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VAT for sole trader start-ups

How to maximise your VAT reclaim

As any new business knows, you can incur significant costs at the outset before you get any income.  Most of these start-up costs will have VAT included and if you plan properly you should be able to recover this VAT as long as you are planning to make taxable supplies.

Save pounds on VAT

Plan ahead and reclaim everything

If you are setting up a business and can ahead, you can register for VAT from the date your business will start.  For most traders there is not any restriction on the date the business can start, but for some professional services eg barristers and advocates, no trade exists until they qualify.  To maximise the VAT to be reclaimed, the sole trader can register for VAT in advance of date of commencement, effective the date they are due to qualify.  This means that the VAT registration will be in place from the 1st day of trading and all sales invoices can be issued as VAT invoices.

Pre-registration VAT

There are specific rules allowing pre-registration VAT to be reclaimed, but any claims to recover pre-registration VAT must relate to the same trade and made by the same person.  A sole trader who incorporates the business is not the same legal person as the new company.  Any VAT suffered by the (unregistered) sole trader can’t be claimed as pre-registration VAT by the new company.

Get help with registering

Your accountant will be able to register you for VAT and recommend the best scheme for you.  It can take a few weeks for HMRC to process applications, but accountants who are registered as agents with HMRC are likely to have a quicker turnaround time.  For advice on registering for VAT and setting up your invoices, please visit the Alterledger website.

Financial Reporting – Strategic Report – Part I

CompaniesHouseNewLogo

In the excitement of an economic outlook rising like the incoming tide during the last quarter of 2013, together with the ‘silly season’ most of us would probably have missed Statutory Instrument No. 1970 – The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, and off course you would be forgiven for it.  This particular statutory instrument made the duty to provide a Strategic Report a part of UK financial reporting legislation.

To most us the update to the Companies Act 2006, Part 15 – Accounts and Reports, will not have any impact, if our our daily task is that of preparing annual statutory financial accounts for approval by the board of directors of a UK incorporated company.  This is because under section 414B of the Act, an exemption applies as follows:

414B Strategic report: small companies exemption
A company is entitled to small companies exemption
in relation to the strategic report for a financial year if—
(a) it is entitled to prepare accounts for the year
in accordance with the small companies regime, or
(b) it would be so entitled but for being or having
been a member of an ineligible group.
Financial Reporting (AICPA)
Therefore, if you prepare annual accounts based on the small companies exemption in section 477, namely:
477 Small companies: conditions for exemption from audit
(1) A company that meets the following conditions in respect of
a financial year is exempt from the requirements of this Act relating to the audit of accounts for that year.
(2) The conditions are—
(a) that the company qualifies as a small company in relation to that year,
(b) that its turnover in that year is not more than £5.6 million, and
(c) that its balance sheet total for that year is not more than £2.8 million;
then you do not have to be too concerned about the requirement to include a Strategic Report as part of the Annual Accounts ending on or after 30 September 2013.
If the answer is that you actually qualify, under the Act to include a Strategic Report, then in part II of this series of articles, we will set out the more detailed minimum requirements you will have to include, in order to stay compliant with the Financial Reporting requirements, as set out in the Companies Act 2006.
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©2014 – 3resource
* Quotes and references (sections) to the Companies Act 2006 available from Companies House

VAT Simplified Invoices

 

man looking at invoice

HMRC have released an update this month to their notice on Keeping VAT records.  One of these changes relates to VAT simplified invoices which were introduced earlier this year as part of the simplification and harmonisation of VAT rules in the EU. Previously only retailers were exempt from providing full VAT invoices to unregistered businesses.

However the changes mean that any business issuing VAT invoices for £250 or less (including VAT) can issue simplified invoices.

What to include in a simplified invoice:

Your name, address and VAT registration number

The time of supply (date)

A description which identifies the goods or services supplied

The each VAT rate charged, the amount of VAT charged.

How does a simplified invoice differ from a full VAT invoice:

In addition, a full VAT invoice must include:

A sequential number based on one or more series which uniquely identify the document

The date of issue (if different from the time of supply)

The name and address of the person to whom the goods or services are supplied

For each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency

The gross total amount payable, excluding VAT, expressed in any currency

The rate of any cash discount offered

The total amount of VAT chargeable, expressed in sterling

The unit price

The reason for any zero rate of exemption.

VAT invoices over £250

If issuing VAT invoices over £250, a full invoice must still be issued or a modified VAT invoice showing VAT inclusive rather VAT exclusive values.

