Q & A' s - Tax & Accounts - Tax Credits, Tax Refunds, Car Leasing

Claim tax credits

Q: One of my friends mentioned that she thought tax credits could only be paid directly into your bank, but I receive mine by cheque. Has something changed?

A: If the Tax Credit Office don’t have your bank account deails, the Office can pay your tax credits by cheque rather than straight into your bank account. But from 6 April 2012, they'll only do this for the first four weeks that they don't have your account details.

If you haven't given details of an account for your tax credits to be paid into, the Tax Credit Office will contact you. You will then need to give account details within four weeks, or your payments could be stopped.

If they don’t contact you, call the Tax Credit Office with your bank account details on 0345 300 3900.

Category: Tax credits

Claiming a tax refund

Q: I left my job at the start of the year and I still haven’t found a new job yet. Am I eligible for a tax refund?

A: Based on the information you’ve provided, it is difficult to say with certainty whether you’re entitled to a tax refund. But if you think you've paid too much tax, you can make a tax refund claim from HM Revenue & Customs (HMRC) if any of the following applies:

• you've been unemployed for at least four weeks
• you stopped working because you've retired and you're not getting a pension from your old employer
• you've returned to studying

You can claim a tax refund by filling in form P50 - Claiming tax back when you have stopped working, which is available online at www.hmrc.gov.uk. Send the form to HMRC, together with form P45, Parts 2 and 3 - and keep Part 1A for your own records.

HMRC will send you any tax refund you're entitled to by post. They'll also send you a new form P45, Parts 1A, 2 and 3, if necessary.

Category: PAYE, NIC & Benefits In Kind

Leasing a car

Q: I’m thinking of leasing a car in the name of my personal company. Do you have any recommendations to keep the tax burden down?

A: Firstly, if the car triggers a benefit in kind, then you will always be better off looking for a vehicle with low CO2 emissions, as this will result in a lower car benefit percentage and therefore a lower personal tax liability for you.

Furthermore, you should also be aware that if the car has emissions over 160g/km, it is likely that 15% of the lease payments will be disallowed for corporation tax purposes. If the emissions are below this level, the entire lease payments should be tax deductible.

However, please note that this level will reduce to just 130g/km from 6 April 2013.

Category: Corporation Tax

Beep Beep!

The wifes car has been branded up, so if she cuts you up-don't hold it against me!

Your Fired! -Although Technically You Were Never Hired!

I have been recruiting and I thought I'd share my experiences, regarding the applications I received.

1. Spelling
If you are going to bother to apply, get your spelling right. With spellchecker these days there is no excuse. Even worse is when my name is spelt wrong! I would'nt mind but it was on the advert and on the website.

2. Attachments
I had been accepting CVs by email.  I've had quite a few where applicants have not actually attached their CVs, even though they say they have. Check and make sure before you send it. It looks really sloppy and most dont even realise they haven't attached it.

3. Company research
A real bugbear for me. Ive had a couple of promising candidates who knew nothing about the company. All it takes is 5-10 minutes on Google so there really is no excuse. If you have'nt got time or nous to do that or cant be bothered then why should I make time for you.

4. Relevance
I received alot of CVs which dont seem to understand what they are applying for. Either they are not qualified or over qualified. It may be that emailing a CV means you can fire them out quickly at no cost, and little thought. Ask yourself would you hire yourself for this role?

5. CV Layout
Set your CV out in a logical manner and simple and clear layout. I spend about 1 minute scanning the CV so I need to see quickly if its worth considering. Your CV needs to tell a story-if you have gaps-then explain your gaps in your covering letter. If you dont explain them then I'll make assumptions which may not be correct.

6. Achievements
If you are going to put these on the CV then make sure they mean something, alot of the achievements I've seen are frankly a load of waffle. Achievements should be specific, what objective was achieved, and it should be measureable.
For example - "I reduced debtors from £100k to £50k within 6 months". Not I "produce accurate accounts" - thats not an achievement-thats your job!

7. Dress
For heavens sake dress appropriately. Open neck shirts and denim jackets are not acceptable. A smart appearance looks like you've made the effort, and you want to impress.

Some of my favourites were
"I worked for William Hill Bookkeepers" - I assume she meant bookmakers!
"I didnt have time to research the company" - This from a candidate who had been out of work for 18 months!
Under Hobbies - "Cleaning" !!!

Directors’ Loan Accounts Explained

March is a popular year end for small companies to opt for because it falls in line with the tax year. Therefore, this time of the year sees directors and shareholders undertaking a pre-year end review and high on the agenda, is often how to deal with the dreaded overdrawn director’s loan account.

