Category Archives: Tax tips

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.

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.

Why am I suddenly suffering NICs when I wasn’t before?

From January 2015 (“Month 10” of 2014/15 tax year), many directors of small companies taking salaries up to the personal allowance will find they’re suddenly stung by NICs when they weren’t in the previous month…what’s happened?

Director NICs
Director suffering employee NICs in month 10

You’ll see the image above for month 10 of 2014/15 for a one person company paying £833/month.  Boxes highlighted in red above show salary, employEE NICs suffered, employER NICs added, but then that the employment allowance effectively waives the employER NICs.  Net effect only the employEE NICs are suffered.

Background

For the last few tax years (up to but not including 2014/15) accountants were generally agreed on what the “best” salary to take was, when you were in full control of the company, hence able to fully choose your salary/dividend mix.  It’d be the NIC threshold, which is typically a bit lower than the personal allowance.

In 2013/14, this amount was £641/month.  Paying slightly above this wouldn’t trigger a personal tax liability, but it would trigger NICs…both employER and employEE.  In the majority of cases, suffering both these NICs would outweigh the corporation tax saving of the slightly higher tax, so paying more was counter-productive.

How is 2014/15 different?

In 2014/15, the equivalent of the above £641/month is £663/month.  However, a small spanner was thrown into the works in the form of the “employment allowance”.  This basically meant that the first £2k of employER NICs suffered by a company would be waived.  Therefore paying slightly above £663/month does still lead to employEE NICs, but no employER ones.  Geeky calculations show that there is a modest overall tax saving to be had by doing this, as the corporation tax saved slightly exceeds the employEE NICs suffered.

Therefore for the first year in a while, a lot of micro business owners are taking a salary that does lead to some NICs being suffered.  Worth also mentioning here that many more won’t as they’ll have gone for the “easy” option of paying £663/month…very slightly more overall tax paid, but many argue not worth it for the extra admin.  There is no “right” answer.

£833/month means that over the year, the NIC threshold will be breached, but it’s still below the personal allowance, meaning no income tax is suffered.  If the salary were to go above £833/month, then income tax would be suffered as well, making it not worthwhile from a tax minimisation perspective.

How do NICs work for employees?

EmployEE NICs are a deduction from the gross salary, so the employEE foots the bill (hence the name).  EmployER NICs are an addition to the gross salary, so the employER foots the bill (hence the name).

For “normal” employees these are calculated on a month by month basis, with whatever was paid in previous months being irrelevant in the current month’s calculation.  Therefore NICs on “normal” employees tend to be fairly constant throughout the year, obviously changing a bit if/when salary increases/decreases.

What about directors?

To prevent some quirky ways those in charge could exploit the above (mainly by paying all their annual salary in one month each year), HMRC decided that director NICs should be done on a cumulative basis.

Each month is no longer looked at in isolation, you’re given a certain allowance from the beginning of the tax year, with no NICs suffered until it’s reached, then NICs suffered on everything following that.

For those paying £663/month, even at the end of month 12 they won’t quite breach this threshold (they’ll be trivially below it).

For those paying £833/month however, the threshold will be met part way into month 10.  Therefore whilst you’d have been happily paying £833 gross pay = net pay for the first 9 months, suddenly employEE NICs are suffered in month 10, and indeed they will be in months 11 & 12 too.

How do I pay this?

There’s a variety of ways you can pay this, see here.  If the company is small, the liability can be paid quarterly, meaning just one payment required in April for the NICs suffered in Jan-Mar inclusive.

Yuck, wish I didn’t have this

Potentially if you’ve been paying £833/month and now decide you’d rather not have the faff of making deductions and paying them over to HMRC, then if your month 10 payroll hasn’t yet been filed, it’s not too late.

If you prepare and file payroll for months 10-12 with a salary reduced to £153/month, you’ll end up below the NIC threshold.  Reasons being:

12 x £663 = £7,956 (below NIC threshold)
12 x £833 = £9,996 (above NIC threshold)
9 x £833 + 3 x £153 = £7,956 (below NIC threshold)

IPSE/PCG tax treatment and how to enter on FreeAgent

A lot of contractors will purchase membership with IPSE (the association of Independent Professionals and the Self Employed, previously PCG – Professional Contractors Group).  They predominantly provide assistance against IR35, but also other things which impact many contractors.

Question many people ask is what is the tax treatment of the membership fees?  IPSE are pretty clear on it here.  In summary, you can reclaim VAT on the cost, but it’s not an allowable expense for corporation tax purposes.

Next question for FreeAgent users is how to correctly account for that in the software.  As things stand, I don’t think there’s any suitable code which gives it the correct tax treatment.  Whilst there is a “subscriptions” code, FreeAgent assumes there’ll be no VAT on these costs (which can be easily overwritten, just change the “Auto VAT” option) but also that it will be allowable for corporation tax (which can’t easily be overwritten).

