Archive for April, 2013

A sales tax to level the internet, retail playing field?

Tuesday, April 30th, 2013

In the United States a piece of legislation is slowly winding through the approval process and if it becomes law would allow state governments to force Internet retailers to collect sales taxes from their customers and remit the proceeds to state and local government – the so-called Market Fairness Act. The states would be required to provide free software to be embedded in retail Web sites to work out taxes due. Could this be coming to the UK?

The impetus to introduce the legislation in the States is the realisation that many local businesses are suffering taxes that overseas internet businesses are not. As a result Americans are buying from internet businesses that can sell at lower prices and still make cash profit due to their lower tax hit.

This has parallels with the experiences of high street organisations in the UK who complain that Amazon and other large, international retailers, with tax paid in off-shore, low-tax jurisdictions, effectively have an unfair trading advantage over their UK resident competitors.

If George Osborne is looking for a way to gather more tax revenue from economic activity in the UK and please the voters at the same this must be a tempting route to follow. One would assume that retailers selling on the internet would have to apply to HMRC, for exemption from the Sales Tax, on the basis that their business was registered to pay tax on its business profits in the UK.

Loans from a company to shareholders – NEW RULES

Tuesday, April 23rd, 2013

An announcement was made in the Budget in March relating to new rules for Directors’ Loans, the legislation has now been published. This legislation will be finalised when the Finance Act becomes law (normally in July) but the new rules have effect for some transactions from 20 March 2013.

 

What is the position for loans made by a company before 20 March?

 

If a close company makes a loan to a participator (for example most shareholders in unquoted companies), the company must make a payment to HMRC if the loan is not repaid within nine months of the end of the accounting period. The amount of the corporation tax, often referred to as s455 tax, is 25% of the loan. This tax is included within the corporate tax self assessment system and the company must report loans outstanding to participators at the year end in the tax return.

 

If the loan is repaid after this date, s455 tax will be repaid but not until nine months after the end of that accounting period in which it is repaid. So the company will need to pay over the tax and wait some time for it to be repaid.

 

A loan includes advances, such as a current account that many shareholders may have with the company when the shareholder is also a director of the company. A loan to an ‘associate’ of a shareholder, such as a relative, is also included as if the loan had been made to the shareholder.

 

What has changed?

 

HMRC have been concerned that some companies have been arranging loans in a way that seeks to avoid the tax. Whilst not necessarily accepting that all such arrangements work, HMRC want to ensure that some of the arrangements are definitely caught by the tax.

 

A shareholder may organise his finances such that he repays a loan or advance made by the company to him just before the end of the nine month period so no tax charge arises on the company. Shortly afterwards the company provides another loan to the shareholder. In substance the shareholder has continual use of the money from the company but the company does not suffer the s455 tax that would otherwise arise.

 

The new law potentially catches such arrangements.

 

There are two rules introduced.

 

The first is a 30 day rule. This applies for loans of £5,000 or more. If at least £5,000 is repaid to the company and within 30 days new loans or advances of £5,000 or more are made to the shareholder (or an associate), the old loan is effectively treated as if it has not been repaid. As a consequence s455 tax may become due.

 

The second is an intention or arrangements rule. The first rule could be avoided by waiting 31 days before the company advances further funds to the shareholder. The second rule applies where:

 

  • the outstanding amount from the shareholder is £15,000 or more;
  • at the time the loan is repaid by the shareholder, that person intended to redraw any of that amount from the company or had made arrangements to make a new withdrawal; and
  • at any time after the repayment is made a new payment is made to the shareholder or an associate.

 

The repayment of s455 tax will be restricted by 25% of the lower of the amount repaid and the new payment.

 

This law applies to repayments of loans on or after 20 March 2013 and so has immediate effect.

 

What should be done by the company and shareholder so that the s455 tax does not arise?

 

For a long time, s455 tax has been an area where HMRC seek to identify companies which do not follow the rules correctly. The new law provides them with extra ammunition.

