A couple of Tax related questions

[aninternalaffair]

Hi Everbody,

This is my first post on this forum (which looks very good incidentally) so I apologise in advance for just launching into a full blown Accounting question but there you go - it's one of the aspects of running my business that I least enjoy!

Just to set the scene. I launched my own specialist recruitment business on the 1st April 2008, starting from my spare room and quite quickly (in my opinion) expanding into premises with staff etc. My first year predicted turnover was pitched at approx £65K though year one has been a great success and the figure is somewhat higher.

I have just received my end of year (to April 5th 2009) accounts and Tax calculations from my firm of Chartered Accountants. I should add that I find these guys quite unapproachable hence my reason for asking on this forum. They show a turnover of £213,000 with net profits of approx £114,000. I am extremely happy with these figures (given that I am 29 years old and my last employed role paid an annual salary of £30K) but am a little concerned about my Tax situation. To be clear I am registered as a sole trader running on the flat rate VAT scheme (though I don't think this has any relevance to my question).

I have always been aware, to a certain extend of the expectations put on me by the revenue re Tax, but now I have this in writing it all looks a little frightening.

My first year Tax payable is £40,490.92 increased by a further £9,078.00 for student loan repayments (I think it will be less as I actually only have £5K outstanding on my student loan). So the total for trading in the last year is £49,568.92.

However the accountants have indicated that I need to pay part of 2010 Tax payable with this amount so it takes the grand total to £69,742.38 to be paid on the 31st Jan 2010. I understand that I then need to pay a further £20,221.46 on the 31st July 21010 for the second half.

I must admit that these figures concern me a little. Much of my net profits were re-invested into my business and I currently have approx £57K available to me (for Tax). The recession is affecting my business and I doubt that 2009 will be quite as profitable so I am concerned with how I will come up with the additional £40K.

Could somebody please tell me if my accountants have got this right and what will happen if I do not make as much money next year. Surely these are estimates and I would be entitled to a rebate if I did not earn as much next year. I think what has really annoyed me is that my wife and I were planning to buy a new house this year and I don't think this will be possible as I am going to have to save every penny that I can for Tax (estimate) payments. Why can't they just charge me in January 2011 for the 2010 Tax year??? You can probably tell that I am new to this Tax lark!!!

Many thanks in advance,

Alex

[Zeno]

In an ideal world, your accountants should have been in contact with you when your business exceeded your expectations to see about converting to a more tax efficient vehicle - a company most likely.

If you are not satisfied with the service they provide, ask for a quote on here. There are many excellent accountants who will work with you to avoid this situation in the future.

As it stands, the tax is not due until January 2010. If you expect to make less next year, you can apply to reduce your payments on account.

[aninternalaffair]

Thanks Zeno,

You are quite right in what you say. The firm of CA that I have been using are widely regarded as reputable so I feel a little let down that they didn't suggest incorporating the business sooner. I failed to mention but I am currently in the process of moving to another firm, who have suggested that trading as a Ltd Company would be a better option so I am looking into this now. Unfortunately I'm guessing that this will not help me with this monster bill!

I must admit, and if I post on here more often then you will realise for yourself, but I can be prone to hitting the panic button a little sooner than would be ideal but I do like to stay on top of things - particularly where I don't have the protection of a Ltd Co if it all goes wrong!

So what you are saying is that I (or my accountants) can contact the revenue during the 2009 trading year to advise that my Tax liability will be significantly less and they may alter the £40K that they are expecting split between Jan 2010 and July 2010?

[elainec100@cheapaccounting]

As you are operating as a sole trader you always get a shock with the first tax bill. I have a small write up on this which explains about Class 4 NI and payments on account. I send this to new sole trader clients - fins it here:

http://www.cheapaccounting.co.uk/fivestarted.php

I would suggest that you may want to look at going down a limited company route.

They may be some tax advantages to doing so but as you can imagine it is difficult to be specific here.

There are loads of us on here who would be happy to give advice.

But let me just say - well done on your success.

Another word of caution - watch your turnover limit on the Flat rate scheme.

[elainec100@cheapaccounting]

Flat rate when you must leave the scheme:

at the anniversary of your start date the total value of your tax inclusive supplies in the year then ending (excluding sales of capital assets) is more than £225,000.


from this link para 12.2:


http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&propertyType=document&columns=1&id=HMCE_CL_000345#P690_53455

[Blackberry]

Tax & NI due seems about right given the profit levels you've indicated.

The payment in January seems high because it includes your first payment on account for the tax year ended 5th April 2010, which is correct. As its your first year and you've not paid tax on account before your effectively paying one and a half year's worth of tax in one go. Once your first year is out of the way, and your payments on account are being made the amount to pay in January should (if profits stay the same) reduce.

If you expect your profits to be less next year then you can reduce your payments on account for immediate relief otherwise you'll get it back when the actual figures are submitted.

Given the profits your making you really should be looking at a more tax efficient set up than a sole trader, most likely a limited company.

I'm surprised your accountants havent suggested this, if your not happy with them and can't approach them then shop around for someone you can trust and talk to.

on a cautionary note, eligiability for the VAT flat rate scheme runs out when your turnover hits £225K, so you are very close to the limit!!

