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Loans to Directors of Close Companies
New rules announced in Budget 2013 discourage participators in close companies from taking loans from their own companies, previously legislated under s.419 ICTA 1988, currently s.455 CTA 2010.
The basis of s.455 CTA 2010 is that, where a close company makes a loan to a participator (or associate of a participator) then it is required to pay to HMRC a tax equal to 25% of the value of the loan. The tax is due for payment 9 months and 1 day after the end of the accounting period in which the loan was made. However, if the participator repays the loan before that date, then the requirement to account for the ‘s.455 tax’ is cancelled, by virtue of s.458 CTA 2010. Where the loan is repaid after that date then HMRC repay the ‘s.455 tax’ 9 months and 1 day after the end of the accounting period in which the loan is repaid.
This brings us to one of the measures brought in by budget 2013. With effect from budget day (20th March 2013) ‘bed and breakfasting’ is no longer possible. ‘Bed and breakfasting’ is a commonly used loophole where the loan is repaid to the company before the day 9 months and one day after the year end to prevent the ‘s.455 tax’ charge becoming due, then soon after the trigger date has passed, the participator re-loans the money from the company. Or indeed, where loans are repaid after the ‘s.455 tax’ has been paid to HMRC, but again the participator soon afterwards re-loans the money from the company and reclaims the ‘s.455 tax’ from HMRC.
HMRC have long tried to challenge these cases. Their manual instructs inspectors to “obtain as much factual evidence of the transactions and the accompanying arrangements as possible” where they think they have found a case of ‘bed and breakfasting’ for referral to the Corporation Tax International and Anti-Avoidance technical team.
However, the new rules now give HMRC a statutory basis to deny relief in circumstances where s.455 tax has been paid if, within a 30 day period, repayments of more than £5,000 are paid to the close company in respect of amounts which have given rise to a charge which are then redrawn either via a loan, advance or ‘extraction of value’ – something else new to watch out for!
In addition, where the 30 day rule does not apply, relief will also be denied if there are amounts outstanding of at least £15,000 and, at the time of the repayment, there are arrangements or there is an intention to redraw an amount again through a loan, advance or an extraction of value.
There has been some discussion amongst tax commentators over whether there is a possibility that ‘s455 tax’ may never be repaid in the circumstances where a participator makes regular withdrawals from their company which are treated as debits to the director’s loan account and then are cleared via a payment of salary or a dividend before the nine-month cut off because there is an intention to continue withdrawing funds in this way in future; a common practice in many owner-managed companies. However our view is that s464C(5) will, in almost all cases, overcome this problem, as it is clear from the draft legislation that the restriction on repayment of ‘s455 tax’ will not apply in relation to a repayment which gives rise to a charge to income tax on the participator (or associate) by reference to whom the loan, advance or benefit was a chargeable payment i.e. where they are charged to income tax on the dividend or salary used to clear the outstanding loan account balance. Without the inclusion of s464C(5) this new legislation could have caused an awful lot of headaches for accountants, tax advisers and owner-managed companies the length and breadth of the UK, so this sensible, well thought through paragraph is really a saving grace in what could have been an extremely burdensome piece of legislation.
Watch out for the references to “extractions of value” in the revised s455 rules. This is an extension of the rules to cover less traditional arrangements where, instead of providing loans the close company seeks to extract and transfer value to a participator in some other way which would have been neither chargeable to tax nor within the s.455 charge before the introduction of this new wording.
Finally, there is a further new rule which puts beyond doubt that fact that loans made via a partnership, LLP or trustees of a settlement are caught by the s.455 tax charge!
For further advice – see your local CIMA qualified accountant.
Ref CCH
martin.pope@theaccountingfactory.co.uk
Business Disclosure – do it right or risk a penalty
Displaying the right information on the right documents is important, so here is a quick reminder…
The rules for companies are set out in The Companies (Trading Disclosures) Regulations 2008
The key sections is…
6. (1) Every company shall disclose its registered name on—
(a)its business letters, notices and other official publications;
(b)its bills of exchange, promissory notes, endorsements and order forms;
(c)cheques purporting to be signed by or on behalf of the company;
(d)orders for money, goods or services purporting to be signed by or on behalf of the company;
(e)its bills of parcels, invoices and other demands for payment, receipts and letters of credit;
(f)its applications for licences to carry on a trade or activity; and
(g)all other forms of its business correspondence and documentation.
(2) Every company shall disclose its registered name on its websites.
Companies House enforce the regulations and can levy penalties of £1000 for non compliance.
Sole Traders can trade under their own name or a “trading as” name provided its not offensive, contains sensitive or resticted words, includes PLC, Limited Company, LLP or is similar to another business (check the internet for potential conflicts).
Partnerships should show all the partners names or if there are more than 20 partners it may keep a list of names at its principle place of business.
steve@bicknells.net
Will HMRC help you get over the Floods?
Will it ever stop raining!
