August 2005 Newsletter
If you have high speed internet access in your hotel you are no doubt taking out time from the pool to read this newsletter? To all our clients and prospects we hope your holiday arrangements progress stress and trouble free. For those of us who are working through, the newsletter includes a summary of VAT schemes that can be used by small businesses, and a few other tax ideas.
Three Ways to make VAT easy for small businesses
Cash Accounting
If your taxable turnover (excluding VAT) will be £660,000 or less during the coming year, you may be eligible to calculate your VAT payments using the cash accounting VAT scheme.
The cash accounting scheme is especially useful for businesses who are owed more, from customers, than they owe their suppliers.
Essentially you pay VAT only when your customers have paid you, not on submission of a sales invoice.
This may improve cash flow and means you only pay over VAT that has already been paid to you. BUT please be aware that you can only claim back VAT on your purchases once you have paid your suppliers.
Annual Accounting
How would you like to minimise the amount of time you spend completing a quarterly VAT return? A solution may be found in the Annual Accounting scheme which allows you to calculate your VAT once a year!
Practically you will need to estimate your VAT for the coming year and pay in monthly (or longer) instalments. The balance will become due with the Return, two months after the end of your accounting year.
A word of caution! If you do use Annual Accounting for VAT, we suggest that you continue to maintain a monthly bookkeeping routine. If you leave everything to the end of the year you will find the filing of your annual return, two months after your year end, difficult to meet! Penalties, surcharges and interest may be charged if you are late.
You can join this scheme if you meet the following conditions:
1. If your expected, taxable annual turnover is £660,000 or less, but more than £150,000 and you have been registered for 12 months already.
2. If your annual taxable turnover is estimated to be under £150,000.
Flat Rate Scheme
If your projected, annual, taxable turnover (excluding VAT) is expected to be less than £150,000, then you could consider the FLAT RATE SCHEME.
Time is saved with this scheme as record keeping is simple - you calculate your total turnover (inclusive of VAT) and apply a flat rate percentage (different rates apply depending on which business sector you belong to). There is potential for a 1% reduction in the rate for the first year of registration.
You can then be certain of what your liabilities will be, although you will not be able to claim back VAT on purchases unless you buy a capital item over £2,000. You must apply to be part of this scheme.
Combine the schemes
You can also use a combination of the above schemes. In this way you can maximise all the benefits:
- VAT due based on cash received
- One VAT return per annum
- Regular monthly payments to ease cash flow.
- Simplify calculation of VAT due by applying the Flat Rate Percentage.
Call us for advice if you think you could benefit from any of the above schemes - or all!
Arctic Systems - More on Husband & Wife Companies
At the risk of repeating ourselves, and as an appeal in this case has now commenced, we need to give thought to what can be done in the interim to forestall any possible problems arising from returns made by companies owned jointly by husband and wife (or those who have entered into a civil partnership).
Things we can do include:-
- review previous tax returns to see if dividends were split adequately, taking into account the judgements made so far in this case.
- deflecting the Revenue's interest by paying fair market salaries to each spouse regarding their respective duties. How this is calculated, however, is a difficult question which we can discuss with you.
- adjusting shareholdings to reflect the real input of each partner, a position much less likely to be challenged by the Revenue.
If you are worried about your own company's returns, pick up the phone!
In business at the 5 April 1996 - and still going strong?
When self assessment was introduced, way back in 1996, the commencing provisions produced a strange result.
If your year end was set to be any month other than the 31 March or the 5 April, then a proportion of your profits "overlapping" the tax year end were actually taxed twice. This created a relief called "overlap relief" which you will be able to claim when you stop trading.
Two problems may arise!
1. If your profits now are much lower than they were
in 1996-97, or
2. If your profits now are much higher than they were in 1996-97.
Profits are now much higher
If your profits are now higher, when you stop trading the deduction for overlap relief will have a less than proportionate affect on your final years tax bill. The outcome may be a larger than expected payment due to Her Majesty's Revenue and Customs.
Profits are now much lower
In this case the deduction of overlap relief from your final years profits may turn your final assessment into a terminal loss. Looking good as there is no tax to pay.
But what if you can't carry the losses back and use them to reduce tax in earlier years?
In this case the notional double assessment of profits in the 1996-97 tax year will become a permanent double taxation of profits!
Possible solutions.
We can help you plan your run down to cessation of trade and perhaps organise a pre-cessation change of accounting date, which may mitigate the effects of overlap relief on close down.
If a higher tax bill looks inevitable, we can help you plan for the "rainy day" - to save in advance and have enough reserves to cover the bill.
So if you are thinking of scaling down your business now that you are getting older, or otherwise contemplating a cessation of trade, then call us now. The best way to minimise any potential damage is to plan for the most effective deployment of overlap relief and maximise any strategic opportunities that you may still have. Once you have stopped trading planning opportunities may be lost!
Incorporating your Business - Tax allowances for plant and machinery
Possible tax advantage can be created if you are using the Holdover Relief provisions when you incorporate your business. (Holdover relief is used when your business assets are transferred partly for shares in the new company but predominately as a credit to your loan account in the company.)
If this applies then you can elect to sell plant and machinery to the company for a nominal price. As this nominal price is likely to be much lower than the tax written down value of the assets, this can give rise to two significant advantages:
1. A cash flow saving as the resulting balancing allowance can be used to reduce your final tax bill as an unincorporated business, and
2. As your marginal rate of tax as an individual is likely to be higher than corporation tax rates, then you create a permanent saving in tax.
Tax Diary August/September 2005
1 August 2005 - Due date for corporation tax for the year ending 31 October 2004.
19 August 2005 - PAYE and NIC deductions due for month ending 5 August 2005. (If you pay your tax electronically the due date is 22 August 2005)
1 September 2005 - Due date for corporation tax for the year ending 30 November 2004.
19 September 2005 - PAYE and NIC deductions due for month ending 5 September 2005. (If you pay your tax electronically the due date is 22 September 2005)
DISCLAIMER - PLEASE NOTE: The ideas shared with you in this email are intended to inform rather than advise. Taxpayers circumstances do vary and if you feel that tax strategies we have outlined may be beneficial it is important that you contact us before implementation. If you do or do not take action as a result of reading this newsletter, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.