VAT input tax checklist

September 2nd, 2011

Checklist for VAT input tax

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Venture Capital Trusts

September 2nd, 2011

Venture Capital Trusts

Venture Capital Trusts (VCTs) are complementary to the Enterprise Investment Scheme (EIS). Both are designed to encourage private individuals to invest in smaller high-risk unquoted trading companies affected by the equity gap.

While the EIS requires an investment to be made directly into the shares of the company, VCTs operate by indirect investment through a mediated fund. In effect they are very like the investment trusts that are obtainable on the stock exchange, albeit in a high-risk environment.

What is a VCT?

VCTs themselves are quoted companies which are required to hold at least 70% of their investments in shares or securities that they have subscribed for in qualifying unquoted companies. VCTs have a certain time period in which to meet the percentage test. If a VCT sells a holding and breaches the test, the VCT is allowed a six month period to

VCTs themselves are quoted companies which are required to hold at least 70% of their investments in shares or securities that they have subscribed for in qualifying unquoted companies. VCTs have a certain time period in which to meet the percentage test. If a VCT sells a holding and breaches the test, the VCT is allowed a six month period to reinvest cash received into another qualifying investment.

Other conditions are:

• they must distribute 85% of their income
• they must have a spread of investments with no single holding accounting for more than 15% of the value of total.

From 22 April 2009 the time limits concerning the employment of money invested are relaxed.

VCTs are exempt from tax on their capital gains and there is no relief for capital losses.

Reliefs available to investors

Income tax relief of 30% is currently available on subscriptions for VCT shares up to a limit per tax year of £200,000.

To qualify for income tax relief the shares must be held for a minimum of five years.

Investors are exempt from tax on any dividends received from a VCT although the credits are not repayable.

Capital gains arising on disposal of the shares are also exempt and, for this relief, there is no minimum period of ownership. There is no relief for any capital losses.

Qualifying companies

The definition of a qualifying company for VCT purposes is very similar to that applying for EIS. The company:

• must be unquoted, although shares on the Authorised Investment Market (AIM) are deemed unquoted for this purpose. They may become quoted later.
• must not deal in land, leased assets or financial, legal or accountancy services. In addition it must not be a trade that has a large capital aspect to it, such as property development, farming, hotels or nursing homes.
• VCT shares must be traded on an EU regulated market rather than being restricted to an official UK list
• the rules governing the amount of a VCT investments which must be held as equity, and the types of shares qualifying will change companies will be excluded from qualifying for VCT purposes where it would be regarded as an ‘enterprise in difficulty’ under the European Commission’s guidelines.

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Small business VAT

September 2nd, 2011

Input VAT matters

Only registered traders can reclaim VAT on purchases providing:

1. the expense is incurred for business purposes and
2. there is a valid VAT invoice for the purchase.

Only VAT registered businesses can issue valid VAT invoices. VAT cannot be reclaimed on any goods or services purchased from a business that is not VAT registered. Proforma invoices should not be used as a basis for input tax recovery as this can accidentally lead to a duplicate VAT recovery claim.

Most types of supply on which VAT recovery is sought must be supported by a valid VAT invoice. This generally needs to be addressed to the trader claiming the input tax. A very limited list of supplies do not require a VAT invoice to be held to support a claim, providing the total expenditure for each taxable supply is £25 or less (VAT inclusive). The most practical examples of these are car park charges and certain toll charges.

The following common items however never attract input VAT and so no VAT is reclaimable – stamps, train, air and bus tickets, on street car parking meters and office grocery purchases like tea, coffee and milk!

Business purpose

This is often an area of contention between taxpayers and HMRC as VAT is not automatically recoverable simply because it has been incurred by a VAT registered person.

In assessing whether the use to which goods or services are put amounts to business use (for the purpose of establishing the right to deduct input tax), consideration must be given as to whether the expenditure relates directly to the function and operation of the business or merely provides an incidental benefit to it.

Private and non-business use

In many businesses, personal and business finances can be closely linked and input tax may be claimed incorrectly on expenditure which is partly or wholly for private or non-business purposes.

Typical examples of where claims are likely to be made but which do not satisfy the ‘purpose of the business’ test include:

1. expenditure related to domestic accommodation
2. pursuit of personal interests such as sporting and leisure orientated activities
3. expenditure for the personal benefit of company directors/proprietors and
4. expenditure in connection with non-business activities.

Where expenditure has a mixed business and private purpose, the related VAT should generally be apportioned and only the business element claimed. Special rules apply to recover input tax claimed on assets and stock (commonly referred to in VAT as goods) when goods initially intended for business use are then put to an alternative use.

Business entertainment

VAT is not reclaimable on many forms of business entertainment but VAT on employee entertainment is recoverable. The definition of business entertainment is broadly interpreted to mean hospitality of any kind which therefore includes the following example situations:

1. travel expenses incurred by non employees but reimbursed by the business, such as self employed workers and consultants
2. hospitality elements of trade shows and public relations events.

