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In this blog, Darren Stone, partner at Leon and Company Chartered Accountants writes about the importance of putting aside enough cash so that a business can pay its taxes on time.
As accountants, we are always being asked about tax and other liabilities which need to be paid over to the authorities, like HMRC, Companies House etc. One thing that I often talk about is the importance of planning for the tax that is due.
Most business owners will be well aware of the regular taxes, i.e. quarterly VAT, monthly PAYE and National Insurance Contributions if you have a payroll, and of course personal or corporation tax on the end-of-year profits.
What many business owners - especially those new to the game - often overlook is the benefit of setting up two bank accounts. One is to manage the business’s day-to-day banking, like paying suppliers, staff, etc. The other is a reserve account (often known as the “number two” or “saver” account); this account is where you can deposit all future monies required to settle the company’s tax, VAT and payroll liabilities. Many people overlook this simple step – and yet it can resolve so many problems.
I am sure many will recognise the old scenario of waiting for a payment to arrive from that stubborn customer, when in the meantime, your own suppliers are waiting to get paid. When you finally get paid, the temptation is to take the whole of that money and pay yourself some (of course!), and pay off your most pressing suppliers, contractors, etc. But hang on a minute! That payment included 20% for VAT, possibly 19% for corporation tax. And what about the PAYE and NICs due on your payroll? Essentially, this is the old “robbing Peter to pay Paul” scenario. And moreover, this pushes the problem down the line. Imagine getting to the end of the quarter, or year, and there’s no cash in the reserves to pay the VAT or tax when it falls due.
This is why I always recommend setting up a reserve bank account on day one. As soon as cash rolls in, it is wise to remember that not all of it belongs to the business. Some of it belongs to the tax man, and as such, should be immediately transferred to this secondary bank account. I realise people will be saying that this is not living in the real world, but I say that not being able to pay your taxes will soon wake up a business owner to the real world.
I strongly recommend speaking with your accountant to work out a guide as to how much you should be putting aside on a regular basis. For many, this is the beginning of cash-flow planning, and moreover, will enable the vast majority to keep on track, avoiding ‘robbing Peter to pay Paul”, and allowing the business owner to get on with growing their business.
Tax Returns deadline - have you done yours?
This month, Darren Stone, partner at Leon and Company Chartered Accountants writes about the upcoming tax return deadline and what is involved.
It’s that time of year again. And I don’t just mean the festive season! Most accountants are now getting busy for the upcoming deadline for submitting self-assessment tax returns for the year-ending 5 April 2017. Notwithstanding the changes on the horizon with the much publicized ‘Making Tax Digital’, which promises to change how we report our income, most of us still file online - and we have until 31 January 2018.
So, do we have to file a tax return? In the main, it is for those of us with non-standard income, including reporting our annual business results from self-employment or a partnership, reporting capital gains (e.g. the “profit” on the sale of a rental property), dividends, trust income, property rentals less qualifying expenses (you can still claim full mortgage interest for one last year only, but please note that wear and tear allowance was abolished from last year!), bank and building society interest received, taxable foreign income, etc. This income, for the period ending 5 April 2017, needs to be reported in our tax returns alongside regular income taxed at source, such as regular PAYE and pension income.
We should also report what private pension contributions we have made during the year, along with any charitable donations made under Gift Aid (possibly including annual synagogue subs!). This is particularly relevant if you are a higher-rate tax payer as you can get some tax relief on these payments. We should also disclose any Child Benefit received where our income is over £50k, and also disclose if a student loan is still being paid off.
The bottom line is that if any of the above applies to you, and you are not already completing a tax return, then you may very well have to register as soon as possible.
The last point to make is if we submit our tax return just one day late, then we incur an automatic £100 penalty, with an increasing penalty scale the longer we leave it. There is also a separate regime of penalties for paying tax late as well. So, a late tax return, and late payment can be even more costly!
If you would like more information on whether you should be registered, then we would be delighted to have a chat. In the meantime, enjoy those festivities…
In this blog, Darren Stone of Leon and Company Chartered Accountants in Leeds answers your burning tax queries.
As accountants, we often get approached by clients and the public with all sorts of tax questions. So, over the next few articles, we continue to answer some of the more common questions. Here is just a selection of recent queries:
Is it true I can claim for eye tests and spectacles as a business expense? A business can, in certain circumstances, claim for eye tests and spectacles for employees using a VDU in their line of duty. But the spectacles must be prescribed specifically for VDU-use, or a taxable benefit will arise. This doesn’t extend to the self-employed individual as it applies to employees only.
Can I claim tax relief on health insurance and school fees? If you have a company, it may pay for these type of expenses; but be aware you would be taxed as if you had received extra income to cover those costs. However, certain insurances that protect the business can be allowable; examples can include key-person cover and relevant life policies. The payment of such premiums is extremely tax efficient.
Can I claim for meals out, including when I treat a perspective new customer to lunch? If you are working away from your main base, then subsistence costs can be claimed, including lunch, possibly dinner and refreshments. That being said, the cost of food and drink must be demonstrably reasonable. If you treat a customer (or any contact!), then this is considered ‘entertaining’ and although it is a legitimate business expenses, no tax relief is granted on such hospitality expenditure.
Can I claim professional fees incurred during the year? Certain legal fees attract tax relief; mainly those relating to trade issues such as drafting a contract, supplier disputes, and employee issues. But be careful, as legal fees relating to shareholders, the company’s structure, and even certain property lease work are not necessarily tax allowable. In general, other professional fees do attract tax relief, including architects, surveyors for business premises, and even accountancy fees! But you should remember that your accountant’s fees for preparing your own, personal, tax return is not actually a business expense – so is not usually claimed.
So far, it sounds like there is so much I can’t claim for. Is there any good news? Certainly! You can claim for all sorts of areas, including stock, equipment, advertising, insurance, repairs, postage, stationery, travel, staff, etc. These can be claimed in your accounts as a deduction against your income; therefore, allowable for tax purposes. So long as the costs are wholly connected with your business, then they would qualify for 100% tax relief.
This is just the tip of the ice-berg with tax questions. In all cases, this article should not be relied upon to make decisions - always seek professional advice first.
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