[David Griffiths]

In principle the accountants are correct. You have to pay your tax for 2008-09 in one payment on 31 January 2010. Then there is a first instalment for 2009-10 equal to half of that amount. The second instalment, for the same amount, is due on 31 July 2010.

Some people see this as a payment in advance, but if you think about it you are making the first payment 10 months into the tax year and the second 4 months after it, so it isn't in advance.

Having said that, it's a lot of cash, and I always warn people of the impact of this. Given that you've made more profit than you thought you would turn over, the initial estimates would have been low, but the principle is the same.

If you believe that the tax due for 2009-10 will be lower, you can apply to reduce the payments on account. That application will be accepted by HMRC with little or no querying - there are penalties for making false applications, but if you've made an honest estimate, there's nothing to worry about. You'll just get charged interest. If you don't reduce the payments, and have less income, then either you'll get a repayment or if your accounts are prepared early enough you can reduce the July 2010 payment to the correct figure.

Two other points come out of this. If you are making that kind of cash and ploughing money back into the business, it may well be that you should consider a limited company, and pay only the 21% Corporate Tax rate on retained profits. Secondly, your turnover could well be too high to stay in the flat rate scheme - the limit is £225k including VAT.

Some of us try to keep clients updated with quarterly estimates of tax liabilities, provided the records are maintained in a manner that enables us to do this. We supply free software and support to help people keep proper records and make the estimates possible.

It sounds as if you need a more approachable firm of accountants, particularly in your first few years in business.

[Zeno]

If you commence trading as a company soon, then you will be able to reduce your payments on account to a relatively low amount as you will only have self employment income for a few months.

Your new advisors should be able to take care of this for you.

[aninternalaffair]

Thank you everybody for your fast and thoughtful responses - very much appreciated.

Again, quite right on the flat rate scheme limit. Perhaps I should form a new post on this but there is an issue here also. Technically speaking, I have actually exceeded the flat rate scheme allowance, but the new firm of CA that I am speaking to feel that there is a way around this.

Basically the 'horrible' firm that I have been with for the first year, put me on the invoice scheme rather than the cash scheme for VAT payment (I think that I have my terminology correct there). As my business trades as a recruitment agency, and I have a multitude of temporary staff (I have to pay VAT on the full invoice including the temporary staff members salary), which also rockets my turnover figures, I often have large invoices outstanding.

Had I been on the cash system, I could have declared (on the 31st March 09) that I had £13K outstanding which would bring me under the limits. My new CA have suggested I write to the revenue to explain that I should have been trading on the cash system, not the invoice scheme - obviously I have already paid VAT on the £13K which has not been paid yet. I have written to the revenue with proof but have not heard back from them on this. How do you fancy my chances on that front?!?!

It would be a great shame to lose the benefit of the flat rate scheme, particularly because I have shelled out a lot on equipment and services to get my business up and running, but have not claimed back a single penny in VAT!

As this post crosses with other replies - thank you for the advice re the Ltd Co. I think I should look at this sooner rather than later.

[Blackberry]

It would be a great shame to lose the benefit of the flat rate scheme, particularly because I have shelled out a lot on equipment and services to get my business up and running, but have not claimed back a single penny in VAT!


Even if your on the Flat rate scheme you can reclaim VAT on assets and equipment purchased with a value over £2k

[aninternalaffair]

Even if your on the Flat rate scheme you can reclaim VAT on assets and equipment purchased with a value over £2k

Thanks Tony, but am I right in thinking that each item has to be worth in excess of £2K individually? My main expenditure is on IT equipment, advertising costs and general tangible equipment to get the office up to scratch. None come in individually over the £2K mark.

[Blackberry]

Thanks Tony, but am I right in thinking that each item has to be worth in excess of £2K individually? My main expenditure is on IT equipment, advertising costs and general tangible equipment to get the office up to scratch. None come in individually over the £2K mark.

Correctamundo! as Fonzie might say!

[aninternalaffair]

Perhaps a bit of a silly question here but would you expect somebody who had accrued a Tax debt of this amount in the last 12 months to have more of a provision already put aside than the £57K which I have?

Basically I would just like to know that my planning has not been to off the mark!

[elainec100@cheapaccounting]

Perhaps a bit of a silly question here but would you expect somebody who had accrued a Tax debt of this amount in the last 12 months to have more of a provision already put aside than the £57K which I have?

Basically I would just like to know that my planning has not been to off the mark!

I advise clients to put aside a percentage of what is earned for tax - work on the theory that it is not your money in the first place.

My system gives all clients an estimate of the tax - so that can 'save as they earn'.

If you are struggling to pay phone HMRC here:

http://www.hmrc.gov.uk/pbr2008/business-payment.htm

[David Griffiths]

Perhaps a bit of a silly question here but would you expect somebody who had accrued a Tax debt of this amount in the last 12 months to have more of a provision already put aside than the £57K which I have?

Basically I would just like to know that my planning has not been to off the mark!

What you have seems to be quite reasonable. Don't forget that the full balance isn't payable until next January and does include some tax for the current year. You have eight months left to put aside the first instalment for 2009-10