Business gifts

A VAT supply takes place whenever goods change hands, so in theory any goods given away result in an amount of VAT due. The rule on business gifts is that no output tax will be due, provided that the VAT exclusive cost of the gifts made does not exceed £50 within any 12 month period to the same person.

Where the limit is exceeded, output tax is due on the full amount. If a trader is giving away bought-in goods, HMRC will usually accept that he can disallow the tax when he buys the goods, which may be more convenient than having to pay output tax every time he gives one away.

1. Routine commercial transactions which might be affected include such things as:long service awards
2. Christmas gifts
3. prizes or incentives for sales staff.

Cars and motoring expenses

Input tax errors often occur in relation to the purchase or lease of cars and to motoring expenses in general. Some key issues are:

1. Input VAT is generally not recoverable on the purchase of a motor car because it is not usually exclusively for business use. This prohibition does not apply to commercial vehicles and vans, provided there is some business use.
2. Where a car is leased rather than purchased, 50% of the VAT on the leasing charge is not claimed for the same reason.
3. Where a business supplies fuel or mileage allowances for cars, adjustments need to be made to ensure that only the business element of VAT is recovered. There are a number of different methods which can be used, so do get in touch if this is relevant to you.

Output VAT issues

Bad debts

Selling on credit in the current economic climate may carry increased risk. Even where credit control procedures are strong there will inevitably be bad debts. As a supplier, output VAT must normally be accounted for when the sale is initially made, even if the debt is never paid, so there is a risk of being doubly out of pocket.

VAT regulations do not permit the issue of a credit note to cancel output tax simply because the customer will not pay! Instead, where a customer does not pay, a claim to recover the VAT on the sale as bad debt relief can be made six months after the due date for payment of the invoice.

Example

A trader supplies and invoices goods on 19 October 2010 for payment by 18 November 2010 (ie a normal 30 day credit period). The earliest opportunity for relief if the debt is not settled would be 18 May 2011. The relief would be included in the return into which this date fell, depending on the return cycle of the business.

The amount of the claim

The taxpayer can only claim relief for the output tax originally charged and paid over to HMRC, no matter whether the rate of VAT has subsequently changed. In the above example the standard VAT rate charged would have been 17.5% (not the current 20%) so a claim can be made for only 17.5%. The claim is entered as additional input VAT – treating the uncollected VAT as an additional business expense – rather than by reducing output VAT on sales.

The customer

A customer is automatically required to repay any input VAT claimed on a debt remaining unpaid six months after the date of the supply (or the date on which payment is due if later). Mistakes in this area are so common that visiting HMRC officers have developed a programme enabling them to review Sage accounting packages and to list purchase ledger balances over 6 months old for disallowance.

Preventing the problem?

Small businesses may be able to register under the Cash Accounting Scheme, which means you will only have to account for VAT when payment is actually received.

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Construction Industry Scheme

August 6th, 2011

The Construction Industry Scheme (CIS) sets out special rules for tax and national insurance (NI) for those working in the construction industry. Businesses in the construction industry are known as ‘contractors’ and ‘subcontractors’. They may be companies, partnerships or self employed individuals.

The CIS applies to construction work and also jobs such as alterations, repairs, decorating and demolition.

Contractors and subcontractors

Contractors include construction companies and building firms and also government departments and local authorities. Any other business spending more than £1 million a year on construction is classed as a contractor for the purposes of the CIS.

Subcontractors are those businesses that carry out work for contractors. Many businesses act as both contractors and subcontractors.

Monthly return

Contractors have to make a monthly return to HMRC:
? confirming that the employment status of subcontractors has been considered
? confirming that the verification process has been correctly dealt with
? detailing payments made to all subcontractors and
? detailing any deductions of tax made from those payments.

The monthly return can be sent either manually or electronically and relates to each tax month (ie running from the 6th of one month to the 5th of the next). The deadline for submission is 14 days after the end of the tax month. Even if no subcontractors have been paid during a month, contractors still have to make a nil return. All contractors are obliged to file monthly even if they are entitled to pay their PAYE quarterly. There is no requirement to make an annual return of payments made which applied under the previous scheme.
Identification

Subcontractors must give contractors their name, unique taxpayer reference and national insurance number (or company registration number) when they enter into a contract. So long as the contractor is satisfied that the subcontractor is genuinely self-employed the ‘verification’ procedure (explained below) must be followed.

Employed or self-employed?

A key part of the new CIS is that the contractor has to make a monthly declaration that they have considered the status of the subcontractors and are satisfied that none of those listed on the return are employees. HMRC can impose a penalty of up to £3,000 if contractors negligently or deliberately provide incorrect information.
Remember that employment status is not a matter of choice. The circumstances of the engagement determine how it is treated.

