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What to check before applying for a loan

What to check before applying for a loan
Before you apply for a loan, there are some things you need to consider.

1. Is a personal loan the right option?
A business loan isn’t the only choice available. Are you able to delay the spending and take time to save the money? Even if you’re not able to save the whole amount, saving a portion of it will put you in a better position.
If the amount you need is relatively small and you’re confident you can pay it back quickly, a credit card with an interest-free period on purchases is another option that could suit.

2. What will the repayments be?
Use our calculator to look at how much your repayments could be and how that may impact your budget.

If you’re looking at a personal loan with a variable interest rate keep in mind that the rate of interest could go up or down. If it was to go up, could you still afford the repayments? If not, you may want to consider reducing the loan amount or extending the loan term.

3. Is the loan secured or unsecured?
A secured loan is one where you provide an asset (such as a car or property) as security for a reduced interest rate. Keep in mind that the asset is at risk if you can’t pay the loan back. With an unsecured loan, you don’t provide security, but the amount you can borrow is typically smaller. HSBC offers both secured loans – in the form of mortgages - and unsecured loans.

4. What's the term of the loan?
This impacts the amount of interest you’ll pay, and ultimately the overall cost of the loan. The longer the loan term is the less your regular repayments will be. But you'll likely end up paying more interest over the course of the loan. Again you can use our calculator to look at how changing the loan term may change the overall amount of interest you pay.

5. What exactly are the fees and charges?
Loans are advertised with a ‘representative APR’ which is an annual percentage rate. This allows you to quickly compare the available offers from different banks. However, the final interest rate you're offered will be determined by:

- your financial history
- your personal circumstances
- how much you want to borrow
- how long you want to borrow for

Lookout for any additional charges associated with taking out the loan. For example, some lenders may charge an arrangement fee. These, together with the interest rate, can make a big difference to the overall cost of the loan.

6. Is there a penalty for early repayment?
Some lenders will charge you a fee for paying off your personal loan early. If you feel this is something you may want to do, then avoiding this fee could be a key requirement.

7. How's your credit report looking?
Your past borrowing and financial history can determine whether you are approved for a loan, as well as the amount of money and interest rate you’re offered. Credit reports detailing your financial history are held by the credit agencies You can see the credit scores and credit ratings that thee agencies have for you for free or for a small fee.

It can be a good idea to check, if only to make sure there are no mistakes on your file. Keep in mind that your credit report isn’t the only thing that a bank will look at when making a decision. So it won’t tell you whether or not you will be approved.

8. Are you ready to apply for a loan?
Getting a quote for a loan won’t usually appear on your credit report, but making an application often will. Too many applications can have a negative impact on your credit report, so it’s wise to be sure that a particular loan is right for you before you apply.

COVID-19: How CloudAccountingNI can help businesses.

As accountants, we are best placed to consider the financial impact that the Covid-19 outbreak will have on small businesses. Each small business is different and there is not a one size fits all approach.

Below are some of the things you, as a small business owner should consider:

1. Keep in touch

Here at Cloud Accounting, we can act as a guide. We will be sending emails. Keep in touch. The sooner that we are made aware of any problem, the easier it might be to solve especially with reference to HMRC payments.

If it gets to the point that you believe you have to put the business up for sale, do nothing until you speak to us. You won't get a good price in this market. The number of clients who take notice of their friends and take action without consulting with their accountant first is surprising. The answer will not always be to go bankrupt or close the company. 

2. Consider your cashflow

Work out your monthly cashflow for the next 3 months – sales and costs, including those deferred.

Aim to remove discretionary cost. Seriously consider removing marketing costs.

Add the income from government support packages

Try to spread the costs as much as possible.

Try to plug any gaps with bank finance.

3. Check out those in potential problems with HMRC

Check whether each client has paid their last tax bill. If not, tell them about HMRC's Time to Pay Service. All businesses in financial distress and with outstanding tax liabilities may be eligible to receive support. Consider those who might have difficulty with the July payment and advise accordingly. 

4. Investment in capital items

Investment advisers say that you should have a cash pile of at least two months to weather any financial storm.

Businesses that do and might have been considering making a large purchase such as a van could find that that the deals are more favourable now than previously.

5. Check insurance policies

Check out any insurance policies you may have – are you, or your staff, covered in any sickness claim? This is the value of having keyman insurance.

6. Government help

Make sure that you are up to speed with government guidance including the COVID-19: guidance for employers and businesses factsheet.

