Mike Tombs's Blog

This blog provides information about tax, accounting and other issues affecting small owner-managed businesses in the UK. It is intended as a general source of information but you should not assume that everything applies to your specific circumstances. We are always happy to discuss providing tailor-made solutions to suit your individul needs. Visit www.tlaservices.co.uk to sign up for our free monthly Tax Tips and News newsletter.

Monthly Archives: July 2014

How to Borrow From your Own Company without Falling Foul of the Law

A number of company directors receive loans from their companies, either to reinvest in the business or for personal use. Until recently the laws surrounding such a transaction have been stringent. However, from the 6th of April 2014 things have changed, albeit for the better, making it easier to take loans from your own company. This article will briefly cover the rules pre-April 2014 and then the new changes.

The Rules Pre-April 2014

Previously when an employee of a company received an interest free or a very “cheap” loan it could be treated as a taxable benefit. The interest rate for loans to employees is determined by the HMRC and was at 4.0% before the 6th of April. For a loan to be classed as taxable, or a benefit in kind, it has to exceed the threshold value which at set at £10,000.

A calculation is required to determine whether a loan breaches this threshold, by taking the loan amount and applying the gazetted interest rate, then taking away any interest already paid by the loaned.

Taking as an example, if you borrowed £10,000 from your company, at the official rate of 4.0% you would be liable for a £400 taxable benefit. However, since it is below the £5,000 threshold you would receive it as a benefit in kind. Once it goes over £5,000 you would have to pay tax on it.

Limit Changes

 

With effect from the 6th of April 2014 the threshold value has been lifted to double the previous value and it is now £10,000. This has the implication that you can now borrow up to £10,000 from your company without paying any tax on it (it is regarded as a non taxable benefit). Another change has been to the rate of interest you will pay if you exceed the £10,000 threshold, which has been reduced modestly from 4.0% to 3.25%.

Potential Downsides?

This loan facility has often been open to abuse and recent changes have been made to tighten the process up. The biggest risk has been company directors borrowing money from their companies and then using it as a way to avoid tax by holding the loan indefinitely.

 

The new rules now mean that a company can no longer loan money to an employee indefinitely without meeting the tax burden. When a loan is still outstanding 9 months after a company’s yearend then 25% in tax will be levied on the outstanding amount. A refund of the tax charges will be made when the loan amount is repaid in full or it is written off. This has been necessary to avoid a common practise which involved paying back the loan just before the nine months were up and then borrowing the same amount shortly thereafter.

Anti-avoidance rule

To prevent the practice mentioned above a new rule has been passed, applying to all companies with yearends beyond March 20 2014. If a company repays a loan just shy of the 90 day period and then another loan extended within 30 days of the repayment, HMRC will consider the repayment as a non-repayment and the 25% tax rate will be applied.

 

Another common practice has been for a company to arrange a “bridging” loan in order to repay the original loan before the 90 days are up. The company would then make a repayment after the 30 day period in order to circumvent the rules. HMRC now watches out for this practise and if a company is found to have done this then the repayment is ignored and tax charged on the outstanding loan amount.

 

As you can see although the changes have made the system more generous, safeguards have also been put in place to ensure that it is not abused. As a director you can now have the option of a bigger loan from your company tax free, but you also have to take responsibility for paying it back and keeping within the rules.

VAT on Digital Services

Do you sell digital services such as: music or software downloads, e-books or online videos? If so, do you know where your customers are, and whether they are businesses or individuals?

From 1st January 2015, when you sell digital services across international borders you will have to collect information about your customers to determine if they are businesses or not, and where they are based. Where your international sale is to a non-business customer, from 2015 you will have to charge that customer VAT of the country where he or she is located (if that’s in the EU). You will also have to register for VAT in your customer’s country. This is because the VAT threshold for traders selling into other EU countries is zero.

Many music and software creators are suspicious of the large online stores such as iTunes, and want to sell their tunes or games directly to their customers. If you sell through a large online store, that store sorts out the VAT so you don’t have to worry about it. However, if you sell your digital product directly to non-business customers who are located in other EU countries from 1st January 2015, you must deal with the VAT consequences.

The easiest way to do this will be through the HMRC website under a system called VAT-MOSS. This system goes live from October 2014, and it will allow you to account for VAT in all the EU countries you sell services to.

However, in order to use VAT-MOSS you must first be registered for VAT in the UK. If you are not already VAT registered, perhaps because your turnover does not exceed the UK VAT threshold of £81,000, you need to pick one of these options:

  1. register for VAT in the UK;
  2. stop selling digital services to non-business customers outside the UK; or
  3. sell only through online stores or other businesses.

We can help you make this choice and do the necessary registrations.

How to Face the Threat of Business Insolvency Positively

In most cases the failure of a business is treated as a personal failure. Your ego may stand in the way of taking the necessary actions to try and resolve your financial predicament, especially when creditors are knocking on your door every day. There is light at the end of the tunnel if you take action and you may still be able to rescue your business. This article will show you 5 steps you can take starting today to help recover your business.

  1. Cease Trading

As long as you are trading then creditors will assume you are bringing money in and will expect to get paid. Ceasing trading as soon as you become aware your business is facing financial difficulty protects you from charges of business misconduct as well as keeping creditors at bay. Ceasing trading consists of the following:

  • Stop taking new orders

  • Stop signing any new contracts

  • Avoid creating new debt

  • Shutting down all operations

Notifying the HMRC (to prevent tax hell) and all your creditors are all part of ceasing trading and this can be accomplished by sending an email to ALL creditors and contacting HMRC by telephone. Explain to your creditors what you are doing (attempting recovery or voluntary windup).

  1. Get Professional Assistance

Taking the first step of acknowledging your business is in trouble is the hardest. After communicating your position to your creditors and the HMRC you need to schedule a consultation with an Insolvency Practitioner. IP’s usually offer free consultations so you do not really have anything to lose. At this point you need professional assistance to help you make an assessment of your business position and help with coming up with options.

  1. Consider a Company Voluntary Arrangement (CVA)

One of the options your consultations with the Insolvency practitioner may suggest is approaching your creditors formally through a CVA. The advantage of a CVA over informal agreements with creditors is that it is a formal agreement with enhanced chances of success. A feature of the CVA is negotiated affordable monthly repayments which will increase your chances of reviving your business, while still keeping your creditors happy.

  1. Emergency Funding?

Even when your business is struggling financially, it is worth the effort to search around for alternative sources of financing to rescue your business. There are companies specializing in providing credit to businesses with poor credit, of course their terms and interest rates may be higher so you need to be very careful. Other sources of emergency finance could be:

  • Invoice discounting
  • Small business grants
  • Loans secured against personal assets
  1. Voluntary Liquidation

Depending on your future business plans, and whether the previous options are available to you, there is always voluntary liquidation. With voluntary liquidation you agree to sell business stock and assets to repay your creditors (called a creditor’s voluntary liquidation). A pre-packaged administration sale will offer any company directors capable of paying fair-value for the assets the opportunity to do so. This will make creditors realize you are taking action to pay down your debts leading to less demands for payment.

 

Following these 5 steps will help you resolve your current financial situation with your business. Burying your head in the sand could have disastrous consequences, both personally and for your business reputation. Take action today and seek professional help.