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Our (hopefully) insightful ramblings…things that occupy our mind!

HMRC enquiries and fee protection cover

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I have recently started offering and speaking to clients about professional fee protection insurance and have seen a fairly encouraging uptake, but not in all cases!

I recently met with a long standing and respected client and was quite taken aback when he claimed that “if you had done your job properly in the first place, then HMRC would not be making an enquiry”.

Of course even if you are happy that your accounting records and tax affairs are in good order, this does not mean that you will not be selected for an enquiry.

After explaining to my client that HMRC are empowered to look into the tax position of any taxpayer, regardless of whether all returns and payments have been made on time,  I went on to explain that clients may have to justify not only their accounts, but also their personal income and lifestyle in the event of an enquiry.

Discover myths about HMRC inspection powers

It is fairly common knowledge that HMRC are carrying out more enquiries in an attempt to close the tax gap between what they believe is due to them and what they collect. Added to the new, far-reaching powers of inspection it is likely to mean that the number of enquiries will continue to increase and that they will become more in-depth.

Investigations can take considerable time to resolve, typically 19 months (although many take several years). During this time, advisors’ time and therefore fees could rapidly mount; but subject to certain limits and exclusions, would be covered by the fee protection product I am able to offer. 

With the infamous mis-selling of PPI in the past, and an extended warranty being offered with pretty much every consumer purchase we make these days, clients will of course act on personal attitudes to insurance policies and risk.  However, having had first hand experience of what can happen should a client be picked at random for inspection, I am pleased to be able to offer this type of product and hopefully offer peace of mind in the event of an enquiry.

How much 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.

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.

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.

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 – if the errors in your original were found to be deliberately misleading you could be asked to pay a penalty that ranges between 20 and 70% of the extra tax you are required to pay.

Additional costs

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, 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.

This is why I am continuing to highlight the benefits of our fee protection service to new and existing clients and offer a package designed to reimburse the cost of specialist financial representation in the event of an enquiry, tailored to cover corporate, partnership, sole trade and personal taxation matters.

Salary Sacrifice Electric Vehicles


Salary Sacrifice

What is it?
Salary sacrifice is a financial solution offered by an employer to employees through a leasing company. With a salary sacrifice scheme, you can lease a car with no initial, upfront costs on monthly payments and no further obligations at the end of the leasing term. Many leasing companies offer turnkey solutions that can be implemented within 4-6 weeks, including comprehensive maintenance and business insurance plans.

With 0% Benefit-in-kind on zero-emissions company cars from April 6th 2020, there has never been a better time to drive an electric car for business.

What are the benefits of a salary sacrifice scheme for an employee?
A salary sacrifice scheme allows employees drive a fully electric company car, by forgoing a portion of their gross salary. The amount will be deducted before tax and National Insurance contributions are applied, akin to childcare, gym membership or cycle-to-work schemes.

What are the benefits of a salary sacrifice scheme for an employer?
A salary sacrifice scheme allows employers to offer employees a new car at a lower cost with a tax-efficient payment method. Additionally, the company may also benefit from reduced National Insurance contribution payments. Salary sacrifice schemes are HMRC and VAT compliant.

Who is eligible for salary sacrifice?
Eligibility for salary sacrifice is dependent on company policy. If an employer offers a salary sacrifice scheme, it’s available to employees with a permanent contract. Employees can learn more about eligibility from their employer.

How do I lease an Electric Car through a salary sacrifice scheme?
Your employer’s leasing company provides an employee engagement portal, which is usually an online platform with step-by-step instructions. To learn more, reach out to us or visit the HMRC website.

Key Benefits

Employer:
Increased employee engagement and retention
National Insurance contribution maintained and insured company cars with all in-life services managed and no daily involvement needed from the employer.
Proven HMRC and VAT compliant scheme
Reduced fuel costs
No initial upfront costs
Employee interaction and
is covered by the leasing company
Salary sacrifice schemes complement existing employee benefits
Employee:
Access to a brand new electric car, at low monthly Contract Hire rates
Significant National Insurance savings
No initial upfront costs
Flexible mileage and terms
Fixed cost motoring without unexpected bills or service costs
Access to new features and functionality with regular over-the-air software updates
Convenient home or work charging, plus access to the world’s largest charging network for long distance travel

Salary sacrifice is a tax efficient way to drive an electric car, however it is only one of the financial incentives

Electric Car Incentives

Electric Car Incentives

Financial Benefits For Electric Cars Many Electric Cars have zero or low emissions and may be eligible for financial incentives that encourage clean energy use in the UK. Benefits for All Electric Drivers: • £3,500 plug-in grant• Exempt from London Congestion Charge• Access to clean air zones, including the London Ultra Low Emission Zone• Up to £35,000 interest-free loan (Scotland […]

What are alphabet shares and why do business owners need to be aware of them?

What are alphabet shares?

Limited Companies are traditionally formed with a nominal number of ordinary shares. As the company grows and more shareholders are added, alphabet shares are certainly something to consider.

