Childcare through your own limited company

Available from 2005 onwards “employer supported childcare” is basically a way to remunerate the employees where everybody is the winner tax-wise. Where the employer is your own company the payments made towards childcare, subject meeting the conditions, are allowed as a deduction and there is no tax or NI liability on the employee that is you. This legislation recognises that employees with children under 16 may have childcare costs and they wanted to make the payment of these as tax efficient as possible.

The conditions to be met are as follows:

• The child is the employee’s child or stepchild and is maintained (wholly or partly) at his expense or is resident with the employee or is a person for whom the employee has parental responsibility

• The care must be ‘qualifying childcare’. ‘Care’ means any form of care or supervised activity not provided in the course of the child’s compulsory education. To qualify the carer must be registered which means either the nursery is Ofsted approved or otherwise the carer registered with the local authority. A person is regarded as a ‘child’ until 1 September following his 15th birthday (or 16th birthday if he is disabled, as defined) and on until the end of the week in which that date falls.

• The childcare scheme is open to all the scheme employer’s employees

If the conditions are met in respect of part only of the childcare provision (for example if the arrangements change partway through the tax year), the exemption applies to that part.

How does it work?

Broadly there are two ways in which it works: either you operate it:

• as a salary sacrifice scheme, or
• as a benefit on top of the salary

Because it should be applied to all employees, if you wish to operate as a benefit then your future employees will be following the same scheme. A salary sacrifice scheme is that is applicable to you only.

To set it up your company could either buy child care vouchers from approved childcare voucher provider or pay directly to an approved childcare provider. Opting for childcare voucher may mean paying commission to the business that is issuing the voucher.

Your company ought to pass a Board resolution approving the scheme, and you could then keep the resolution as a record for future reference should there be any enquiry.

How much can you claim?

For the tax year 2015-16 a basic rate tax payer could claim up to £55 per week or a maximum of £243 per month. For a higher rate tax payer this is reduced to £28 per week or £124 per month. Each working person (parent/guardian) is entitled to this as long as you have a child in a qualifying childcare scheme. Both parents can claim and it does not matter how many children you have, and the claim is based on the maximum payable to the employee not dependant on the number of children. So if a company has husband and wife as directors both will be able to claim subject to the maximum limit.

Auto enrolment – small businesses

Every employer with at least one member of staff now has now additional responsibilities in the form providing a workplace pension scheme and contributing towards it. This is called automatic enrolment. The start date for getting the pension in place depends on the number of employees that a business employs. For small businesses the following table provides the staging date or the start date:

Number of employees Staging date
160-249 01-Apr-14
90-159 01-May-14
62-89 01-Jul-14
61 01-Aug-14
60 01-Oct-14
59 01-Nov-14
58 01-Jan-15
54-57 01-Mar-15
50-53 01-Apr-15
40-49 01-Aug-15
30-39 01-Oct-15

For those employing less than 30 employees the staging date is linked their PAYE codes as explained below.Fewer than 30 employees with the last 2 characters in their PAYE reference numbers:
92, A1-A9, B1-B9, AA-AZ, BA-BW, M1-M9, MA-MZ, Z1-Z9, ZA-ZZ , 0A-0Z, 1A-1Z or 2A-2Z – 01-Jun-15
BX – 01-Jul-15
BY – 01-Sep-15
BZ – 01-Nov-15
02-04, C1-C9, D1-D9, CA-CZ or DA-DZ – 01-Jan-16
00 05-07, E1-E9 or EA-EZ – 01-Feb-16
01, 08-11, F1-F9, G1-G9, FA-FZ or GA-GZ – 01-Mar-16
12-16, 3A-3Z, H1-H9 or HA-HZ – 01-Apr-16
I1-I9 or IA-IZ – 01-May-16
17-22, 4A-4Z, J1-J9 or JA-JZ – 01-Jun-16
23-29, 5A-5Z, K1-K9 or KA-KZ – 01-Jul-16
30-37, 6A-6Z, L1-L9 or LA-LZ – 01-Aug-16
N1-N9 or NA-NZ – 01-Sep-16
38-46, 7A-7Z, O1-O9 or OA-OZ – 01-Oct-16
47-57, 8A-8Z, Q1-Q9, R1-R9, S1-S9, T1-T9, QA-QZ, RA-RZ, SA-SZ or TA-TZ – 01-Nov-16
58-69, 9A-9Z, U1-U9, V1-V9, W1-W9, UA-UZ, VA-VZ or WA-WZ – 01-Jan-17
70-83, X1-X9, Y1-Y9, XA-XZ or YA-YZ – 01-Feb-17
P1-P9 or PA-PZ – 01-Mar-17
84-91, 93-99 – 01-Apr-17
Fewer than 30 unless otherwise described – 01-Apr-17