But help is at hand, HMRC launched their helpline (12/2/14)
The helpline will enable anyone affected to get fast, practical help and advice on a wide range of tax problems they may be facing.
HM Revenue and Customs (HMRC) will also:
- agree instalment arrangements where taxpayers are unable to pay as a result of the floods;
- agree a practical approach when individuals and businesses have lost vital records to the floods;
- suspend debt collection proceedings for those affected by the floods;
- cancel penalties when the taxpayer has missed statutory deadlines.
The helpline is in addition to other HMRC telephone contact numbers.
The helpline is 0800 904 7900. Opening hours are Monday to Friday, 8.00 am to 8.00 pm; Saturday and Sunday, 8.00 am to 4.00 pm, excluding bank holidays.
I hope the weather improves soon and your business can keep going and survive the storms.
steve@bicknells.net
The Risk-Based Approach – Risky business for SMEs? – Part I
HMRC (Photo credit: Images_of_Money)
The issue:
Risk-based approaches to manage Compliance Service delivery are undergoing a maturity model evolution.
This per se is not a negative issue, however, do risk-based approaches leave us exposed to more or less compliance risk?
We pose this question because a number of process advances, including technological drivers have over the past few years increased the incidence of the risk-based approach (r)evolution.
As an example, HMRC launched their risk based approach pilot scheme related to business record keeping called ‘Business Records Check‘ a few years ago (2011), only for the initiative to ‘go quiet’ and then suddenly to rear its head again late in 2013.
The facts:
From the HMRC web site, the following information was published:
By extrapolation, HMRC also publish within their background report the following table:
Next steps:
Related articles
Should you start your own business?
Economy in recovery
It now looks like the UK economy is in recovery. Even if this isn’t the case, when people think that times will get better they start to spend money again. With interest rates at historic low rates there is little incentive to stockpile cash in the bank for consumers and for entrepreneurs debt is relatively cheap to finance a new venture.
No Change for Currency (Photo credit: Wikipedia)
What’s your plan?
If you are starting a new business, it is important to work out what you will be selling, but to survive the early days of a start-up you will need good projections of your cash flow. As you grow you may need investment from banks or other third parties. Without good quality management accounts is it more difficult to persuade a potential investor to part with their cash.
Ask for help!
You can’t do everything on your own. Work out what your core activities are and how much time you need to do them. If you have time left over for ancillary activities then you are better completing these yourself too. The cost of hiring specialist help, whether it be an accountant, web designer or lawyer can seem to be too much for a nascent company to bear. However if you are spending so much time working out your accounts that you don’t have time for your customers you will cost yourself more in the long-term.
Business booming in Scotland
According to this article from the BBC more Scots are starting up their own business. Records from Companies House show that more than 340,000 companies were formed in Scotland last year. Glasgow and Edinburgh are at the forefront of the economic recovery in Scotland. If you have a good business idea, now could be the time to let that idea take form, especially if you have a service that supports other new businesses.
Give yourself a break
To give your business the best start, make sure you understand your finances. Don’t forget that if you registered a company you are obliged to file accounts with Companies House as well as HMRC. For more information on company formation see my blog here.
For support and advice on the finances of your business contact Alterledger or visit the website alterledger.com.
Are you benefiting from the Online Sales Boom?
Just in case you haven’t been watching the BBC News….
A record amount of online shopping was done in December 2013, says the British Retail Consortium (BRC).
Close to one in five non-food items was bought online last month, according to the BRC survey.
There was also a 19.2% growth in internet purchases from a year earlier, the fastest increase in four years……..
The online retail boom was very much in evidence in late 2013, with many High Street chains expanding their internet offerings, and some shops reporting record figures for the amount customers purchased online around Christmas.
In a recent AccountingWEB survey on average survey respondents said more than 80% of their customers use a smartphones or a tablet and almost all expect this number to increase over the next 12 months.
Without an online presence your business is likely to be become invisible to your customers.
Its not just about having a website either, there needs to be something that will keep your customers visiting your website and you probably need an app….
steve@bicknells.net
3 reasons why businesses are sold
When you think about it, there are really only 3 reasons why a business owner would want to sell their business:
Cashing In
Sometimes the the value of your business could be over inflated, remember the dot com bubble. Throughout history there have been times when the price that a buyer is prepared to pay is huge compared to normal business valuation models.
When: March 11, 2000 to October 9, 2002
Where: Silicon Valley (for the most part)
Percentage Lost From Peak to Bottom: The Nasdaq Composite lost 78% of its value as it fell from 5046.86 to 1114.11.
Imminent Threat
This can be caused by many things:
- New Legislation
- Loss of Resources
- Increased Competition
- Loss of Banking Facilities
Basically the seller will be aware that a problem is looming and they want to sell before the problem damages their business.
Life Changes
From a buyers perspective these are often the best businesses to buy, the key reason behind the sale being:
- Retirement
- Relocation
- Life Style
- Selling due to Illness
- New Business Opportunity
steve@bicknells.net
10 financial mistakes all new business should avoid
Starting a new business is always a challenge but there are some common financial mistakes that all start ups should avoid.
