HM Revenue and Customs (HMRC) have announced the latest in a string of initiatives designed to collect more tax.  This initiative, called the Electricians’ Tax Safe Plan, focuses on electricians who are not paying the right amount of tax and is similar to the 2011 initiative aimed at plumbers.

The aim is to focus on people who make mistakes in the amount of tax they pay – even though they have taken reasonable care; those who are careless; or those who deliberately don’t tell HMRC about something they should have paid tax on.

It should be stressed that although the letter is going out to 50,000 electricians, HMRC acknowledge that they “do not think everyone who receives a letter owes us tax.”

More information is available from here.

HM Revenue and Customs to Target Electricians

If you are an employer, you may need to apply for a dispensation.

Why?

Because expenses reimbursed from an employer to employees – including directors – should be included as income on a personal tax return, with a corresponding claim of expenses for exactly the same amount.  This amounts to a lot of work for the taxpayer which makes absolutely no difference to the amount of tax payable.  In order to avoid this, an employer must apply for a dispensation, which satisfies HM Revenue and Customs (HMRC) that expenses claimed are either supported by receipts or verified by someone other than the claimant.

A dispensation, once approved, can be in place for several years (or indefinitely) and will mean saving work for the employer, the employee and HMRC – a win-win-win!

The following link will take you to the HMRC website, which has summary information as well as detailing the process for claiming a dispensation.

http://www.hmrc.gov.uk/paye/exb/schemes/dispensation.htm

NB It has been usual Revenue practice in the past to backdate the application to the start of the tax year (in this case, 6 April 2011), although there is no guarantee that this will be done in future.  You will appreciate that the dispensation needs to be in place before 5 April 2012, therefore you should deal with this sooner rather than later.

Employers – Do You Need a Dispensation?

Whether an individual is an employee or self-employed in a particular situation is a question of fact depending on the terms under which he or she works.  When you engage someone to do work for you, you have to decide whether or not to apply the PAYE rules.  It is up to you to get it right or suffer the consequences.  In certain areas, HM Revenue & Customs (HMRC) has placed emphasis on reclassifying individuals claiming to be self employed.  They have issued a couple of documents (ES/FS1 & ES/FS2) examining the issue of employment status.  These cover the following principal factors:

• The degree of control and supervision exercised over the individual’s work,
• Whether services are performed mainly or wholly for one business,
• Where the duties are performed,
• Terms of pay, holiday time, pension arrangements, and other benefits,
• Whether the work has to be performed personally, or whether a substitute may be supplied,
• Provision of items of equipment,
• The financial risk and responsibility for loss undertaken by the individual.

NB We strongly recommend that if you are in any doubt as to the status of an individual, ask HMRC to clarify the situation.  Obtaining their approval will avoid the risk of you having to make a settlement of liabilities to tax or NI that you failed to deduct from the employee’s remuneration.

A PAYE system is required if you have a requirement to deduct PAYE and NI from your employees.  It is important to establish whether you have an obligation to deduct PAYE and/or NI, as you can still be an employer without having to operate a PAYE scheme.

Before establishing a PAYE system, it is necessary to notify HMRC by telephoning the New Employers Helpline (0845 607 0143).  Upon registration, HMRC will send you a New Employer pack which includes various documentation and a CD-ROM, showing guidelines on operating PAYE, national insurance (NI), statutory sick pay, statutory maternity pay, statutory paternity pay and statutory adoption pay.

The PAYE and NI deducted from employees should be paid to HMRC by 19th of the month following payment.  Employers whose average monthly payments of PAYE and NI are less than £1,500 in total are allowed to pay quarterly rather than monthly (i.e. by 19th of July, October, January, and April).  Employers who pay electronically have until the 22nd of the month to pay. Where the 22nd falls on a weekend or is a bank holiday, payment must be received by the previous bank working day.  Further details can be found here.

Electronic filing of PAYE returns
Employers are now required to file year end return forms P35, P38A and P14 electronically.  The requirement that all employers will have to send their returns electronically is from May 2010.

How we can help
PAYE can be a tortuous procedure for the new business.  We would be pleased to show you how to operate it properly or provide a service for the maintenance of your PAYE records.  If this is of interest, please do not hesitate to contact us.