For new employers the staging dating will be as follows:
New employer (PAYE income first payable between 1 April 2012 and 31 March 2013) – 01-May-17
New employer (PAYE income first payable between 1 April 2013 and 31 March 2014) – 01-Jul-17
New employer (PAYE income first payable between 1 April 2014 and 31 March 2015) – 01-Aug-17
New employer (PAYE income first payable between 1 April 2015 and 31 December 2015) – 01-Oct-17
New employer (PAYE income first payable between 1 January 2016 and 30 September 2016) – 01-Nov-17
New employer (PAYE income first payable between 1 October 2016 and 30 June 2017) – 01-Jan-18
New employer (PAYE income first payable between 1 July 2017 and 30 September 2017) – 01-Feb-18

More information on auto enrolment could be found here

Mircro-entities reporting and FRS 105

In a move to reduce administrative burden for small businesses, companies in the UK meeting certain criteria called ‘micro-entities’ will be subject less disclosure requirements when it comes to financial reporting. The Small Companies (Micro-Entities’ Accounts) Regulations 2013 having radically overhauled the reporting regime for micro-entities, FRC is all set to introduce a new accounting standard FRS 105 effective 2016.

Micro-entity

A new section 384A inserted in to the Companies Act 2006, broadly qualifies a company as a micro-entity in a financial year if the qualifying conditions are met in that year. In order to qualify as a micro-entity two or more of the following conditions should be met:

Turnover – not more than £632,000
Balance sheet total – not more than £316,000
Number of employees – not more than 10

Where an accounting exceeds more than 12 months the figures for turnover must be proportionately adjusted. The balance sheet total means the aggregate of the amounts shown as assets in a company’s balance sheet. The number of employees means the average number of persons employed by the company in the year.

Eligibility criteria

Regardless of whether a company qualifies as a micro-entity its eligibility to apply FRS 105 is further restricted and the following types of entities are not eligible:

Public companies
Financial institutions including insurance companies and banking companies
Companies that are excluded from the small companies regime
Charities
Limited liability partnerships
Small parent companies that choose to prepare group accounts
Companies that are not parent companies but whose financial statements are included in consolidated accounts

True and fair view

Given the significant reductions in disclosure requirements the first casualty of this new regime appears to be that ‘true and fair view’ of the financial reports produced under FRS 105 has been compromised. A new section 396(2A) inserted in to the Act says it all:

“In the case of the individual accounts of a company which qualifies as a micro-entity in relation to the financial year the micro-entity minimum accounting items included in the company’s accounts for the year are presumed to give the true and fair view required by subsection”.

Financial statements

FRS 105 requires preparation of only a balance sheet and a profit and loss account, and has scrapped the need to prepare ‘statement of total recognized gains and losses’ and the ‘cash flow statement’. Applying Format 2 the profit and loss account comprises the following line items:

Turnover
Other income
Cost of raw materials and consumables
Staff costs
Depreciation and other amounts written off assets
Other charges
Tax
Profit or loss

However, for preparing the balance sheet both Format 1 and Format 2 have been detained although having been condensed signficantly.

Format 1

A Called up share capital not paid
B Fixed assets
C Current assets
D Prepayments and accrued income
E Creditors: amounts falling due within one year
F Net current assets (liabilities)
G Total assets less current liabilities
H Creditors: amounts falling due after more than one year
I Provisions for liabilities
J Accruals and deferred income
K Capital and reserves

Format 2

ASSETS
A Called up share capital not paid
B Fixed assets
C Current Assets
D Prepayments and accrued income
LIABILITIES
A Capital and reserves
B Provisions for liabilities
C Creditors (1)
D Accruals and deferred income

Notes on the balance sheet formats – Creditors (Format 2, item C under Liabilities): Aggregate amounts falling due within one year and after one year must be shown separately.

Whilst there are significant reductions in disclosure requirements under FRS 105, certain accounting items get watered down treatments under the new standard. Borrowing costs, for example, aren’t capitalized and are written off to profit or loss, fixed assets will be stated at depreciated historic cost and there is no scope for revaluation or fair value treatment. Deferred tax accounting has gone the dinosaurs way!

Company law

It must however, be noted that companies are governed by the provisions of the Companies Act 2006 and reporting under FRS 105 does not anyway compromise on the compliance requirements under that Act.