- Lack of Planning – Businesses normally start with a great idea but you need to have business model that works and to at least have a basic business plan and cash flow.
- Over Trading – this happens when a business expands too quickly for its working capital, when you start a new business its tempting to accept every order without considering whether you can have the resources and the cash to deliver.
- Wasted Marketing and Advertising – new businesses are an easy target for marketing companies but its important to stick to the essentials to start with, having a website, e mail and business cards are essential, magazine advertising and other things can be done as the business grows, in the early stages you are experimenting and finding your market so if you spend too much too soon you might promote the wrong things at the wrong price.
- Wrong Business Structure – Before you start your business get some advice from your accountant, its important to choose the right structure not just for tax reasons but also for investment and ownership.
- Wrong Staff – Choosing the right team is critical for business success, choose staff that have the right skills, the right attitude and are dedicated to the success of the business.
- Over Ambitious – All too often businesses plans are over ambitious with sales growing rapidly, often they prove to be unrealistic, when preparing a sales forecast start with your order book and be cautious in your assumptions.
- Overheads – Many businesses over spend on overheads for example renting premises too early, work from home, if you can, to minimise costs.
- Stock Problems – Buying the wrong stock, under or over stocking are also issues for start ups, try to adopt a ‘just in time’ stock policy.
- Getting Paid – A sale is only a sale if you get paid, any one can give things away, make sure you manage your clients and get paid on time.
- Competition – Keep an eye on your competitors, they will be watching you and responding to maintain their market share.
steve@bicknells.net
Micro Entity Accounts – who can file them?
Micro-entity accounts are a new type of accounts that can be submitted to Companies House. They will provide the smallest companies with the opportunity to prepare and publish simplified financial statements (profit & loss account; and balance sheet) if they wish.
A micro-entity is defined as meeting two of the following criteria:
- Balance sheet total: £316,000
- Net turnover: £632,000
- Average number of employees during the financial year: 10 (or fewer)
Micro Entities are exempt from filing their profit and loss with Companies House.
Business Minister Jo Swinson said:
“Thriving micro-businesses are a vital ingredient for a stronger economy. However, because of their size they don’t always have dedicated finance teams behind them. We therefore need to make sure that they can focus on growing their business – rather than completing unnecessarily detailed paperwork.”
There are approximately 1.56 million micro-entities in the UK, as compared with a total number of companies on the UK register of approximately 2.8 million.
I don’t think this is going to help much? Micro Businesses still need to file corporation tax returns, deal with PAYE, RTI, VAT, minimum wage, Auto Enrolment Pensions, and a wide range of other requirements
steve@bicknells.net
Repay your debts sooner and save money
Order your debts
My advice is straightforward and you will have seen it before, but it is probably one of the easiest ways for individuals and companies to save money. If you have any debts make sure you know which has the highest rate of interest. If you are in a position to repay debt, you should pay off your most expensive loans first. For individuals this is likely to be store cards or credit cards, followed by other unsecured lending to banks in the form of an overdraft.
Even with historically low base rate from the Bank of England, you can pay between 30% and 40% interest a year on store card and credit card purchases.
Maintain minimum payments
For the remainder of your debt, make sure you keep up your minimum payments. Failure to do this may mean additional charges are added to the debt and may affect your credit score.
Check for forgotten accounts
If you have a balance in your PayPal account or your energy supplier you are lending money free of charge. You might be relaxed about this, but while you are paying interest on your own debts you are much better getting the balances transferred to your lenders. Clear out any long term balance from PayPal etc and check your statements from your energy suppliers and any other suppliers to arrange for overpayments to be refunded.
Example
Let’s say you have a balance on your credit card of £200, which you are repaying at £5 a month. The table below shows the total interest you will pay and the time taken to repay the entire balance. At an annual interest rate of 32% (2.34% monthly interest) you will pay nearly £395 in interest on your original purchase of £200 and it will take nearly 10 years to pay the whole balance back. If the annual interest rate rises to 35% you monthly interest would be more than the £5 monthly payment and you would never pay your original £200 off.
| Annual Interest | Total Interest £ | No of months to repay loan |
| 32% | 394.82 | 119 |
| 29% | 259.65 | 92 |
| 20% | 111.85 | 63 |
| 14.9% | 70.75 | 55 |
So – if you happen to have £200 in your PayPal account that you had forgotten about at the same time as a £200 credit card balance, you could transfer the cash, pay off your credit card balance and save yourself between £70 and £395!
Manage your cashflow
Work out how much cash you actually need for your day-to-day needs. It is likely that you are receiving little or no interest on cash in the bank. If you are confident that you have surplus cash, use it to pay down any debts you have – but start with the expensive debt don’t share it out equally between the different debts you have.
For support and advice on restructuring and paying off debt contact Alterledger or visit the website alterledger.com.
Business Accountant 