  • Refund for businesses and employers required to access Statutory Sick Pay 
  • 100% Business Rates retail discount for one year 
  • Funding support for those small businesses that pay little or no Business Rates because of Small Business Rate Relief
  • The Coronavirus Business Interruption Loan Scheme
  • The CoronaVirus Job Retention Scheme

7. Financial Help

You should investigate what help is available from your bank, what terms and conditions there are, and whether the help is currently needed. Most banks have pledged to offer support by mortgage repayment holidays, temporary increases in credit card limits, waiver of fees on early access to fixed savings accounts and late credit card, mortgage, and loan payments.

8.  Supply chains

Contact your suppliers. Suppliers will be more likely to contact you if they have to resort to restrictions. We advise investigating alternative suppliers. Supply chain issues are already threatening to derail some small businesses. Investigate the whole supply chain – you may say 'it's OK I get my supplies from XYZ Ltd based in the UK', but do you know where XYZ Ltd gets its supplies from?

9. Late payments

When cash is restricted, the temptation is to make late payments. This must be resisted, if only for reputational reasons. Late payments are already causing problems for businesses as 74% of business owners reported invoices due to be paid at the end of February had not been settled and were unlikely to be cleared before the end of March (business lender MarketFinance.com). Check your debtors! Tighten up your invoicing processes.

10. Review business costs

Look at all costs and reduce discretionary and non-essential expenses as far as possible. Fixed costs such as wages, rent, utilities, financing costs and tax liabilities not affected by a decline in sales need to be properly managed. Suggest investigating whether costs can be spread rather than paying in one lump sum (e.g. car insurance).

11. Review marketing strategy

No one is going to do or buy much other than the essentials during this crisis and, although this situation might lead you or your clients to reduce costs by rethinking the marketing strategy, this might not be the right time – consistency is key to recovery.

12. Review mortgage payments

Banks will be lending cheaply. Now might be a good time to consider remortgaging both your business and personal finance. Mortgages are based on past data, which will invariably be better for these past three years – defer applying and that may mean lending based on reduced profit figures making it more difficult to get a mortgage. 

13. Carry on

It is vital that the business must at least give the impression that it is carrying on. This may be impossible if the business is a restaurant, but is feasible for the many others who might have to self isolate. There are such businesses as Virtual Assistants that can help. 

If you have the facility to invite clients into your accounting software, now might be a good time to place this at their disposal. Consider plugging their books into bank data feeds, if not already used.

And finally, 14. look ahead

The coronavirus crisis will change the way businesses and society works. When the urgent part of the crisis is over, businesses should consider what this crisis changes for them, what they have learned and plan for any future crisis.

What can a tax investigation cost my business?

Tax investigations can be incredibly costly, with various elements adding up to create a financial headache for small business owners.

We explain where the different fees can come from, and how your business can protect itself from running into financial difficulty as a result of a tax investigation.

What can a tax investigation cost my business?

Time

While it might not seem like a financial cost at first, a tax investigation can eat up a large portion of your time which will have a cost implication.

You will often be called upon to provide additional information during the investigation, working alongside accountants and other financial specialists to respond to requests. Completing these tasks  can keep you away from your business.

If you’re part of a small team of salespeople or a sole trader for example, this could severely hamper your business and your ability to work -  your ability to sell, offer services to customers and, ultimately, make money.

Putting steps in place to help protect your business can help you get through this process smoothly and help to keep your business afloat during a tax investigation.

Tax repayments

A tax investigation is carried out to  calculate if  you owe any money to HMRC and how much that is. That repayment can vary depending on the findings of the investigation.

You  should also be aware that any repayments you make could be subject to additional fines – especially if the errors in your original tax return were found to be avoidable or deliberately misleading.

Penalties are based on the reason for the error occurring, such as late or inaccurate payments. More serious reasons can incur a much  higher penalty.

For example, if you have provided a tax return that contains a deliberate error, you could be asked to pay a penalty that ranges between 20 and 70% of the extra tax you are required to pay.

This is why accuracy is so important when reporting your finances. Should you owe a large amount in back taxes, then be required to pay a large additional penalty on top of that, because of providing inaccurate information, this could potentially cause problems with your business’s finances.

Additional fees

On top of back pay and penalty fees, you should also take into consideration the additional cost of getting help to deal with your tax investigation.

You might need a specialist to help you work through financial issues in a certain area. This could include a VAT specialist to help you calculate whether you made accurate payments or not.

You should also factor in the general accountancy bills that might build up through the investigation. In some cases, these additional fees can be significantly more than the amount you’re being asked to pay HMRC.