The issue of the status of workers within the construction industry is not a new matter and over the last few years HMRC have been making substantial efforts to re-classify as many subcontractors as possible as employees. The courts have considered many cases over the years and take into account a variety of different factors in deciding whether or not a worker is employed or self-employed. The tests which are applied include:
? the right of control over how, what, where and when the work is done; the more control that a contractor can exercise, the more likely it is that the worker is an employee
? whether the worker provides a personal service or whether a substitute could be provided to do that work
? whether any equipment is necessary to do the job, and if so, who provides it
? the basis of payment – whether an hourly/weekly rate is paid, whether there is any overtime, sick or holiday pay and whether or not invoices are raised for the work done
? whether the worker is part and parcel of the organisation or whether they are conducting a task which is self-contained in its own right
? what the intention of the parties is – whether there is any written statement that there is no intention of an employment relationship
? whether there is a mutuality of obligation; that is, an ongoing understanding that the contractor will offer work and the worker accept it
? whether the workers have any financial risk.

As can be seen from the above, there are a number of factors which must be considered and the decision as to whether somebody should be classified as employed or self-employed is not a simple one.

Clearly, HMRC would like subcontractors to be classed as employees, as this generally means that more tax and national insurance is due. However, just because the HMRC think that somebody should be re-classified does not necessarily mean that they are correct.

HMRC have developed software known as the employment status indicator tool, which is available on their website, to address this matter but the software appears to be heavily weighted towards re-classifying subcontractors as employees. It should not be relied on and professional advice should be taken if this is a major issue for your business.

‘False self-employment’ in the construction industry

The government has been looking at the best way to address the issue of what they believe is ‘false self-employment’ in the construction industry. They have concluded, for income tax and national insurance purposes, that they will introduce legislation which deems workers within the construction industry to be in receipt of employment income unless one of three simple, clear and easy to apply criteria is met.  These criteria take the form of three questions which ask whether the worker provides:
? their own equipment (other than customary to the trade)
? their own materials
? additional workers to complete the job.

The worker will have to satisfy at least one of these criteria to be regarded as self-employed. The government have been consulting on this issue and the rules are proposed at this time.

Verification

The contractor has to contact HMRC to check whether to pay a subcontractor gross or net. Not every subcontractor will need verifying (see below). Usually it will only be new ones. The verification procedure will establish which of the following payment options apply:
? gross payment
? a standard rate deduction of 20%
? a deduction made at the higher rate of 30% if the subcontractor has not registered with HMRC or cannot provide accurate details to the contractor and HMRC cannot verify them.

HMRC will give the contractor a verification number for the subcontractors which will be matched with HMRC’s own computer. The number will be the same for each subcontractor verified at any particular time. There will be special suffixes for the numbers issued in respect of subcontractors who cannot be verified. The numbers are also shown on contractors’ monthly returns and the payslips issued to the subcontractors.

Clearly, these numbers are a fundamental part of the system and contractors have to ensure that they have a fool-proof system in place for obtaining and retaining them. It will also be very important to give precise details to HMRC because, if their computer does not recognise the subcontractor, the higher rate deduction will have to be made.

Who needs verifying with HMRC?

If a contractor is paying a subcontractor they will not have to verify them if:

? they have already included them on any monthly return in that tax year; or
? the two previous tax years.

A payslip?
Contractors have to provide a monthly ‘payslip’ to all subcontractors paid, showing the total amount of the payments and how much tax, if any, has been deducted from those payments. The contractor has to provide this for each tax month as a minimum. Contractors are allowed to choose the style of the ‘payslips’ themselves but certain specific information has to be provided including the:

? contractor’s name
? contractor’s employers’ tax reference
? tax month to which the payment relates
? subcontractor’s name, unique tax reference or specific subcontractor reference
? the gross amount of the payment
? cost of any materials which have reduced the gross payment
? amount of any tax deductions made and
? verification number where deduction has been made at the higher rate of 30%.

If contractors include such payments as part of their normal payroll system, it needs to be clear that although payslips are being generated for those individuals, they are not employees and have clearly been classed as self-employee
Are tax deduction made from the whole payment?
Not necessarily. The following items should be excluded when entering the gross amount of payment on the monthly return:

? VAT charged by the subcontractor if the subcontractor is registered for VAT
? any Construction Industry Training Board levy.

The following items should be deducted from the gross amount of payment when working out the amount of payment from which the deduction should be made:

? what the subcontractor actually paid for materials including VAT paid if the subcontractor is not registered for VAT, consumable stores, fuel (except fuel for travelling) and plant hire used in the construction operations
? the cost of manufacture or prefabrication of materials used in the construction operations.

Any travelling expenses (including fuel costs) and subsistence paid to the subcontractor should be included in the gross amount of payment and the amount from which the deduction is made.

Penalties
The whole system is backed up by a series of penalties. These cover situations in which an incorrect monthly return is sent in negligently or fraudulently, failure to provide CIS records for HMRC to inspect and incorrect declarations about employment status. However, it is expected that two further penalties are likely to be much more common on a day to day basis for:
? failure to send in the monthly return there will be a penalty of £100 per 50 subcontractors (or part thereof) per month
? failure to provide a subcontractor with a ‘payslip’, a penalty of up to £300, plus a further penalty of up to £60 per day for continuing failure.