Taking money from the business for personal use when trading as a sole trade or partnership is fairly painless and unless proprietors’ drawings are a major drain on the business’ assets, there are generally no tax implications.

A company on the other hand is a separate legal entity, and therefore, making withdrawals from a personal company requires far more consideration.

In this article, we take a closer look at the consequences on overdrawn director’s loan accounts and how their impact can be reduced, or even avoided.

An overdrawn Director’s Loan Account

If a payment is made to a director and it does not form part of the director’s remuneration package or is not an allowable expense for the company, the payment must be set against their director’s loan account. If the director has a balance available on their director’s loan account, then the director can merrily set such a payment against their loan account with no tax implications.

However, once the available funds are exhausted, the director is in default and therefore a debtor of the company. This can have two implications:


Corporation tax charge - S455

Firstly, if a balance remains outstanding on their loan account at the company’s year end, this can lead to a tax charge on the company called S455. This only applies to ‘close companies’ though- generally speaking a company with less than five shareholders/ directors. The loan account balance must be shown on supplementary pages of the company’s corporation tax and the S455 charge is calculated as 25% of whatever balance was outstanding on the director’s loan account at the period end. The S455 tax is payable nine months and one day from the end of the relevant accounting period.

An overdrawn director’s loan account is effectively an interest-free loan, so S455 is supposed to deter the company from providing such generous perks to its directors. However, S455 is rather unusual in so much as it is temporary- it is repaid back to the company by HMRC, as the loan is repaid by the director to the company. Where the loan is repaid within nine months of the end of the accounting period though, relief is due immediately, i.e. the S455 is never physically paid (although disclosure is still required in the company’s tax return).

Provided the director repays the loan within nine months of the end of the accounting period, say by the company electing a dividend, S455 may never actually need to be paid.


Benefit in Kind

The second implication of an overdrawn director’s loan account is that it can trigger a benefit in kind. As mentioned above, an overdrawn director’s loan account is effectively an interest-free loan. The benefit would be equal to the interest (the calculation of which is stipulated by HMRC). There are a few exceptions though, which can mean no benefit arises:

• the loan is used for certain ‘qualifying’ purposes by the director, such as buying an interest in a partnership
• the company chose to charge the director interest, but the tests for this are fairly stringent
• the loan is deemed ‘small’, i.e. it is under £5,000 throughout the year
  

The interaction between S455 and the benefits code

The interaction between S455 and the benefits code can lead to some unexpected consequences:

• A S455 charge may be mitigated by an election of a dividend after the year end. However, if the balance on the loan was over £5,000 at some point, then a benefit in kind would arise.
• A loan remains under £5,000 throughout the year but does not get repaid by the year end or within the nine months following. This would result in a S455 charge payable but no benefit in kind arising.

So as you can see, an overdrawn director’s loan account could result in a S455 charge or a benefit- or both.

Record Keeping and Disclosure

Good record keeping with regards to a director’s loan account is essential. Poor records could result in the misallocation of expenses/ payments and ultimately, the right taxes not being paid.

Good records are also important, because disclosure of the balance on each overdrawn director’s loan account must be made in the company’s accounts, and the largest balance during the year must also be stated. This would ensure that a loan account that starts and ends below £5,000 is highlighted and also shows lenders and other interested parties how responsible directors are being.

Overall, the key is to keep timely, accurate records and to keep the transactions relating to each of the directors separate.

So what’s the best solution for dealing with an overdrawn director’s loan account?

As with a lot of scenarios, it’s hard to give one solution that will suit everyone’s circumstances. But as a general rule, the triggering of a benefit in kind and S455 charge can be fairly painless provided the director is intending to repay the loan fairly quickly.

However, if the overdraft may exist for some time, it may be preferable for the company to declare dividends (profits permitting). Although there may be personal tax implications for the directors, it is likely to be the quickest way for the overdraft to be cleared. Furthermore, dividends do not attract National Insurance, so it is also likely to be the cheapest option too.

Were All Going On A NI Holiday - Apparently Not!

According to government figures, small businesses are failing to take advantage of a NI tax break, given to new businesses who employ staff. The relief means no employer NI contributions need to be payable for 12 months. This isn't available nationally, only in certain areas.
It is available in Leicester. The government were expecting 132,000 to take advantage of this scheme, but only 5000 have done so. There seems to be a lack of awareness of the scheme, and I certainly find this to be the case in my experience. Businesses do have to apply for this relief, it isn't automatically given.

