Articles in Category: Contractors

Which trading vehicle to use

on Friday, 15 June 2018. Posted in Startup Advice, Accountancy Advice, Business Advice, Tax Advice, Contractors

To incorporate or not?

Which vehicle is right for your business?

 

In another blog we highlighted some of the points we discuss at our first meeting with a new business-owner. This blog will consider the first of the points we mentioned.

When you have decided to start your own business and you know what you are going to do, one of the next questions to consider is which trading vehicle to use. Are you going to be self-employed or will you incorporate the business as a limited company?

Some of the pros of being self-employed are:

  • simplicity,
  • less bureaucracy,
  • there can be less expenses,
  • the tax treatment of cars can make it quite favourable to run a car through the business,
  • if the profits are low there can be less overall tax to pay.

And some of the cons of being self-employed are:

  • often existing businesses do not like trading with self-employed people – the gig economy can create confusion over whether you have worker’s rights and whether you are actually an employee or not.
  • Depending on the profits of the business you could be paying more tax than you need to. The higher the profits the self-employed have the more tax they will pay when compared to a company and its owner.
  • If the business fails you will be responsible for all the liabilities that are owed.

The Pros of trading via a limited company include:

  • Businesses prefer to trade with a “proper” business that is incorporated.
  • With higher profit levels overall less corporation tax, national insurance and income tax will be paid over to HM Revenue & Customs (HMRC) than a business that is self-employment.
  • Limited liability: if the company fails (and assuming the insolvency is not due to illegal reasons) your liability to pay creditors is restricted to those to whom you have given a personal guarantee to.

The Cons of using a limited company include:

  • Often it is not worth having a company car as too much tax is paid.
  • There are more costs of compliance: Companies House, the Accountant etc
  • The entrepreneur’s relationship with the company can become confusing as they can have multiple interactions: they are the owner, director, employee, creditor and often the landlord.

Aysgarth Chartered Accountants is an accountancy practice that specialises in start-ups and entrepreneurial SMEs. This blog is not intended to give advice, it merely introduces the subject and is not an exhaustive list of all the Pros and Cons of being self-employed or incorporating. If you would like to know more about establishing your own business we would love to discuss this in more detail with you at our Leeds office. Please get in touch.

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The Business Start-up and Corporation Tax

on Saturday, 23 June 2018. Posted in Startup Advice, Accountancy Advice, Business Advice, Tax Advice, Contractors

how it is calculated and when it needs to be paid

When to pay corporation tax

 

Companies pay Corporation Tax based on their profits. The profits chargeable to Corporation Tax may not be exactly the same as the profits before tax figure in the year end financial statements. Some of these differences include:

Permanently Disallowed Expenses: From the accounts figure there maybe some items that are permanently disallowed as a tax deductible expense, for example entertaining suppliers or customers. This means that whilst entertainment is a valid business expense for the accounts it is not a tax deductible expense, spending on entertainment will not reduce your tax bill.

Temporarily Disallowed Expenses (timing differences): Other items, like pension contributions, are only allowed in the financial year they are actually paid over and not when they are provided for in the year end accounts.

Depreciation of fixed assets is generally not allowed but instead Capital Allowances or an Annual Investment Allowance are given as a deduction.

Dividends: UK dividends payable and receivable are outside the scope of corporation tax

Other differences: There are claims, like the R&D allowance, that create a different tax deductible expense when compared to the expense in the accounts.

Corporation Tax rate. Once the profits chargeable to corporation tax have been calculated then the correct corporation tax rate needs to be applied. HMRC treat each year ending 31 March as the corporation tax year.

For the year ended 31 March 2018 all companies will pay tax at a rate of 19% of the profits chargeable to corporation. The previous year it was 20%. If then a company has a year end of 31 December, for the 2017 year it will pay tax at 20% for January to March 2017 and 19% for April to December 2017.

When is the tax due to be paid? Ignoring companies that are on quarterly payments, in general corporation tax is due 9 months and 1 day after the year end. Therefore a company with a 31 March year end should pay its tax by 1 January the following year. If tax is paid early interest is paid by HMRC, if tax is paid late they charge interest. A tax return also has to be filed within 12 months or there will be penalties.

HMRC is set-up to only process tax periods that are 12 months or less. Therefore if a company has a 13 month financial period for its accounts, 2 company tax returns will have to filed and the corporation tax due is payable on 2 separate dates: 9 months and a day after the end of each tax return.

And unlike other taxes, when corporation tax is paid the payment reference changes every year, the last number increases by 1 for each company tax return period.

