Monthly Archives: March 2016

The Death of Dispensations

Well, the P11d dispensation !

An employer is required to inform HMRC of all expenses paid to an employee, even if those expenses are incurred in the performance of their duties and on the employers’ behalf – wholly, exclusively and necessarily. This means that the employee has no choice but to incur those costs in order to do their work. These costs are entered onto the employees P11d (see blog post at http://performanceaccountancy.co.uk/that-p11d-time-of-the-year/) and on the face of it, increases the income for the employee. The employee then needs to submit a tax return in order to counter-claim the value as costs of employment. That makes the tax effect net out. Of course, if the counter claim is not done in a reasonable time from the submission of the P11D, the employees tax code is amended and for a couple of months, the employee will be paying too much tax until the tax return is accepted and the PAYE code changed again.

P11DWhat a palaver. The above is all a bit of a fuss and fuddle, so HMRC has seen sense and they do offer a dispensation process for having to declare certain benefits and expenses on tax returns etc. Some cannot be covered by a dispensation for example cars, gym membership, healthcare etc. This then makes the completion of the P11D and P9D a lot easier. Once a dispensation has been granted, then it lasts indefinitely although HMRC does review them on a regular basis. The dispensation also removes the requirement for employees to submit claims to HMRC. The main area of spend routinely covered by the dispensation are travel including subsistence costs, business entertainment, use of phone and credit cards usage.

 

The great thing about having the dispensation is if you have a lot of expense claims in your business, you won’t have to keep track of all the payments to employees and analyse them out into types of spend. You also time to complete the forms & then submit to HMRC. Even if you get an outside resource to do the fling, they are still going to cost money.

But – from April 2016, the dispensation has disappeared. Oh no. Under new legislation, there is a statutory exemption for reimbursed expenses so they do not have to be on the P11d / P9d and therefore do not have to be counter claimed on the employee’s tax return. However, non-allowable expenses will still need to be put through the P11D system, or put through on the payroll with tax & national insurance deducted. If an employee is not refunded tax allowable expenses, then they can still be claimed via the tax return system.

This whole thing does not affect the benefits that would usually go on the P11d/P9d. What is covered by the end of the dispensation? It exempts expenses and benefits that would otherwise be deductible from earnings under ITEPA 2003 Chs 2, 5 of Pt 5, or Ch 3 of Pt 5, such as travel and subsistence expenses, business entertainment and professional fees and subscriptions.

What’s the catch?

Vertical shot of a tired businesswoman having a lot of paperwork

It does mean that employers (yes that includes the owner/director companies) need to ensure their internal systems are up to scratch in case HMRC want to review the expense reporting. There is now a statutory requirement for the employer to validate expense claims based on actual receipts or validate the allowances claimed.

Care does need to be taken when a company reimburses an employee the whole cost of something where there is a personal element to the cost. The typical example is a phone bill. The phone is in the name of the employee, but the company allows the employee to expense the bill to the business. The deemed business element will be covered under the new rules for a deduction, but the personal cost of the phone would need to appear on the P11d as an expense reimbursement. Where there is a split between personal and business costs, they need to be documented fully and justified if requested.

 

 

 

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The information contained in this document is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is provided or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

 

Accounting Software

This is a question that comes up time and time again, and it depends on what you want out of your system, or out of your business.


Choices are vast, from Sage, Xero, FreeAgent, Quickbooks, Clearbooks, Kashflow, Freshbooks or even just the humble excel file. It is often a personal preference and you could try them all. Some need more set up than others, some you can invite an accountant to monitor what goes one, and some will supposedly hook into the HMRC tax return system (i’ve not tried this).

Ask business colleagues that you trust what they use, how they use it and how they find it. My preferences are Excel, Clearbooks or Xero. For startups, I recommend excel, for people that want something a bit more professional to send invoices and the such, then Clearbooks, but for ability to integrate to other software like a CRM system, bank feeds, scanning systems – then I would recommend Xero in one form or another. We use Xero here at Performance Accountancy. Of course there are times I could have thrown it out the window, and there are things I am still discovering, but it is work the upfront effort somebody needs to put in.