Allowable expenses – small limited companies

In order for an expense to be allowed as deduction from a company’s income it must have been incurred ‘wholly and exclusively’ for the purpose of the trade. In other words personal expenses or expenses which are of a capital nature are not allowed unless specifically allowed. That said here is an indicative list of items which are usually allowed as deductions. It must, however, be noted that this note is very general in nature and items which are not straightforward should always be checked and confirmed before being claimed as expenses.

• Salaries paid whether to the directors or otherwise are allowable expenses including the employers’ national insurance contributions paid. However, if the company has paid salary in excess of the lower-earning-limit the company ought to register with HMRC as an employer, and the salary should be pay-rolled.

• Travelling and subsistence expenses whilst being away to a temporary workplace or on business are allowed as a deduction. This is a complex area because what constitutes a temporary and permanent workplace has been subject of court cases between HMRC and tax payers. Broadly any travel undertaken and subsistence paid for business purpose is allowable.

• Costs of advertising and marketing your business such as advertisements, websites, website hosting, networking etc are allowable.

• Pension contributions made on behalf of the directors in to an approved scheme is an expense allowed as a deduction.

• Travel and parking costs are allowable provided it is incurred for the business. Where own vehicle is used mileage allowance can be claimed @ 45p/mile for the first 10,000 miles, and 25p/mile thereafter.

• Expenses incurred for any training course will be allowed as a deduction so long as the skills acquired in the process are relevant to the business and its current earnings.

• Stationary, postage, and printing costs incurred for the purpose of the business are allowable as expenses.

• Business insurance, such as professional indemnity, employers’ liability, public liability etc. are all allowable as expenses

• Telephone and broadband expenses are allowed as deduction provided the contracts are in the name of the company

• Expenses incurred on mobile phones are allowable provided the contract is in the name of the company

• The cost of business calls made using a personal residential phone can also be claimed

• If you’re using your home for business purposes you could either use a flat rate of £4/week without receipts or work out a proportion of the household bills. The acceptable way is to first work out the total costs for a year and then allocate on the basis of the number of work hours used in a year.

• Computer equipments and software used for the business can be claimed as expense from the business. Computer equipments will be claimed through capital allowances for tax purposes.

• Expenses incurred on business gifts of value up to £50 to each individual could be claimed as expenses.

• Bank charges and interest paid on business loans are allowable.

• Expenses incurred on Christmas party could be claimed subject to an annual limit of £150 per person which includes your partner or spouse.

• Professional fees paid to accountants or solicitors will be allowed as a deduction.

• Certain professional subscriptions (e.g. Royal College of Surgeons, Nursing etc) are allowed.

• Business magazines and books purchased for business are allowed as a deduction

• Childcare Vouchers paid/issued by the company are allowed as deduction subject to a limit of £55 per week or £243 per month.

• Charitable donations made by the company to recognised charities will be allowed as a deduction.

• Commissions paid for getting business or payments made to a subcontractor are allowed as a deduction.

Global Accountancy

UK VAT Registration

VAT Registration

VAT registration is required of every taxable person making taxable supplies beyond the threshold. There are a number reasons why a business will need to register for UK VAT. This article is about the basics of UK VAT registration.

Compulsory VAT registration:

The current VAT registration threshold is £81,000 from 1 April 2014. In arriving at the turnover, all income must be aggregated to determine the threshold set for registration. Businesses trying to escape the registration by splitting the business will be caught by the disaggregation rules, which prevents businesses from artificially separating businesses. Should artificial separation be apparent HMRC would look into financial, economic or organisational links between the businesses to establish if there was indeed an artificial separation. Businesses with turnover breaching this threshold in the past 12 months on a cumulative basis will need to apply for VAT registration. Once the VAT registration threshold has been exceeded, HMRC must be notified by the end of the following month. Registration is also compulsory if you know that within the next 30 days that you will exceed the registration threshold.

Voluntary VAT registration: Even where you are under no obligation to compulsorily register for VAT you could still register for VAT on a voluntary basis. One advantage of voluntary registration is that it allows a business to claim input tax on initial expenditure.

Intending trader registration: This is where you could apply to register before beginning to trade. HMRC need to be satisfied that a business intends to make taxable supplies and is entitled to be registered for VAT. If there are changes to the intention once the business is registered, the business must notify HMRC if its intention is no longer to make taxable supplies.

Exemption from VAT registration: An exemption is available for businesses that only make zero-rated supplies. Though not regularly used, these businesses are usually in a net VAT repayment situation. This exemption may be useful in situations where the administrative burden and cost would be greater than the actual VAT recovered.

Group Registration: Group companies under common control can apply for a group VAT registration. There are a number of advantages; intra-group transfers are ignored for VAT purposes. The group registration has to elect a representative member, who must account for the group Output tax and Input tax. This does not vindicate other group members of any liability as all members are held as jointly and severally liable. To be included within a VAT group, members must be “bodies corporate”, establishments or fixed establishments in the UK and be under “common control”.

