Thinking ahead on VAT compliance

Before the inspectors come calling, it pays to give your business a VAT healthcheck. David Wilson of Barnett & Turner talks us through the process. An annual VAT healthcheck is essentially a review of the VAT practices of a business – something akin to a mock VAT inspection but with added benefits. Many people in accountancy firms who provide this kind of service may be ex-VAT officers themselves, so they’ll know exactly the kinds of issues that are likely to raise concerns with HMRC.

For you, a healthcheck is a reassurance that your VAT affairs are in order, which will give you peace of mind – and additional credibility – if an inspection is called. Of course, in the current climate, there is a lot of pressure for the taxman to bring in more money, so scrutiny is only likely to increase. In addition, a healthcheck is an opportunity for a friendly VAT expert to look at ways in which the business could improve its VAT position – something the VATman won’t necessarily tell you!

When I go through the activities of a business, I start with fundamentals such as where VAT should and shouldn’t be charged. A common area here is cross-border compliance. Although the regime was simplified in 2010, it’s still a confusing world which many of our clients find problematic. There’s also the issue of expenditure and whether a client has claimed back VAT in areas they shouldn’t. I’m thinking here specifically of expenses such as business entertainment, which is a common target of the VATman.

After the healthcheck, it’s normal to write a report outlining findings to the client, quantifying errors and suggesting ways of dealing with them. My recommendation would always be to disclose any mistakes, as this openness with HMRC will be a mitigating factor when it comes to deciding on penalties. However, if you’ve been prompted to make a disclosure by, say, the threat of an inspection, it’s more likely that a penalty will be imposed. The fine can be up to 30%, but can often be mitigated down or sometimes be waived altogether.

It’s a mistake to think that all VAT issues will be uncovered by regular accountancy work unless it’s been specifically agreed as part the terms of engagement with your accountant. This is one of the things that makes the VAT healthcheck so essential. But how much work is actually involved? Well, it will probably depend on whether you’re asking your adviser to look at a specific issue or simply asking for them to take an overview and highlight any identified areas of concern. It may also be that you’re able to do some of the groundwork yourself, which would reduce the time commitment and fees of your accountant.

A typical scenario might lead to uncovering an underpayment of VAT. A client might then choose to engage us to handle that issue, manage the process and get things sorted out with HMRC. On the plus side, it may be that the healthcheck identifies efficiency savings which can then reduce the debt.

Overall, if the Revenue can see that a VAT healthcheck has been undertaken, they may well take comfort that you are acting responsibly and doing your best to comply with regulations. This will ultimately make your life easier so it is good sense to think ahead and to work proactively with your accountant in this complex area.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Converting to limited company status? The choices just got harder.

Following changes to the rules around partnership and LLP structures, many businesses have been looking to convert to limited company status, writes Jonathan Wilson of Barnett & Turner. But the announcement in the Chancellor’s Autumn Statement on goodwill has now left people scratching their heads. When the Chancellor announced changes to entrepreneurs’ relief in the Autumn Statement, it came as something of a bolt out of the blue. With more and more clients in partnerships and LLPs looking to convert to limited company status, the news that relief would no longer be granted on the sale of goodwill caused many owners to revisit their strategy.

The context, of course, is a series of moves which have made partnership status less attractive. For many businesses, a partnership structure has the flexibility needed to bring new people in to an equity stake. Recent changes mean that ‘salaried members’ have to go on to the payroll and the use of ‘corporate partners’ is, in many cases, prohibited, leading to potentially very high tax rates being suffered irrespective of whether profits are available to be drawn out.

As a result, many accountants and advisers have been helping clients to make the transition to a limited company. Although this structure is more rigid, one of the clear benefits of the change of status has – until now – been the ability to pay only 10% tax on a profit from the sale of goodwill to the limited company.

When the Chancellor announced that this would no longer be possible, it was mentioned within the general context of closing loopholes on tax avoidance. The decision has, however, caused a great deal of concern – particularly to businesses which were in the middle of the conversion process. For some it’s a “double whammy”, because as well as removing the availability of entrepreneur’s relief, any deduction within the company for amortisation relief has also been removed.