Paying over the deductions
Contractors have to pay over all deductions made from subcontractors in any given tax month by the 19th following the end of the tax month to which the deductions relate. If payment is being made electronically, the date will be the 22nd, or the next earlier banking day when the 22nd is a weekend or holiday. If the contractor is a company which itself has deductions made from its payments as a subcontractor, then the deductions made may be set against the company’s liabilities for PAYE, NI and any CIS deductions it is due to pay over.

What about subcontractors?
Subcontractors who were registered with HMRC before the introduction of the new CIS will have been transferred over to the new system.

However, if a subcontractor first starts working in the construction industry on a self-employed basis after 5 April 2007, or had a temporary registration card that has expired, they will need to register for the new CIS.
To register, a subcontractor needs to contact HMRC by phone or over the internet and they will conduct identity checks. The rules for subcontractors to be paid gross are broadly equivalent to the previous rules. There is a business test, a turnover test and a compliance test similar to the previous regime.
Subcontractors not registered with the HMRC will suffer the higher rate deduction from any payments made to them by contractors.

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Shares and Shareholders

July 28th, 2011

Shares in a company represent ownership. When an individual buys shares in a company, they become one of the owners of the business. This entitles them to a share of the profits of the company – the dividends.

What are shares and why are they issued?

When an individual buys shares in your company, they become one of its owners.

Small companies issue shares in their company in return for a lump sum investment. This investment may either come from friends and family or, for businesses that are looking for capital to fund high growth, through formal equity funding finance.

These investors are willing to put up capital for a share in a growth business. The advantage of raising money in this way is that you don’t have to pay the money back or pay interest to the investors. Instead, shareholders are entitled to a share of the distributable profits of the company, known as dividends.

How are shares issued?

When you set up a company with share capital, you can decide on the level of share capital and the number of shares of a fixed nominal value.

A statement of capital and initial shareholdings must be delivered to Companies House as part of the incorporation of the company and this will set out:

• the amount of share capital the company will have
• the division of the share capital

The founders of the company must sign form IN01 and the memorandum of association and state the number of shares they want. These are then issued upon incorporation and are called subscriber shares.

Family or friends

You may choose to issue shares to family or friends in return for making investment in your business, rather than accepting the offer of a loan from them. That way you’re not obliged to make repayments.

It is important to formalise any agreement with family members or friends as this can help you avoid or resolve any disputes that may arise in future.

Employees

Employee share ownership schemes offer employees a stake in the business, encouraging loyalty and helping you to retain key staff.

They also provide an incentive or reward for performance and can help recruitment.

Issued capital

A company need not issue all its capital at once. Issued capital is the nominal – rather than actual – value of the part of the share capital that has been issued to shareholders.

For example, a company that issues 500 shares at £1 each has an issued share capital of £500.

A Private limited company only needs to issue one share of any value, but Public limited companies (plcs) must have at least £50,000 worth of issued share capital before they are allowed to trade. Initially they must satisfy this requirement by means of shares in sterling or in euro shares (and not by a combination of the two).

Further shares can be issued in the company by the directors, subject to the rules set out in the Articles of Association, but typically by being authorised to do so by ordinary resolution of the company’s existing members.

An exception to this is that the directors of a private company incorporated under the Companies Act 2006, which will only have one class of shares, do not need any prior authorisation from the company to allot shares.

The directors set the price of these shares.

Limited companies must notify Companies House of any new shares issued.

Types of shares

A company may have many different types of shares that come with different conditions and rights.

There are four main types of shares:

1. Ordinary shares are standard shares with no special rights or restrictions. They have the potential to give the highest financial gains, but also have the highest risk. Ordinary shareholders are the last to be paid if the company is wound up.
2. Preference shares typically carry a right that gives the holder preferential treatment when annual dividends are distributed to shareholders. Shares in this category receive a fixed dividend, which means that a shareholder would not benefit from an increase in the business’ profits. However, usually they have rights to their dividend ahead of ordinary shareholders if the business is in trouble. Also, where a business is wound up, they are likely to be repaid the par or nominal value of shares ahead of ordinary shareholders.
3. Cumulative preference shares give holders the right that, if a dividend cannot be paid one year, it will be carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the business, provided the company has distributable profits.
4. Redeemable shares come with an agreement that the company can buy them back at a future date – this can be at a fixed date or at the choice of the business. A company cannot issue only redeemable shares.

 Transfer of shares

In a private company, shares are usually transferred by private agreement between the seller and buyer, subject to the company’s rules and approval of the directors.

Certain taxes apply when you transfer or sell shares:

• If you are transferring shares yourself using a paper stock transfer form Stamp Duty may be payable when the value is over certain limit
• Any gains you have made on selling shares may be subject to Capital Gains Tax.

When a shareholder dies or becomes bankrupt, their shares and the rights associated with them must be given to a personal representative or executor.

Paying dividends and paying tax

A dividend is a part of the company’s profits that is given to shareholders.

Small companies often pay dividends after the annual accounts are prepared, or often where directors are also shareholders at regular times during the year.

The dividend is calculated per share, so the more shares you own, the more money you get.

Dividends attract income tax, but not National Insurance charges.

