Layman guide to confirmation statement and persons of significant control for micro companies

The Companies House “annual return” is no more.  Instead we have the “confirmation statement”.  In many ways it’s similar to what it replaced…so what’s changed?

Persons of significant control (PSC)

There’s lots of big sentences with long words which make this sound much harder than it actually is.  Oversimplifying a little, a PSC is anyone with >25% share ownership in your company.

First thing to say – shareholders aren’t always humans.  I mention this as it’s largely why this section looks complicated.  Shareholders can be either a human being, a corporate body (eg Ltd Co) or what’s known as a “legal person”.  For your typical micro business, it’ll be the first option, “a person with significant control”.

Adding a PSC

We’re adding our first person.  There are quite a few basic details requested.  There is an option to protect the identity of PSCs from the public record.  Reality is the vast majority of business owners won’t be able to do this.

It then asks for your date of birth.  As with details for directors, only the month and year will be publicly available (to go some way towards making life harder for potential ID fraudsters).  It also requests Nationality.

Correspondence address – this will be publicly available.  If you’re concerned about data privacy, you may want to make this somewhere other than your home address.  Having said that, the majority of small Ltd Co owners will use their home address for this.

Home address – your actual home address is separately requested.  This won’t be publicly available.  Your country of residence will be publicly available.

Nature of control

This is where again it can look more complicated than it really is.

Ownership of shares –> The person holds shares, then choose relevant %.  Note that if the person owns exactly 25%, 50%, or 75% they fit into the lower category (ie 50% exactly is “more than 25% but not more than 50% shares”, it’s not “more than 50% but not more than 75% of shares”).

Ownership of voting rights –> The person holds voting rights.  Unless you’ve got a fancy share structure where only some shares hold voting rights (wouldn’t recommend this for a simple micro company) then this will exactly mirror the shares.

Right to appoint or remove the majority of the board of directors.  As suggested earlier assuming it’s a human shareholder, the 2nd and 3rd options aren’t relevant.  It’s just whether the 1st is true or not.  In practice anyone controlling the company (ie >50% shares) can appoint or remove directors.  For micro companies the directors and shareholders are likely to be the same people (or spouses/similar), so this is more a technicality to put on the form rather than something you need to be concerned about.

Has significant influence or control.  (updated 24 Nov 2016) it seems if any of the above boxes have been ticked, this now needs to be left blank.  If you do tick the top option whilst also confirming that the individual holds shares/voting rights etc, the Cos Hse form seems to give an error message.  Simply leave this one blank.  We think it’s only relevant if none of the above more specific reasons apply.

When did this person become a PSC?

Logic might suggest it would either be the date of incorporation, or if it’s someone who only received shares later than that date, the date they went over 25% share ownership.  However, the form will only accept a date on/after 6 April 2016.

I’d therefore suggest you choose 6 April 2016, unless you only obtained your shares after that date.

Rest of form

After that, the rest of the confirmation statement is no different to the annual return.  Check the registered office address is still valid and shareholders match, but otherwise typically just a case of clicking confirm/next half a dozen times then paying a £13 fee to Companies House.

Unpaid share capital – something that confuses a few people. Just enter £0 here, on the basis you will have paid for your share (if not physically putting the £1 or £100 in, it’ll likely have been dealt with via director loan account.

Shortened deadline

Oh…and whilst you had 28 days to file the annual return, you have just 14 days to file the confirmation statement.  Having said that, there was no financial penalty for late filing of an annual return, and the same seems to be true for the confirmation statement.  As with the annual return though, if left too long Companies House will start threatening striking off action.

Changes to tax on MVLs overstated

Following the Autumn statement there’s a consultation document about taxation of distributions from members voluntary liquidations (MVLs), amongst other things. Google something like “HMRC liquidation consultation document 7029” to see the full PDF…though be warned in typical HMRC style despite covering a fairly small topic it’s a hefty 19 page PDF.