These additional fees, penalties and back payments can mean that your business stands to take a significant financial hit at some point. This can cause a great deal of stress, especially in a lengthy investigation where you’re waiting on a final fee from HMRC, all the while utilising an accountant who has on-going fees to be paid.

VAT implications of paying for staff gym memberships and subsidised healthy meals

Q. My client is a new social media enterprise company and the directors are keen to encourage a healthy lifestyle amongst staff.

To capitalise on all the good intentions and resolutions of January they are to pay for a corporate membership to a local gym and are offering subsidised healthy meals and snacks in their office café. Please could you advise of the VAT implications of these initiatives.

A. Employee rewards and perks are dealt with in HMRC’s manual VAT Input Tax (VIT43700). Here it explains that services provided to staff can be a legitimate business expense, if they are provided mainly to reward or motivate staff.

If so, the VAT incurred is all input tax. No apportionment under s.24(5) of the VAT Act 1994 (VATA1994) is necessary. In some cases, a charge to output tax for private use may have to be made under the Supply of Services Order.

However, HMRC said: ‘Where facilities are provided to all employees strictly for the purposes of the business it is generally not our policy to apply such a charge.

‘But perks provided to specific individuals within a business should generally be subject to an output tax charge to reflect private use.’

Specific guidance on recreational facilities can be found at VIT43950 and here it is confirmed that where sports and recreational facilities are available to all employees, the VAT incurred on the cost of providing the facilities is input tax.

Again it is not HMRC’s policy to apply the Supply of Services Order. If any charge were to be made, then output VAT would be due on that amount.

With regard to staff meals, HMRC’s manual VAT Food (VFOOD5060); paragraph 10 of Schedule 6 of the VAT Act 1994 specifically refers to the provision of food and drink in the course of catering by an employer to an employee.

Where such supplies are made, the value of the supply is the monetary consideration alone, if any, paid by the employee. So where an employee pays for a meal, snack or drink, the supply is standard-rated and the value of the supply is the amount paid.

Where an employee is not required to pay for a meal, snack or drink the value of the supply is nil and no VAT is due.

Additionally, for completeness, following the judgment of the Court of Justice of the European Union (CJEU) in Astra Zeneca (Case C-40/09), where employees pay for benefits under a salary sacrifice arrangement, employers must account for VAT on the value of the supplies unless they are exempt or zero-rated.

Subject to the normal rules, the employer can continue to recover the VAT incurred on related purchases. Equally where deductions are made from salary for the benefits, the value of the supply is the amount deducted.

BUYING PROPERTY THROUGH A LIMITED COMPANY: THE PROS AND CONS

It's become quite a trend (and for very good reason). But is it right for you?

The biggest trend that's taken place during my time in property is the huge and sudden shift to people buying properties within companies.

Up until 2015, it was very much a minority choice: there was no compelling need for many people, and mortgages for companies were much less competitive.

But then the changes to the treatment of mortgage interested introduced in the summer 2015 budget happened – which made the company route far more appealing. According to brokers, up to 80% of new mortgage applications are now for limited companies.

It still won't be for everyone, but it's now something that every investor should consider. Getting the ownership structure right could make a huge different to the amount of tax you pay over your lifetime (and beyond) – so let's take a look at the pros and cons…

ARE YOU A TRADER OR AN INVESTOR?

The first important distinction to draw when making this decision is whether you’re a property trader or investor.

If you buy a property to make value-adding improvements and sell on for a profit, you’re a trader. In this case you’re likely to be best off buying as a limited company.

Why? Because when trading properties as a limited company you will pay corporation tax on your profits – you can find the current rate here. If you’d bought a property to “flip” as an individual, your gains would be taxed as income – which, if you're taxed at the higher rate, will be a whole lot more (current rates here).

(As an individual you might be able to get the profit treated as a capital gain rather than income if you could prove that you intended to rent the property out, and maybe did for a short time before selling it, but let’s park that one for now.)

If you buy a property to collect the rent and watch its value creep up over the years, you’re an investor. This is where we get into “it depends” territory: most investors have historically operated as sole traders, but many will now benefit from using a limited company.

WHY MIGHT INVESTORS WANT TO USE A LIMITED COMPANY?

From a purely financial perspective, there are three obvious reasons why you might want to hold property as a company rather than yourself.

1. TAX TREATMENT OF PROFITS

If you own a property in your own name, the profits you make from renting it out will be added to your other earnings (such as from your job) and taxed as income tax. But if instead you hold it within a company, the profits will be liable for Corporation Tax instead.

The rate of Corporation Tax tends to be around half of the higher rate of income tax – which is an enormous saving.