Information in this Factsheet is correct at the time of compilation but is subject to changes in legislation.

Factsheet | Introduction to PAYE

The deadline is now 2 February 2012.

A statement released by HMRC read:

Self Assessment deadline

To make sure our customers are not disadvantaged if they cannot get through to HMRC’s call centres on 31 January, we will not impose any late filing penalties for people who file their Self Assessment returns on 1 and 2 February.

The SA deadline remains midnight on 31 January. But HMRC will treat all returns that come in by midnight on 2 February as though they were submitted by 31 January. No customer will have to pay interest on payments due on 31 January that are paid on 1 or 2 February.

Acting Director General Personal Tax, Stephen Banyard, said: “We’ve always been very clear that we want the returns – not the penalties. For that reason, we don’t want anyone who can’t get through for help and advice on 31 January to be disadvantaged in any way.”

Of course, it is still important that the deadlines are met, as the penalties for the late submission of your tax return can be quite nasty.  Details of how to pay your tax can be seen here.

HMRC Extend Tax Return Filing Deadline

We recently had a visit from a company director who was out of his depth.  The company had been formed (and effectively run) by his father, who had produced accounts.  Unfortunately they had not been filed with Companies House (nor had the annual return), and were 10 months late, attracting a penalty of £1,500.  There was a proposal to strike off, which was suspended, I would guess at the request of HMRC whilst they tried to get any tax which was due.

The accounts showed that the company had broken even for the last 2 years.  A good effort had been made at preparing accounts in line with Financial Reporting Standards, although they fell short, mostly through the notes not matching up with anything, and making other simple errors such as not including any share capital, and including depreciation even when there were no fixed assets.

There were other issues which the director was not too sure about such as whether a PAYE scheme was run, and how their main ‘employee’ (the director’s brother) was handled – originally thought of as self employed, although the amount paid to him strangely worked out as 52 weeks at the same amount (i.e. 52 x £250 = £13,000).

The situation was now desperately bad.  HMRC had visited the business and given them 5 days to complete the company tax return, otherwise they would take the assets which they had listed (which were not down as assets on the balance sheet), effectively stopping the business from trading.  They had assessed that the business owed £8,000 in corporation tax.

During our meeting, we felt that we were providing solutions to their problems, to the huge hole they found themselves in.  We felt able to help the business alongside our existing workload, the business would pay a much smaller amount of corporation tax (I would estimate less than £2,000), they would get HMRC and Companies House off their back, and would be able to concentrate on their business.  The director seemed happy that this was exactly what he wanted.  However, towards the end of the meeting, I mentioned that as this was a new client with an urgent job, we would require a down payment.  We never saw the director again.

We have had businesses approach us before who have got themselves into all kinds of sticky situations by not being aware of their obligations, not planning for taxes, not filing their returns and doing other silly things such as putting their car through a company, but not accounting for the resulting benefit in kind.  The thing that struck me about this case was the belief that the directors could handle everything, that these were not difficult things to deal with, and yet was now struggling to the point where it was being a bigger distraction to the business and even threatened its very existence.

Now the dilemma I faced when putting this article together was the angle to take.  There were several possible stances I could have taken such as:

• Directors have responsibilities and should make sure they are met.  Last year, we had a limited company director come to us, his company had been wound up by Companies House because he hadn’t filed anything and he didn’t even realise.
• The increased risk of facing a HMRC investigation.  Over the years, we have seen tax returns completed for sole traders, partnerships and limited companies that contain significant errors in what can and cannot be claimed for tax purposes.  From HMRC’s perspective, there must surely be easy tax to be collected from these unrepresented businesses.

But I have (not unsurprisingly) decided to highlight the price of not getting professional advice.  To paraphrase Red Adair, “if you think the cost of a professional is high, try the cost of an amateur”.  I wouldn’t dream of trying to service my car.  I’m not stupid, and sure I could do it if I really wanted to, but would obviously have to get a book and some tools to do so.  I would then spend a long amount of time doing it, with the ultimate risk that if I mess it up, I will have to pay someone to put it right.  Why do some businesses take such a cavalier approach to their accounts?