From some of the marketing I’ve seen from liquidators and accountants alike, I believe the impact of these changes is being massively overstated.  This may simply be a questionable marketing tactic from the liquidators specifically, “buy now or miss out forever”, with the truth being considered unimportant…but I appreciate many of you will be aware I’m partly behind MVL Online so may consider myself being biased.  I like to think not, though it does mean I’ve taken more of an interest in these tax changes than many accountants might.

So, what is actually changing?

Basically the already existing anti avoidance legislation transactions in securities is being beefed up a bit.  It attempts to prevent people continuing to trade whilst still getting cash out under the normally friendly capital gains tax (CGT) rules.

Old/existing rules

There already is anti avoidance legislation in place to prevent the above scenario, but it’s fair to say a lot is left open to interpretation, with little in the way of clear cut black and white rules to check whether you’d be caught. This legislation is able to look through any liquidation if they successfully argue the underlying trade continued.  Ie someone transferred the trade and assets (except hefty cash balance) from Oldco to Newco, then liquidated Oldco to get the cash out tax efficiently.  If so, they’ll tax the distributions as dividends rather than via CGT.

One of the main problems from a clarity perspective is that it was left very unclear as to where the line would be drawn between a trade continuing just with someone taking a brief holiday, vs the old trade properly ceasing and a new trade starting.  People threw around various timescales for this, from a couple of weeks, to multiple years…but reality is we were all guessing how HMRC might interpret it, and perhaps more importantly how a judge might if it went to tribunal.

New rules

The new rules (still under consultation at time of writing) have set a clear cut two year timescale on this.  Ie if you liquidate today and set up a new company doing a similar thing in 18 months time, be warned you could see those liquidation distributions taxed on you as dividends rather than capital gains.

One other thing that’s been clarified is that the business type doesn’t need to be the same.  This unfortunately (though probably deliberately) means it will catch those looking to disincorporate following the new dividend tax.  By this I mean close down their Ltd Co and instead start again as a sole trader/partnership.

The three conditions to be caught

Distributions as part of a liquidation normally taxed via CGT would instead be taxed as dividends if all the following conditions are met:

  • Condition A – An individual who is a shareholder in a close company receives from it a distribution in respect of shares in a winding-up;
  • Condition B – Within a period of two years after the winding-up S continues to be involved in a similar trade or activity; and
  • Condition C – The arrangements have a main purpose, or one of the main purposes, of obtaining a tax advantage.

A will realistically apply to the vast majority of the situations I’m thinking of, being a small owner managed company that’s cash rich, coming to an end and being liquidated.

B is open to interpretation as to exactly what counts as “a similar trade or activity”.  In particular see bit about PAYE further down.

C again is a little unclear.  There may be many reasons for liquidating a company, but cynic in me thinks where the tax treatment is beneficial when compared to dividends, it’s likely HMRC could argue this point does apply regardless of what other genuine motives there may have been.

So should I be scared?

If you plan to use an MVL to get cash out tax efficiently then immediately restart a new business doing exactly the same thing, then yes!  In fact you should be caught under the existing rules.

If you have no intention of restarting, then no!  If you’re liquidating your company for reasons such as:
– emigrating,
– retiring,
– doing something completely different,
then it doesn’t matter whether you’ll be getting lots of cash out upon liquidation at a nice, friendly tax rate.  You’ll be fine whether you liquidate before or after 5 April 2016.

Do take a bit of care that despite your intentions at point of liquidation, if circumstances change and you get an opportunity to go back to what you were doing before within 2 years, you could be at risk.  Arguably this is the only thing that is changing in practice.

There’s also suggestion that the new rules are likely to make MVLs less appealing, at least from a tax perspective, for property special purpose vehicles (SPVs).  Many property developers choose to regularly liquidate and restart a clean company.  Sure, tax can be one reason, but another key one is limiting liability.  Ignoring any ethical/moral question, this can be a good idea.  You do a large piece of building work, the client’s happy and pays, you then liquidate.  If a year down the line a problem crops up with the property, the legal entity which did the work no longer exists so the customer has little come back against the builder.  Outside the scope of this post, but I believe there are various unions/trade bodies which help the customer in these circumstances…but for the purpose of this post, there’s a reasonable chance that any tax benefits of this tactic will be removed, as most property developers would be on the next project within 2 years.