Yes, Children Do Pay Tax

Stars Word On Stage Means Famous People Like Celebrities Divas And Superstars

I get asked a lot by parents whose children work in the theatre or in films about whether the children are supposed to pay tax, and what happens about the costs the parent spend in order to get tax relief for these costs wholly & exclusively incurred.

There is a common misconception that children don’t have to pay tax on earnings and therefore tax returns are not done. Unfortunately, this is not the case, and the taxman wants to get his fair share of the child’s earnings.

Everybody needs to pay tax, no matter their age, and like adults, children have the same personal allowance. Normally children don’t work or if they do the pay is low so would not reach the personal allowance. People under 16 don’t pay national insurance so when you add the two together, it comes up with the idea that children don’t pay tax.

A child actor / model / performer effectively is their own business so the guidelines of keeping records showing income and expenditure need to be kept, and the records need to show that the payment was made to the child. If the child is under the personal allowance for all taxable income, there is no need to pay tax, but as soon as it’s likely to go above the personal allowance, then the child will need to be registered with HMRC in order to do a tax return. Once the child turns 16, national insurance kicks in, class 2 and 4 will need to be paid, so registration will have to be done. OK – so the budget of 2016 says class 2 will be disposed of for everybody – but they will find something else.

 

Whilst we are talking about children, if a parent gives a child money and that money earns more than £100 before tax in interest, then the whole amount (not just the amount over £100) is deemed to be the parent’s income. The parent will be taxed on it. This limit is just for parents and not other family members. If the £100 limit is likely to be breeched, then you may want to consider a tax free investment like a tax free Junior ISA. Always speak to a financial adviser about investments.

 

 

 

Always speak to an accountant or financial adviser before taking any action.

So what if you have poor business processes?

business hand hold light bulb and business process

Sometimes it can be an uphill struggle to get owners of growing businesses to understand the need for sturdy & documented business processes to not only help when things need to get done but also when things go wrong and need to be corrected.

The definition of the word “process” according to the Cambridge dictionary is “a ​series of ​actions that you take in ​order to ​achieve a ​result”. A business process is a group of activities that convert inputs to outputs by using an organisation’s resources. A breakdown somewhere in the process can have serious implication for a business.

For example: You can purchase a great product from a company that you love to use, but if the customer support from the company was poor, you would be reluctant to buy again from them. The company concerned are then always struggling to find new customers rather than nurture the ones they have. Effort and money are likely to be put to the marketing and sales activities without addressing the real issue of support.  Process implementation and improvement can then result in direct savings but also improves the image of the business in the customers’ eyes. That can lead to recommendations, referrals and repeat business.

If you focus on growth as a goal and that’s all you want to do, then you’ll probably be changing your business processes and systems to cope with it. It becomes easy to cut corners to push that growth through, but there are not steps in place to make sure it is effective and efficient, and the back office processes can cope with the growth. Rapid growth can lead to great PR and with companies riding that wave, they fail to look internally to see what rot may be setting in. Throwing people at a system & process issue does not solve the problem, just covers it up and then just gets bigger over time as the business grows.

There are several symptoms of inefficient business processes and implementation:

  • Lack of standard processes to address business requirements and improvements needed;
  • Business expectations may be unmet;
  • Poorly implemented business processes can result in a lack of effective training to new employees or subcontractors and therefore leads to longer time for staff to be useful to the business;
  • Challenges faced may be dealt with in different ways rather than in an agreed pre-defined method;
  • The organisation becomes very reactive and developing processes on the fly to deal with issues faced with there and then, rather than creating proactive processes to deal with issues before they come about;
  • No method of continuous process improvement to maintain business needs. Often they are set in stone but never reviewed months/years down the road.

There is a soft metric of poor processes, and that is the one of staff morale. A poor process can really zap the energy of your people as when they are energised and engaged, they feel that there is nothing they can’t do. If they are disengaged, then everything that needs to be done will be a struggle, and that leads to high staff turnover. It may be customer service systems as talked about before, or simple things like the time taken to pay an employee’s expenses. If they feel like they have to fight to get their money, they are less likely to incur future cost and a feeling of resentment kicks it. It will not be a productive place to work.

