1. Accounting for VAT on the basis of sales invoices raised in a quarter, minus purchase invoices received from their suppliers in that quarter OR
2. The cash basis which is customer receipts minus supplier payments.

   For most businesses the cash basis is better, you only pay over the output tax to HMRC after your customer has paid you.

The Flat Rate Scheme is available to smaller businesses. Under the flat rate scheme you would normally ignore the VAT you have been charged by your suppliers and pay HMRC a fixed percentage of your GROSS turnover ( i.e. including the VAT you have charged your customer). The applicable percentage is determined by the sector in which the business operates.

The flat rate scheme can be really good for people who effectively sell their time, where the amount of VAT that they could claim back is quite small.

What I now discovered is, even when you are using the cash basis under the flat rate scheme, you can still get relief for bad debts. This is the case even though, under the cash basis, you won’t have paid any VAT to HMRC, because your customer has not paid you. Here is a the link to the HMRC notice with a worked example. It’s paragraph 14.2

HMRC Notice 733

A man had a pet elephant. He tried to take it through customs by foot and was refused by the official. “I am afraid you can’t take an elephant through here sir”. He protested but to not avail.

The next day the man tried again hoping that someone else would be on duty. “I am sorry sir. As I explained yesterday, there’s no way you can take an elephant through the border”.  There was a heated exchange but the guard was adamant.

The next day the border guard looked up and say the same man, again with the elephant but this time, there was a piece of bread lodged in each ear of the elephant. The guard leapt to his feet “I told yesterday and the day before, you can’t take your elephant through the border!!!!”

The man grinned knowing that he had triumphed.“It’s none of your business what I put in my sandwiches!”

BCMS stated that on average they are able to obtain a final value of 2.5 times the lowest offer received.

There were 2 key things which really stood out to me.

1 What could the buyer do with your business?

I think it was Steve Jobs who said that, when it comes to a new gadget, a baby boomer will typically as “What is it?” whereas their child would be more likely to ask “What can I do with it?”. This came to mind when the speakers talked about the value of a business. They argued that traditional valuation models place too much emphasis on past performance. The value of a business depends on what the buyer will be able to do with it. For this reason, premium valuations are more likely to be obtained when selling to someone entering the market from overseas or a business providing complimentary goods/services as opposed a competitor. Just as features are more important than benefits, the future is more important than the past.

This made me think of the stock market. The price of a quoted share is determined by sentiment about the future prospects of the company more than the past performance.

2 Establishing choice of buyers

It was emphasised many times yesterday that at all stages the seller must ensure they have a choice of potential buyers. For BCMS this means approaching an average of 240 potential buyers at the beginning right through to keeping in dialogue with those unsuccessful at the final stage . To burn your bridges to early is very dangerous and gives the buyer the upper hand.

I must say I was very impressed with BCMS, the presenters and the approach that they advocated. I would recommend anyone thinking of selling their business to attend a BCMS seminar.

As anyone who has their own business will know I have found it very rewarding to build up the business although of course it has its own challenges! I remember in the early days coming to terms with the fact there was no IT department to phone or office removals department to ask to move some furniture around. It’s DIY when you are running a small business!

In 2001 I was fortunate to find Mr John Moorby a chartered accountant with a small practice  who was looking to retire. We came to an arrangement for John to pass over his clients to RDP  and we moved into his office in Martlesham Heath.

It’s been great to get to know our clients , who now number around 250. Many surveys of business people show accountants to be their most trusted adviser and this is a role things brings a great sense of responsibility.

Cutting Cake

I am grateful to all who have helped us grow over the last 10 years. Richard & Derek from RDP Colchester and my staff past and present , Katy, Christine, Bev, Claire, Mandie, Isaac and Nicola.

We look forward to the next 10 years!

First 10 Years: A piece of cake

To mark RDP’s 10 years in Martlesham Heath we have created a new advertisement for Tescos TV.  I don’t think the Coen brothers will be quaking in their boots but I hope you like it!

To launch the VAT initiative HMRC are writing to about 40,000 businesses whose turnover has apparently already exceeded the compulsory VAT registration threshold. Those businesses will be invited to register for VAT and pay over all the VAT owed since the date they should have registered, plus a low penalty of only 10% of the VAT outstanding. Those businesses that first exceeded the VAT threshold within the last 12 months may get away with a nil penalty, but it will be up to the Taxman to decide what level of penalty applies.