What about a PAYE job in a similar field?

If you’d asked me a week ago I’d assume you’d be 100% safe.  The consultation talks about doing a similar “trade or activity”.  My understanding was that “activity” was included so as to catch investment businesses as well as trading ones.  However, it seems some believe that it could include someone reverting to PAYE employment in a similar industry too (eg a contractor taking on a permie/umbrella role in the same field).

Another accountant who queried this with the person behind the consultation was told:
(you ask)”whether ‘trade or activity’ includes being in employment. I think that employment will count as carrying on the same or a similar trade or activity. However, as with my comments above, meeting Condition B does not in itself mean that the legislation will apply. Where a person ends their own business and liquidates a company, and goes on to act as an employee for an unconnected third party, it would seem unlikely that Condition C would be met”.

As per my own thoughts on Condition C, I take little comfort in his closing comments, as I think HMRC could easily change their view on this.  I’ve therefore written to the author asking for the rules to confirm that things like PAYE employment would specifically not be at risk (whether he takes any notice is another matter of course).  Last thing I think anyone wants is further uncertainty in the tax world.

18/01/2016 – uninteresting update – Adrian Coates has responded to my consultation comments…but only to say he’ll consider my views together with others.

Summary

Getting an MVL of a redundant, cash rich company will still be a viable, tax efficient method of extracting cash.  You just need to be careful to ensure you do something very different for at least two years following the liquidation.

UPDATE 9 AUGUST 2016

Whilst still not much is set in stone, it seems HMRC have been sending out a standard response to anyone requesting clearance (ie conformation in advance that their situation wouldn’t be caught) regarding this.  See the below PDF:

Distributions in a winding up_Clearance requests

Most significant bit to my mind is last sentence of 1st para on 2nd page:
“Condition C will not be met where the individual is employed by an unconnected third party.”
So situation some people were concerned about is Joe Bloggs does IT development work on a contract basis through Joe Bloggs Ltd.  He then liquidates (with a tidy cash balance) to become an employee doing IT development work for big corp.  Seems crystal clear HMRC are saying they will NOT attack this situation.

Also of interest (to me at least!) are examples 1 & 3.  Both seem to me to be situations the legislation if read broadly could easily be attacked by HMRC.

Eg example 1 – someone running a Ltd Co semi retires, liquidating, but then does the same thing as a sole trader.  I imagine in this case the turnover of the sole trader business would be quite a bit lower than the Ltd Co before it…but still, seems surprising to me HMRC saying this wouldn’t be caught.  I wonder where the line would be drawn, eg if the sole trader business was just as big as the Ltd Co, presumably HMRC wouldn’t be so happy.  Perhaps this example adds more confusion on where boundaries are rather than clarity…but still, it suggests HMRC won’t be too aggressive regarding this anti avoidance rule.

Do I charge VAT when selling services to overseas client?

It’s another “write an answer to a question we get asked a LOT” blog post.  This post includes a lot of what NOT to do, covering some of the most common mistakes people make.

It’s becoming increasingly common for even micro UK businesses to have clients outside the UK.  For the purposes of this post I’ll be talking about sales of:
services rather than physical products,
NOT “digital services” for the purposes of VAT MOSS (ie bespoke work you’re doing, rather than selling a “make once sell many” eBook/app/similar),
sales that are B2B rather than B2C (ie you’re selling to an overseas established business, rather than an end consumer),
– from a UK supplier to an international customer.

The key thing that can get complicated is where is the place of supply deemed to be, and the above are key in making that decision.  Where all the above apply, the place of supply is deemed to be where the customer is based (hence not in the UK), so no UK VAT should be charged.

Very brief outside scope vs exempt/zero rated

It’s also important that these sales are outside the scope of UK VAT, rather than being a sale that’s zero rated or exempt from UK VAT.  If you think this sounds pedantic, it certainly isn’t if you’re on the flat rate scheme, as your FRS % isn’t chargeable on outside the scope sales, but is chargeable on zero rated/exempt sales (despite no VAT being charged).