Dividend waivers vs alphabet shares

Dividends are received by all the shareholders of a Limited Company, in proportion to their personal shareholdings. Should there be a need for one shareholder to be paid a different amount to the other shareholders, there either needs to be a dividend waiver or the share structure needs to be amended.

  • If you believe you’ll use dividend waivers on a regular basis to distribute company profits disproportionately to the same class of shareholder, then it’s advised to use alphabet shares as a permanent alternative method.
  • HMRC are more likely to question dividend waivers
  • Waivers can be seen as unreliable as all shareholders must give their consent each time
  • Alphabet Shares do not need the consent of all shareholders, as dividends are declared by reference to shares held, meaning that dividends declared as being payable to holders of Ordinary shares have no bearing on dividends declared as being payable to holders of an Alphabet share
  • It is possible to attribute rights or restrictions to alphabet shares. This could be in relation to voting rights or or rights to distribution on wind up.
  • Alphabet shares allow freedom and flexibility in paying dividends, so payments can be made to a certain class of share without having to pay the same amount in dividends to each company shareholder. If your Limited Company’s shareholders are taxed at higher rates than one another (if at all) then alphabet shares are a particularly good idea.

Settlement Rules

Whether you decide to use dividend waivers or alphabet shares, it’s important to understand whether either is caught by the Settlement Legislation.  In short, the Settlement Legislation is designed to expose and punish anyone who uses dividend waivers or alphabet shares purely to divert income from one person to another, thus resulting in a tax advantage.

For alphabet shares it’s particularly important to understand that a lack in voting rights (for example) could result in being caught by the Settlement Legislation.

To ensure you do not fall foul of the Settlement Rules, we advise you do the following:

  • Any new shares made under the alphabet scheme must be an outright gift and have exactly the same rights as the original ordinary shares. Restrictions cannot apply (such as being non-voting, carrying lesser rights to capital, or promise to return shares on demand). You must not make the shares redeemable preference shares.
  • If you decide to gift shares to spouses, it’s recommended to show that they have an active interest in the running of the company, such as becoming a director, the company’s secretary or even an administrator.
  • Only pay dividends into a bank account that holds the recipient’s name (such as joint accounts) to ensure you don’t attract unwanted HMRC attention.
  • Remember that in order to claim Entrepreneur’s Relief should you decide to sell the company, a 5% share is required.
  • Pay some dividends to each type of share, so as to minimise the risk of HMRC claiming that dividends should not be paid, unless one class of share was not allocated any dividend.

What’s the difference between buying, Hire Purchase, or leasing business-asset


We are often asked what the differences are between buying outright, hire purchase and leasing business assets. So here is a summary of how they work for tax, VAT and what’s shown in the accounts for each method.

The choices will depend on what finance is available, but each method has different treatments for tax, VAT and accounting purposes.

Buy – Outright purchase with cash or a bank loan

How it works for tax
The depreciation charge is not allowable for tax relief but you can claim capital allowances.
100% tax relief may be available up to a maximum of £200,000. This does not apply to cars and the excess over £200,000 gets a lower rate of writing down allowance
Qualifying energy saving or environmentally beneficial equipment gets a 100% tax deduction.Loan interest used for the purchase is tax deductible.

How it works for VAT
If the purchaser is VAT registered, the VAT is claimed back on the VAT shown on the suppliers invoice.VAT can’t normally be claimed on cars.

What the accounts show
The cost of the asset goes on the balance sheet usually as a fixed asset and it is depreciated.


Hire Purchase – The asset usually includes an option to purchase at the end of the term

How it works for tax
This is the same as for an outright purchase.The finance charge is normally an allowable tax deduction.

How it works for VAT
VAT is normally payable with the first installment and claimed back in the normal way.
VAT can’t normally be claimed on cars.

What the accounts show
The asset on HP is shown as if it was purchased i.e. the cost of the asset goes on the balance sheet and it is depreciated.
The hire purchase amount due is shown as a liability on the balance sheet, which is reduced by the HP payments (excluding the interest element).


Operating Leases  – The asset isn’t owned but rented and returned to the owner at the end of the rental period e.g. contract hire

How it works for tax
The tax relief is given for the rental paid, except where the asset is a car with a Co2 emission exceeding 130g/km, where there is a 15% reduction in the tax claimable amount.

How it works for VAT
VAT is charged on each rental. Most businesses will be able to claim back 50% of the VAT on a car.  This restriction does not apply to maintenance charges shown separately on car contract hire.

What the accounts show
The rentals appear on the profit and loss account as an expense.


Finance Lease

How it works for tax
For short term leases tax relief is normally  given for the finance lease payments,  with a 15% disallowance  for cars with Co2 emissions exceeding 130g/km
For long term leases tax relief is given in line with the accounting treatment  and capital allowances claimed.

How it works for VAT
VAT is charged on each rental. Most businesses will be able to claim back 50% of the VAT on a car.

What the accounts show
For short leases (up to 7 years) the rental payments are shown as an expense on the profit and loss account.For longer term leases the asset is shown on the balance sheet and depreciated. 
There is  also a liability shown for the future rental payments.

Please contact us if you want more advice on this topic.

CLOUD ACCOUNTING LLP

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Name: Cloud Accounting LLP
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