When paying dividends, the company must send a dividend voucher to the shareholder . This shows the amount of the dividend and the amount of tax credit. The tax credit indicates the amount of tax paid by the company on the shareholder’s behalf. Companies can pay dividends electronically if a shareholder agrees to it. Companies no longer need to send a dividend voucher in such cases

Dividends are paid after tax has been deducted at the basic rate. If you pay a higher rate of tax, you may be liable to pay additional tax on your dividend.

Making changes to share capital

Companies can alter their share capital through a number of routes.

Since 1 October 2008 private companies have been able to reduce share capital by means of a special resolution and a statement by the directors confirming the solvency of the company. The procedure is subject to any provision in the company’s articles prohibiting or restricting the reduction of capital. There is a fee of £10 for this procedure.

Issuing shares to a new shareholder

A company can issue shares to a new shareholder by authorising the directors to allot shares. The authority can be in the articles or given by an ordinary or elective resolution.

Allotment creates a right to be issued with the shares.

Changing the shares

A company can consolidate or subdivide its share capital if authorized to do so by the articles.

Consolidation is when the shares are put together and then divided into shares of larger amounts, e.g. 200 shares of £1 are consolidated to create 100 shares of £2.

Subdivision is when shares are divided into smaller amounts.

To consolidate or subdivide shares, a company must pass an ordinary resolution, then send the resolution and a completed form SH02 to Companies House within a month of the change.

Posted in Accounting and Bookkeeping, companies, company owners, Directors, Guidance notes, Legal, Limited Companies, owning a company, shareholding, shares, Starting in Business, Xebox | | Comments: Comments Off

Liability of a director during company insolvency

July 28th, 2011

Directors owe a duty of care to the company’s creditors. If a company continues to trade when it is insolvent, its directors can be held personally accountable if their actions cause financial loss to any of the company’s creditors.

You will also be liable under any personal guarantees.

What do I do if my company is in financial difficulty?

Directors must use their judgement and known facts to establish whether the company is, or is about to become or is insolvent

They must establish whether or not a problem is only on a short-term basis and will be rectified by trading on, or means terminal failure, or something in the middle ground. Directors must be cautious, they should not do anything (writing cheques, committing the company to any action, paying creditors, taking deposits etc) without seeking professional advice.

In many situations one of the direct or indirect causes of insolvency is management failure. This may be accompanied by a lack of control, poor record keeping and a lack of accurate financial information.

Accurate and up-to-date accounts are vital in determining a company’s solvency.

How do I tell if my company is insolvent?

A company is insolvent on a cash-flow basis if it is unable to pay its debts as they fall due, or fails to satisfy a judgment debt. There is a second balance sheet test for solvency which asks.

The cash-flow test

Many companies will fail the cash-flow test on a short-term basis at some time in their existence. Temporary cash flow problems may be caused by

• The failure of a customer to settle a debt on time.
• Overtrading (having too much cash tied up in stock and debtors).
• As a course of a delay in refinancing.
• Not making the required sales to break even.
• Having to make unscheduled payments.

Short-term cash flow problems can be corrected by trading on or after rearranging overdrafts or loan finance.

The balance-sheet test

Very simply do the business liabilities exceed the business assets, taking into account the value of assets with the company in a distressed financial position and providing for all contingent costs, losses and provisions.

If a company does fail its balance sheet test, the directors must act to protect the interests of its creditors to avoid any allegations being made of wrongful trading under the Insolvency Act.

If the company is insolvent directors should take the following steps:

• Obtain and document professional advice and their actions and responses.
• Ensure that the company’s accounts are up to date with a full list of assets, debtors and creditors
• Consider whether any part of the company is worth saving.
• Discuss whether it will be possible to make a formal or informal arrangement with creditors.
• If the company cannot be saved the directors should put it into liquidation.

The accounts should be prepared on a break-up basis which means the fixed and current assets are valued to their net-realisable value.

To avoid personal liability for their actions when a company is in financial difficulties its directors should be careful not to:

• Dispose of company assets at undervalue.
• Show one creditor preference to the detriment of another.
• Accept customer deposits or payments on account if completion is uncertain.

Most important of all if a company is insolvent directors need a licensed insolvency practitioner

Posted in bankruptcy, companies, company, Corporation Tax, Directors, Employment, Guidance notes, insolvency, Legal, Limited Companies, owning a company, Personal Tax, receivership, shareholding, shares, Xebox | | Comments: Comments Off

Companies House deadlines and late filing penalties

July 28th, 2011

All limited companies and limited liability partnerships (LLPs) must file copies of their financial accounts at Companies House. Every company and LLP has an accounting reference date, which determines the date that its financial year ends. This is also the date that determines when accounts are due for delivery to Companies House.

All limited companies and LLPs must also provide copies of their audited accounts to Companies House, within a specified period of time – the filing deadline – following the end of its financial year, also known as the accounting reference date.

This requirement to file annual accounts applies to all companies and LLPs, including small companies such as flat management companies.

This guide explains how a late filing penalty is imposed on a business if its accounts are not filed in time, how you can avoid these penalties, what happens when a penalty has been imposed and how to appeal.