• If a business comes to us on day 1, we can give them advice on a range of issues, even including the most suitable business trading style.
• If they come to us before the year end, we may be able to advice them on actions they can take to reduce their tax bill.
• If they come after the year end, they’ve lost that planning opportunity, but we can still make sure they comply with their obligations (and plan going forward).
• If they come to us like the business in the case study above, it’s damage limitation time.

I’ve mentioned this case study to a couple of other businesses, and the attitude is the same as mine; how do they sleep at night?  It seems such a hard way of learning how limited companies work.

A Lesson in How NOT to Run a Company

If you have a business, chances are you’ll also have a self assessment tax bill due at the end of January.  The following is a quick summary of how to deal with it:

1. The Deadline

If you have a tax bill for the 2011 tax year, it is due by 31 January 2012.  Failure to pay by this date will result in interest and possibly surcharges (e.g. there is a 5% surcharge on any outstanding tax not paid by the end of February).

2. How to Pay

There are a number of ways to pay your tax bill, the most common ones being a cheque in the post, by cash at your bank, or by BACS.  See here for the full rundown.  NB HMRC now accept faster payments, which may give you a couple more days.

3. What if You Can’t Pay?

HMRC have a system in place called the Business Payment Support Service, commonly known as ‘Time to Pay’, which allows business owners to arrange with HMRC to spread the payments of their taxes if their business is struggling.  However, as we reported last year, it appears that the regime is not as easy as it used to be.

4. Payments on Account

Many sole traders and partnerships also have Payments on Account to make, which are contributions towards the following year’s tax bills.  Please see here for an explanation as to how Payments on Account work.

Paying your Self Assessment Tax

2012 sees the reduction in the Annual Investment Allowance (AIA), the generous tax relief available on the purchase of assets.  From April 2012, the concession reduces from £100,000 to £25,000.  We highlighted this in our blog from May 2011.  However, we thought we would describe a scenario to outline the importance of getting the timing right.

The AIA is apportioned on a time basis.  For a company with a 31 December year end, the entitlement for 2012 will be:

£100,000 x 3/12          £25,000

£25,000 x 9/12            £18,750

Total                            £43,750

If the company wishes to spend £50,000 on assets, they would receive £43,750 AIA if the expenditure was before 31 March 2012.

However, if the expenditure was after 1 April 2012, the AIA would be restricted to £18,750.

The balance of allowances that would not benefit from AIA would still receive relief, but only at 20% – and this is reducing from April 2012 to 18%.

So you can see how the timing of expenditure can significantly accelerate the relief you receive.

2012 and the Changes to Tax Relief on Assets

2011 Tax Returns have to be filed by the end of January, so you haven’t got long.  Anyone can complete and submit their own personal tax return.  The following tips may help you:

1. It is now too late to file a paper return, so it must be done online.  If you haven’t already registered to file online, get this sorted ASAP, as this may take a couple of weeks to come through.
2. Make sure you have all your documents – for instance, if you are employed, you will need a P60.
3. Consider whether there are any employment related expenses you can claim; for instance, if you are paid mileage for using your own car for doing your job at less than 40p per mile (for first 10,000 miles), you can claim tax relief on the difference.
4. If you are self employed, remember that capital expenditure will be dealt with under capital allowances (e.g. Annual Investment Allowance).  Also, if you work from home, don’t forget to claim for use of home as office.
5. If you have previously come across late filing penalties, you should be aware that they have now changed, and have got harsher.
6. If you are due a tax refund, remember to claim it – HMRC do not send you your own money back automatically!  However, be suspicious if HMRC send you an email saying that you’ve got a tax refund.

This list is not exhaustive, but may help you to prepare.  If you have more complicated tax affairs or are self employed or own a limited company, we would recommend you get advice – of course we would, we’re accountants!  Seriously, the cost of advice may be more than compensated in terms of time and tax saved.

NB any advice above is generic and may be subject to individual circumstances.

Tips for Completing your Self Assessment Tax Return

Companies House’s response has been to introduce the Protected Online Filing (PROOF) service, which makes online submissions the only option.  We recommend this, as it is a more secure way of operating a company.

Further information is available from here.

Companies House – Are You Protected?

The office will be shut for Christmas at 1.00 p.m. on Friday 23 December.

We will reopen on Tuesday 3 January.

Christmas Shutdown