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Changes planned for Directors Loans
This year we had some good news for next year, the exemption threshold for employment-related loans has been increased for 2014/15 from £5,000 to £10,000, as long as the balance is below this level there is no tax charge for employees or employers.
But there could be bad news for participators (Directors/Shareholders) who have been using one of these techniques to avoid the 25% temporary Corporation Tax charge:
1. Using a Partnership or LLP where the company is a partner or member as a way to get loans
2. Making arrangements that did not qualify as loans but the where value ended up in the hands on a participator
3. Making loans repaying them within 9 months and getting a new loan, the Bed and Breakfast approach
4. Transfers of assets
5. Loans channelled through third parties
New anti avoidance rules are coming, there is a consultation paper aimed at minimising the scope for abuse and there will be new legislation in the Finance Bill 2014 and Finance Bill 2015.
Be warned!
steve@bicknells.net
The tax benefits of goodwill on incorporation?
Lets start with a typical scenario:
- Mr Smith has been running a small garage for a few years
- he decides to incorporate his business and sets up Smiths Garage Limited with himself as the sole director and shareholder
- he transfers the goodwill of the business and its other assets and liabilities to Smiths Garage Limited but does not claim incorporation tax relief under Taxation of Chargeable Gains Act (TCGA) 1992, s162, nor does he claim hold-over relief under TCGA s162
- at the time of incorporation, the goodwill of the business is valued at £100,000
- Mr Smith makes a chargeable gain on the transfer of the goodwill, which is deemed to be at market value, of £100,000 which, after deducting the annual CGT exemption (£10,900 2013-14), will be taxable at 10% due to the availability of entrepreneur’s relief
- the company will pay Mr Smith £100,000 for the acquisition of goodwill and this is done by way of a credit to Mr Smiths director’s loan account. Mr Smith is able to draw down on this account without any further tax charges.
In addition Mr Smith started his Sole Trader business after the 1st April 2002 so he can claim a corporation tax deduction for amortisation of the goodwill in the company accounts. Small Companies pay Corporation Tax at 20%, so being able to deduct Goodwill on £100,000 will save £20,000 in Corporation Tax.
However, please bear the following in mind:
- If the business started before 1st April 2002, Corporation Tax Act 2009 s895 prevents the company from claiming a deduction against corporation tax, also refer to HMRC Spotlight 1: Goodwill – companies acquiring businesses carried on prior to 1 April 2002 by a related party
- Where a trader transfers his business to a limited company of which he is a ‘substantial shareholder’, the parties are treated as ‘related parties’ and the transfer must be at market value, but you can ask HMRC to carryout a post transaction valuation check by submitting form CG34
- Goodwill relating to personal services is not normally considered to have a market value as it can not be transferred
- In general it is expected that intangibles will have a useful life of no more than 20 years
- Get professional advice to help you to prepare the valuation, disclose the capital gain and claim the tax relief
steve@bicknells.net
Should a subcontractor Zero Rate supplies to a housing main contractor?
This question comes up on a regular basis because it has cash flow implications for the main contractor.
If a contractor constructs a new building they will normally have to charge VAT at the standard rate. The contractor may, however, be able to zero-rate your supply if they are involved in constructing a qualifying building. A qualifying building can be:
- a building ‘designed as a dwelling’ ;
- a building that will be used solely for a ‘relevant residential purpose’ ; or
- a building that will be used solely for a ‘relevant charitable purpose’ (for non-business use or as a village hall).