 

Rebecca Taylor ACMA

High Income Child Benefit Charge

The High Income Child Benefit Charge (HICBC) is a tax charge which repays part of the child benefit received by high earners earning over £50,000 to a 100% repayment for those earning over £60.000. It applies to child benefit received from 7th January 2013.

Happy kid playing with toy airplaneWho does it affect?

You may need to pay a tax charge if:

  • you have an individual income over £50,000
  • and either you or your partner receive Child Benefit or someone else gets Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep.

It doesn’t matter if the child living with you is not your child.

 

What do you need to do?

If you are affected by the tax charge, you can:

  • Stop receiving the Child Benefit (only recommended if you’re adjusted net income is over £60k). Follow this link for how to do this.
  • Carry on receiving the benefit and pay any tax charge at the end of the tax year.

How to calculate adjusted net income?

It is important to realise that the income used to calculate the tax charge is your adjusted net income. You can use the calculator on Gov.uk to work out your adjusted income.

How to pay the tax charge

If the tax charge does apply to you, you will need to submit a self-assessment return to HMRC by 31st January following the end of the relevant tax year. Do not rely on HMRC writing to tell you that you need to submit a return as they may not realise you need to. Normal self-assessment penalties apply if returns are late or incorrect.

How much do you need to pay?

The charge is 1% of child benefit received for every £100 of income over £50,000 of adjusted net income. The charge will never be higher than the amount of child benefit received and if the income is over £60,000 the amount paid back to HMRC will be equal to the benefit received.

Rebecca Taylor ACMA

Fake email alerts from HMRC and Companies House

Red button spam with icon envelope, internet concept.Fake email alerts from Companies House and HMRC have become increasingly sophisticated. There was a time when it was relatively easy to spot a fake email alert but even accountants have been caught out by recent fake email alerts. And it isn’t just Companies House and HMRC. Be careful of emails from banks, other institutions, postal services, voicemail services and even Skype. Previously harmful emails have tried to direct you to a fake website to steal your personal details but these recent emails have attachments which could harm your computer.

What to look for

These fake email alertss have an attachment which appears to support details in the email message. For example, it could claim to be a customer complaint from Companies House, a missed delivery or a bank transaction. The email address could give you a clue that it is a fake email alert but many now look like they have come from a genuine email address. Some fake emails have footers which have been obviously copied from another email. If you are not expecting an email from the sender, think twice before opening any attachments, particularly .zip files.

Why

These emails are all trying to get you to do one thing: open the attachment. The attachment invariably contains malware or a virus and will either damage your computer, steal your details or even demand a ransom (see an article from the National Crime Agency on Cryptolocker).

Advice

The National Crime Agency provides this advice:

This is a case where prevention is better than cure.

  • The public should be aware not to click on any such attachment.
  • Antivirus software should be updated, as should operating systems.
  • User created files should be backed up routinely and preserved off the network.
  • Where a computer becomes infected it should be disconnected from the network, and professional assistance should be sought to clean the computer.
  • Various antivirus companies offer remedial software solutions (though they will not restore encrypted files).

Example of fake emails

Follow the links for some examples of fake emails:

http://www.hmrc.gov.uk/security/examples.htm

http://www.companieshouse.gov.uk/securityAdvice/index.shtml

Interim or final dividend – does it matter which?

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Dividends are used by many business owners as a tax-efficient way to extract profit from a company. So it is important to understand the procedure for paying them. But does it matter whether the dividend is final or interim if the tax treatment is the same?

The Companies Act 2006

It isn’t HMRC that makes the distinction between the two dividend types, but company law. The Companies Act 2006 says “The company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends”

So one group of  people, the directors,  may pay interim dividends, but shareholder approval must be obtained before a final dividend is paid.

So why is HMRC interested?

HMRC doesn’t particularly care which type of dividend is paid. It is interested in whether the payment is really a dividend or whether it was salary a bonus or a loan payment. As higher taxes and NI may accrue with these payments HMRC will want to see proof that the payment was a genuine dividend.

And this is where the timing of the payment and the paperwork are important. Under new anti-avoidance rules it is no longer possible for a director to receive a loan from the company, repay it to avoid the 25% tax charge and then take out a fresh loan within 30 days. HMRC will want to be certain that the payment is indeed a dividend. If the correct procedure has been followed and the paperwork is complete then this should not be challenged.

Mind the GAAP

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Thanks to http://www.freedigitalphotos.net

There are changes afoot and much is being made of ‘FRS 102’ and ‘new UK GAAP’, so in an effort to understand what all the fuss is about, and how it will impact on a small accounting practice with a client base firmly in the SME sector, I have dragged myself off to seminars and scoured t’Internet, and what follows is a brief summary of my understanding to date of these changes.