 

If loans or advances on a current account are made to a shareholder, the amounts need to be cleared within nine months of the accounting period in which these amounts arose. A long established procedure of declaring a dividend or granting of a bonus which is equal to the amount outstanding will continue to remove a s455 tax liability.

 

It is essential however that the amounts are cleared properly and, in the case of a dividend, in compliance with company law. This is where we can help you to ensure that s455 tax is not payable.

 

Please contact us if you require any further information or advice.

 

What is overtrading?

Tuesday, April 23rd, 2013

Imagine that for the next quarter your turnover doubled from £60,000 to £120,000. To achieve the extra turnover you had to purchase product that cost you £60,000.

 On the face of it this is great news for your business. In three months you will have generated £60,000 (Sales of £120k less direct costs of £60k) of additional profit for your business. In this example we are going to assume that there were no increases in your fixed costs. Unfortunately, business up to this point has not been good and at the beginning of this exceptional quarter’s trade increase your overdraft is almost at maximum – you are £20,000 overdrawn and your limit is £25,000.

In order to buy the additional product you agreed to pay thirty days after invoice date. You were not in a position extend these payment terms as you were not purchasing for stock but to meet sales orders as they were placed. However, you advised your customers that they would need to pay you within thirty days. Quite reasonably, you were reassured that cash inflow each month would more than cover cash outflow and all would be well.

At the beginning of the second month you needed to pay your suppliers £20,000 and as planned you received £40,000 from customers. Your bank manager was pleased.

At the beginning of month three of the quarter you were obliged to pay your suppliers a further £20,000 but this time half of your customers were a week late paying you and the rest advised you that they would need to pay after sixty days due to their own cash flow problems. So for that week you had to use most of your overdraft facility.

 At the beginning of month four you were unable to pay your suppliers as agreed as all your customers pushed to extend their payment terms to sixty or even ninety days. You had very little room to manoeuvre. In order to continue trading you needed to pay suppliers otherwise they would withhold deliveries for month four. Your bank was unable to increase your overdraft as you were unable to offer further security and in the time available you could not raise additional private funds to introduce into your business.

Even though on paper you had generated £60,000 of additional profits cash flow was a nightmare. Overtrading is the term used to describe this type of short-term trading crisis that is created by sudden boosts in sales volume.

In order to work your way through these issues you need to plan ahead. Not only do you want to demonstrate that you are going to make more profits, you must also work out how and where you are going to find the cash flow to support the increase in trade. Otherwise…

If you want to set up effective cash flow management for your business we can help. Don’t wait until you have exhausted your working capital. Planning is the key to surviving short term overtrading conditions.

Interested in making more profit?

Tuesday, April 23rd, 2013

 We would guess, yes you are? But how?

 The problem with stagnant markets (i.e. verging on recessionary) is the amount of ‘talking down’ that goes on: don’t know about you but sales have taken a hammering, don’t get the support we need from the bank, and so on…

 We would like to offer you a different perspective.

Profit is the difference between your sales and costs, ipso facto if you are going to increase your profits, you need to impact the £ value of either variable. In this blog post we are going to concentrate on sales.

 There are three features of your sales that you need to examine:

  • Price – the amount you charge for your goods and services
  • Number of customers, and
  • Number of times your customers buy from you in a trading cycle.

 Price is straight forward, you can either leave them as they are or, increase or decrease the amount you charge. The same is true for numbers of customers and the frequency of their buying events with your business. What is interesting is the propaganda associated with price increases and the neglected area of sales frequency: getting your customers to buy more from you.

 For example it may be possible to increase your prices, reduce the number of your customers and still make more profit. To achieve this apparently, impossible and unlikely transformation, you will need to focus on cross-selling: how can you tempt customers back to buy from you twice a week instead of once a week? (Or per month or per quarter the principle is the same.)

 Perhaps you could consider offering a new product or service? If you increase prices and expect that you will lose customers, it’s likely that the majority of the customers you will lose are the ones that take up your time with complaints and never pay their bills on time? What is certain is that selling more to the customers who are loyal to your business will impact profit growth and likely out distance the negative impact of losing custom.

 It’s always more productive to sell to existing customers, they know you after all… The trick is to find something to tempt them to increase their buying visits?