With a little time to reflect, it’s clear that the decision to convert to limited company status is now much more finely balanced, but many clients may still decide to make the change. There’s always the option of gifting goodwill on incorporation rather than selling it. It’s also important to look at the question of whether you have ‘base cost’ in your goodwill, in circumstances when it might have been bought from previous retiring partners. If so, there may be a small tax advantage still, although it’s fairly marginal.

Ultimately, the circumstances which were provoking LLPs and partnerships to change their company structures haven’t gone away. It’s just that the Chancellor has removed one of the attractive carrots that was previously dangling in front of business owners. Your accountant will be able to look closely at your circumstances and give you appropriate advice in light of all the recent changes.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Being up front about the new tax challenges

As Accelerated Payment Notices start putting the brakes on tax avoidance schemes, Jono Wilson and Tracy Henson of Barnett & Turner look at the complex implications for accountants, as well as their clients. One of the key planks of the Revenue’s attempts to crack down on tax avoidance is the new regime of Accelerated Payment Notices (APNs). In a nutshell, if a particular DOTAS scheme is under enquiry, HMRC can issue an APN to an individual or company requiring them to pay the tax up front that would have been owed if the DOTAS weren’t in operation. There’s a penalty of 5% if the payment isn’t made within 90 days. The figure then rises to a hefty 10%.   If you receive such a notice and cannot pay it’s vital that you speak to HMRC, as they will seek to enforce the debt and collect the payment.

The good news is that if your scheme is ultimately found to be legal by the courts, HMRC must repay the money paid to them and no penalties apply. The process can, however, take a long time. Critically, the system also throws up some difficult issues for professional advisers working with corporate clients. How exactly do we provide for the APNs in the accounts?

Although the new arrangements clearly differ from the previous tax enquiry issues accountants have tackled, the broad principles will be the same. There is a dispute between two parties that could give rise to a potential liability for the company.

There are three criteria set out in current accounting standard FRS 12 which have to be met before recognising a provision at the balance sheet date:

• there is a present obligation as a result of a past event;
• it’s probable that a ‘transfer of economic benefits’ will be required to settle the obligation; and
• it’s possible to make a reliable estimate of the amount involved.

Once the APN has been issued, then it is a reasonable view that as this is an enforceable debt, it will need to be reflected as a liability in the accounts. If recognised as a liability – or if you have made a payment – then there’s a deduction which needs to be accounted for. There are two possible places for this to hit the accounts; it can be shown as a tax charge or as an asset. However, the conditions for recognising a contingent asset are strict – there has to be a reasonable degree of certainty – and therefore once the APN has been received, there is a higher threshold to avoid it impacting on the tax charge. If there is not a reasonable degree of certainty, then the standards do allow disclosure in the accounts of a ‘probable contingent asset’.

With disputes of this type, there is always going to be a fine balancing act. It is actually increasingly difficult to know with any degree of certainty the outcome of a specific case. This is particularly true in an environment where it might be argued the emphasis is now on sending signals about tax avoidance rather than deciding each case on its individual merits.

On receiving an APN, you will need to then consider how this is reflected in the accounts and the signal this may send about your perceived view of the strength of your case. On the other hand, there are clearly dangers to being too bullish and failing to accept that there is any obligation (not least dealing with HMRC officers seeking to collect the tax due under the APN). Your accountants are there to hold your hand through the process, but remember a lot of this is new territory and there won’t necessarily be a black and white answer.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

The new world of converging standards

1st January 2015 will see the introduction of new accounting standards in the UK (FRS 101, FRS 102 and FRS 103), which may well change the way your professional adviser deals with your company figures. Jono Wilson of Mansfield-based accountants Barnett & Turner explains what the new rules mean. We’ve been talking about new accounting standards for a number of years and some accountancy firms have already chosen to adopt them for their clients. By the beginning of 2015, it will no longer be optional. Everyone will need to comply.

Put simply, figures are going to be calculated in different ways to reflect the increased drive towards standardisation in accounting practice around the world. You may see the impact on both your profit and loss account and your balance sheet. In turn, this might change the view taken of your business by both your bank and HMRC as well as credit reference agencies.

At the time the switch is made, there will be a need for two sets of figures. Your accountant will review the books in the light of current UK GAAP rules, but also produce a set of accounts which complies with the new regime. This will allow year-on-year comparison between two points – say, 31st December 2014 and 31st December 2015.

