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Small Business Accounting

When do I need to pay my Corporation Tax?

Annual Accounts and Corporation Tax

After the end of its financial year, your private limited company must prepare:

You need your accounts and tax return to meet deadlines for filing with Companies House and HM Revenue and Customs.

Action                                                                         Deadline

File first accounts with Companies House               21 months after the date you registered with Companies House

File annual accounts with Companies House           9 months after your company’s financial year ends

Pay Corporation Tax                                                      9 months and 1 day after your ‘accounting period for Corporation Tax ends

File a Company Tax Return                                         12 months after your accounting period for Corporation Tax ends

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IR35

The IR35 legislation is aimed at what HMRC calls “disguised employees”. These are individuals who attempt to use an intermediary, usually their own limited company (a “personal service company”) to avoid paying tax.  Before the IR35 legislation closed the loophole in the law, people could set up a limited company and then hire out their services in that company’s name to do the same job as an employee.  Working through a company significantly reduced their tax bills, as well as the employer’s national insurance bill of the “client” who would otherwise have been their employer.

The IR35 legislation aims to prevent this form of tax avoidance by differentiating between individuals who operate as genuine contractors, and those who work as independent entities but with the working conditions of employees.  HMRC can launch IR35 enquiries and inspect contracts and arrangements, and if they decide that a self-employed contractor is “inside IR35” i.e. a “disguised employee”, they can require payment of backdated tax, national insurance, interest and possibly a penalty.  It’s therefore essential that self-employed contractors operating through limited companies are aware of this and check their contracts carefully to ensure compliance with the IR35 rules, or seek help to do this.

If you are concerned about IR35, you can talk to us.

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Construction Industry Scheme

CIS (Construction Industry Scheme)

You must tell HM Revenue and Customs each month about payments you’ve made to subcontractors through your monthly return.

You need to send your monthly returns or submit them online to HM Revenue and Customs by the 19th of every month following the last tax month.

You must pay HM Revenue and Customs every month by the 22nd (or the 19th if you’re paying by post). You may be charged interest and penalties if you pay late.

Pay CIS deductions to HMRC in the same way as PAYE and National Insurance payments.

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Your Dividend Questions answered

Types of shares

When a company is incorporated at Companies House, it must have at least one share.  Most commonly shares are in £1 increments although this is not compulsory.  One penny, 25p, 50p and £5 per share are not unusual.  Ordinary A shares come with full voting rights.  Not all shares carry voting rights.  Typically, A shares do and the others don’t.  ‘Alphabet shares’ can be issued and it is most usual to have A shares for the directors and B shares for example, to the spouses, partners, children or employees.  Corporate entities can also be shareholders.  It is acceptable for one individual to hold more than one class of share in a company.

 

Who can be a shareholder?

If you are over the age of 16, you can be a shareholder.  You do not need to be a director to be a shareholder, nor do you need to be a shareholder if you are a director.

 

Who is entitled to receive dividends?

If you are a shareholder of a limited company and the company declares a valid dividend, you are entitled to receive a dividend should a dividend be issued to your class of share.  Just because you are a shareholder, it does not guarantee you will receive a dividend. 

 

How often can dividends be issued?

A company can only pay a dividend if it has distributable reserves.  This means it has made a profit after tax has been deducted.  Dividends can be taken at any time but it is advised to take no more frequently than quarterly.  Quarterly, half yearly or annually are all acceptable.  Doing so more frequently may be construed as salary by HMRC and be liable to personal income tax and national insurance at the prevailing rates.  Issuing a dividend monthly for £1200 and a salary of £987 is not realistic.  Profits rise and fall from month to month.  In the example below a company makes modest profits and every quarter calculates how much can be extracted in dividends.  You will see that the profits rise and fall over the course of the year and in this example, a total of £3807 can be taken in dividends over the course of the year.

 

 

Jun-

17

Jul-

17

Aug-17

Sep-17

Oct-

17

Nov-17

Dec-17

Jan-

18

Feb-18

Mar-18

Apr-

18

May-18

Annual figs

SALES

£3,000

£3,250

£1,200

£1,750

£2,400

£2,500

£1,200

£1,750

£4,000

£2,700

£2,550

£2,700

£29,000

COST OF SALES

£50

£50

£50

£50

£50

£50

£50

£50

£50

£50

£50

£50

£600

GROSS PROFIT

£2,950

£3,200

£1,150

£1,700

£2,350

£2,450

£1,150

£1,700

£3,950

£2,650

£2,500

£2,650

£28,400

EXPENSES

£2,000

£2,500

£1,200

£2,000

£2,000

£2,000

£2,000

£2,000

£2,000

£2,000

£2,000

£2,000

£23,700

NET PROFIT

£950

£700

£50

£300

£350

£450

£850

£300

£1,950

£650

£500

£650

£4,700

CT @ 19%

£181

£133

£10

£57

£67

£86

£162

£57

£371

£124

£95

£124

£893

PROFIT AFTER TAX

£770

£567

£41

£243

£284

£365

£689

£243

£1,580

£527

£405

£527

£3,807

AMOUNT AVAILABLE AS DIVIDEND

   