This leads to the main point we try to get the directors of start-up companies to understand: unlike PAYE which is deducted immediately an employee is paid, corporation tax is not due until 9 months and a day after the year end. Make sure you do not spend all the company’s bank balance because you may well be spending the tax that will become due.

Don't worry! This blog is just a simplified version of the corporation tax rules. Rates and rules may change in the future. The comments above may seem complicated but in this short space they cannot cover every possibility or scenario. If you are our client we will look after all this for your company. But if you are stuck with your corporation tax or would like a second opinion on a tax matter then please get in touch.

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Self assessment

on Friday, 29 June 2018. Posted in Startup Advice, Accountancy Advice, Business Advice, Tax Advice, Contractors

Income tax and tax returns

31 January tax deadline

 

If you are self-employed or receive untaxed income then you have to file a self-assessment tax return. Technically that does not necessary mean a director has to file a tax return but usually HMRC like to think it does.

Self Assessment tax returns are your personal responsibility. If you pay an accountant to prepare your return on your behalf they should invoice you personally. If they invoice your limited company then there would be a benefit in kind and you would have additional tax to pay.

If you are going to file a paper tax return it must be filed by 31 October following the end of the tax year. Electronically filed returns have the deadline pushed back 3 months until 31 January. If the tax return is late there will be a fine to pay.

Tax arising from the tax return is due to be paid by 31 Januaryax arising from the tax return is due to be paid by 31 January after the tax year to which it relates. At new client meetings I then usually take a sharp intake of breath and try to explain payments on account!

If your tax is over £1,000 then you have to pay a further 50% of it as a payment on account (in advance) for the current year’s tax. Another payment on account is due by 31 July – ie in 6 months’ time (and AFTER the end of the tax year to which it relates). The tax then due by the next 31 January has the payments on account made over the last 12 months deducted but you then add 50% of the tax liability (before the payments on account were subtracted) for the next tax year. Confused?!

Try to follow through this table:

Tax year Tax due Payment on account 1 Payment on account 2 Less payment on accounts paid Total due 31 January Tax due 31 July Year tax paid
X1 500 0 0 0 500 0 2019
X2 1,500 750 750 0 2,250 750 2020
X3 1,500 750 750 (1,500) 750 750 2021
X4 2,000 1,000 1,000 (1,500) 1,500 1,000 2022
X5 2,000 1,000 1,000 (2,000) 1,000 1,000 2023
X6 2,000 1,000 1,000 (2,000) 1,000 1,000 2024
X7 3,000 1,500 1,500 (2,000) 2,500 1,500 2025
X8 3,000 1,500 1,500 (3,000) 1,500 1,500 2026
X9 3,000 1,500 1,500 (3,000) 1,500 1,500 2027

Important things to be aware of are:

  • if your tax is less than £1,000 then you will escape payments on account.
  • you will also escape payments on account if the tax due is less than 90% of your total tax suffered, eg if you earn a large salary under PAYE but have other minor income that is untaxed
  • Payments on account do not mean you are paying MORE tax, it just means you are paying it EARLIER (but still a lot later than our PAYE friends are)
  • Payments on Account are fixed by legislation but if your income goes down or you have more taxed income (ie a PAYE salary) then you can justify reducing the payments on account
  • If you under pay payments on account HMRC charges interest on the late tax but if the payments on account were too much HMRC will give you interest on the money deposited with the government.

All this can soon become very complicated. If your income stays roughly the same then all that happens is that once you are into Payments on Account there is a rhythm: every January and July paying some income tax. If your tax liability is gradually increasing then the January payment will also include a balancing payment, so the rhythm is large payment January, “small” payment July, large payment January…

The tax rules do change so the rules mentioned today may not be applicable in the future. If you are unsure about your tax return then please contact us to take the stress and worry out of self assessment.

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Cloud Accounts Apps

on Tuesday, 24 July 2018. Posted in Making Tax Digital MTD, Startup Advice, Business Advice, Cloud Accounting, VAT advice, Contractors

Recording financial transactions and meeting your legal duties

For Cloud Accounting we recommend Xero

 

Your new business is named and ready to start trading but how are you going to record its financial transactions and meet your legal duties?

In our recent blog on “VAT and the start-up enterprise” we referred to Making Tax Digital (MTD) and the new VAT rules. These proposed regulations confirm the centrality of the digital recording of accounting transactions. Unless you have a very simple and small business this means using an accounting programme. Desktop Apps are rather dated and inflexible. If you have to email backups there will be GDPR issues to consider.