If the banks see a reduction in the net assets, there’s a danger they may argue you’ve broken a covenant when in fact under the old rules you were fully compliant. If your accountant feels this is likely to be an issue, it may be necessary to sit down and talk the numbers through – explaining the way in which the accounting procedures have changed and reassuring your bank that there’s been no material change to your position.

It’s even possible that a company which has been solvent under the old standards might technically become insolvent under the new rules. This situation could arise if your profits are hit by the rebuttable 20-year maximum amortisation period for goodwill becoming five years or indeed the changes to how deferred tax is calculated.

The revision to the figures could, for example, then lead HMRC to argue that dividend payments are technically illegal. In larger businesses, changes will mean the revaluation of investment property being reflected in the P&L reserve, leading to ring fenced profit which is non-distributable.

If this all sounds a little worrying, remember that there’s an upside too. If your business is operating across different market places, we’re now getting closer than ever to ‘convergence’ in accounting practices. This means that consolidation of accounts is potentially going to become a lot easier.

Your accountants will be anticipating the changes and will be well equipped to advise you on their implications, although as a rule of thumb, the smaller your business, the less likely you are to see a major impact.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Changes To Taxation Of Pensions On Death

Hot on the heels of the relaxation of the rules on pension drawdown earlier this year, the Chancellor announced at Party conference that he intends to abolish the 55% tax charged in certain circumstances on the balance of undrawn pension funds at death. This creates further flexibility in pension planning which should now be given greater priority in your financial plan. At present a pension fund can only be passed down tax free on death if the individual has not drawn anything from it, including the tax free sum, and is aged under 75 on death, otherwise there is a 55% tax charge on the fund. This has prompted some individuals to draw down the maximum amount available each year during their lifetime on the basis it only suffers a maximum 45% income tax charge. There are however restrictions on how much can be drawn out of the fund each year during an individual’s lifetime, but these restrictions are set to be removed from April 2015.

Now that the 55% tax charge is due to be abolished from April 2015 it will prompt those drawing a pension to reconsider the amount they draw, safe in the knowledge that what they leave behind will not suffer a tax charge on their death and can be passed down. Under these new rules if the death occurs before the age of 75 then the undrawn fund can be withdrawn in full by the beneficiaries tax free but a death after 75 results in an income tax charge on the beneficiaries as they draw it down.

If the fund is not fully drawn down by the beneficiaries in their lifetime then it can pass down to the next generation on their death, thereby creating a situation where pension planning today can be beneficial for a number of generations. These are clearly quite progressive changes and will offer much more scope on pension planning in the years to come. It will also remove one of the biggest criticisms of pension schemes, the restricted access to the fund which currently exists.

Exciting times ahead!!

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Property ownership: a talking point for husbands and wives

The way in which you share ownership of property with your spouse can have big financial implications, writes Tracy Henson of accountants Barnett & Turner. When a husband and wife buy a house together, they are usually ‘joint tenants’, which means they have equal rights to the property. In the event that one of them dies, the home will automatically pass to the other partner, but it’s only possible to sell or remortgage with the other’s consent. A good analogy is to think of the property as a bowl of soup. It’s not possible to cut it in half.

If you’d prefer your property to be more like a cake which can be sliced in various directions, then it’s essential that your legal status is as ‘tenants in common’. This allows for different shares of the property to be owned by the two partners.

Imagine a scenario, for instance, in which you own a second home and rent it out. If your spouse is working and is a higher-rate taxpayer, but you earn a lot less, it makes sense for you to receive the rent as income. That way, you’ll end up paying a lower marginal rate of tax and help to protect your child benefit at the same time, as you could avoid your partner heading over the £50k threshold established by the government.

It’s worth bearing in mind though that HMRC will, by default, consider you to be joint tenants, so you need to make your status clear and legally watertight. It’s usually a simple matter, if both of you agree. You just need to arrange to make a declaration of trust stating the way in which the shares are owned. Alternatively, one partner can issue a notice of severance. The co-owner simply has to acknowledge receipt. Either method then also requires a form to be sent to the Land Registry.

Most of the time, I would advise my clients that the minority shareholder in the property should retain at least a nominal 1% stake. Remember that you’re not just splitting ownership of the income, but also the underlying ownership of the house or apartment, which calls for a great deal of trust. If a husband, say, has all the earned income in the household, while the wife receives the proceeds from property, this may be good news from the perspective of income tax liability, but may not be an ideal scenario in relation to Capital Gains Tax and inheritance tax. So talk through the options with your accountant before making any fundamental decisions.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Own a second home? The taxman may be ringing the doorbell.

