This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!!
Bad debt adjustments
Q: I have recently found out that one of my customers has been declared bankrupt. Unfortunately, I invoiced them four months ago for £1,000 plus VAT of £175 and as this is still outstanding, there is a good chance I won’t receive this and will need to write it off.
How do I account for this in my December 2010 year-end accounts and what income tax relief can I get? And what do I do about the VAT?
A: As the debt is only possibly irrecoverable at this stage you may only ‘provide’ for the debt. You will therefore reduce the amounts owing to you at 31 December by £1175.
For income tax purposes, the doubtful debt expense of £1,000 is allowable because it is for a specific debt and therefore written off in the profit and loss account.
Provided that you have paid the VAT over to HMRC, you can reclaim VAT that you paid and which you have not received from the customer, provided that either the Official Receiver has notified you that no monies will be forthcoming or the debt becomes six months old or more.
You add the amount of VAT you are reclaiming to the amount of VAT you are reclaiming on your purchases (input tax) and put the total figure in Box 4 of your VAT Return.
If you cash account for VAT, you will never have paid the VAT over to HMRC and therefore, you are not due a refund from HMRC. You will merely need to do the accounting adjustment above.
If you would like more information of the treatment of bad debts, and a referral to help with collecting overdue amounts, get in touch.
Qualifying years for National Insurance
Q: Last year I incorporated my business and I now draw a small monthly salary and quarterly dividends, which means I do not have to pay any tax or National Insurance. Should I be paying National Insurance to protect my rights to state pension and benefits?
A: National Insurance is charged on income from employment when the earnings exceed £110 per week. However, if your earnings are above the Lower Earnings Limit (currently £97 per week) you are still credited with a qualifying earnings period for state pension and benefits.
If your earnings fall under the Lower Earnings Limit, you can consider making voluntary National Insurance Contributions.
Certain individuals may also be entitled to National Insurance credits where they have not been earning due to caring for a younger child or disabled person, or where they are an approved foster carer. There are also credits available for people in receipt of certain state benefits.
You have not stated your age, but if you are concerned about your state pension, you should apply online for a forecast at www.direct.gov.uk.
High earners tax tips
Q: I am the Director of Marketing for a London-based company and have a salary of £120,000 per annum, plus benefits. What changes are going to affect me during 2011/12, and how can I mitigate these changes?
A: From April 2011, the Government is lowering the 40% higher rate band from £37,401 of taxable income to £35,001, to ensure high earners do not benefit from the £1,000 increase in the personal allowance. National Insurance will also rise by 1%.
Furthermore, those earning over £100,000 like you will lose their personal allowance at a rate of £1 for every £2 of income in excess of this band. And worst of all, income in excess of £150,000 will be taxed at the Additional Rate of 50%. You’ve mentioned that your employer gives you benefits in kind, so this may well apply to you.
High earners have been one of the hardest hit by the Budget, so you need to be more aware of the allowances available to you and smarter with your tax planning. Here are some really simple ideas for you to consider:
- Investing up to £10,680 in an ISA
- Top up your pension. Whilst relief has reduced to contributions below £50,000, contributing to your pension remains one of the best ways to reduce your tax liability
- Transferring assets to someone you trust such as your spouse if they are a lower tax rate payer, to cut your overall tax bill as a couple. There are pitfalls here for the unwary!
- Childcare vouchers. Their benefits have been reduced for higher rate tax payers, but there are still some tax savings
- Putting your money in investments with capital growth; rather than income such as dividends, to make use of your Annual Exemption of £10,100
- Consider investments in Venture Capital Trusts or through the Enterprise Investment Scheme
- Donating under the Gift Aid scheme
Staff suggestion box
Q: We have a staff suggestion scheme in place and one of the staff has come up with a great idea that we think will create less waste during our manufacturing processes. Consequently, we think it will save us about £14,000 over the next twelve months and about £10,000 annually.
What is the maximum that I can pay him without having to deduct tax and NI?
A: As a result of you adopting the suggestion and it being expected to lead to efficiencies that you estimate will save you money, you meet the exemptions under the ‘financial benefit award’ rules for staff suggestion schemes.
There are two ways of calculating the award. The first is to pay 50% of the expected first year savings. The second method is to apply 10% to the expected savings over the first five years.
With both of these methods, there is an overriding amount of £5,000 that can be paid without the employee being subject to PAYE and NI. Any payment above this will be subject to PAYE and NI and should be added to your employee’s wages in your normal payroll calculations.
The first method results in an award of £7,000 and the second £5,400. However, if you wish to avoid tax, then the maximum you can pay him is £5,000. You would then not need to make any deductions and have no additional reporting requirements.