£1,296

   

£405

   

£648

   

£1,458

£3,807

 

Put simply, dividends are profit (sales minus expenses) after tax provision (19%) calculated on a quarterly basis.  It is not necessary to issue a dividend if you don’t want to but if you do, the guidance in this notice should be used.

What is the process for declaring a dividend?

The bookkeeper/business owner prepares the management accounts which shows CT provision and calculates the dividends available for distribution.  A meeting is held and it is agreed what dividends will be issued.  Take the example above.  In Q1 a profit of £1296 was available.  Let us say there are 3 classes of share.

John holds 1 A share and 1 C share

Janet holds 1 B share

Susan holds 1 D share

 

At the meeting, it is agreed to issue 100% of the profits equally between the 4 classes of share

 

25% of £1296 is £324 per share category.

 

In this example, John gets £648 and Janet and Susan each get £324.  Minutes and dividend vouchers need to be issued to John, Janet and Susan each time a dividend is issued.

 

Let us suppose in Q2, the dividend is only issued to the B share holder.  100% of the dividend (£405) goes to Janet.

 

John could use any combination he wants to distribute the dividends.

 

 

What is the tax implication on dividends?

For the year ending 5/4/18, each shareholder is entitled to receive £5000 tax free in dividends.  For the year ending 5/4/19, each shareholder is entitled to receive £2000 tax free.  Each shareholder is required to submit a personal tax return declaring their dividend income.  Dividends over the initial tax free allowance are taxed at 7.5% up to £34,500, the dividends are taxed at 32.5% with no national insurance contributions currently required.

 

What would you advise?

Doing your bookkeeping on a regular basis and producing and acting upon management accounts is crucial.  With MTD (Making Tax Digital) coming in in April 2019, it will be necessary for companies to submit their accounts on a quarterly basis to HMRC.  By doing your bookkeeping regularly, you will ease the pain of having to do this.   If you need more help or advice concerning dividends or bookkeeping, please contact us for an exploratory meeting.

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All you need to know about Directors Loan Accounts  

A director’s loan account is simply a mechanism for recording transactions between the director and the company.  In a family or personal company situation, transactions between the director and the company are commonplace.  The director may lend money to the company or borrow from it, the director’s behalf and salary or dividend payments may be credited to the account.  However, there are tax consequences if the account is overdrawn at the year end and remains so at the corporation tax due date.

One of the main benefits that may be available to a director of a personal or family company is the ability to borrow easily and cheaply, assuming that the company has the funds available.  The rules make it possible for the director to borrow up to £10,000 for up to 21 months without any tax consequences.  If the amount exceeds £10,000 – even for as little as one day – there will be a benefit in kind charge to pay on the loan.  However, this is likely to be significantly cheaper than the cost of a commercial loan, and will not entail the costs and restrictions inherent in obtaining a commercial loan.  If the directors loan account is overdrawn at the end of the accounting period and remains overdrawn at the time at which the corporation tax for the period is due nine months and one day after the year end, the company is required to pay a tax charge on the outstanding loan balance (a ‘section 455’ charge).  The charge is 32.5% of the outstanding loan balance and is payable with the corporation tax for the period.  The rate of tax is the same as the higher rate of tax on dividends.

The section 455 tax can be avoided if any overdrawn loan account balance is cleared before the corporation tax due date.  However, this will not always be the most tax-efficient option as depending on the route taken to clear the debt, the tax payable may be more than the section 455 tax.  Further, the section 455 tax is repaid if the debt is cleared at a later date, with the repayment being due nine months and one day from the end of the accounting period in which it was cleared.  This paves the way for paying the section 455 tax initially, clearing the loan at a later date when this can be done tax effectively and reclaiming the section 455 tax.  If the director has sufficient funds to clear the debt, this will be beneficial from a tax perspective as it will prevent a section 455 charge from arising without triggering tax liabilities on the director.  Whether it is worthwhile to pay the director a bonus or a dividend payment to clear the loan account will depend on the director’s personal circumstances – if this can be done tax-free or at a low rate of tax, it may be preferable to paying the section 455 charge.  However, if the taxpayer is a higher or additional rate taxpayer, paying the section 455 tax will be the cheaper option.  Remember, not only will the bonus or dividend need to be sufficient to clear the debt, it will also need to cover any associated tax and National Insurance.