Non-established taxable person

There has been a significant change to the VAT registration threshold applying to Non-established taxable persons (NETPs). “An NETP is any person who is not normally resident in the UK, does not have a UK establishment and, in the case of a company, is not incorporated here. ”The change is in reference to the threshold, from 1 December 2012 if you are a NETP business and do not have an establishment in the UK and make any taxable supplies in the UK it must register for VAT in the UK. This is a significant change and will catch NETP businesses that are trading below the currently VAT registration threshold and thus are not required to register for UK VAT. This brings the UK’s NETP requirement for registration in line with many of its European counterparts as many countries have a registration limit of nil, i.e. you need to register as soon as you make any taxable supplies.

Deregistration

Though this guide is about registering for VAT, it is important to know the two main types of deregistration, compulsory deregistration and voluntary deregistration. There are a number of circumstances that will force a trader to be compulsorily deregistered. For current voluntary deregistration the threshold is £77,000 from 1 April 2013 (previously £75,000). Please note that the VAT deregistration threshold is usually increased annually.

Taxable supplies

Taxable turnover includes standard rated, zero-rated, private use, reverse charge, self-supplies and acquisitions from other EU member states. Exempt and outside the scope supplies do not need to be included.

Another category of sales that would bring a supplier to become liable to UK VAT is ‘Distance Selling’. This is where supplies are made from another EC country directly to a non-VAT registered entity, a typical example is a mail order business. The threshold to note here is £70,000 (since 1 January 1993), distance sales to the UK exceeding this threshold will require the business to register for UK VAT, the option of earlier voluntary registration is also available.

Pre-registration expenses

One of the key questions businesses ask in VAT registration situations is regarding pre-registration input tax recovery.

There are separate rules for goods and services. For goods to qualify for input tax recovery they must have been purchased for the purposes of the business and not supplied onwards or consumed before the date of registration, and finally the VAT must have been incurred within three years of the date of registration.

For services for qualify, the cost must have been incurred for business purposes and the VAT must have been incurred within six months of the date of VAT registration.

In both situations the input tax recovery is subject to being supported by an appropriate VAT invoice. Also, the input VAT would be claimed through the businesses first VAT registration.

Administration

Output VAT only needs to be accounted for from the date of VAT registration. VAT invoices cannot be issued until a VAT registration number has been issued. This can present businesses that are waiting for their VAT registration number with an administrative issue. The general practice is to issue invoices ‘gross’ with the legend ‘VAT registration number applied for’. The invoice must not show a VAT amount on the invoice.

Once a VAT number is attained, invoices issued with the legend mentioned above would need to be re-issued correctly displaying the VAT amount.

Failure to notify

Failure to register your business on time or to notify HMRC of your liability will result in a penalty. The penalties regime has been reconstructed and is effective for periods commencing 1 April 2009.

Tax advisors

HMRC after agency workers now!

HMRC have tried everything in the past to kill disguised employment – from IR35 to targeted anti-avoidance provisions for e.g. those involving employee trusts and loans. In the process the rule book has only got thicker and thicker. Now the latest is that Budget 2014 is made to target those employed through agencies – called agency workers. Once the finance bill becomes law later this summer, the new provision will become effective 6 April 2014 whereby payments made by an agency (e.g. a recruitment agency) to a worker will be classed as employment income and subject to PAYE tax and NI unless the contrary is proved i.e. that the terms and conditions of the work were consistent with that of being self-employed. The old ‘substitution’ clause will not help any more. Typically, being contractually able to send a substitute to do the work reinforced the ‘self-employed’ argument. Now the ‘substitution’ clause within a contract will be specifically disregarded whilst deciding whether or not a worker is self-employed. To add to the pain, the personal service companies (PSCs) are also likely to be caught by this rule. So far contractors could hide behind an agency (between their PSC and the client) and avoid being caught by the rules, but that is all likely to change now. Contractor better take expert advice!