Use of home
Q: I’ve been talking to my mates down the pub, and I’ve found out that some of them claim lots more Use of Home in their accounts than I do- yet we do similar things. Why is that?
A: There are two main ways of calculating use of home. If there is only minor use, for example writing up the business records at home, you may put through a reasonable estimate with little risk of dispute by HMRC. Needless to say, it should be consistent with your household utility bills though.
If you were based from home, then you could apportion the household bills such as gas, electric, water etc by dividing the total costs over the number of rooms, and multiplying that figure by the number of rooms used for business purposes.
In order to satisfy tax law, when part of the house is being used for the business then that must be the sole use for that part at that time. Thus if the part of the home used for business purposes is simultaneously used for some other non-business purposes, then no deduction is available.
As you can see from the above, if you don’t work from home regularly, you may be using the first method. If you are working regularly from home, then it would be advantageous to use the second, i.e. apportionment method.
In practical terms, you will need to be seen to be applying common sense to your claim, for example, if you only write up your books at home, there would be a far smaller charge than if you were working each day from home and treating it like an office. Although there is no fixed proportion of costs for particular trades, there is an expectation of what use of home will amount to. Any enquiries from HMRC will be more likely when the amount of use of home claimed is significant and inconsistent with the nature of the trade. If the room has a dual purpose, you must be aware that the room should not be used for any other purpose whilst it is being used for business purposes.
Each case will be different, so if you would like advice in this area, please feel free to contact us.
Q: I finished drawing up my books for the year ended 31 December 2010, and realised I’d made an error with my VAT. I think when I totalled up the input VAT for the June quarter, I missed out a whole page of my cashbook expenses.
Am I able to reclaim this now somehow?
A: You may correct errors that arose in VAT accounting periods that ended up to four years ago.
At the end of your VAT accounting period, if the net value of previous return errors is less than £10,000 and 1% of the Box 6 figure on your VAT return for the period when you discover the error (subject to an upper limit of £50,000), then you can make the adjustments to correct the error on the next return.
As your mistake was not deliberate or careless, no penalties or interest should arise.
However, if you had made a deliberate or careless error, you could have been required to separately notify HMRC and in this instance, HMRC would probably have levied penalties which can be up to 100% of the error.
In conclusion, you will be able to reclaim the input VAT on your next return provided it meets the criteria above.
VAT and cashflow
Q: The settlement of my VAT liability each quarter is beginning to become a burden in these difficult times. Is there anything I can do to reduce my liability or ease my cashflow?
A: Firstly, you may be able to reduce your liability by registering for the Flat Rate Scheme (FRS). Basically, you would pay an industry specific percentage (set by HMRC) of your turnover inclusive of VAT at the standard rate. You would not be able to recover your input VAT, unless it was on capital items costing in excess of £2,000 (including VAT). You would need to assess whether the scheme would be advantageous for you. However, you should bear in mind that once you join the scheme, you must remain in it for 12 months and your VAT exclusive turnover must be below £150,000 p.a.
If your annual turnover is above £150,000 but below £1.35m, then you could apply to use the Annual Accounting Scheme. You make 9 monthly payments based on the previous 12 months with a final balancing payment and only submit one return per year.
If your customers are slow to pay and your VAT taxable turnover for the next 12 months is expected to be under £1.35m, you could apply the Cash Accounting Scheme. This will mean that all VAT is accounted for on sales invoices only once customers have settled them, and on your suppliers’ invoices when you pay them; not when they are raised.
The above schemes may be used in conjunction with one another.
As you can see, there are a number of things to consider and therefore we suggest you contact us for specific guidance and advice, before making a decision.
Amending a tax return
Q: I rushed the preparation of my 2009/10 tax return in order to file it on time, but I have just realised that I missed off my rental accounts!
Can I revise my tax return and will I incur any fines for doing this?
A: If you make a mistake on your tax return, you’ve normally got 12 months from 31 January after the end of the tax year to correct it.
You may notify HMRC in the form of a letter to your Tax Office, detailing the omissions and which page numbers and boxes are affected. Or you may find it easier to write to them and enclose an amended return or just the particular pages that have changed. Alternatively, if you filed your return online with HMRC, you may make any alterations online.
No penalties for late filing will be applicable, but please be aware that if the amendment results in additional tax to pay, you will be charged interest from the due date of payment. As 28 February has also now passed, you will be liable to a 5% surcharge on any unpaid tax. And a second 5% surcharge will apply from 31 July 2011 if it continues to remain outstanding at that point.
Disclaimer – advice shared in this column is intended to inform rather than advise. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.