The requirement to register for VAT is based on total turnover in a 12 month rolling period and needs to be reviewed each month to determine if the business needs to register immediately. The compulsory VAT registration thresholds of turnover in the past 12 months is…

From 1 April 2011: £73,000
1 April 2010 – 31 March 2011: £70,000
1 May 2009 – 31 March 2010: £68,000
1 April 2008 – 30 April 2009: £67,000
1 April 2007 – 31 March 2008: £64,000
1 April 2006 – 31 March 2007: £61,000

The VAT initiative is also open to any business who has not received a letter from HMRC, but believes they should have registered for VAT at some point in the past. If you want to take up the offer of low penalties for late VAT registration you need to tell HMRC you want to be part of this VAT initiative by 30 September 2011.

Once your notification has been processed you will receive a notification reference number (NRN), which you must quote on your application form to register for VAT (form VAT1). Without this notification number you will not be able to take advantage of the nil or 10% penalties on offer. The VAT1 form must be completed in paper form, (NOT online) and posted to the VAT initiative section to arrive by 31 December 2011.

Please talk to us before notifying HMRC of your intention to register for VAT. We can help you calculate any VAT due and any other tax owing on undeclared sales.

Accountants used to be sent copies of thse  but HMRC stopped this a few years ago becuase of “data protection” issues. HMRC have now issued a statement admitting that there are delays in the issue of these.

Delay in the issue of some Self Assessment statements

HM Revenue & Customs (HMRC) has more Self Assessment statements than usual to issue this year. Normally these are all issued in July, but this year some will be issued later. The majority will be sent on time.

No one needs to worry about this, HMRC will send out statements to remaining customers soon.

If HMRC have asked you to make a second payment on account in July, you normally have to pay this by 31 July. You usually have to pay interest if you don’t pay on time. If you receive your statement in August, you should still pay the tax due as soon as you can. You’ll only be asked to pay interest on the tax due on the second payment on account if you still haven’t paid it more than 30 days after you receive your statement.

Online customers will still be able to check their statement online and pay online too.

HMRC are sorry if anyone experiences any inconvenience.

Questions and answers

How will I know if I am one of the customers who have been affected?

Most customers who are due to make a payment will get their Self Assessment statement by 31 July. The statement tells you how much tax they need to pay. If your Unique Taxpayer Reference (your ten digit reference number) ends with digits from 70 to 99 then you may be affected. If so HMRC will send your statement as soon as possible.

I’d like to pay now – what should I do?

If you send your tax return online you can pay electronically, or you can make a payment by phone. You can find advice on how to pay by following the link below.

How to pay Self Assessment

How do I know how much to pay?

If you send your tax return online you can find out how much you owe by viewing your account online.

Log in to Self Assessment Online

How many people are affected by the delay in issuing statements ?

HMRC estimate around 500,000 customers are affected.

You’ve been here before – in January 2008 around 500,000 – 600,000 customers didn’t get their Self Assessment statements on time – why has this happened again?

HMRC changed their forecasting arrangements in light of the 2008 events and over the past three years these have proved more than adequate. However the volumes on this occasion have risen out of all proportion to previous patterns. HMRC will now ensure that they understand the reasons for this and will be fully prepared for any future rises.

I think this is were the future lies. There are great benefits for accountants and their clients from using this technology.

Once your business is VAT registered you must charge VAT at the appropriate rate (normally 20%) on your sales. You also have to submit regular VAT returns, either quarterly or monthly, which means you need to keep your records of sales and purchases up to date. If this all sounds a bit too much to cope with there are a number of schemes you can sign up to which are designed to make VAT reporting much easier for small businesses.

One of those schemes is the flat rate scheme for small businesses. When you use this scheme you don’t have to worry about your purchases. You just have to total-up your sales each quarter and pay over a flat percentage as VAT to the Taxman. The percentage used will depend on your trade sector. If your business makes very few purchases you can benefit significantly from being within the flat rate scheme.

Some people prefer to keep their total sales below the compulsory VAT registration threshold, so they don’t have to charge VAT and submit VAT returns. They do this by turning down work that would take them over the VAT threshold. This is not illegal, but the Taxman is very suspicious of businesses who manage their sales in this way.

If you use this strategy to avoid VAT registration, you need to be able to prove all your sales are correctly recorded and declared. Later this year the Taxman will offer a limited amnesty to those who have sales over the VAT threshold but who have not registered for VAT. Once that amnesty period is over he will start to actively investigate traders who report total sales just below the VAT threshold. Contact us for further information if you are interested in taking advantage of the amnesty.