Tax Advisors

Dividend and the company law

With the explosion of private limited companies, particularly one-man bands, extracting profits from companies has become a genuine need for the owners to meet their personal cash flow requirements. Dividend is one of the common ways in which profits could be extracted from a company. As many director-owners tend to pay themselves a monthly dividend it is time the law behind the dividend is understood clearly. Whilst the governing law is the Companies Act 20016 (CA/06) it is equally important that the internal constitution of the company called the Articles of Association of the company (articles) too are looked up when it comes to dividend distributions.
Dividends are paid out of distributable reserves (s.830) which are defined are as the company’s accumulated realised profits less the accumulated realised losses. As the company’s capital is needed to pay off any liabilities due to its creditors, dividends cannot be paid out of capital. Dividends could either be interim dividends paid in-year or final dividends paid after the accounts of the company have been finalised for a particular accounting year. The key provisions contained within CA/06 and the model articles with regard to dividend are as follows:

1.Power to declare dividends vests with the shareholders who may declare dividends by ordinary resolutions. However, the power to declare interim dividends (i.e. those typically taken out on a monthly basis by the contracting community) is delegated to the directors who will need to ensure that the interim dividends are based on interim accounts drawn up in accordance with the relevant accounting standards. The directors must ensure that there are sufficient distributable surplus available at the time of declaration. The shareholders may resolve to reduce the dividend recommended by the directors but they cannot increase the sum of dividend recommended by the directors.

2.Eligible members: Dividend is paid to those shareholders whose names appear on the register of members as on the date the dividend becomes due and payable.

3.Illegal dividends: Where the dividends are not paid in accordance with provisions of the CA/06, these are called illegal dividends. An example is where a dividend has been paid in excess of the available surplus. In such situations the directors will be held liable. Whilst there are no criminal sanctions for payment of illegal dividends, If at the time of the distribution the member knows or has reasonable grounds for believing that it is so made, he is liable to repay it (or that part of it, as the case may be) to the company (s.847).

That said, briefly the procedure for declaring and paying the dividends are as follows:
1.Check that there are no restrictive clauses within the Articles

2.Pass a board resolution if an interim dividend to be declared, and a shareholders resolution in the case of a final dividend. Either way written resolutions are acceptable

3.Prepare dividend tax vouchers: This is the official document that provides the details of the dividend received by a shareholder and is a valid document when it comes his personal tax affairs.

4.Whilst preparing the dividend tax voucher one must check the number of shareholders listed on the register of members and the number of shares held by each of them on the date dividend is due (called the record date).

5.Dividend wavers: It is common for some shareholders to waive their entitlement to receive dividends. This must be checked to ensure that dividends are not paid to those who have waived their rights.

Once the dividends payments have been made adequate accounting entries will need to be posted to the accounts. It is common for director shareholders to have the dividend sum credited to the director’s loan account whereas for a shareholder the sum could be credited to ‘dividend payable account’.

Small Business Accountants

Micro-entities accounting and reporting

The Small Companies (Micro-Entities’ Accounts) Regulations 2013 came into force on 1 December 2013 and apply to accounting years ending on or after 30 September 2013. So a company that qualifies as a micro-entity can now prepare its accounts in compliance with these regulations if its accounting year ended on or after 30 September 2013.

What is a micro-entity?

A company will need to meet at least two out of the following three thresholds to qualify as a micro-entity:
• Turnover: Not more than £632,000
• Balance sheet total: Not more than £316,000
• Average number of employees: Not more than 10
The turnover limit is adjusted proportionately if the financial year is longer or shorter than twelve months.

Specifically excluded entities

An entity that is excluded from being a small company will not qualify as a micro-entity. Further, charities and LLPs are excluded so are investment undertakings, financial holding and insurance undertakings, credit institutions, qualifying partnerships, overseas companies, unregistered companies and companies authorised to register pursuant to s1040 of the Companies Act 2006.

Group situations

A parent company can only qualify as a micro-entity for the purposes of its individual accounts if it qualifies as a micro-entity individually and the group headed by it qualifies as small. Also, a parent company that prepares group accounts cannot qualify as a micro-entity for the purposes of its individual accounts.

Main features of micro-entity reporting

Simpler balance sheet and profit and loss account presentation as given below.. However, the director’s report requirements still apply.

Balance sheet format – option 1

A Called up share capital not paid
B Fixed assets
C Current assets
D Prepayments and accrued income
E Creditors: amounts falling due within one year
F Net current assets (liabilities)
G Total assets less current liabilities
H Creditors: amounts falling due after more than one year
I Provisions for liabilities
J Accruals and deferred income
K Capital and reserves

Balance sheet format – option 2
ASSETS

A Called up share capital not paid
B Fixed assets
C Current Assets
D Prepayments and accrued income

LIABILITIES

A Capital and reserves
B Provision for liabilities
C Creditors*
D Accruals and deferred income
*Aggregate amounts falling due within one year and after one year must be shown separately.

Profit and loss account format

A Turnover
B Other income
C Cost of raw materials and consumables
D Staff costs
E Depreciation and other amounts written off assets
F Other charges
G Tax
H Profit or loss

Tax Accountants