How to deal with this correctly on FreeAgent

The key section is “Contacts“.  I appreciate some of you only use this for client name for your own internal purposes and nothing more, but this is one situation where completing at least a little more information is compulsory.

Key things are:
1) Ensure you change the country drop down from its default United Kingdom to the appropriate country.  This is NOT just for show.
2) Check the setting slightly further down.  This will default to what’s normally the correct setting, but where you’re selling services internationally, B2B, you want it to show “Charge VAT – Only if contact is also based in the United Kingdom VAT area“.

Key settings in FreeAgent contact
Key settings in FreeAgent contact

With those settings as above, when you then go on to raise a sales invoice to that client from the “Work” –> “Invoicing” section of FreeAgent, it should correctly be treated as outside the scope of VAT.

This means not only will you not charge VAT to your client, but the sale won’t appear at all on your (UK) VAT return.

Extra possible quirks

A few extra things to consider:

  • EC sales lists – no additional tax is at stake, but where you sell services to EC countries, you’ll likely need to start submitting EC sales lists.  These are relatively straight forward and can be submitted online, they’re basically just a summary of your European customers, their country, their local VAT number, and total value of your sales to them.
  • B2C sales – if your client is an end consumer, but you’re still selling a bespoke service internationally, then you should change the “Charge VAT” setting to “Always”.  Reason being for B2C sales typically the place of supply is deemed to be where the supplier is based (rather than customer), hence sales are deemed to happen in the UK.
  • Sales of “digital services” – the B2C sales rule above was to some extent abused by the likes of Amazon who were able to set up shop in low VAT countries like Luxembourg, so if a UK consumer wanted to buy an ebook, they’d pay 15% VAT to Amazon, or 20% VAT to a UK supplier, hence giving Amazon an unfair advantage as taxes made their prices lower than local competition.  Therefore new rules were introduced from 1 Jan 2015 called VAT MOSS (or VAT Mini One Stop Shop).  These meant where you’re selling “digital services” (this would be most things where you create it once then can re-sell an identical item lots of times, eg ebooks, apps, music/video etc) to an EU consumer, you need to charge VAT based on where your customer is.  This is a bit of an admin nightmare for micro businesses, as you need your online shop to be set up to gather various bits of information from your client and charge their local VAT rate accordingly…then send this info on once a quarter, together with payment of international VAT.  This is a complex area so no great detail gone into here.
  • Sales of physical products – this very rarely applies to our typical client base, so again I won’t go into details here.

Where should I allocate the annual return fee on FreeAgent?

Shortest blog post ever…but answers a question we get asked a LOT.

Q –  Which category should I put my £13 annual return fee to on FreeAgent?

A – It doesn’t really matter which category you put it to.  Sundries, accountancy fees, legal & professional, all are equally correct.

Key thing is ensure you override FreeAgent’s “Auto VAT” to “0%” as there’s no VAT on Companies House fees.

Why I hate webinars

What is it about webinars that seemingly makes them the new “must use” thing?  They’re rubbish, and here’s why:

Start time

For TV programmes/films, those in power are increasingly realising people don’t want to have to schedule their lives around their favourite programmes.  We want to be able to watch them when we can, fit the programme around our life rather than the other way around.  Hence the success of things like Netflix and iPlayer.

The internet has had this ability for ages.  Youtube is over a decade old.  You can watch a video whenever you want, regardless of what other people are doing.

Webinars are a massive step backwards from this perspective.  You need to book it into your calendar, plan your work/fun activities around it…and hope nothing unexpected/important crops up last minute, as otherwise tough, you’ll miss the webinar.

Technology

Yes, the technology is there for webinars to work…but you can guarantee at least a quarter of people meant to be on a given webinar will have tech difficulties.  These will inevitably only be discovered last minute, so whilst you’re ready and waiting bang on the start time, nothing happens for the first 10 minutes as someone has to install a bunch of software updates.