The obvious solution is to use an online accounts app. These Cloud based programmes are brilliant. You, your staff and your accountant can all be working on live data. Most have Apps for phones or tablets, so as long as you can access the internet you could be sat on the beach and still be sending out invoices, reconciling your bank account or posting last month’s depreciation!

We find that with these Cloud products you get what you pay for. If the accounting system is free or cheap then it will be free or cheap for a reason. Our advice is to invest a few more pounds each month – it will save you time and probably money in the long term.

This is why we recommend Xero. It isn’t perfect but in general it is better than the other Cloud packages.

It will email your quotes, invoices, credit notes and statements out to customers. You can attach pdfs, pictures or other documents to transactions. If you have a query you could call us up, we would log on to your data and we could talk it through with you, making sure that everything is posted correctly.

But the best bit is the interaction with bank accounts. An increasing number of banks have direct bankfeeds with Xero (for example Santander and HSBC), other banks have indirect bankfeeds via a third party provider (for example Lloyds, NatWest and Barclays) but some banks you have to download the statement and then upload it into Xero. With the direct bankfeeds yesterday’s bank transactions just appear on Xero the following morning. And once the information is in Xero, then with one click of a mouse you can reconcile the bank account and record a sales invoice as being paid. This is so efficient.

Over the years we have written a number of blogs on cloud accounting but if you want to know more and see how we can work with you on this important topic then please get in touch.

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IR35 and disguised employment

on Wednesday, 15 August 2018. Posted in Startup Advice, Accountancy Advice, Business Advice, Tax Advice, Contractors

A brief introduction

IR35 – be aware of this ever-changing regulation

IR35 is the name given to the legislation that was introduced to stop people misusing limited companies and puts them back to the same tax position as if they were employees. Essentially the veil of incorporation is removed and consideration is given as to whether the appropriate employee of the removed Personal Service Company (PSC) is really an employee of the client company. In the past it was for the directors of the PSC to decide but since April 2017 the client (if it is a public sector organisation) has to decide and in the future this may be extended to the private sector.

IR35 is probably best explained with an example. Andrea has her own company, A Limited, which contracts with Big Plc. A Limited is contracted to deliver a project for Big Plc, which Andrea will deliver. Is Andrea a disguised employee of Big Plc or not?

There are no simple answers to this question. In the courts they will consider Mutuality of Obligation (MOO) – does the client (Big Plc) have an obligation to provide future work and does the contractor have to accept this work. HM Revenue & Customs (HMRC) has an online Check for Employment Status for Tax (CEST tool), which they now admit does not test for this critical factor.

The CEST tool does however ask about: personal service, control, financial risk and part and parcel. If you take the online CEST checker then as soon as the tool decides IR35 does not apply it will end the test. Make sure you keep a copy of these results. If you get to the last section the result will either be that IR35 applies or (unhelpfully) that it is unable to determine the status. This last result is frequently the answer CEST gives when the facts of IR35 cases that HMRC have lost are fed into it.

The tax consequences of IR35 puts the individual (in our case Andrea) in the same tax position as an employee but they do not (probably) have any employee rights and they have the expense of running a company.

HMRC have lost many cases over the IR35 status of a contractor but they have won some. The main problem is that it is not always clear whether IR35 applies. Sometimes it obviously does and frequently it obviously doesn’t. But in the middle ground , which is neither black nor white, there are many shades of grey!

The solution to the IR35 problem is to remove the temptation to save tax and national insurance. This will not happen with simplistic questions but by a radical overhaul of the tax system – but that is a whole new topic!

This blog is not a technical article that covers all aspects of IR35. This blog is part of a series for ordinary people thinking about doing an extraordinary thing: setting up their own business. Professional advice should be obtained if you think your business may fall foul of the IR35 rules. We would be happy to discuss this further with you so please get in touch.

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Tax Timing Differences

on Saturday, 18 August 2018. Posted in Startup Advice, Accountancy Advice, Business Advice, Tax Advice, VAT advice, Contractors

Don't spend that last pound!

Don't be caught out with tax timing differences

When you start your own business you move into a different way of being taxed – everything is deferred, your payment of tax is delayed.

As an employee you receive a payslip that details the PAYE and National Insurance (NI) that has been deducted from your gross salary to arrive at your net salary. There will, probably, be other deductions like pension contributions. As long as your tax code is correct then your PAYE should be calculated correctly – as we have warned before: all employees should regularly check their tax codes.

When an employee is paid, their tax and NI has already been deducted and usually will never need to pay any more tax in the future, errors aside.

If you are self-employed or have your own company, both you personally and the company will pay tax in the future. These taxes are based on the taxable profits of the business.