Late filing penalties explained

All limited companies – public and private – and limited liability partnerships (LLPs) must file their annual accounts and reports on time. If they fail to do so, they face an automatic fine. The time allowed for filing depends on whether the accounts are the first or subsequent ones and whether it is a private limited or public limited company.

Filing first accounts

For private companies and LLPs, if the first accounts cover more than 12 months, they must be delivered to Companies House within 21 months of the date of incorporation, or three months from the end of the accounting reference period, whichever comes later. If the accounts are for 12 months or less, they must be delivered within nine months of the end of the accounting reference period.

For public limited companies, if the first accounts cover more than 12 months, they must be delivered to Companies House within 18 months of the date of incorporation.

Subsequent accounts

In subsequent years, private companies and LLPs have nine months from the end of the accounting reference period to file the accounts, and public limited companies have six months. If the accounting reference period is changed, the filing time may be reduced.

Late filing penalties

The amount of penalty charged depends on when the accounts are filed.

The penalties are doubled for late filing in two successive financial years beginning on or after 6 April 2008 (for companies) or 1 October 2008 (for LLPs).

Fines on directors and designated members of LLPs

Failure to file accounts is a criminal offence which can result in directors, companies or designated members of LLPs being fined personally. The Registrar may also strike the company or LLP off the public record. If a late filing penalty is not paid, it can result in enforcement proceedings.

How to avoid a late filing penalty

It’s important to allow enough time for your accounts to reach Companies House within the period allowed. If the filing deadline expires on a Sunday or bank holiday, you need to take this into account. To help you file on time:

• make a diary note of the filing deadline to remind you in good time
• read the filing reminders Companies House send to your registered office
• tell your accountants and remind them as appropriate to prepare and deliver your accounts on time

First-class post does not guarantee next-day delivery, so it is worth thinking about using guaranteed delivery methods such as couriers. The most secure and cost-efficient way of filing company documents is to use the Companies House WebFiling service.
If there is a special reason why your accounts may be filed late, you can apply to extend the period allowed, but an extension will only be granted if the reasons are exceptional.

What happens when a penalty has been imposed?

If you deliver accounts for a company or limited liability partnership (LLP) late, Companies House automatically issue a penalty notice to the registered office address. This gives details of the penalty, including the last date for filing, the date of filing of the accounts and the amount of the penalty. It also includes information about how to pay the penalty.

If you don’t pay the penalty, Companies House will ask debt collectors to take action. If you still fail to pay, they will take action in the County Court or Sheriff Court, where you will be given the chance to file a defence. You may want to avoid legal action, because Companies House will seek to recover their legal costs if the court finds against you.

Restoring a company or LLP to the register

If you restore a company or LLP to the register after it has been struck off and dissolved it will not have to pay penalties for the period it was dissolved. However, you will still need to pay any penalties:

• outstanding on accounts from before it was dissolved
• for accounts delivered on restoration if they were overdue at the date the business was dissolved

Late filing penalty appeals

You can always appeal against a penalty, but it will only be successful if you can show that the circumstances are exceptional, because the Registrar has very limited discretion on collecting a penalty. An example of exceptional circumstances could be a fire destroying the financial records of the company or limited liability partnership (LLP) a few days before the filing deadline.

The following situations are outside the Registrar’s discretion and cannot be considered for an appeal:

• your company is dormant
• you cannot afford to pay
• your accountant was ill
• you relied on your accountant
• these are your first accounts
• you are not familiar with the filing requirements
• your company or its directors have financial difficulties (including bankruptcy)
• your accounts were delayed or lost in the post
• the directors live or were travelling overseas
• another director is responsible for preparing the accounts

If you still want to appeal, you must do so in writing to the address shown on the front page of the penalty notice. You will normally get a reply within ten working days, and any recovery action will be suspended while the appeal is considered.

If your appeal is rejected, you can write to the senior appeals manager in the Late Filing Penalties Department at the appropriate Companies House office (shown on the penalty notice). If the senior appeals manager upholds the penalty, you can ask for the Independent Adjudicators to review your case, but you should not contact them until you have heard from the senior appeals manager

Paying by instalments

If you have difficulty in paying the penalty in a lump sum, you can usually pay in four monthly instalments – in exceptional circumstances you can pay in up to ten instalments, depending on the amount you have to pay. You must ask in writing to pay in instalments, explaining the reasons why you can’t pay the penalty outright.

Posted in Business start up, companies, companies house, company, compliance, Guidance notes, late filing fees, Legal, Limited Companies, Limited Liability Partnership, LLP, non compliance, penalties, Xebox | | Comments: Comments Off

Basic Company Administration

July 28th, 2011

Company administration: the basics

For all companies, there are regular administrative tasks that need to be completed to keep the information about your company held at Companies House up to date.

This guide considers who is legally responsible for getting the tasks done, what you must send to Companies House and where you may risk a penalty or other legal sanctions if you don’t do things in the right way (or on time).

Meetings and company records

There are various types of formal meeting that a company needs to consider, each with different notice periods and responsibilities.

