Where are my profits?:Things that surprise clients #3

Posted on March 10, 2011 by

During the 1990′s I was treasurer of a sports club in Colchester. Following a European Court ruling it became possible to claim back VAT on sporting activities and the club had a windfall of more than £20,000  by way of a VAT repayment.

It was like kids being let loose in a sweet shop! Lots of capital expenditure became affordable and was considered and properly approved by the committee. Many committee members couldn’t get their heads around the fact that as monies were spent on new capital items, the profits showed little change. The explanation, of course, is that capital expenditure reduces your bank balance immediately but is not shown in the profit and loss account. It is depreciation that is recorded in the profit and loss account, so that the cost of the asset is spread over its useful life.

Now as an accountant in practice there is a slightly different variation. “If my profits  are £xxx, where are they? Why aren’t they showing in my bank account?”

There are usually 2 answers to this. Either

  1. You have already withdrawn the funds from your business in the form of drawings ( for sole traders or partnerships) or dividends ( for limited companies)
  2. The difference is explained by movement in your working capital. Working capital is stock, trade, debtors, trade creditors and bank/overdraft balances.

Trading profits may have been used to reduce the amounts owing to trade creditors, they may be be tied up in stock or in amounts owing to you by customers. Someone once said “Turnover is vanity, profit is sanity but cash is reality”. Debtors are not “reality” by that definition but, with good credit control, they are the next best thing.

So if confused as to where your profits have gone, look at the movement in your working capital. It will probably be the answer.

Next time: Property Improvements

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VAT registration:Things that surprise clients #2

Posted on March 6, 2011 by

You must register for VAT if your sales exceed £73,000 in any 12 period.

http://www.hmrc.gov.uk/vat/start/register/when-to-register.htm

It is not only the 12 month period that coincides with your accounting year. It is any 12 month period. From the date that you exceed the £70,000 you have the rest of that month and the whole of the next month before you start to charge your customers VAT. It can be costly to discover, after the event that you should have been registered some months previously. The registration will be back dated and from that effective date of registration, HMRC will say that 1/6 of your  sales receipts were VAT. 

Normally, if your customers are VAT registered they will be indifferent as to whether you charge VAT , as they can recover the VAT on their VAT return. If your customers are not VAT registered then you can’t really go back to them and ask them for extra money. In addition there will be a late filing penalty.

You can register voluntarily if your turnover is less than £70,000. This can often be beneficial when businesses use the flat rate scheme. More of that another time.  

A BBC Money Box programme in January found that a scam exists where some businesses that are not VAT registered masquerade as if they are registered for VAT and then pocket the extra they have charged. If you are unsure about the authenticity of a VAT number you can check it here.

http://ec.europa.eu/taxation_customs/vies/

Next time: “My accounts show profit, but where’s the money?”

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HMRC Amnesty for Plumbers

Posted on March 3, 2011 by

I have been told that HMRC are having a crackdown on tradespeople and first in line are plumbers.  HMRC are offering an amnesty for plumbers who have previously not declared all of their income. The amnesty means reduced penalties will apply not that the underpaid tax itself will be written off.

Here is an excerpt from the HMRC website:

Introduction to the Plumbers Tax Safe Plan (PTSP)

The Plumbers Tax Safe Plan (PTSP) is designed for people working within the plumbing industry who have not told HM Revenue & Customs (HMRC) about all their income in the past and who now want to get back on track. It is intended to cover people who work (or worked) in the plumbing, heating or gas installation trades and this includes anyone who installs and repairs pipes and fixtures for water, drainage or gas systems in a building.

HMRC believe that their customers want to get things right, and want to help them. Many customers will have paid the right amount of tax but some will not. HMRC want to make it easy for those not paying the correct amount to put that right and seriously follow up those who choose not to.

If you’ve not yet told HMRC that you have started working for yourself or you’ve not told them about all your income, you probably won’t have paid the right amount of tax. If that’s the case, the PTSP is just what you need to help get your tax affairs up to date.

Advantages of PTSP

If you take advantage of the PTSP you can tell HMRC about any income that you haven’t previously told them about and you will pay a lower penalty.

Also if you find that you can’t afford to pay what you owe you may be able to spread your payments depending on your circumstances.

It is likely that most people will only have to pay HMRC at most up to six tax years.

It’s basically a ‘fresh start’. If you decide to take advantage of PTSP, you can stop worrying about what might have happened had HMRC found out that you’d not been telling them about all of your income. It’s a chance to start getting things right from now on, whilst knowing exactly how much it’s going to cost to sort out things for the past.

You can find out more by following the link to some things you need to know.

To take advantage of the PTSP you must:

  1. Notify HMRC by 31 May 2011 of your intention to take part in the PTSP. This is a simple process and can be done online, by phone or by post. At this stage, HMRC only need to know that you will make a disclosure.
  2. Once you have done this you must make your disclosure and pay HMRC what you owe by 31 August 2011.