FreeAgent does however give you the ability to create new codes, with whatever tax settings you choose.  Step by step instructions on how we recommend doing it below:

  • Go to “Settings” –> “Income & Spending Categories”.
  • Click “Add New” –> “Admin Expenses category”.
  • I’d suggest calling it “IPSE Membership”, but this is free text, so put what you like.
  • Nominal code, I’d suggest “357” so it sits as near as you can get it to subscriptions.
  • Reporting name “Subscriptions to professional and trade bodies”.
  • Make sure you remove the default tick in “Allowable For Tax”.
  • Leave VAT at “Standard rate”, then “Create Admin Expenses Category”.
IPSE Membership
How to add IPSE Membership category to FreeAgent

Now, whenever you allocate a payment to that code, FreeAgent should correctly reclaim VAT (barring unrelated factors like whether or not you’re on the flat rate scheme) but not allow it for corporation tax purposes.

Contractor sideline business – start new company?

Something we get asked quite a lot is what best to do when someone with an existing business wants to set up something a bit different on the side.  This may be a contractor wanting to develop their own apps/games, to team up with other people to form a bigger consultancy and take on bigger projects, or perhaps do something entirely unrelated to their main work.

Anyone who’s read my blogs will know my main focus is on keeping it simple.  If there are big tax savings/other benefits to be had, then sure, consider more complex options…but complex isn’t always (indeed very rarely is) better.

Key question is typically whether to run it all through their existing business, or to create a completely independent business for it.

Benefits of running it all under your existing company:

Less admin – you only need to keep one set of books.  You don’t need to worry about which company’s bank account to pay for things from.  You don’t need to worry about intercompany loans, or funding via director loan account.  Your personal tax stays easy as there’s just one company you draw salary/dividends from.
Less cost – directly related to the above, accountancy fees typically won’t change much if one company starts to do a few other things.  If you wanted a second company, fees would almost certainly increase, possibly close to doubling.
Joint costs – inevitably there’ll be some purchases which don’t relate to one specific business or the other, as you’ll use it on both.  Eg you buy a new computer, a lovely desk, or rent an office.  If it’s one company, no worries!  If you had two, you might need to apportion costs or charge a “rent” for the other company using the first company’s stuff.
Use of losses – if one company effectively has two trades, one profitable, the other loss making, the losses can be offset against the profits within the same year.  This basically means you get corporation tax relief for any losses the new business might incur in the early days, when set up costs dwarf income.  This would not apply if you had two separate companies, one profitable, one loss making (caveat – can potentially be achieved with a group structure…but see my second paragraph about keeping it simple).
Potentially lower CT rate – this won’t make a massive difference with tax rates as they stand, and would only impact a few anyway, BUT…if you have a highly profitable contracting business making (say) £200k annual profits, it’ll fit nicely in the small company rate, meaning 20% corporation tax.  If it takes on a second trade, regardless of whether the second trade makes a small loss reducing this to (say) £190k, or small profit increasing it to (say) £210k, you’ll still be below the £300k threshold above which you drift into the slightly higher marginal tax rate.  If on the other hand you had two independent companies, one making a profit of £200k, the other making either a loss or profit of £10k, then as you control two companies, the tax bands will be halved.  This means the £200k profit company will be paying marginal rates on profits above £150k.  Google “associated companies” if you want more info re this.

Benefits of setting up a new company:

Complete separation – if you feel it really is a completely different business, you may feel it would muddy the waters to have the figures merged.  Having separate books will make it crystal clear how well each business is doing.  Yes with just one company you can of course do a bit of management accounting to keep tabs on the profits of each business…but it’s harder.
Different owners? – not relevant if both companies will be “just you”, but often the second company will be some kind of joint venture with one or more other people.  Giving them shares in your main company is a dangerous thing to do, but if you set up a new one, it can have its own share split which doesn’t need to mirror your first company.
VAT? – depending upon what you’re doing in each business, sometimes it’ll make sense for one to be VAT registered, the other not.  Eg one business might be selling to VAT registered businesses, whilst the other sells to Joe Public (who can’t reclaim VAT).  If you have two separate companies with different businesses, you can validly have one registered for VAT, the other not.  Similarly you may benefit from both registering for VAT, but one being on the flat rate scheme, the other not.  Only thing to be careful of here is if they invoice each other, you might end up with one company charging VAT that the other can’t reclaim.
Completely different branding – before making this point, I should stress one company can have multiple trading names.  This is fine, but any invoices/websites/whatever would need to state somewhere “XYZ is a trading name of ABC Ltd”.  Sometimes you might not want this.  If you have two separate companies, they can have completely independent names
Selling a business – one Ltd Co can potentially sell off a “business” from it, whilst keeping the other business ongoing.  However, any potential buyer would typically prefer the clarity of one company with just that business in it.  Not every business will have “selling out”/”go for an IPO” as a plan for even years down the line, but some do.