Annual general meetings (AGMs) – under the Companies Act 2006, most private companies are no longer required to hold an AGM. Private companies can positively opt to do so if they wish. Shareholders can also demand an AGM if at least 5 per cent wish to hold one. In such circumstances, private companies will need to give 14 days’ notice.

However, all public companies and any private companies with traded shares are still required to hold an AGM. Under these circumstances the company must hold an AGM and give 21 days’ notice before the AGM is due to take place.

Companies are also no longer required to send out annual accounts prior to an AGM. Under new rules, they must now be sent to members by the time they are filed with the Registrar of Companies.

Other meetings – for most limited companies the notice period is 14 days. For unlimited companies, it is seven days. For limited companies with traded shares (public and private) the notice period is 21 days unless the company offers all shareholding members the opportunity to vote electronically and it has passed a resolution to reduce the period of notice to no less than 14 days.

When important decisions have been taken at meetings, Companies House has to be notified within 15 days.

Minutes must be kept of directors’ and general meetings.

These tasks are usually carried out by the company secretary; Private companies are not obliged to appoint or retain a company secretary, the onus then falls on the directors. However, public companies are required to appoint a company secretary.

Keeping official records for the company

Companies must keep official records of:

• shareholders and the shares they own, ie a register of shareholders
• directors and secretaries, ie a register of directors and secretaries
• the usual residential addresses of the directors
• directors’ other commercial interests
• loans or other obligations that affect the company’s financial health
• who, other than the registered owner, has an ‘interest’ in the shares – if it’s a public company

Making records accessible

Some people must be sent particular company records; others are entitled to look at them. The following is a brief summary of the key rules that you must follow:

• Anyone can ask to inspect your company’s register of members. However, since 1 October 2007, a company may ask the requester to provide their name and address, the purpose of the request and whether they intend to share the information with anyone else. If you think the request is not for a proper purpose, you have five days to go to a court to get permission not to allow the inspection.
• No one may inspect the register of directors’ usual residential addresses – unless under a court order.
• Anyone can ask to inspect your company’s register of directors and its register of company charges, ie mortgages, if any.
• Members of your company are entitled to inspect and have copies of the minutes of the general meetings.
• Only directors are entitled to see minutes of directors meetings – but others may ask for copies of a particular meeting.

Filing yearly accounts and the company’s annual return with Companies House

Directors are personally responsible for submitting yearly accounts and the company’s annual return to the Registrar of Companies.

A letter is issued to the company’s Registered Office each year just before your annual return is due. If you file, or would like to file, online via the Companies House website, the letter provides all the necessary information to enable you to do so.

However, if you want to file on paper, telephone the number provided on the letter and a paper form will be issued. It is a record of general information about your company, e.g. the address of your registered office, details of your directors, secretary, shareholders and share capital.

Companies House WebFiling service is quick and secure.

Also the cost of filing an annual return online is £14

Your company’s annual accounts must also be filed. If you do not submit accounts to Companies House on time you will be liable to a late filing penalty.

Protect your corporate identity

The Companies House PROOF (PROtected Online Filing) scheme provides additional security when delivering your directors’ details and registered office address electronically.

Company directors hold an important position in a company. They have power to make purchases and enter into credit arrangements on behalf of the company. Similarly, the registered office address is important because it is the address to which all official communications is sent.

Records held at Companies House are sometimes used to check the legitimacy of a company and its directors before credit or loans are made. Therefore, it is important that the records are correct. Companies are vulnerable to fraud if people fraudulently enter themselves on record as company directors or file a bogus registered office address.

To combat fraudsters posing as legitimate directors, Companies House offers companies a free, secure, online system for notifying changes to directors and the registered office address. If you opt to notify electronically, Companies House will not accept notices from your company in any other format.

You can register for the scheme using the company authentication code to access the WebFiling service. Before opting in, you must agree to the terms and conditions which state that any future changes will only be accepted by Companies House using the secure electronic method.

This service is voluntary, you may opt out at any time and Companies House will revert to accepting notices from your company delivered electronically or on paper forms.

Penalties for late returns and informing Companies House

About 150,000 companies are penalized each year because they file their accounts late. The penalties range from £150 to £1,500 for a private company and £750 to £7,500 for a public company. These penalties are doubled if accounts are filed late in two successive years.

Directors and secretaries may be prosecuted if the annual return is delivered late or not at all. A conviction would mean a criminal record, and usually a fine of up to £5,000.

If no return or accounts are filed at all, Companies House may also strike the company off the register.

Other events you have to tell Companies House about

Companies have to inform Companies House about changes to important company information. For example, you must notify Companies House if:

• you have changed your accounting reference date
• you have appointed a new officer
• an officer has departed
• an officer’s personal details have changed
• you have made a share issue

You should also inform Companies House if any important decisions are made at a company meeting or if the company incurs any financial charges that affect its assets.

If you want Companies House to change your registered office, you must file a request using form AD01

Posted in Accounting and Bookkeeping, companies, companies house, company, compliance, Directors, Guidance notes, Legal, Limited Companies, Limited Liability Partnership, non compliance, shareholding, shares | | Comments: Comments Off

What is Value Added Tax?