See link for further details.
http://www.hmrc.gov.uk/paye/intro/nics-holiday/eligibility.htm

Superb Value Offer For New Business Start-Ups

See above for our latest offer to new start-ups, to make sure they get off on the right foot. Starting right and making sure you comply with rules is important, and we can do that, and let you concentrate on working on your business. We also help you to grow and prosper. Remember we work for you, NOT the Inland Revenue!

Common Questions Regarding Accounting & Tax - March Part 1

Problems with paying tax

Q: I’m self employed and I’ve only just prepared my tax return. As a result, I’ve only just found out that I haven’t put enough aside for my tax liability. What should I do?



A: Your balancing payment for 2010/11 and the first payment on account for 2011/12(if applicable) are due by 31 January 2012, together with your tax return.

If you are struggling to pay your tax, you should call HM Revenue & Customs’ (HMRC) Business Payment Support Service (BPSS). HMRC will ask you probing questions about the business and your cashflow, to ascertain why you can’t pay your tax. If they think you genuinely cannot pay your tax they may grant you an extension to settle your taxes in or agree a payment plan. However, they do not reduce the amount outstanding and they will still charge you interest.

Even though you can’t afford to pay your tax, make sure you still file your return before 31 January 2012. Otherwise, you will be charged an automatic penalty of £100.

Sole trade or company?

Q: Up until recently, I was employed in a fairly well-paid job. However, I have left my job and started my own business. Do I need to set up a company? If not, are there any benefits of doing so now?



A: No, you are not obliged to form a company.

However, business owners often chose to set a company up because they can be a more tax efficient vehicle to trade through. Furthermore, being a company makes the business look established and gives it status. And it gives the shareholders (the owners of a company) assurance that their liability is restricted to their investment in the event the company begins to fail to meet its debts.

Having said that, new businesses often generate losses in their early years of trading. If you believe your business will generate losses initially, you ought to consider remaining unincorporated. This would then allow you to carry back any losses against your employment income. If you form a company to trade through from the outset, any losses made by the company are confined to its affairs and cannot be used against your personal affairs.


What is a K code?

Q: I have just received my tax code from HMRC for 2012/13, and it is a K code. Can you tell me what this means and how it will affect my income?



A: Your tax code shows how much tax-free pay (personal allowance) you are entitled to.

Your personal allowance can be increase by things like the Married Couple’s Allowance and professional allowances/ subscriptions.

But it can also be reduced by taxable income that you receive without any tax taken off it (some state benefits/ pensions etc), taxable company benefits and any unpaid tax you owe from previous years.

If you have been issued with a K code, such adjustments have reduced your tax-free allowance to such an extent, that they are actually more than your personal allowance. Normally, the number in a tax code indicates the amount of income you are entitled to tax-free. However, the number in a K code denotes how much should be added to your gross income, before calculating the tax to be deducted from your pay.


Do I pass Class 2 NI if I’m employed and self employed?

Q: I have a full-time job but I also have a small business of my own. Therefore, I pay Class 2 NI contributions. But as I am paying my ‘stamp’ on my employment income, do I have to continue paying Class 2 as well?

A: Class 2 contributions count towards:

• Incapacity Benefit/Employment and Support Allowance
• Basic State Pension
• Bereavement benefits
• Maternity Allowance

I’m afraid you do have to pay Class 2 NI; despite the fact you are paying Class 1 on your employment income. However, if your profits are deemed to be ‘small’ (currently £5,315), you may be eligible for an exception from paying Class 2 NI.

If you are only liable for Class 2 contributions, you should consider your position carefully before applying for an exception.


Is my company dormant?

Q: I formed a company a while ago and I am now receiving letters from Companies House telling me to file the company accounts. However, I did not set the business up eventually. The only transactions were the bank charges in the company bank account. Do I still need to file accounts or is the company dormant?



A: By definition, a dormant company will have no ‘significant accounting transactions’ during the period. There is little guidance on what is deemed to be ‘significant’, but when deciding you should consider whether such a transaction would be entered into its accounting records. You may also disregard the following specific transactions:

• Receipts from shareholders for the payment of their shareholdings
• Fees paid to Companies House for a change of company name, the re-registration of a company and filing annual returns; and
• Payment of a civil penalty for late filing of accounts.

Bank charges do not meet the above definition, and therefore, the company is not dormant. It should therefore abide by the normal obligations for a small private limited company.

If you do not intend to make use of the company for some time, it may be advisable to source a business bank account that does not incur bank charges. You may then be able to take advantage of the reduced filing requirements for a dormant company.