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VAT – an introduction

VAT  (or Value Added Tax to give its full name) was introduced in the UK IN 1973 and is the third largest source of government revenue  after income tax and National Insurance.  VAT is levies on the sale of goods and services by UK businesses.

The standard rate of VAT is currently 20% and this rate has been in place since 4th January 2011.   This rate covers most goods and services.

The other rates are:-

Reduced rate of 5%, which covers some goods and services, such as domestic  fuel or children’s car seats.

Zero rate, examples of which are children’s clothes and some foods.

Some items are exempt from VAT altogether, such as postage stamps and insurance.  No VAT is charged on anything that is outside the scope of the UK VAT system.

 

VAT is charged by a business  at the point of sale of goods and services.   The threshold for a  business  to register for VAT is when the  VAT taxable turnover exceeds £83,000 (April 2016).   (Taxable turnover is the total value of everything sold that is not exempt from VAT.  There are, however, different thresholds for buying and selling from other EU countries).

To register for VAT, a business will need to contact HMRC if the business goes over the VAT threshold in a rolling 12 month period.  In fact, a business should monitor its turnover regularly  to check whether it will go over the threshold.   It is generally possible to register with HMRC and it is possible to appoint an agent such as Harmonea to submit VAT returns behalf of the business.

The de-registration level for a business is less then £81,000 (April 2016).

There are various VAT schemes and here are examples of some of the schemes:-

 

The VAT Accrual Scheme:-

This is commonly used.  The return is calculated on the difference between the sales and purchase invoices within the relevant period, in this case, the last quarter.  The return does not take account of whether the sales and purchase invoices have been paid or are still outstanding.     A return is submitted to HMRC every quarter.

The Flat Rate Scheme:-

With this scheme, a business will pay a fixed amount of VAT.  The business will retain the difference between what it pays to HMRC and what it invoices its customers for.   However, no VAT can be claimed on the business’s purchases.  There is an exception to this, where it is possible to reclaim VAT on a single purchase of capital expenditure, where the amount of the purchase, including VAT, is over £2000.

The threshold for joining this scheme is £150000 and is over £230000 to leave.  The scheme cannot be rejoined  until 12 months after leaving.

There are incentives for the first year of registration.

 

Cash Accounting Scheme:-

With this scheme, VAT is not included on the sales of a business until the customer pays the invoice.  With regard to the purchases, the VAT on these cannot be reclaimed until the purchases have been paid.  Cash Accounting is ideal for those with slow payers.

The joining threshold for this scheme is £1.35 million and the threshold for leaving the scheme is £1.6 million.

 

Annual Accounting Scheme:-

If this scheme is used, the business will make advance VAT payments to HMRC.  These payments are based on the VAT due for the previous year or on an estimated  return for a new business.

Only once VAT return is submitted each year and this will include the balance of the VAT due.   If the VAT has been overpaid , then it will be necessary to apply for a refund.

The turnover would need to be £1.35 million for joining the scheme and over £1.6 million to leave.

 

A VAT return can be submitted online and is due one calendar month and seven days after the end of the last quarter, (a quarter is known as the accounting period).  The payment also needs to reach HMRC within this timeframe.  There are various penalties for late submission of a VAT return, the severity of which depends on the amount of previous late submissions and the turnover of the business.

 

Please contact Harmonea if you would like any more information on VAT.Facebooktwitterredditlinkedinmail

What do your numbers tell you?

Ratios

To enable us to appraise the performance of a business there are a number of financial performance indicators that we can use. The key performance indicators (KPI’s) are sometimes referred to as ‘ratios’ and ratio analysis is an important part of how we can understand how well a business is doing. These KPI’s can be set as targets to help manage the performance of the business through the decisions made by management.

There are several categories of ratios that you can look at: profitability, revenue, cost and liquidity

Profitability Ratios:

Margins are a common way of measuring the profitability of a business by considering the profits earned compared to the sales revenue generated. They are sometimes referred to as measures of ‘return on sales’ for this reason.