The company has to pay corporation tax 9 months and 1 day after the end of its accounting year. Therefore if the year end is 31 March the corporation tax is due to be paid on the following 1 January. You can read more about corporation tax here.

If an individual has untaxed income: property rentals, self-employment profits or company dividends, these have to be declared on their self-assessment tax return, which covers a tax year: 6 April to the following 5 April. The tax and NI due from the tax return is due to be paid by the following 31 January. Therefore the tax due for the tax year 6 April 2018 to 5 April 2019 needs to be paid by 31 January 2020.

As payments on account have already been discussed in this startup series, you can read about them here. Payments on account are paid each January and July.

If your business is VAT registered then the VAT should be paid one month and a week after the end of the VAT quarter or if you pay by direct debit it will be taken out one month and 10 days after the end of the VAT quarter. Read more about VAT here.

All this means is that you and your business have tax liabilities (for Income Tax, NI, Corporation Tax and/or VAT) to pay an undefined amount of tax in the future. You must set aside some money to pay these future costs. HMRC have to collect these taxes and usually they are very good at collecting them. This is the tax timing difference you must be aware of and is why we warn clients that just because everyone else has been paid and there is £1 left in the business bank account at the end of the month, unless you have set aside some money for tax, you cannot touch that £1!

If you need help with your tax affairs then please do not bury your head in the sand but do something constructive – get in touch with us.

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Contractors and online accountants

on Wednesday, 21 June 2017. Posted in Startup Advice, Accountancy Advice, Business Advice, Cloud Accounting, Contractors

Online Accountancy: talking to a brick wall?

Is talking to your accountant like talking to a brick wall?

 

Buying products and services online is often associated with value for money and ease, but many contractors are realising that online accountancy firms are an expensive and frustrating business.

The trouble with web-based accountants is that they treat their clients like numbers on a spreadsheet and add no value to the relationship – leading to serious and costly mistakes. They tie clients into contracts and force them to use of their preferred accounting software. Advice is not forthcoming or proactive, often leaving the responsibility firmly in the hands of the client!

The reality is that many contractors feel ripped off, locked in and resentful of the amount of tax they’re paying! Online apps are all very good if you know exactly what you are supposed to feed into them!

Many contractors who trade via a limited company are turning to Aysgarth Chartered Accountants for our personal approach to accountancy. As a firm we take time to get to know our customers, explain in simple language, all of their responsibilities and support them in maximising their profits and success.

Recently we met with a contractor who had a P60 showing nil. After a short discussion we were able to show him the mistakes with his salary and corporation tax computations. His relief and delight were evident in the feedback we received: “It is evidence in itself of [the accountancy firm's] approach being somewhat lacking, that you were able to explain things much more clearly to me in the space of a telephone call and a few emails in less than a week, than [they could] in a year and a half!"

If there are any freelancers and contractors who would like a bit more hand holding when it comes to accounts and tax, and all via a personalised bespoke service, then please get in touch – we would love to help!

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How rubbish are your accounting records?

on Thursday, 22 December 2016. Posted in Startup Advice, Accountancy Advice, Business Advice, Cloud Accounting, Contractors

And is it your accountant’s fault?

How rubbish are your accounting records?

 

We all know that if you are trying to run your own business and do everything that sometimes the accounting records fall below the required standard. But when you pay a professional, either an accountant or a bookkeeper, to look after your books of account you expect better. How I wish that was always the case.

I have seen instances where businesses have relied on bookkeepers and accountants to keep their Cloud or desktop accounts packages up to date and correct but the fees they have been charged have been a waste a money.

The worse Cloud examples have been on KashFlow, which is probably due to their system being too complicated with the accountants and bookkeepers not really understanding it all. However even on Xero I have seen mistakes. I have also witnessed similar errors on desktop accounting packages like Sage.

These are all genuine examples:

Ignoring the accounts package.
The year end accounts should reflect your accounts package but some accountants forget to put the year end adjustments and journals on to the clients’ accounts. This means that every year the accounts package and the financial statements grow further apart and have little in common. If you run a balance sheet report at your last completed year end does your retained profit figure agree to the year end accounts? If it doesn’t your accountants are not looking after you.

Year end routine.
Every accounts package has a year end routine to run so that it knows the old year’s accounts have been finished. This can be as simple as entering a date or a tick on your accounts package or like KashFlow it can involve running their year end adjustment, which bizarrely is found in reports and not in journals. I could tell you about 2 companies, both of whom used KashFlow, where the previous accountant or bookkeeper had no idea about the year end routine and at any point the client could have entered an old item in a year that had been finished but the accounts package had not closed down.