You will still be taxed on the dividends if you take profits out of the company (which we'll come to later), but there’s flexibility: you can time your dividend payouts for maximum tax-efficiency, or distribute them to family members who are only basic rate taxpayers – or just leave the profits rolling up within the company to buy the next property.

2. TAX TREATMENT OF MORTGAGE INTEREST

As of April 2020, mortgage interest will no longer be an allowable expense for individual property investors (they'll claim a basic rate allowance instead) – but it will continue to be allowable for companies that hold property.

(The change is being phased in from April 2017.)

The post I've linked to goes into how it all works, but the upshot is that if you pay tax at the higher rate and you use mortgages to buy property, your tax bill will be higher if you own property in your own name rather than in a company.

3. OPPORTUNITIES TO MITIGATE INHERITANCE TAX

Property held within a company gives more options when it comes to planning for Inheritance Tax. It's all far beyond my pay grade (and you should take advice from a specialist tax advisor if passing properties on forms an important part of your plans), but you can make use of trust structures, different types of shares, and all kinds of clever methods that you wouldn't otherwise have access to.

So if there’s an income tax advantage, a mortgage treatment advantage and potentially an Inheritance Tax advantage, why wouldn’t you invest through a limited company?

Because of course, there are downsides too…

WHY NOT INVEST THROUGH A LIMITED COMPANY?

1. MORTGAGE AVAILABILITY

This used to be a major drawback: mortgages for companies were limited, expensive and had lower borrowing limits.

The number of products on offer for limited companies is still much lower than for individuals, but it's changing rapidly: as ever more investors are moving in this direction, lenders are following in order to win their business.

You will still need to give a personal guarantee and your own finances will be scrutinised, so in many ways it's a personal mortgage in all but name: think of the company as being a “tax wrapper”. So while you won't find quite as many options and the rates and fees are likely to be higher, it's less of a dealbreaker than it once was.

2. DIVIDEND TAXATION WHEN YOU TAKE THE MONEY OUT

If you're leaving your rental profits in the company, no issue: you pay corporation tax, then leave the post-tax income to roll up – maybe to buy more properties.

But if you're taking the money out (to spend on your own living costs, for example), you'll be taxed on the dividends you take. That means you'll be paying corporation tax first, then paying a hefty whack in dividend tax on what's left (current rates here) in order to take it out.

So if you want to live off your property income rather than leaving it to accumulate, it'll be a bit of a toss-up. You'll save tax in some ways, but incur extra tax in others. You'll have to run the numbers to work out which will work out best in your situation.

3. EXTRA COST AND HASSLE

Not a biggie, but there are higher accountancy costs associated with filing annual company accounts – so that's an expense to factor in, and your life will be full of more paperwork than it would otherwise have been.

HOW TO DECIDE IF USING A LIMITED COMPANY IS RIGHT FOR YOU

Which side of the fence you come down on when it comes to buying through a limited company is going to largely depend on three factors:

HOW MUCH INCOME DO YOU HAVE?

If you’re paying the higher rate of income tax, and you don’t have a lower-earning spouse whose name the property income could be put into, the lure of paying the much lower rate of Corporation Tax is going to be strong.

However, do bear in mind that if you’re actively acquiring properties your portfolio could be generating a paper tax loss rather than a profit – so with planning, taxable gains could be delayed until you retire and your income falls.

DO YOU WANT THE PROPERTY INCOME TO LIVE OFF?

Leaving it rolling up in the company (for future purchases, or just until your non-property income falls) will leave you better off than if you need to take it out to spend.

DO YOU USE MORTGAGES?

The ability to claim the entirety of your mortgage interest as operating expenses (once the new rules take hold) will be a major argument for using a company for higher-rate taxpayers.

WHO ARE YOU BUYING PROPERTIES FOR?

Initially of course it’s yourself, but what’s your exit strategy – do you plan to sell them off to finance your expensive cruise habit in your later years, or is it important that you pass your portfolio on to your children or grandchildren?

If passing your properties on is important to you, holding them within a company (if structured correctly) could result in huge Inheritance Tax savings.

SO THE ANSWER IS, OF COURSE…”IT DEPENDS”

Phew…1,300 words in and we’ve still really only scratched the surface of this whole debate.

If there's one thin we've learnt, it's that there are a lot of different factors in play – so you need to realise that compromise is inevitable, and weigh up all the pros and cons before deciding which side of the fence to come down on.

Before doing so, you should absolutely speak to us at Cloud Accounting LLP rather than this post being the end of your research, just use it as a way of getting up to speed with the facts so you can have a productive conversation with an expert.

CLOUD ACCOUNTING LLP

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