If the building qualifies the client issues a certificate to the Main Contractor (section 17 of Notice 708)
| This certificate has the force of law. |
|---|
| Certificate for zero-rated and reduced-rated building work. |
| 1. Address of the building: |
| 2. Name and address of organisation receiving the building work: VAT Registration number (if registered): Charity registration (if registered): |
| 3. Date of completion (or estimated date of completion) of the work: Value (or estimated value) of the supply: £ Name, address and VAT registration number of building contractor: |
| 4. I have read the relevant parts of Notice 708 Buildings and construction and certify that this organisation (in conjunction with any other organisation where applicable) will use the building, or the part of the building, for which zero-rating or reduced-rating is being sought solely for (tick as appropriate ): a relevant charitable purpose, namely by a charity in either or both of the following ways: otherwise than in the course or furtherance of business or as a village hall or similarly in providing social or recreational facilities for a local community a relevant residential purpose, namely as: (a) a home or other institution providing residential accommodation for children (b) a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder a hospice residential accommodation for students or school pupils residential accommodation for members of any of the armed forces a monastery, nunnery or similar establishment or an institution which is the sole or main residence of at least 90 per cent of its residents and will not be used as a hospital, prison or similar institution or an hotel, inn or similar establishment. |
5 I certify that the information given is complete and accurate and acknowledge that if the building, or the part of the building, for which zero-rated supplies have been obtained, within a period of 10 years from the date of its completion:
a taxable supply will have been made, on which this organisation will have to account for VAT at the standard rate. . |
| General warning 1. HMRC reserves the right to alter the format of the certificate through the publication of a new notice. You must ensure that the certificate used is current at the time of issue. Warnings for the issuer 2. You may be liable to a penalty if you issue a false certificate. 3. You are responsible for the information provided on the completed certificate. Warnings for the contractor 4. You must take all reasonable steps to check the validity of the declaration given to you on this certificate. 5. This certificate does not automatically confer zero-rating or reduced-rating on your supplies. You must check that you meet all the conditions for zero-rating or reduced-rating your supply – see Notice 708 Buildings and construction. |
However, the main contractor can not issue certificates to its subcontractors…
16.4 Should subcontractors accept certificates?
No. If you are a contractor working to a main contractor, you should not be issued with a certificate. You must always standard-rate your supply when working on a certificated building.
This means the Main Contractor has to pay the VAT to the subcontractors and then recover the VAT on its next VAT return which for smaller Main Contractors can cause problems.
steve@bicknells.net
Expenses – There’s an App for that
Keeping track of income and expenses can hard when you are busy so why not try using a phone app? HMRC suggest the following:
| Software supplier | Product | Platform |
| Forbes Computer Systems Ltd (Opens new window) | Forbes Receipt Keeper | Android |
| FreeAgent Central Ltd (Opens new window) | Earnest | iPhone, iPod touch, iPad |
| Immagini Ltd (Opens new window) | ZipZipBooks | Android |
| Intuit (Opens new window) | MyBizTracker | iOS (iPhone, iPod touch) |
| Mr Tax Software Ltd (Opens new window) | Text 2 Save Tax | Android. |
| Quick File Ltd (Opens new window) | Quick File | All – free web-based application |
| Sage (Opens new window) | Sage Record Keeper | iPhone, iPad iOS |
| 123 Tax (Opens new window) | 123 Tax application | Windows Phone |
I have been trying out the Sage Record Keeper Mobile on my iPhone, its pretty good for free, here is an overview:
- Record cash in and cash out
- See your balances at a glance and track CIS deductions – Standard or Higher Rate
- You can even take photos of your receipts – no longer worry about losing them- multiple photos if needed
- Estimate the current year’s tax and refer back to previous ones (up to 6 years)
- Quick links to record income and expenses in seconds
- Enter details, specify type of payment used and add notes
- Add and customise tags for transactions to group them into categories
- Add several tags to each transaction
- Search and filter by category, supplier / customer, amounts or other details
- Backup your information using iCloud
For use outside of the app you can export all or just a selection of transactions and photos as CSV and image files. They’re automatically attached to an email for sharing with anyone.
So no excuses, use your phone and stay organised.
steve@bicknells.net
What Travel Expenses will the taxman allow?
Apart from Business Mileage, what can you claim and what counts as a business trip?
Assuming your employer or supplier or customer aren’t reimbursing your costs….
If you’ve got to make journeys for business purposes you can deduct your travelling expenses from your taxable income – so you’ll pay less tax.
In addition, there is no restriction on the standard of travel and accommodation, provided the main purpose of the trip is that of business, you can travel first class and stay at the best hotels.
But what if the trip is partly business and partly pleasure, in this case you will need to apportion the costs and only claim for the business element.
What are business journeys (HMRC definition)
You can only get tax relief on the cost of business journeys. These are when, as part of your job:
- you have to travel from one workplace to another – this includes travelling between your main ‘permanent workplace’ and a temporary workplace
- you’ve got to travel to or from a certain workplace because your job requires you to
But business journeys don’t include:
- ordinary commuting – when you travel between your home (or anywhere that is not a workplace) and a place which counts as a permanent workplace
- private journeys – which have nothing to do with your job
If you’re not sure if a place you travel to counts as a permanent workplace telephone HM Revenue & Customs for advice.
Travel expenses include the actual costs of travel and also the subsistence expenditure and other associated costs that are incurred as part of the cost of making the journey.
The cost of business travel includes
- the cost of any necessary subsistence costs incurred in the course of the journey
- the cost of meals necessarily purchased whilst an employee is at a temporary workplace.
If an overnight stay is needed then the cost of the accommodation and any necessary meals is part of the cost of business travel. Even where an employee stays away for some time and the travel expenses are deductible, the cost of meals and accommodation is part of the overall cost of the business travel.
Travel expenses that qualify for relief
You can get tax relief on the necessary costs of business travel like:
- public transport fares
- hotel accommodation
- meals
- tolls
- congestion charges
- parking fees
- business phone calls, fax or photocopying costs
But you can’t get tax relief for things that aren’t directly related to the business journey.
So far so good, but what about…..
Alcohol – claiming for a few drinks with your meal will be fine but other than with meals they would generally be considered a personal expense
Your Family – if you take your wife, husband or partner on a business trip their costs will be taxable unless they are on the trip for a business reason
Newspapers, Laundry and Phone Calls Home – HMRC allow claims for incidental overnight expenses up to £5 per night in the UK and £10 per night outside the UK
Learning the Lingo – no you can’t claim for language lessons
Staying with Friends – until 2009 HMRC were happy to agree a scale rate of £25 per night but now its based on actual costs
Basically, before you claim, stop and think, can you justify the expense as being a business expense for business purposes.
steve@bicknells.net
How do you define Value?
The simple answer is you don’t, its your client that decides what Value is and what it means to them.
We can give it mathematical definition its
Value = (Tangible and Intangible Benefits) less (Price plus Usage plus Disposal Cost)
There is a theory that Value is made up of 3 elements
- Revenue Gain
- Cost Reduction
- Emotional Contribution
These are the elements that determine the value to the client.
These elements became the Value Triad documented by Harry Macdivitt, Mike Wilkinson here is a link to their work on Value Based Pricing
Once you understand what value is, then you can prepare your Value Proposition.
A business or marketing statement that summarizes why a consumer should buy a product or use a service. This statement should convince a potential consumer that one particular product or service will add more value or better solve a problem than other similar offerings.
http://www.investopedia.com/terms/v/valueproposition.asp
The question for us is: what are the critical differences between us and the competition and how does this influence the value we offer? Our success in meeting those requirements is based on the differential value of our product or service offering.
CIMA list the following ideas about how to differentiate in their article Building Value Through Differentiation
- Consistency
- Convenience
- Customised Services
- Combinations (collaboration and package deals)
How do you determine the value of your products and services?
steve@bicknells.net
Crowdfunding – How Social Media is helping businesses to get funding
Here are some examples:
- In 1997 British rock group, Marillion, raised £38,000 from its fans to pay for its US tour. They then went on to use the same method to fund several albums
- In 2010 Hotel Chocolat offered 3 year, FSA approved ‘chocolate bonds’ to its 100,000 tasting club members. Customers were invited to invest £2,000 for a gross annual return of 6.72%, or £4,000 for a return of 7.29% which were paid in regular deliveries of chocolate. The Bonds raised an incredible £3.7m for the company.
- In 2011 Caxtonfx (foreign exchange) raised £4m from its bond issue
- In 2012 Mr & Mrs Smith (travel website) started the process of raising £4m from a 4 year bond with cash interest of 7.5%, or 9.5% if the ‘Smith loyalty money’ option is taken
- In 2012 Pebble Technology, a Palo Alto based smart watch company used Kickstarter.com to raise $10m against forward sales of its Pebble watch
According to Simon Dixon, to be successful in crowdfunding there is a simple formula £££ = R + SC + E
Where the money raised depend on the strength of the rewards your offer (R), how much social capital you have (SC) and the emotion attached to your story (E)
Its early days, but could this be the future for some businesses, using their fans and contacts to access funding. Social Media and the internet are definitely playing a part in moving this forward.
steve@bicknells.net
What are the differences between a Ltd Co and a Plc?
Well over 95% of limited companies in the UK are “private” – it is by far the most common form of limited company.
The main advantages of a being public limited company are:
- Better access to capital – i.e. raising share capital from existing and new investors
- Liquidity – shareholders are able to buy and sell their shares (if they are quoted on a stock exchange)
- Value of shares – the value of the firm is shown by the market capitalisation (based on the share price)
- The opportunity to more easily make acquisitions – e.g. by offering shares to the shareholders of the target firm
- To give a company a more prestigious profile
As always there are some disadvantages to being a PLC (as opposed to remaining as a private company). The main downsides are:
- Once listed on a stock exchange, the company is likely to have a much larger number of external shareholders, to whom company directors will be accountable
- Financial markets will govern the value of the company through the trading of the company’s shares, and will represent the market’s view of the company’s performance over time
- Greater public scrutiny of the company’s financial performance and actions
These are the main differences in summary:
- You must use the description ‘PLC’
- A public company must have issued share capital to a nominal value of £50,000 of which 25% must be paid up.
- Only public companies can offer their shares to the public
- There are strict rules that shares must be issued for full value
- PLCs must file their accounts within 6 months from their year ends
- PLCs must have two directors
- PLCs must have a suitably qualified company secretary
- PLCs must hold AGMs when the accounts can be received
- PLCs cannot approve written resolutions unless authorised by the articles
- There are strict regulations on PLCs purchasing or providing financial assistance to purchase their own shares
- Traded PLCs cannot place restrictions on transfers of its shares. Otherwise such restrictions in the articles are permitted
- Election of directors at general meetings must be in separate resolutions
- PLCs cannot take advantage of the abbreviated accounts regime (but nor can larger Ltd Co’s)
- Listed PLCs can hold shares in treasury (with limits)
- Listed PLCs must have their remuneration report approved at the AGM
- PLC directors can only have authority to issue shares for five years
- A PLC articles cannot exclude pre-emption rights on the issue of new shares
- PLC financial results must use International Accounting Standards if listed but unlisted Plc’s can use UK GAAP
- Nominees of PLC shareholders where the PLC is listed on a regulated market can nominate information rights for the shareholders
- The articles of PLCs must have a specific authority to enable the board to authorise a transaction where the director has a conflict of interest
steve@bicknells.net
When the HMRC inspector visits get some extra help
HMRC campaigns and task forces are on going and Compliance checks are becoming common. As stated in the HMRC Infographic record compliance yielded £20.7bn.
So its worth knowing that you can appoint an extra adviser to help you answer the inspectors questions, its quick and easy to to arrange using this link
http://www.hmrc.gov.uk/forms/Comp1.pdf
Its a temporary authorisation that does not cancel or amend permanent authorisations ie your normal advisers/accountants
HMRC have also issued new Fact Sheets for Compliance Checks and Penalties
http://www.hmrc.gov.uk/compliance/factsheets.htm
Sometimes we all need a little help and specialist advice can be invaluable
steve@bicknells.net
Should my Work in Progress be classified as a Debtor (UITF40)
It’s a common issue and area of confusion and it has tax implications. WIP is valued at the lower of cost or net realisable value but Debtors whether invoiced or not are valued at Sales Value, uninvoiced Sales are shown as Amounts Recoverable on Contracts within Debtors.
Here is an example from HMRC
A joiner contracts to create fitted bookcases in an office for a total price of £15,000. He purchases the timber (materials cost £6,000) and builds the doors in his workshop. He also prepares the timber for the rest of the structure in his workshop. He then builds the skeleton of the bookcases on the customer’s premises and attaches thereto the timber that he has already prepared in his workshop. What is the accounts treatment if his year end occurs after he has prepared the timber and the doors but before he has gone to the customer’s premises to build the skeleton and fit them?
The contract is a single contract and the joiner should recognise revenue according to the stage of completion of the work. It is not relevant whether the work is done at his workshop or at the client’s premises. Neither is it relevant that part of the contract can be regarded as ‘goods’ and part as ‘services’: both are treated in the same way for accounting purposes.
Let us assume the joiner assesses that he has done 1/3 of the work by the year end and he has used half of the timber and other materials. The calculation would be: total price £15,000 less materials at cost (£6,000) leaves £9,000. Assuming the profit attaches only to the labour, accrued income is £3,000 (1/3 complete) plus materials at cost of £3,000 ( a half used), a total of £6,000. The remaining half of the total cost of the materials (£3,000) is work in progress. These figures should then be adjusted to reflect any likely losses, discounts, delay in payment or cost of difficulties expected to arise in completing the contract. Any progress payments received should be treated as creditors in accordance with SSAP 9.
http://www.hmrc.gov.uk/manuals/bimmanual/bim74270.htm
Also further guidance at
http://www.hmrc.gov.uk/helpsheets/hs238.pdf
So do you have Work in Progress or Amounts Recoverable on Contracts?
steve@bicknells.net
Business Accountant 