July 28th, 2011

Value Added Tax: An Introduction

VAT registered businesses act as unpaid tax collectors and are required to account both promptly and accurately for all the tax revenue collected by them.

The VAT system is policed by HMRC with heavy penalties for breaches of the legislation. Ignorance is not an acceptable excuse for not complying with the rules.

We highlight below some of the areas that you need to consider. It is however important for you to seek specific professional advice appropriate to your circumstances.

Scope

A transaction is within the scope of VAT if:

1. there is a supply of goods or services
2. made in the UK
3. by a taxable person
4. in the course or furtherance of business.

Inputs and outputs

Businesses charge VAT on their sales. This is known as output VAT and the sales are referred to as outputs. Similarly VAT is charged on most goods and services purchased by the business. This is known as input VAT.

The output VAT is being collected from the customer by the business on behalf of HMRC and must be regularly paid over to them.

However the input VAT suffered on the goods and services purchased can be deducted from the amount of output tax owed. Please note that certain categories of input tax can never be reclaimed, such as that in respect of third party UK business entertainment and for most business cars.

Supplies

Taxable supplies are mainly either standard rated (20%) or zero rated (0%).  The standard rate was 17.5% prior to 4 January 2011.

There is in addition a reduced rate of 5% which applies to a small number of certain specific taxable supplies.

There are certain supplies that are not taxable and these are known as exempt supplies.

There is an important distinction between exempt and zero rated supplies.

If your business is making only exempt supplies you cannot register for VAT and therefore cannot recover any input tax.

If your business is making zero rated supplies you should register for VAT as your supplies are taxable (but at 0%) and recovery of input tax is allowed.

Registration – is it necessary?

You are required to register for VAT if the value of your taxable supplies exceeds a set annual figure (£73,000 from 1 April 2011).

If you are making taxable supplies below the limit you can apply for voluntary registration. This would allow you to reclaim input VAT, which could result in a repayment of VAT if your business was principally making zero rated supplies.

If you have not yet started to make taxable supplies but intend to do so, you can apply for registration. In this way input tax on start up expenses can be recovered.

Taxable person

A taxable person is anyone who makes or intends to make taxable supplies and is required to be registered.

For the purpose of VAT registration a person includes:

• individuals
• partnerships and LLPs
• companies, clubs and associations
• charities.

If any individual carries on two or more businesses all the supplies made in those businesses will be added together in determining whether or not the individual is required to register for VAT.

Administration

Once registered you must make a quarterly return to HMRC showing amounts of output tax to be accounted for and of deductible input tax together with other statistical information. For businesses whose turnover is more than £100,000 (excluding VAT) returns must be filed online. In addition, smaller businesses which registered for VAT on or after 1 April 2010 have to file online, regardless of turnover. By April 2012 all other businesses will have to file online.

Returns must be completed within one month of the end of the period it covers, although generally an extra seven calendar days are allowed for online forms.

Electronic payment is also compulsory for those businesses filing online.

Businesses who make zero rated supplies and who receive repayments of VAT may find it beneficial to submit monthly returns.

Businesses with expected annual taxable supplies not exceeding £1,350,000 may apply to join the annual accounting scheme whereby they will make monthly or quarterly payments of VAT but will only have to complete one VAT return at the end of the year.

Record keeping

It is important that a VAT registered business maintains complete and up to date records. This includes details of all supplies, purchases and expenses.

In addition a VAT account should be maintained. This is a summary of output tax payable and input tax recoverable by the business. These records should be kept for six years.

Inspection of records

The maintenance of records and calculation of the liability is the responsibility of the registered person but HMRC will need to be able to check that the correct amount of VAT is being paid over. From time to time therefore a VAT officer may come and inspect the business records. This is known as a control visit.

The VAT officer will want to ensure that VAT is applied correctly and that the returns and other VAT records are properly written up.

However, you should not assume that in the absence of any errors being discovered, your business has been given a clean bill of health.

Offences and penalties

HMRC have wide powers to penalise businesses who ignore or incorrectly apply the VAT regulations. Penalties can be levied in respect of the following:

1. late returns/payments
2. late registration
3. errors in returns.

Cash accounting scheme

If your annual turnover does not exceed £1,350,000 you can account for VAT on the basis of the cash you pay and receive rather than on the basis of invoice dates.

Retail schemes

There are special schemes for retailers as it is impractical for most retailers to maintain all the records required of a registered trader.

Flat rate scheme

This is a scheme allowing smaller businesses to pay VAT as a percentage of their total business income. Therefore no specific claims to recover input tax need to be made. The aim of the scheme is to simplify the way small businesses account for VAT, but for some businesses it can also result in a reduction in the amount of VAT that is payable.

Posted in Business Tax, companies, Guidance notes, Input tax, Limited Companies, Limited Liability Partnership, LLP, Output tax, Partnership, Partnerships, Self employment, Sole Trader, Starting in Business, types of business, Value Added Tax, VAT | | Comments: Comments Off