Summary

So plenty of things to consider, and there is no “one size fits all” correct answer.  However, unless any of the benefits of two companies are significant and required from day one, our advice generally is to run it from your existing company until it is proved to be a viable business in its own right.  As at that point, you can create a separate company and spin it off.  Otherwise you can have a situation where someone sets up a new company for every idea that pops into their head, then gets swamped with filing deadlines and accountants fees for multiple different entities, few of which achieve anything!

Interest to hear other people’s thoughts on this, especially if you strongly disagree with any of the points above.

RTI filing deadlines with FreeAgent

RTI filing deadlines are causing confusion for a lot people (like everything HMRC related!)

RTI is very different to every other tax in terms of deadlines.  VAT, corporation tax, self assessment, for all of those you wait until the period ends, and then have a certain amount of time after the end date to file the return.  RTI is different, giving you much less slack.

Basic rule (that you can realistically ignore)

The basic rule is you need to submit your payroll information to HMRC for any given period on or before the date staff are paid.  For the purposes of this blog, and as FreeAgent doesn’t support weekly pay, we’re only going to discuss monthly payrolls.

BUT…HMRC have no idea when you physically pay your staff, as they don’t have direct access to your bank statements (thank goodness).  So how do they know?

Let’s ignore what the rules say for the time being, and look at the information HMRC actually do know/find out when you submit:
the date the payroll is said to occur.  In theory this should be the date the payroll is paid (but in reality it might not be).
the date you actually clicked the buttons to submit the payroll.

Payroll RTI date
Payroll RTI date

Above is a screen print (with sensitive data blurred) of a month 7 payroll period (October), as drafted on 11 September 2014.

Key thing I want to flag is the date highlighted in red.  In this example, 25 Oct 2014.  That date is to some extent editable, but whatever is chosen for it becomes the filing deadline.  It needs to be a date between 6 Oct 14 and 5 Nov 14.  FreeAgent defaults to 25th of each month, and I see no good reason to change this consistently, it’s as good a date as any.

This business is a bit ahead of themselves, month 6 was submitted early (deadline for it would have been 25 Sep, it was submitted 9 Sep), but that’s fine, no harm in submitting early.

What are the default FreeAgent filing deadlines?

As FreeAgent defaults to set the payroll date to 25th of the month, that is also the filing deadline, so:
Month 1 – 25 April
Month 2 – 25 May
Month 3 – 25 June
Month 4 – 25 July
Month 5 – 25 August
Month 6 – 25 September
Month 7 – 25 October
Month 8 – 25 November
Month 9 – 25 December
Month 10 – 25 January
Month 11 – 25 February
Month 12 – 25 March

What if I only notice on 26th of the month that I haven’t submitted the payroll for that month?  Well, you can be cheeky, and edit the date, putting it back a day, then submit (so it’s on time).  Not really recommended, and of course there’s only a small window that this is physically possible anyway (absolute latest 5th of the month afterwards).  Plus, for the time being there’s no penalty for late submissions.

Why don’t I set it to 5th of the month after to give me maximum time to file?  Theoretically you can…but I wouldn’t recommend it.  People tend to find having a payroll date of 1st-5th the month confusing.  Reason being it means for profit and loss purposes the payroll is in a different month to for payroll purposes.  Eg take a company with a year end of 31 March.  If they ran their payroll dated 5th of the month, then “Month 12” payroll would be processed 5th April, making it in the year after the year it realistically related to.

HMRC have recently agreed to delay the introduction of late filing penalties for companies with <50 employees until March 2015.  Therefore, at present, even if you’re late (as many companies have been multiple times), there’s no penalty.  Be aware this will change, it was going to be from October 2014, but due to teething problems all round, small companies have another 6 months respite.

If an RTI return is submitted late, FreeAgent will ask you for the reason.  The options are:
– No other reason applies
– Notional payment: Payment to Expat by third party or overseas employer
– Notional payment: Employment related security
– Notional payment: Other- Payment subject to Class 1 NICs but P11D/P9D for tax
– Micro Employer using temporary “on or before” relaxation
– No requirement to maintain a Deduction Working Sheet or impractical to report work on the day
– Reasonable excuse
– Correction to earlier submission

Reality is most of those are “big boy” only things where there are complex issues at play.  The main one most FreeAgent users are realistically going to use will be “No other reason applies”.

If the real reason is “I forgot”, this does not count as a “Reasonable excuse”.  Neither does your hamster dying or you having man-flu on the submission date.

So realistically, what should I do to stay on top of things?  I’d recommend setting a monthly recurring reminder in your calendar, perhaps dated 6th of each month, to submit the month’s payroll.  Yes, it’ll be almost 3 weeks early, but better that than doing the reminder for 25th, then if you’re on holiday that week, or it’s a Saturday you’ve got to mess around with dates or accept it’s late.

In terms of when can you physically pay the salary, to stay on the right side of the law, I’d recommend always paying yourself a bit to late rather than early.  Realistically HMRC won’t know when you transfer the funds unless they do an enquiry and demand the information (highly unlikely), but better to be safe than sorry.

Any queries/comments, feel free to post below.