 If you would like to discuss these issues in more detail and see how they could be employed to increase your business’s profitability, please call, any time.

Preparing your accounts for income tax purposes – the cash basis

Monday, April 22nd, 2013

You may have heard that the Government has been considering whether to allow some small businesses to compute taxable profits for the purposes of income tax on a cash basis rather than the usual accruals basis. The Government has recently issued draft legislation to allow this option.

 

The cash basis can first apply for the 2013/14 tax year which means that your tax return for 2012/13, which has to be submitted by 31 January 2014, will continue to be on the same basis as in previous years. There is therefore plenty of time for us to consider what is best for you and your business.

 

The key aspects of the cash basis are that:

 

  • Small businesses would be taxed on their cash receipts less cash payments of allowable expenses.

 

  • It is only available to unincorporated businesses.

 

  • It is an optional scheme and requires an election by the owner(s) of a business.

 

  • Businesses can enter the cash basis if their receipts for the year are less than the amount of the VAT registration threshold (currently £79,000) or twice that (currently £158,000) for recipients of Universal Credit. Universal Credit is being introduced by the Government from October 2013 and is the replacement to the Tax Credits system.

 

  • Businesses will not have an option of leaving the cash basis in future tax years unless there is a ‘change of circumstances’.

 

  • Businesses must leave the cash basis the year after their receipts exceed twice the amount of the VAT registration threshold unless their receipts fall back to below the VAT registration threshold.

 

 

This sounds simple so should you elect for it if you can?

 

The cash basis sounds simple but there may be significant complications depending on the nature of your business.

 

Points to consider from a tax perspective include:

 

  • Cash receipts include all amounts received in connection with the business including those from the disposal of plant and machinery. The good news is that if a customer has not paid what is owed to you by the year end, the amount due to you is not taxable until next year.

 

  • Allowable payments include paid expenses but will still need to meet the existing tax rule of being wholly and exclusively incurred for the purposes of the trade.

 

  • Payments will include purchases of plant and machinery, when paid, rather than claiming capital allowances. The bad news is that if you have not paid a supplier by the year end, the amount is not relievable until next year.

 

In addition there are special rules in the draft legislation:

 

  • Interest payments will only be allowed up to a limit of £500.

 

  • Business losses may be carried forward to set against the profits of future years but not carried back or set off ‘sideways’ against other sources of income.

 

  • Rules on entering or leaving the cash basis are intended to ensure that income is taxed ‘once and once only’ and expenses are relieved ‘once and once only’. These rules will require special calculations to be performed.

 

Are there any non-tax considerations?

 

Yes, there may well be.

 

You may still need to have a set of accounts prepared which include a profit and loss account and balance sheet. The health of a business needs to be considered by you not just in relation to a positive bank balance but also the inherent profitability of the business. This is provided by a profit and loss account. Production of a balance sheet provides a snapshot of the assets and liabilities of the business.

 

If you need finance from the bank for your business, the bank is likely to require profit and loss accounts and balance sheets in addition to cash flow forecasts. The bank would want to see the profitability of the business and the assets tied up in your business.

 

As we have already stated the cash basis first applies for the submission of the 2013/14 tax return which we would normally send to HMRC mid to late 2014. There is therefore plenty of time for us to discuss the best option for you.

 

Please contact us if you require any further information or advice.

 

 

Government launches online toolkit to help employers when taking on their first employee

Wednesday, April 17th, 2013

An online toolkit that provides employers with help when taking on their first employee has been
launched by the Government. An update from the version that was launched a year
ago, the “Employing staff for the first time” toolkit helps potential employers
through the process of hiring their first member of staff and sets out the
relevant legal requirements. This includes information on setting pay
(including paying at least the national minimum wage), getting the right
employers’ liability insurance, issuing a written statement of employment
particulars, understanding tax requirements and registering as an employer with
HMRC, checking a new employee’s legal right to work in the UK and giving an
employee a pay statement showing deductions which have been made.

https://www.gov.uk/employing-staff

 

New National Minimum Wage Rates Announced

Tuesday, April 16th, 2013

The following National Minimum Wage Rates will come into force from 1 October 2013:

  • The      adult rate will increase by 12p from £6.19 to £6.31 per hour.
  • The      rate for 18-20 year olds will increase by 5p from £4.98 to £5.03 per hour.
  • The      rate for 16-17 year olds will increase by 4p from £3.68 to £3.72 per hour.
  • The      apprentice rate will increase by 3p from £2.65 to £2.68 per hour.
  • The      accommodation offset will increase from £4.82 to £4.91.