Don’t assume that the Revenue won’t investigate you for the profit on your rented property, writes Jonathan Wilson, Partner at Barnett & Turner. A new campaign is under way and it’s time to take action. According to HMRC, landlords may owe more than £500m in unpaid tax from the profit they make on renting out homes. Although there are 1.4m people who let property in the UK, half a million of them aren’t even registered with the taxman. It’s figures like these which have led to the creation of the Let Property campaign, in which the Revenue may investigate as many as 900,000 property owners renting out homes in the UK and overseas.

Although the news may come as a shock if you’re currently a landlord of a second home or investment property, it’s worth thinking calmly and seeing the initiative as an opportunity to perhaps get your affairs in order.

You can make a voluntary disclosure to HMRC about any undeclared income by phoning the Let Property campaign helpline on 03000 514 479. Tell the Revenue that you want to fill out a notification form and they’ll then give you three months to calculate and pay what you owe.

Many categories of individual landlord can benefit. It doesn’t matter whether you have a single property or more than one. You can be living abroad and renting out a property in the UK or doing the reverse. Specialist landlords – dealing in student or workforce rentals – can take advantage of the scheme, as can someone renting out their main home for more than £4,250 a year.

It’s important to stress, however, that Let Property is not designed to be used by companies or trusts renting out residential property or anyone letting commercial property.

If you have any queries, it’s well worth discussing your position with your accountant who can deal with HMRC on your behalf.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Opening up in the UK: a guide for overseas businesses

With the right professional advice, you can feel much more confident about setting up a business in the UK, argues David Wilson of Barnett & Turner: Imagine you are setting up a business in an overseas territory. You may be establishing the venture to undertake a specific contract, or you may just be dipping your toes into new territorial waters. Either way, would you want to go to all the expense and hassle of trying to recruit a finance team overseas, when you don’t know anything about the local labour market or culture? Similarly, without the knowledge of the local legal, accounting and tax regulatory framework, setting up a business in an overseas location can be a daunting task.

The challenges are, of course, also true in reverse. An overseas business setting up in the UK will find itself confronted by the same issues. Professional advisers need to work closely together to provide the guidance needed at the beginning of the venture, including the selection of the most appropriate structure for the business, from both a legal and tax perspective.

Lawyers can assist with, among other things, company formation, appointment of directors and the issuing of shares, as well as commercial contracts for client and subcontractor agreements, company secretarial issues, annual returns and banking agreements. You can then turn to your accountants for advice and support on other matters.

If your business has employees, you will require assistance with UK employment legislation, contracts of employment for UK staff and taxation of inbound or outbound employees. There’s also the question of corporate benefits, which might be anything from medical and dental care through to maternity/paternity leave, death in service, salary exchange and pension auto-enrolment.

The lack of a local finance function can often be a challenge. An outsourced accounting and payroll provider takes away the hassle of bookkeeping, calculating and paying suppliers, employees and payroll taxes. They can also help with the submission of VAT Returns and the paying of any VAT due, the preparation of management accounts and the filing the year-end financial statements in accordance with UK standards.

With the advent of cloud-based bookkeeping and payroll software, your overseas head office can have access to live data that is maintained by the outsourced provider.

Outsourcing allows the directors and owners to concentrate on their ‘core’ function, while growing the business and customer relationships in the UK. It can also mean that less investment is required in IT and software to support the finance function and allow limited resources such as office space to be used for core activities. Outsourcing also gives you peace of mind on staffing issues such as training, sickness and holidays.

Taxation advice will also be important. As an overseas owner, you’ll need to understand your reporting obligations in the UK. Any employees you bring over to the UK, or subcontractors you engage to carry out work over here, will have UK tax reporting obligations. Your parent company will need advice on how to repatriate any profits made in the UK, while specialist input may be required when dealing in VAT, as well as Import/export.

One final thought to bear in mind is that although the UK company on its own may be considered ‘small’ for audit purposes, an audit may be required of a UK subsidiary of a medium or large-scale overseas group.