It’s like conference calls.  Phones, whilst getting ever more sophisticated at many things, are seemingly becoming continually worse at actually making/receiving calls.  It can be hard with just two people, but add in a few more and there will be a problem, wasting everyone’s time.

Other people(!)

So, there’s a webinar, where you did remember when it was on, nothing unexpected cropped up last minute, you do log in, and (eventually) all the other users manage to get it working.  Great.

Next thing is after the absolute simplest statement from one of the people hosting it, someone asks a question that’s of no interest to you.  The main focus of the webinar gets sidetracked as it drifts off on a tangent that perhaps just one person wants it to take, frustrating everybody else.

This will likely repeat multiple times over the course of the webinar, often meaning the key thing that you actually wanted to learn about never comes up, as sod’s law it’ll have been 3/4 into the planned timeslot, but stuff over-ran early on meaning it gets left off.

Timing

All of the above issues are either directly or indirectly about timing…but there’s one other timing feature not covered by the above.  In a video, you can fast forward the dull bits/bits you don’t need help with.  You can also slow down/replay the bits that interested you/you struggle with.  You can do all this without impacting others…as of course it won’t always be the case that everyone finds the same bit interesting/hard.

 

So…why do big businesses and public sector organisations insist on using them all the time?  Please, just release a video instead.  The world will be a better place.

What Corbyn can teach small businesses

There seemed to be lots of surprise about Jeremy Corbyn winning the Labour leadership by a landslide.  What happened, and what can we learn from it?

Out of the four candidates, Corbyn had very strong views, many of which differed from what’s currently “the norm” in politics (though some will say they were the norm 35-40 years ago, and failed).  This made him a bit of a Marmite character, you either think he’s brilliant or an idiot.

The other three…well, to the masses, nobody really understood what any of them stood for, or what they’d do differently to the Tories/Ed Milliband.  Quite possibly that’s because the current system is generally very good, so doing nothing beyond minor tweaks is the best route forwards, but that hardly makes you exciting to vote for.

I won’t go into the specific politics involved as it’s outside the scope of this post and I’m not clever enough.  However there’s two relevant things as far as I’m concerned:

  1. Corbyn got 59.5% of the vote, three times as many as second place, with just 19%.  This despite many considering (rightly or wrongly) his opponents were far more credible candidates.
  2. If you believe many pundits, under Corbyn Labour will never get into power, as whilst he might appeal greatly to a minority, he won’t be able to convince the majority (ie inc Tory voters).  There’s concern Labour could become a minor party, fighting for stuff which only a small section of the population want.

Now, if you’re Amazon, or Tesco, the second point is significant.  To appeal to the masses, you need to take great care not to alienate too many people.

However, 99.99% of us don’t run a business anything like Amazon or Tesco.  We run tiny businesses, which even in a small niche will unlikely ever cater to more than 10% of the market we’re in…more likely a fraction of 1%.  Therefore I think we can learn a great deal from Corbyn’s success (or indeed the rise of UKIP/The Greens/SNP in the 2015 general election).

Corbyn’s recent popularity proves it’s seeing something different that people want.  Also having a clear message of what you stand for.  Being asked to vote between seemingly identical candidates or parties (who could really distinguish between Labour/Tory proposed policies last election?), it’s no wonder voter numbers go down.

In politics, the first past the post system means minority parties need to do REALLY well to actually achieve anything.  In the small business world, thankfully, there is nothing like the first past the post system.  Great success can be achieved from only catering to a small section of any market.

So what does this mean for you?

  1. if you want people to be interested in what you do rather than the competition, make sure you’re actually different to your competitors, and be clear about what you offer/stand for.  If you’re just another [accountant/web designer/whatever], no different to all the others, why would anyone be interested.
  2. as small business doesn’t have any kind of first past the post system, only appealing to a small part of the total audience is absolutely fine.  Find a niche you’re passionate about/an expert in.  Far better to really appeal to some of the market, than have the entire market ignore you as nothing special.

In the small business world, be like the minor parties.  Find a niche sector of the market that’s not getting much focus from the big boys and hammer home how you can help.

Power shift from customer to supplier

I’m sure we’ve all heard the adage “the customer’s always right”.  Theory being whilst they might be demanding, possibly even unreasonable from time to time, they are what pay the bills so you have to try your best to keep them happy.

Does this apply anymore?  I’m starting to think not.  I think there’s three main reasons for this.  How new these are I’m not sure, but it seems to increasingly be the case that suppliers call the shots.

 

Customer lethargy?

This really hits with the big corporates.

We’re all guilty of lethargy as customers here.  We’ll moan about our bank/utility provider, but very rarely change.

We’ve become accustomed to sitting through 20 minutes of “your call is really important to us, please continue to hold” automated messages, before possibly speaking to a human.  We hate it, but don’t expect other suppliers to be any different, so stick with “the devil we know”.

We also know that their price quotes are mostly marketing spin.  You go to some price comparison site, every competitor price is lower than the deal you’re on now…but that’s just because they hook you in on a low deal, then ramp up the price a year later, knowing again that whilst you’ll think about doing something about it, you probably won’t bother.

Unfortunately I don’t think there’s any way to fix this.  Perhaps we are all busier than we used to be, and the belief “they’re all as bad as each other” means we put up with it.

The corporates know this, which is why they put so little effort into customer service.  It sounds like a terrible idea for a small business to not care much about your customers…but for big corporates it seems it’s a rational business decision.

So the end result is the supplier charging you an unreasonably high price, but you as customer do nothing about it.

 

Simple supply and demand?

We’ve been trying to get a few bits of building/handyman work done over the last few years.  I imagine many people have been in the situation we’ve encountered:

So you need some work done.  You contact 3 builders, expecting 3 quotes, so you can go with the one who you felt comfortable could do the job and price was ok.  Is that what happens?  Not from my experience.

You contact 3.  One won’t respond at all.  One will come round promising the earth but then never be seen/heard from again.  The third, if you’re lucky, will actually give you a quote.

If you actually wanted 3 quotes you’d probably need to contact 10+ builders.

The above is just to get the quote.  You then confirm with the “lucky” builder that you want to press ahead, and struggle to pin them to a date when they can actually start.

Why?  I’m not a builder so don’t know for sure…but I think in the South East it’s perhaps largely a supply/demand issue.  With house prices so ridiculously high, building an extension compares well with the other option of moving to a bigger house.

This applies to far more than just building work, but is perhaps an issue only suffered when dealing with suppliers of a tailor made service, rather than an off the shelf product.

What it means is that it’s all very well being a customer with cash sitting in your pocket, but that doesn’t in itself guarantee you’ll find plenty of suppliers wanting to provide the service you’re after.  Very frustrating situation to be in, especially when all you hear on the news is about massive unemployment etc etc.

Then the work starts, things take longer than expected, cost more than quoted, you don’t get the calls with updates when you were promised…but when you ask around your peers it seems like that’s par for the course.  You therefore end up having little choice but to be grateful for the average service you get.

Only thing I don’t understand is why more suppliers don’t politely decline the work at the outset, rather than string you along with promises they seemingly have no ability to/intention of keeping.

 

Automation/systemisation reducing flexibility of suppliers?

Possibly this is the only “new” one, though could have started with Henry Ford and his no doubt slightly misquoted “you can have any colour you like, as long as it’s black”.  It’s also one I can sympathise with as a supplier.

For us to remain competitive, we need to be able to systemise things.  This largely means having Maslins clients fit a certain “mould”, so we can:
– have a database help keep track of things for us, like deadlines,
– do searches to easily find all clients who meet a certain criteria for advice purposes,
– ensure we can be on top of any tax changes that impact them (tax legislation is HUGE and constantly changing, so being an expert in every single thing is impossible).

On the MVL Online side it’s even more pronounced.  Clients need to complete an online form, again populating a database, which then has information pulled out into various templates across the lifespan of a liquidation.

This isn’t about providing bad client service, I’d certainly hope it’s about the opposite, ensuring we provide GOOD client service.  Avoiding the risk of over-promise/under-deliver, ensuring things don’t slip through cracks etc etc.

However, what it does mean is when a potential client approaches us, asking whether we can do things a different way to what we normally would, quite often the answer will be unfortunately not.  It’s not practical for us as a business to take on clients of all shapes and sizes, or each with very bespoke needs.

It also sometimes means a client who’d been happy with us to a certain point finds they have to move on.  Fortunately this is normally very amicable, and is typically due to a client becoming “too successful” and outgrowing us.

We’re of course far from the only supplier this applies to.  Indeed it’s more obvious with things like software.  Take a package like FreeAgent.  You can get it for circa £25/month and it’s great.  However, it can’t cater to every possible business.  If it doesn’t cater to yours, you could try to build your own system, but this would cost an absolute fortune in web developer time…alternatively you could of course look around for other “off the shelf” packages that might be better suited.

What you’ll quite often end up finding though is that you as the customer have to “give” in terms of what you want, because what the supplier provides is fixed.  Another example of the customer being a little low in the power rankings.

 

Interested in what other people think.  Have you been in situations where you as customer have felt very “weak”?  Or examples where you as supplier have got customers jumping through hoops just to give you money?!

Company cars are overrated

Quite a lot of clients ask us about company cars.  Long story short, in our experience it nearly always makes sense to find a modest car sufficient for your needs, often second hand, buying it personally, paying all costs personally, and reclaiming mileage from your Ltd Co for business journeys.

But the car salesman makes company cars sound so appealing

Of course they do, it’s their job.  They want to sell (or lease) you a brand new car now.  Even better if you’ll be trading it in for a newer model in a few years time.  By getting you onto a company car, you’ll find the tax rules potentially further encourage you to get into a cycle of regular replacement.

Two vital things to bear in mind when considering tax on company cars:

1) the benefit in kind tax is based on the car’s list price when new, irrespective of the actual age of the car.

2) the % band based on CO2 emissions keeps moving every year.  This is understandable, as cars get more fuel efficient, the government moves the goal posts to make it harder and harder to get the lowest %.  See here for a table showing rates for the last year or two and the next few years.

Year 1 – The year you get the car it seems great.  Let’s say the car’s list price is £30k, it’s petrol, and has CO2 emissions of 100g/km.  On the day you get it, it’s worth £30k to both you and from a tax perspective, and (based on 2015/16 tax year) you’re taxed on 15% of that value.  Seems a good deal, taxed on £4.5k per year to get usage of brand new car.

Year 2 – The car’s lost its brand new feel, but you’re still paying tax based on £30k, now at 17%.

Year 3 – The car’s starting to get a bit tired, but you’re still paying tax based on £30k, now at 19%.

Year 4 – The car’s worth a fraction of its list price is, but you’re now taxed based on an annual value of 21% of the £30k.  You’re now taxed on £6.3k per year to get usage of a four year old car.  It’s starting to feel very unfair, the tax you’re paying on it increases every year despite the car getting older and older and being worth less and less.

…so what do you do?

Well of course the dealer will suggest the best option is that you trade it in, getting the newest latest model, perhaps £30k again, but due to lower emissions you’re back at the 15% rate or thereabouts…and so it continues, you’re trapped in this cycle.

Alternatively, you continue with the same car owned by the company, as the car still works fine and you don’t need a newer one…but then you’ll continue to see your tax charge increase each year despite the car getting continually older and less valuable.

Your third option would likely be to buy the car outright, and with any luck you can agree a price with the dealer and the tax man so it’s you personally buying the car.  No more ever increasing benefit in kind, and you revert to reclaiming mileage.  This may seem the obviously most appealing option (at least to me?!)…but if that’s the case, why didn’t you just buy the 3 year old car personally in the first place?!

 

Other reasons to consider:

P11Ds – chances are if you don’t have a company car, you won’t have to do one (obviously check there are no other taxable benefits in kind).  Having a company car means you definitely will.

