scheme is optional and open to businesses that do not breach the relevant limits which have recently changed due to the increase in the standard rate of VAT. From 4 January 2011, a business must leave the scheme when income in the last twelve months exceeds £230,000, unless this is due to a one off transaction and income will fall below £191,500 in the following year. A business must also leave the scheme if there are reasonable grounds to believe that total income is likely to exceed £230,000 in the next 30 days.

The turnover test applies to your anticipated turnover in the following 12 months. Your turnover may be calculated in any reasonable way but would usually be based on the previous 12 months if you have been registered for VAT for at least a year.

To join the scheme you can apply by post, email or phone and if you are not already registered for VAT you must submit a form VAT1 at the same time.

You may not operate the scheme until you have received notification that your application has been accepted and HMRC will inform you of the date of commencement.

 

When is the scheme not available?

The flat rate scheme cannot be used if you:

  • use the second hand margin scheme or auctioneers’ scheme
  • use the tour operators’ margin scheme
  • are required to operate the capital goods scheme for certain items.

In addition the scheme cannot be used if, within the previous 12 months, you have:

  • ceased to operate the flat rate scheme
  • been convicted of an offence connected with VAT
  • been assessed with a penalty for conduct involving dishonesty.

The scheme will clearly be inappropriate if you regularly receive VAT repayments.

 

How the scheme operates

VAT due is calculated by applying a predetermined flat rate percentage to the business turnover of the VAT period. This will include any exempt supplies and it will therefore not generally be beneficial to join the scheme where there are significant exempt supplies.

The percentage rates are determined according to the trade sector of your business and range from 4% to 14.5%. The table in the appendix to this factsheet summarises the percentages. In addition there is a further 1% reduction off the normal rates for businesses in their first year of VAT registration. The percentages used in the scheme changed from 4 January 2011 to reflect the increase to 20% in the standard rate of VAT.

If your business falls into more than one sector it is the main business activity as measured by turnover which counts. This can be advantageous if you have a large percentage rate secondary activity and a modest major percentage trade. You should review the position on each anniversary and if the main business activity changes or you expect it to change during the following year you should use the appropriate rate for that sector.

Although you pay VAT at the flat rate percentage under the scheme you will still be required to prepare invoices to VAT registered customers showing the normal rate of VAT. This is so that they can reclaim input VAT at the appropriate rate.

 

Example of the calculation

Cook & Co is a partnership operating a café and renting out a flat. If its results for 2012 are as follows:

 

VAT inclusive turnover:                                                                                                        £

Standard rated catering supplies                                                                                     70,000

Zero rated takeaway foods                                                                                                5,500

Exempt flat rentals                                                                                                            3,500

                                                                                                                                   _______________

                                                                                                                                      £79,000

                                                                                                                                   _______________

Flat rate 12.5% x £79,000 = £9,875

Normally £70,000 x 20/120 = £11,667 less input tax

Treatment of capital assets

The purchase of capital assets costing more than £2,000 (including VAT) may be dealt with outside the scheme. You can claim input VAT on such items on your VAT return in the normal way. Where the input VAT is reclaimed you must account for VAT on a subsequent sale of the asset at the normal rate instead of the flat rate.

Items under the capital goods scheme are excluded from the flat rate scheme.

 

Transactions within the European Community

Income from sales of goods is included in your turnover figure.

Where there are acquisitions from EC member states you will still be required to record the VAT on your VAT return in the normal way even though you will not be able to reclaim the input VAT unless it is a capital item as outlined above.

The rules on services are complex.  Please get in touch if this is an issue so that we can give you specific advice.

 

Records to keep

Under the scheme you must keep a record of your flat rate calculation showing:

  • your flat rate turnover
  • the flat rate percentage you have used
  • the tax calculated as due.

You must still keep a VAT account although if the only VAT to be accounted for is that calculated under the scheme there will only be one entry for each period.

 

Summary

The scheme is designed to reduce administration although it will only be attractive if it does not result in additional VAT liabilities. The only way to establish whether your business will benefit is to carry out a calculation and comparison of the normal rules and the flat rate rules.

 

How we can help

We can advise as to whether the flat rate scheme would be beneficial for your business and help you to operate the scheme. Please do not hesitate to contact us.