 

Employers to design own apprenticeship schemes

Friday, April 12th, 2013

Employers will be able to design and develop their own apprenticeship standards and qualifications, Deputy Prime Minister Nick Clegg has announced.

The decision follows last year’s review by entrepreneur Doug Richard, which found apprenticeships should be more focused on the needs of employers in order to encourage take-up, address skill shortages and boost growth.

Government plans include:

  • employers setting industry standards for apprenticeships
  • incorporating English and maths GCSE qualifications into apprenticeships
  • targeting each apprenticeship at a specific ‘skilled job’
  • creating a more outcome-focused approach towards apprenticeships.

‘Misperceptions’ about apprenticeships

A recent Chartered Institute of Personnel and Development survey found almost half of parents view apprenticeships as most appropriate for manual or ‘blue-collar’ jobs. Less than a fifth thought that apprenticeships had the same status as a university education.

We can help with employee issues, including PAYE and apprenticeship schemes.

Inquiry into high number and cost of whiplash claims

Thursday, April 11th, 2013

The House of Commons Transport Committee will look at how the number and cost of whiplash claims in the UK can be reduced. The inquiry follows a December 2012 whitepaper from the Ministry of Justice, which described Britain as the “whiplash capital of the world”.

The whitepaper reported that, between 2006 and 2012, there was a 60 per cent rise in claims for personal injury caused by road traffic accidents despite a 20 per cent fall in the number of reported accidents over the same period.

The Committee’s inquiry will also look to establish:

  • whether whiplash claims add £90 to the average premium as claimed
  • what proportion of this additional cost is due to “exaggerated, misrepresented or fabricated” claims
  • whether the Government’s proposals to tackle fraudulent claims will help reduce insurance premiums
  • the impact of the proposals on access to justice for genuinely-injured claimants.

The Association of British Insurers (ABI) has set out proposals for reducing the number and cost of whiplash claims, which include:

  • independent medical assessments of whiplash claims by accredited medical experts
  • assessments would take into account the circumstances of the collision rather than the claimant’s reported symptoms
  • a laid down prescribed level – independently-set – of damage awards for whiplash.

“Our proposals will ensure better medical assessment of whiplash claims, offer a quick, simple way of paying genuine claims; provide certainty for claimants and compensators, and deter fraud that ends up being paid for through higher motor insurance premiums,” said the ABI’s assistant director of motor and liability James Dalton.

Millions leaving work to care for family members

Wednesday, April 10th, 2013

Millions of UK adults are leaving employment or reducing working hours to care for an elderly, disabled or seriously ill family member, according to research from Carers UK and business forum Employers for Carers.

The research found:

  • 2.3 million adults have given up work to become carers
  • three million have reduced their working hours
  • 22 per cent believed their work has been negatively impacted as a result of caring
  • 27 per cent of those aged 45-55 said that caring had caused their work to suffer
  • a £5.3 billion cost to the economy in lost tax revenues and additional benefit payments.

Ian Peters, chairman of Employers for Carers, said: “… these findings highlight that much more needs to be done to make supporting colleagues who juggle work and care part of normal workplace practice, and ensure that families can access the advice, support and services they need to enable them to combine work and home life.”

Heléna Herklots, chief executive of Carers UK, said: “… support from employers can only go so far, and families need to be able to access reliable, good quality and affordable care and support services to enable them to juggle work and care. Without urgent action from Government to ensure families can access this support, millions more will see their careers and earnings suffer – with long-term personal costs to families and significant costs to business and the UK economy.”

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