NEWS

Accounting records to satisfy the tax authorities

By Clive Lewis, ICAEW, in conjunction with X-Forces

Legally you have to keep accounting records for your business. This is so you can fill in your tax return and show the figures are right. Good records will help you to run your business more efficiently. Here we focus on accounting records needed to satisfy the tax authorities.

HMRC checks on tax returns

If HMRC has reason to suspect a self-assessment, Corporation Tax return or VAT return is incorrect, it will carry out a ‘compliance check’. After investigation, it may issue an assessment or amend the relevant return to collect any unpaid tax. You can ask for a review of, or appeal against, most of HMRC’s decisions, or ask for your appeal to be heard by an independent tribunal.

HMRC also carries out checks on how businesses keep their records. Initially, an HMRC representative might telephone you and ask questions to help establish whether you are keeping the business records you need to meet your legal responsibilities. They may arrange a suitable date and time for a visit to your premises. The consequence of a compliance check or ‘a business records check’ may be the business having to pay additional tax as well as facing penalties.

For more information, see www.hmrc.gov.uk/record-keeping/index.htm

Records for Value Added Tax (VAT)

Every business registered for VAT is required to maintain financial records that comply with the guidelines provided by HMRC.

For more information, see www.hmrc.gov.uk/vat/index.htm

Records for employers

HMRC requires every business that employs staff to keep proper records for Pay As You Earn (PAYE) and for the calculation of tax liabilities. With the introduction of Real Time Information (RTI), employers must advise HMRC of their payroll at the same time as making payment to employees.

For more information, see www.hmrc.gov.uk/paye

Limited company accounts

It is a requirement of the Companies Act that every company should keep proper accounting records of money received and paid, of all sales and purchases, and of assets and liabilities.

For more information, see www.gov.uk/running-a-limited-company/company-and-accounting-records

Ready to go?

Register for X-Forces’ start-up and business planning support today at www.x-forces.com Help for businesses can be obtained from ICAEW’s Business Advice Service, in the form of a free, straightforward discussion with an ICAEW Chartered Accountant. Find out more at
www.businessadviceservice.com

NEWS

Part 9: Taxation of limited companies

By Clive Lewis, ICAEW, in conjunction with X-Forces

One of the first decisions a start-up business must make is what business format to trade under. There are three basic formats – sole trader, limited company or partnership – although there are some other alternatives.

The decision as to which format to choose has been made more complicated by a change in the way dividends from limited companies are taxed. The change took effect on 6 April 2016. Until then most people forming limited companies paid themselves a salary to use up their personal tax allowance and took the renaming profits as dividends. This was because, previously, dividends were treated as 10% tax paid as well as not making the recipient liable to National Insurance.

So what are the changes?
From 6 April 2016 dividends received attract tax above a dividend tax-free allowance of £5,000. Above this level, dividends will be taxed at 7.5% for standard rate tax payers. Higher rate tax payers will pay tax at 32.5% above earnings of £32,000. For the top rate of tax (earnings above £150,000) dividends will be taxed at 38.1%

How does this work in practice?
Two illustrations will aid understanding.

Profit £30,000
•    Sole trader tax and NIC – £5,920
•    Limited company corporation tax and income tax on dividends – £5120
•    Saving for limited company – £800
Profit £75,000
•    Sole trader tax and NIC – £23,128
•    Limited company corporation tax and income tax on dividends – £21,470
•    Saving for limited company – £1,658

Figures for limited companies assume a salary of £8,000 to the owner, to reduce taxable profits and to minimise the NIC contributions and the balance of profits after tax paid as a dividend to the owner.

With profits of £30,000, a saving of £800 for the limited company would be absorbed by the additional costs of administration of a company.
So, from 2016/17 onwards, to make savings in taxation, choosing a limited company is now less tax efficient. To cover the costs of being a limited company and to make significant savings in taxation, a business needs to be making profits approaching £40,000. The savings of forming a limited company start tailing off at around £50,000 and, at £100,000, the tax saving will probably not justify the additional costs.

Ready to go?
Register for X-Forces’ start-up and business planning support today at www.x-forces.com Help for businesses can be obtained from ICAEW’s Business Advice Service, in the form of a free, straightforward discussion with an ICAEW Chartered Accountant. Find out more at www.businessadviceservice.com