If you can put further flesh on these bones or correct misunderstanding then please feel free to comment.

First a little terminology:

  • IFRS Foundation”: an independent, not-for-profit private sector organisation.
  • “IASB”: International Accounting Standards Board is the independent standard-setting body of the IFRS Foundation.
  • “IFRS”: International Financial Reporting Standards which are designed to be global standard so that company accounts are understandable and comparable across international boundaries.
  • “IFRIC”: International Financial Reporting Standards Interpretations are the official interpretations of IFRSs.
  • “IAS”: International Accounting Standards are international financial reporting standards that were created by the predecessor body of the IASB and form part of the body of IFRS requirements.
  • “SIC”: the official interpretations of the IASs.
  • “IFRS for SMEs”: a self-contained standard of 230 pages, designed to meet the needs and capabilities of small and medium sized enterprises (SMEs) and includes simplified language and fewer disclosure requirements (expect to be aligned with FRS 102 in due course).
  • “SMEIG”: SME Implementation Group is an advisory body to the IASB, is providing recommendations to the IASB in connection with IFRS for SMEs.
  • “Small Company”: organisations with up to £6.5m turnover, £3.26m assets, and 50 employees (to be revised to £10m turnover etc. under new EU directive).
  • “Micro Company”: companies with up to £632k turnover, £316k assets, and 10 employees.
  • “UK GAAP”: Generally Accepted Accounting Practice in the UK is the overall body of regulation establishing how company accounts must be prepared in the United Kingdom.
  • “ASB”: UK Accounting Standards Board which is the body responsible for publishing accounting standards and other guidance.
  • “FRS”: Financial Reporting Standard.
  • “SSAP”: Statements of Standard Accounting Practice.
  • “UITF”: Urgent Issues Task Force of the UK Accounting Standards Board (now disbanded).
  • “SORP”: Statement of Recommended Practice for charity accounts and reports.
  • “New UK GAAP”: new reporting standards applicable from 1st January 2015 (latest) comprising
    1. “FRS 100”: Application of Financial Reporting Requirements which sets out the overall reporting framework.
    2. “FRS 101”: Reduced Disclosure Framework which permits disclosure exemptions from the requirements of EU-adopted IFRSs for certain qualifying entities.
    3. “FRS 102”: the Financial Reporting Standard applicable in the UK and ROI which replaces all existing FRSs, SSAPs and UITF Abstracts.
    4. “FRS 103”: the Financial Reporting Standard for insurance companies.
  • “FRSSE”: the Financial Reporting Standard for small company accounts includes reduced reporting requirements (anticipate this may be phased out in due course).

Phew! so which standard do I use?

Listed company consolidated accounts: must use IFRS

Listed company parent/ subsidiary accounts: either IFRS or UK GAAP (FRS 102)

Other companies: either IFRS or UK GAAP (FRS 102)
Small (& micro) companies: either above or IFRS for SMEs or FRSSE

Charities: must use UK GAAP (FRS 102 or FRSSE) and the new Charities SORP

So in particular, what is FRS 102?

  • for medium and large companies is similar to IFRS but reduced disclosure requirements
  • allows ‘amortised cost’ or ‘fair value’ methods of valuation except equities held which which must be at fair value
  • investment properties should be valued at far value via the P&L where possible but depreciated costs allowable if fair value involves undue cost or effort
  • allows goodwill to be amortised rather than applying impairment method
  • no ‘indefinite life’ option for goodwill
  • other intangibles to be recognised separately from goodwill
  • greater regulation of hedge accounting such as forward currency contracts
  • option to use IAS 39 (which outlines the requirements for the recognition and measurement of financial assets, financial liabilities, and some contracts to buy or sell non-financial items)
  • deferred tax to be provided on revaluations
  • government grants can be recognised immediately or accrued and matched with costs
  • holiday pay entitlement must be accrued where holiday not taken
  • disclosure of total lease commitment (i.e. note on operating lease liability)
  • cash flow statement required
  • reduced reporting for small companies which will no longer be required to include a director’s report, analysis of income

New EU Directive

From 1st September 2013 micro companies can report a greatly simplified balance sheet (and P&L) and are not required to provide notes and analysis on most balance sheet items, but must still include details of directors’ loans.

HM Revenue & Customs

All the above deal with reporting for public record; there are no changes on reporting requirements to HMRC at this time, so from a parochial point of view, is this going to make any real difference?

Paul Driscoll is a Chartered Management Accountant, a director of Central Accounting Limited, Cura Business Consulting Limited, Hudman Limited, and AJ Tensile Fabrications Limited, and is a board level adviser to a variety of other businesses.

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