Clunky, ineffective processes frustrate your employees & customers and gives the impression you really don’t care about them.

Sometimes it’s all about flow and things just work:

  • A team firing on all cylinders
  • Where people, processes and technology all seem to slip into place and make everything seem effortlessthree_custom_gears_13895

What has to be remembered is that when a process is designed around people that use it, or are affected by it, then it’s more likely to achieve flow for the business. Having it designed round a whiteboard by people who have no direct input to the process, then it’s likely to fail.

There are three interrupters to flow:

Friction:

  • Too many steps in the process;
  • Too much manual intervention or too much paper;
  • Major bottlenecks & delays;
  • Recurring errors;
  • End user frustration;
  • Customer or stakeholder complaints.

Noise: – often known as data overload

  • Slow decision making that often comes too late;
  • Inaccurate decisions based on bad data;
  • Complex reports that people can’t understand therefore don’t use;
  • Excessive meetings interrupting the day;
  • Data silos
  • Lack of visibility into critical factors;
  • Unable to take a holistic view and join the dots.

Drag: – This is the dead weight

  • Managers spend too little time on critical tasks
  • Admin costs spiral
  • Performance suffers in important but non-core areas of the business
  • Bottlenecks slowing the processes
  • Experts spending time on housekeeping tasks

 

Time and resource is needed in a business to document out what is supposed to happen for its key processes and to try and mitigate the flow interrupters. We will be holding a webinar that covers what a business can do to start the documentation process and buy in in order to help the business get on an even keel with happy staff and with the aim for growth. Contact Louise for further details.

 

Louise Herrington

Business Process Expert at Performance Process

Tel: 01344 834258

Email: [email protected]

Is Your Clutter Clearance Taxable?

I’ve done it myself – got rid of items (mainly clothes) that I no longer fit into in order to Sell Keys On Monitor Showing Online Marketingdeclutter the wardrobe, garage, loft and other hiding places for this stuff. I could spend a week doing it – no, maybe a month. I’m then left with what am I going to do with it all so I turn to eBay to get something out of my investment. Would I consider it a business – nope, not at all. Would I declare it on my tax return? No as it’s not a business and just a sale of personal property.

 

But HMRC have been looking at the online marketplaces such as Amazon, Gumtree, eBay, Itsy, Music Magpie, Preloved and have used their extended powers in order to obtain user information as they are looking for traders suspected of running a business selling via these routes and looking for undeclared income on self-assessment.

 

This then brings up the question of when does a seller become a business or online trader?  The only guidance we are given is in BIM20205 (and others in the same number range) which talks about the badges of trade. These determine if something is of a hobby or personal use, or a business. These are:

  • Profit seeking motive – do you intend to make a profit;
  • The number of transactions – if they are systematic & repeated, then that is likely to be a trade;
  • Are there similar transactions outside online trade – do you have an existing trade that is sold in the traditional way therefore online activity is just a new route to market;
  • Interval of time between purchase and sale – this implies the purchase or resale processes
  • Amount of time dedicated to these activities;
  • Method of acquisition – if acquired by inheritance or gifts, then the sale is not likely to be a trade.

 

It is possible that something starts off as a hobby but after a while can turn into a business. When it turns into a business using the badges of trade assumptions above, then that is when the business needs to be registered with HMRC as a sole trader. It’s best to use an example here:

Sally works as a hotel receptionist and pays PAYE on this employment. In her spare time, she makes blankets for the elderly and occasional sells them when completed to friends and work colleagues for an amount that just about covers her costs, although sometimes not. Any money that comes in goes towards her holiday pot.

She then decides that the holiday pot was not growing fast enough to get to her holiday in Malta, so in order to get extra cash, she starts to sell online via an auction site and the initial experiment produces £30 profit per sale. Spurred on by this, she then buys materials and within a month is selling 10 to 15 a month all at a profit. It starts to get to the stage that she wants her own website to advertise her blankets and maybe take special orders.