Fuel – you need to take care over who pays for fuel, you, or the company.  Money will likely need to be reimbursed one way or the other at rates which are regularly changing.  Alternatively you can get the company to pay for all fuel and accept a further hefty benefit in kind charge.

VAT fuel scale charges – if the company pays for fuel, you need to calculate the fuel scale charge to pay over to HMRC in addition to your usual VAT liability.  This is supposed to offset the fact you’ll be reclaiming VAT on all fuel, whilst some will be used for private journeys.

Your plans might change and you want to close the company – so you sign up for a 3 year lease, 1 year later you get offered a brilliant permie role, or emigrate, so want to close your Ltd Co.  You can’t…unless you can agree an early exit fee with the lessor, but that likely won’t come cheap.

So…when you’re looking at the shiny new cars and the salesman tells you what amazing tax breaks you can get by doing it as a company car, ensure you consider all the facts before pressing ahead.

Accounting and tax references and codes

Shortly after incorporating a company you’ll likely register for various taxes, have to activate online services, whilst your accountant attempts to gain agent authorisation for those taxes.  This all means you can be inundated with what seems like hundreds of codes, references and passwords.  Some are vital and will stay the same forever.  Others are one use then throwaway codes.

We’ve summarised all the main ones here with an explanation of what they are and if/why they’re important to you.  Immediately below is a downloadable/printable form you can use and complete with details for your own business.  Some are sensitive information, so of course only complete what you’re happy to and save somewhere secure:

Accounting/tax references/codes
Accounting/tax references/codes

Companies House related

Companies House registration number – 8 digits, all numbers.  Publicly available, permanent, and is unique to your Limited Company.

Authentication code – 6 digits, random combination of letters/numbers.  Password to file things online with Companies House

 

HMRC related

Company UTR – 10 digits, all numbers, used for corporation tax purposes.  HMRC don’t make it easy by often putting it as part of a longer reference.  Eg the first time you’ll get it, it’ll be the bold part of a reference in the format “123 12345 67890 A”.  It’ll also form part of a payslip reference, format “1234567890A00101A”.

Personal UTR – 10 digits, all numbers, used for personal tax (ie self assessment) purposes.

VAT registration number – 9 numbers, often spread out slightly in the format “123 4567 89”.  Sometimes preceded with “GB” if being used in an international setting.

Employer’s PAYE reference – 3 numbers, “/”, 2 letters, then further numbers (quantity varies), so something like “123/AB12345”.  Unique payroll reference for your business.

Accounts Office Reference Number – 3 numbers, 2 letters, 8 numbers, eg “123AB00012345”.  Another unique payroll reference for your business.  This one is normally used when making payments.

Gateway ID – 12 digits, used for logging in to the HMRC portal.

You will also on occasion get the below one use codes (not on the form above as by their nature no point in keeping a permanent record):

Activation code – following attempting to enrol for an online HMRC service (within your HMRC portal login), HMRC will send out an activation code by post.  This is a one use code to enter on your HMRC portal login to confirm enrolment of that online service.  This is a security measure by HMRC, as it means only those with access to post at the address HMRC have linked to that tax will be able to enrol the online service.

Authorisation code – following your accounting finding out some of the tax references listed above, they’ll likely request agent authorisation.  Data protection means HMRC won’t divulge your or your company’s financial details to anyone, so an account needs to be appointed as your authorised agent before HMRC will discuss your affairs with them.  HMRC will send a letter out to you with code to forward to your accountant if you agree with them being your agent, starting:
“CT…” for corporation tax,
“SA…” for self assessment,
“VT…” for VAT,”PE…” for PAYE.

Should I register for VAT?

For the typical Maslins client, the answer to Q1 below is “Yes”, so it makes sense to register.  However, this won’t apply to all businesses, so I thought the short flow chart below should help people decide whether or not to register their businesses for VAT.

Should I register for VAT
Should I register my business for VAT?

There will inevitably be some exceptions, and exceptions to the exceptions…but for the typical small business the above will apply.