Margin on Sales

There are two margins that can be calculated:

Gross Profit margin (%) = Gross Profit/ Sales x 100

Net Profit Margin (%) = Net Profit (profits before tax)/ Sales x 100

  • Falling margins may be due to increasing costs or reduced selling prices
  • Differences between the gross profit margin and the net profit margin allow you to establish whether changes in profitability are due to changes in cost of sales or caused by other operating costs
  • Useful for setting prices e.g. increasing your selling price relative to the direct costs will result in an increased gross profit margin.

Return on capital employed (ROCE)

Whilst margins look at profits in relation to sales revenue generated, ROCE looks at profits in relation to investment required to finance the business.

ROCE = Net Profit / Capital employed* x 100

*Capital Employed = Total Assets less Current Liabilities

  • It measures how much profit is generated for every £ of assets employed and indicates how efficiently the company uses its assets to generate profit
  • The only ration that compares profits to the overall size of the business and is sometimes viewed as the most important ratio for analysis purposes

Revenue Ratios:

Average Selling Price = Total Revenue / No of units sold

  • Average price charging for the units that we are selling
  • Can be compared to competitors prices to see how competitively priced your products are

Sales per employee = sales / No of employees

  • Measures the average value of sales generated per employee

Asset turnover = Sales/ Capital employed

  • Measures the value of turnover generated for every £1 of assets employed
  • Measures #efficiency’ of the use of assets that you have invested i.e. are the assets being used to generate adequate turnover

 

Cost Ratios:

It can be useful to measure how well a business is controlling its cost base as the level of trade grows.

Cost of sales as a % of turnover = Cost of sales/ Sales x 100

  • If increasing as sales increase it may indicate poor cost control and that that the company is growing to quickly
  • If falling as sales increase this may be due to ‘economies of scale’ as volumes rise e.g. bulk purchase discounts.

Liquidity Ratios:

Some ratios help us to consider the cash flow position of the business which is crucial for long term planning. Many profitable businesses become bankrupt due to poor cash flow management.

Current Ratio

This shows if the short-term liquid assets of the business (e.g. cash, trade debtors & inventory) are adequate to cover the short-term liabilities (e.g. Trade creditors Accruals & Tax).

Current ratio = current assets/ current liabilities

  • If it falls year on year it may indicate difficulties with cash flow and that we will have difficulty paying creditors when they demand payment which can lead to bankruptcy.

Average receivables collection periods (debtors days)

This shows how long it takes you on average to collect money from trade debtors. It is important that you collect money quickly as this helps with liquidity and cash flow in order to pay suppliers, staff etc.

Debtors days = trade debtors / Sales x 365

  • If increasing it indicates you are taking longer to collect debts. You may want to consider tightening up credit control or offering settlement discounts to encourage faster payment.

Average payables period (creditor’s days)

Shows how long you take to pay your suppliers

Creditors days = trade creditors / cost of sales x 365

  • By delaying payment to suppliers you can improve your cash flow. However, this can have a negative impact on your relationship with these suppliers.

A ratio figure on its own means very little, to make sense of ratios you need to compare them to something. This could involve comparison with budgets, against previous year figures, against industry averages or perhaps competitors.Facebooktwitterredditlinkedinmail

Are you giving out the wrong message for your business?

I recently saw a leaflet for something I could be have been interested in. At the point of taking the next step I looked for an email address to email to arrange a meeting to discuss their offering. My impression of this business suddenly did a nose dive on the professionability scale. They had a hotmail email account. Was this a part time business? Another person involved in this business had an email address sexysuzy@……. For the cost of a domain running at around £6 for 2 years, why had they not grabbed it?

I then saw that they had a website with the business domain so why were they not using the domain with an associated email address? This person had a good website so I proceeded to email.

Not getting a reply I telephoned the number on the website but it went to the home phone answerphone. Had I got the wrong number?

It took three weeks for an email reply which was full of apology. Was this person taking their business seriously? Could they cope with the work I was proposing to give them?

We met up and he gave me his business card. Oh dear! I think it was a DIY job from Staples and was completely mismatched to the website. It was poorly thought out, poorly printed and was misaligned. It gave incomplete information and contained spelling mistakes.

This business was giving out all the wrong messages before we had had the opportunity to work together.

The meeting went well but the jury is still out as to whether to use him. I have my doubts.

What is the point of all this? This person could have made a much stronger impact with so little effort.

Had he had a consistent brand image – domain, logo, standard of presentation, my impression would have been very different.

Had the telephone been answered by a human or by a professional answerphone, my impression would have been very different.

Had the initial response been earlier and the final proposal sooner after the meeting, my impression would have been very different

By the time we got to the end of the sale process, I had lost confidence in this person which is such a shame. Time will tell if I made the right decision.Facebooktwitterredditlinkedinmail