Setting-up your accounts package
There is one bookkeeper whose work I have seen where they did not realise they were acting for a limited company but had set up Xero for a sole trader. This meant they treated a number of items incorrectly: Directors’ loans are not the same as Owner’s drawings, a personal car cannot be treated as an asset of the business, where was the share capital etc?

Have they done what they said?
I have had an argument with one sacked freelance bookkeeper who was adamant she had filed the client’s VAT returns, despite the fact that HMRC were still showing them as unfiled and we ended up filing them. This was one of many errors that bookkeeper made, but she was always so convincing in arguing her case that she had done everything. I do not mind giving people the benefit of the doubt but once they start to lie it is time to replace them.

Does the bank account balance?
Generally if the bookkeeper or accountant has a bank account balance that agrees to the bank statement you know there should not be too many problems. But if they cannot justifiably get your bank account to balance you should replace them. One bookkeeper, who had not been helped by the accountant, managed to have 3 different bank account balances in various sections of KashFlow!

Summary
So to summarise: if you want accurate accounting records that tie in with your year end accounts do not simply get any accountant or bookkeeper to look after them. Make sure they have experience in that accounts package and keep checking up on their work. We offer a review service when we can look at your accounts and report back to you about the quality of the work: please use the contact us page to get in touch with us to discuss this further.

And if your accounts are a mess then you need to do something about it now. It will require an investment to sort it out but the cost of doing nothing will be more. Again please use the contact us page and let’s have a conversation about it. We are here to support you and improve things for your business.

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Invoicing - is it all right to use a spreadsheet or word processing template?

on Tuesday, 15 March 2016. Posted in Startup Advice, Accountancy Advice, Business Advice, Cloud Accounting, Contractors

The right tool for the task in hand

When you want to hammer a nail you don’t pick up a screwdriver do you? It is all about the right tool for the right job.

So why when you need to invoice a customer do you send your client an invoice from Excel or Word? Spreadsheets and word processing packages are not the correct invoicing apps for a serious business to use.

The first problem with them is that it is easy for them to contain errors.

Addition errors: My wife recently received an invoice from her music teacher: 2 lessons at £30 each were totalled as £30 in total. Was this an error in the formula or was the last month’s invoice not retyped correctly?

Update errors: It is easy to forget to update fields: sending out invoices in the current month dated last month, not updating the invoice number – how many invoice numbers 347 can you have?

Saving errors: Or what about issuing an invoice and then forgetting to save it or keep a copy? No one will now know about that invoice or will chase it for payment – trying to keep costs down has now cost you a lot of money!

The second problem is that they duplicate time and effort. All those invoices have to be entered on to your accounts package (or worse: accounts spreadsheet). Your poor bookkeeper is now re-typing everything, checking it is all complete: where is invoice 980 or did it ever exist?

The solution: use a proper accounts app (like Xero, FreeAgent or KashFlow) that can produce professional invoices but update the accounting system at the same time. The invoices are more likely to be accurate, will have a proper audit trail and can be easily checked or recovered without the poor bookkeeper wasting hours of time that you are paying them to do a productive job.

Save money by being more efficient and using the right tool for the job! If you want to discuss this further then please get in touch.

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Cookie-Cutter Approach?

on Saturday, 13 December 2014. Posted in Accountancy Advice, Business Advice, Cloud Accounting, Tax Advice, Contractors

perhaps it is time for a change as we are not all from the same mould

Are you an individual or a commodity? And what about your business? We treat our clients as individuals. We go out of our way to listen to and to understand our clients. That means we recognise they have choices, which they will exercise based upon their knowledge. All clients are different.


We will recommend what we think is the best approach but if the client wants to take another way (and it is legal!) we will work with them.


For example, we generally do not think spreadsheets or desktop accounting packages are the best way for most small businesses to record their bookkeeping. We recommend Cloud-based accounting packages, for example Xero or IRIS KashFlow. If a client, however, wishes to use another package or spreadsheets we will not sack them, unlike some other accountancy practices.


Likewise we will recommend the approach for owners of family run businesses to take in order to pay themselves. If the owner-managers wish to take another legal approach then once we comprehend their reasons we will work with them, we will not take our bat home.


If you do not like accountants (or other suppliers) dictating how you should operate then perhaps it is time for a change, time for a different approach, as we are not all from the same mould.

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xero-certified-advisor-logo-hires-RGB cashflow-logo

 

We love Cloud Accounting and think it is the way forward for most businesses. We are Silver Partners with Xero Online Accounting Software and Certified Partners of IRIS’s KashFlow. Please contact us for more information on Cloud Accounting and also read our blog.