The tax implication then is that the initial sale of blankets would not be considered as a trade as it was a few sales to friends and lacked commerciality therefore just a hobby. Once the blankets entered the auction state and materials being purchased to turn into the final product to sell at a profit, then commerciality begins. That is when Sally should have registered with a self-employed business.

 

The result then is the sale of personal items to clear clutter of unwanted goods etc. is not considered a trade unless several of the badges can be identified. Once those can be proved, you must register with HMRC (https://www.gov.uk/new-business-register-for-tax) as a business. It’s easier than you think, but if you need help, get in touch with us.

Right – must put in my calendar which month to declutter the house.

 

 

 

 

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Always talk to your accountant before acting on any advice. If you’d like to talk to us about your accounting requirements, please complete the contact form     http://performanceaccountancy.co.uk/contact-us/ and we’ll get in touch

 

THE STING IN THE TAIL – You Will Be Paying Tax Each Month

Jelly fishNow for most people this is no different to what they normally do and if you are a PAYE only employee or self-employed, then this won’t be relevant to you now. BUT, if you are a Company Director/Shareholder (or plan to be), then this will affect you.

 

Dividend Tax – yawn yawn, it’s been mentioned all over the place by many accountants and observers that from 6th April 2016, you will get a £5,000 tax free allowance for dividends in the year, and any dividends after that will be taxed at 7.5% if you are a basic tax payer, 32.5% if you are a higher tax payer, and 38.1% if you are an additional tax payer.

 

That’s fine if you only own a few investments, but if you are a director/shareholder of your own company it can hit you hard.  It is likely that you’ll only be paying yourself a small amount of salary, maybe enough to get your national insurance credit, but not to pay NI or PAYE. Let’s say this is £8,000 as I like easy numbers. You have your personal tax allowance of £11,000 for the year, so you still have £3,000 of available allowance. Woo Hoo. At the moment, it appears that the first £3000 of dividends will be covered by the personal allowance and then you get the £5000 dividend allowance. So assuming you have no other income anywhere (I am ignoring the savings allowance), then you can have £8000 of salary and £8000 of dividends before tax is paid. Over £8000 of dividends  will be taxed at 7.5% etc. per the above.

 

A better example for those that have a bit more dividend income:

 

New rules of 2016/2017 Old rules if applied to 2016/2017
tax paid tax paid
Salary of £8000 0 Salary of £8000 0
Dividend paid of £50000 Dividend paid of £50000 = value £55,555
 – £3000 covered by personal allowance 0  – £32000 @ 10% 3,200
 – £5000 covered by dividend allowance 0  – £23555 @ 32.5% 7,655
 – £27000 taxed at 7.5% 2,025 Less dividend credit -5,555
 – £15000 taxed at 32.5% 4,875
Total tax to pay 6,900 Total tax to pay 5,300

The upshot here is you pay £1,600 more tax that you would have done.

 

If that is not bad enough, HMRC do not want to wait until January 2018 deadline for self-assessment to get their hands on the money. They have decided to change the PAYE code in order to get some of the tax from you each month. This will be seen as a line called “dividend tax” on your P2 coding notice.

 

In all the illustrations I have read, it only talks about basic rate tax payers, but the change will also be put through for higher rate payers which in theory will produce a negative tax code. Some say it’s fairer and will put director/shareholders in the same position as PAYE employees in paying tax monthly, but where the issue does come up is if you have had a bumper year and paid a lot of dividends in the year, your tax code will be based on that year. If things are not so good, you’ll be paying tax on money not received. .You could think of it as a savings plan, or you could appeal the notice of coding my calling HMRC or completing their on-line form found here >>>> (https://online.hmrc.gov.uk/shortforms/form/P2) <<<< and you can enter all your expected income and benefits for 2016/17 including expected dividend receipts.

 

 

 

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Always talk to your accountant before acting on any advice. If you’d like to talk to us about your accounting requirements, please complete the contact form http://performanceaccountancy.co.uk/contact-us/ and we’ll get in touch.