For more information see the Plumbers Tax Safe Plan Guidance Pack (PDF 146K)

These terms will not be available to people who choose not to sign up for PTSP if later HMRC find that they are behind with their tax affairs.

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How much tax?:Things that surprise clients #1

Posted on February 20, 2011 by

I have decided to start a series on things that surprise start ups. To start this series, the way HMRC collect self assessment tax and national insurance for sole traders and partnerships.

When sole traders and partnerships start up, they can go a long time without paying any tax – but their first payment is higher than they think .

For example

If someone started trading on 6th  April 2010, their first tax and national insurance payment will be in January 2012 ( for the 2010/2011 tax year). This is called a balancing payment. But, at the same time,  they will also be required to pay 50% of their 2010/2011 liability, as a payment on account , towards their 2011/2012 liability. So to use the vernacular – they get clobbered. 

This can bemuse people when they calculate their first tax payment as a percentage of their profits and end up with a figure much higher than the standard rate of tax!

HMRC explanation

My advice is

  1. Use the long period before you have to pay any tax to save funds so that you have the funds to make the first balancing payment and the payment on account
  2. Let me prepare your first accounts and tax return as soon as possible after your year end so you know what your liability will be at the earliest possible stage and can plan accordingly.

Next time – registering for VAT

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New clients

Posted on February 10, 2011 by

After the hard work of leading up to 31 January tax return deadline, February is a good time to meet new potential clients.

When we take on a new client I like to ask how they heard of RDP Accountants. Yesterday I got a answer I had never heard before!

The client told me that they had been stressed out about their tax affairs and decided to visit a friend who had recently moved to Martlesham Heath. The friend suggested they went to the pub to distract her from her anxiety and – bingo – there was our signage. The client concluded it must have been a sign ( sorry about the pun) and made an appointment to see me.

Not sure what marketing strategy that comes under but maybe I need to encourage more people go to the local ?

The Douglas Bader

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Driving Your Business Forward

Posted on February 10, 2011 by

On Wednesday I attended an excellent business seminar sponsored by Barclays on the subject of Driving Your Business Forward. The title was very apt as the meeting took place on a bus, kitted out with hi-tech equipment and parked up at Ipswich Town Football Club. The speaker was Robert Craven and he gave 9 very practical tips about how to grow your business.

In addition to standard advice to increase prices, reduce costs and fix under-perfomers, Robert challenged business owners to grasp the nettle and do what they know they should do (but lack the courage) rather than blaming external factors.

The section about sorting out your proposition is the one I will be  working on. There are benefits to RDP clients because of the size of our practice, it’s location, the software we use, the fact that we are regulated by ACCA and our fixed price fees. I need to make sure I communicate these benefits clearly to people who are thinking about appointing us as their accountants.

There were interesting case studies about how to be remarkable like restaurants with a pay-what-you-like menu.

Finally the delegates were encouraged to link up with an accountability buddy and talk in 3 weeks time to see how much progress we have made on our action points. In my case this was the person behind me. As we talked we realised that we had worked for the same employer in the 1980′s and that we had both interviewed the same person for a job last year. Small world!

 

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Changes to tax credits

Posted on February 4, 2011 by

Our website has a new article about how tax credits are changing.
Tax credit changes

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IR35 Case

Posted on February 3, 2011 by

I was interested to read in the press that an engineer working on a contract basis has won his appeal against HMRC. HMRC had argued that he was subject to IR35.

One of the key factors was that the client had the right to cancel the contract immediately. This was inconsistent with the mutuality of obligation that exists between employer and employee.

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How to save £100 in tax

Posted on February 2, 2011 by

I just read in the i newspaper some amazing statistics about last minute and late filing of tax returns. Apparently 572,455 people left it until the last day to avoid a £100 fine and 19,500 filed on-line returns between 11pm and 11.59pm on 31st January.

Understandably clients often ask me how they can save tax and are keen to hear creative ideas about what they can do.  I am now tempted to say “You can save £100 straight away by letting us file your return on time and by making sure you pay your tax on-time”. Boring but effective!

In my practice we file all client returns on line. Because people tend to leave things to the last minute 42% of all returns that we filed for 2009/2010 were submitted in the month of January. Not an even spread when 58% are filed over a 9 month period and the remaining 42% over a 1 month period.

RDP Tax Returns by month 2009/2010

One of my new year resolutions is to break the back of the tax returns by 31st October from now on. This will have the following benefits to clients:

  1. Clients will have at least 2 months to budget for any tax due by 31 January 2012
  2. Clients will get a preprinted giro-slip from HMRC confirming the amount due
  3. No more confusion from HMRC reminders ( these are generally printed before Christmas but arrive in the post in January)
  4. Reduced risk of return being late through illness, poor weather or IT issues
  5. Clients avoid the RDP annual price increases which take effect from 1 January each year
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Tax returns

Posted on January 11, 2011 by

Blogging is a luxury in January for an accountant in practice. Last week, after Ashes victory, I was telling friends another English century was required in January. That’s me with 109 tax returns to do! Down to 87 now!

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