With the right support and advice in place at the outset, the challenges of establishing a UK business shouldn’t be insurmountable. So make sure you speak to your professional advisers at the earliest possible stage.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

To get on top of the issues, it’s important to be in touch.

Why it pays for clients and their accountants to have regular meetings and reviews. I was recently phoned by a prospective client who was looking for help in preparing his accounts. He ran a small limited company with a turnover of around £300k, which had a history of losses in the early years. The business had been kept afloat by finance introduced by the proprietor.

Although there were many issues that his current accountant might have chosen to explore with him – including business pricing, development and the repayment of personal loans – it seemed that none of this was actually happening. The professional adviser confined his work to compliance and only ever contacted the client once a year.

Unfortunately, this is all too common a scenario, as many businesses don’t really know the kind of level of service they’re entitled to expect. A little investment of time with your accountant can, however, pay huge dividends.

We try to maintain at least four critical points in the year when it’s essential to make contact with clients. The first three are straightforward and should really be fairly obvious:

Before the year-end

Two or three months before the year-end, it’s time to discuss the expected results and what will happen to this year’s profits, as well as distribution and pension planning. We start the process by letter, phone or setting up a meeting.

In advance of a personal tax return

We often end up handling the personal tax affairs of our business clients. This is another opportunity for a chat about planning, ISAs, pensions and so on.

When the accounts are prepared

There should be a formal discussion when the accounts are being completed and another chance to look at distributions and dividends.

Whilst I appreciate that “time is often money” and that some clients are more receptive than others to regular communication, I would maintain that there is always room for at least one more contact point. This needn’t be at any particular time of the year. It’s a general get-together or phone call in which you simply ask the questions, ‘How are things going?’ and ‘Is there anything else we can do to help?’

If you’re a client of a larger firm, it’s fair to say that your contact at some points in the year may be with senior managers or specific experts in tax or audit. You should still expect that a partner will take enough interest that they’ll call you periodically to check on how the company is progressing and see what your plans are for the future, without an invoice following shortly afterwards.

If that’s not the kind of service you’re currently getting, perhaps it’s time to rethink your arrangements?

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Keep it in the family: planning your business for the next generation

Business coverage in the press often focuses on large multinationals and publicly-listed companies, but the reality is that most firms are family owned. Although the failure rate for new enterprises can be high in the early days, once a family business has established itself, it can often become very long-lived. And that raises very important questions about succession planning. It’s sometimes difficult to envisage the circumstances in which you’d relinquish the reins of a company that you or your parents helped to found. After all the blood, sweat and tears that have been involved in building the company up, you may be understandably protective of what you’ve created. But an exit strategy of some kind is essential if you want to make sure the company is in safe hands when you’re no longer able to continue playing an active role.

It’s worth reviewing your options at an early stage in conjunction with your accountants. One possibility is obviously that you start to wind the business down. Another route is a straightforward trade sale. But if, like many people, you want to keep wealth and ownership within your family, there are some important questions you need to address.

Although your children are the obvious choice as successors, things may not always be clear cut. Perhaps they don’t actually show any inclination to follow in your footsteps? The ideal successor will often be a son or daughter who’s shown an active interest in the business and already played some role in its success. Can you be sure, however, that they have a broad enough perspective to help the company meet the challenges that lie ahead?

Some business owners actively encourage their children to go out into the wider world to pick up skills and experience that can ultimately be transferred back to the family firm. Gaining a qualification in law or accountancy can be very useful, for instance. Or perhaps developing an in-depth understanding of sales and marketing while spending time with a blue-chip corporation.

If you’re thinking ahead in this way, you might also want to consider other changes. Is there an argument for strengthening the management team? Or bringing in non-executive directors with relevant expertise?

Your accountant can provide an independent sounding board for this type of planning. At the same time, they’ll be able to talk you through any tax implications of a handover from one generation to another.

Generally speaking, such transfers will be exempt from inheritance tax, as we’re talking about a business asset which would be exempt and therefore effectively sit outside your estate. If you choose to sell the business and pass on the cash raised, however, that will be classed as part of your estate for inheritance tax purposes.

One option to consider is the transferring of shares well in advance of your death, perhaps over a period of time. Although Capital Gains Tax will be payable, Entrepreneur’s Relief should apply to lessen the burden.

Most accountants will have experience of addressing this type of issue alongside their clients. But their message would be that it’s never too early to start the discussion.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk