Author Archives: Shaya Grosskopf

Should I move my buy-to-let properties into a company?

Since the former chancellor George Osborne introduced cuts to landlord tax relief thousands of landlords have seen their costs rise and are looking for ways to mitigate the hit. The limited company route was touted as the solution. So is it?

Here’s what the government has done as part of their buy-to-let clampdown:

  • Phased out mortgage interest that can be claimed against rental income. By April 2020 mortgage interest won’t be an allowable expense for individuals and instead, there will be a 20% credit. For 40% or 45% higher or additional rate taxpayers, this means an effective 20 or 25% tax hike.
  • Scrapped the wear and tear allowance.
  • Introduced a 3% surcharge on stamp duty payable on the purchase of buy-to-let properties or second homes.
  • Increased capital gains tax on residential property by 10% to 28% or 18% for basic rate taxpayers.

The key to the limited company question is the changes to mortgage interest tax relief and wear and tear. Landlords who own property personally pay income tax calculated on the rental income generated by these properties, not just on the profit they made after mortgage interest. When a limited company owns property this is viewed as a business and all expenses are tax deductible. Landlords can still take the income from the company in the form of a dividend, and will pay tax on this only.

Looking at it in its simplest form, a mortgaged property should be better off in a company. Indeed, thousands of landlords have now opted for this route – figures from Countrywide show a fifth of all buy-to-lets are now held by company landlords.

However, there are many considerations to think about. Here are some:

Costs of transfer

If you want to transfer property in your name to a limited company it can be very expensive. This transfer of ownership will trigger a sale and repurchase and incur stamp duty with the 3% surcharge on top. If the property has gone up in value since purchase there is also a capital gains tax hit. Plus there will be legal, valuation and mortgage fees.

Gifting land at nil cost to the personal company controlled by the landlord or close family avoids neither stamp duty nor capital gains tax.

Corporate costs

On the whole, mortgage rates for limited companies are higher and they incur higher fees than personal ones.

Mortgagors typically ask for personal guarantees from the owner-managers of small property businesses, so any benefits from the limitation of liability are lost.

Companies have running costs. They incur corporation tax, require accounts and an annual confirmation statement to be formally filed.

The tax savings made by having the company own the property would need to outweigh the additional costs and administrative burdens of running a company.

Your current and future tax position

If you are looking to supplement your income while you work, then you may be better off not buying through a limited company as you will be taxed twice – as well as paying corporation tax, you’ll need to pay tax on the money you take out of the company. Corporation tax rates are currently at 19%. Dividends are tax-free for the first £2,000 with subsequent dividend tax rates at 7.5%, 32.5% or 38.1% depending on the level of your other income.

If your property investment is part of a long-term investment strategy and you only want the income for the future after you have stopped working then a limited company is more likely to suit.

An overview of the main tax costs to consider to understand if setting up a limited company makes sense for you:

  Property held personally Property held through a limited company
Tax when buying a property Stamp Duty rates plus 3% surcharge. Stamp Duty rates plus 3% surcharge.
Rental income taxation Subject to Income Tax at your marginal rate 20%/40%/45%. Profits subject to Corporation Tax at 19%.

If drawing an income through dividends the first £2,000 is tax-free but dividend tax rates at 7.5%/32.5%/38.1% apply on top of Corporation Tax.

Mortgage interest tax treatment In 2018/19 you will be able to deduct 50% of costs from rental income before tax due, reducing to 25% next year.

By April 2020 mortgage interest won’t be an allowable expense for individuals and instead there will be a 20% credit

Mortgage interest is an allowance deductible expense.
Tax when selling a property Capital Gains Tax at 18/28%  –   depending on whether you are a basic or higher rate taxpayer after £11,700 annual exemption. Subject to Corporation Tax at 19%.
Other taxes   Annual Tax on Enveloped Dwellings applies to properties worth £500,000 or more. 100% lettings relief is available but a return must be filed.

 

The general view is that it can be very useful when you have a number of buy-to-let properties. For landlords with perhaps one property, it’s not worth it.

What’s clear is that you will need to do some thorough sums in order to work out exactly what difference going the corporate route will make to your finances.

To get some professional advice contact Shaya Grosskopf.

 

 


Employment and Self-Employment

A quick look into the complicated and increasingly fuzzy differences between employment and self-employment.

The tax position

Overall, the self-employed enjoy tax advantages compared to their employed colleagues.

  1. A self-employed worker pays lower rates of national insurance (at the time of writing: 9%, or 2% on earnings above £46,350).
  2. There is no benefit in kind tax on private use of business vehicles.
  3. Expenses which are wholly and exclusively for the purposes of business can be claimed as deductions against taxable profits, while employee expenses adds a further condition before they can be claimed – expenses must be wholly, exclusively and necessarily incurred in the course of their employment.
  4. Self-employed workers also have the cashflow advantage of paying tax due on their earnings in the tax year ending on 5 April in two instalments at the end of the succeeding July and January. Employees have tax deducted from their earnings when it is paid.
  5. Self-employed workers often have the option to direct the profits of their business to limited companies, which can have significant tax benefits.
  6. Self-employed workers can pay salaries to family members, reducing their own taxable profits, and utilising the family member’s tax-free personal allowance. The salary must be paid on a genuine commercial basis for actual services provided and must actually be paid. Employees would have no such flexibility.

However, the self-employed must go through the bureaucracy of completing a self-assessment tax return. In general, and with many exceptions, employees earning less than £100,000 do not need to complete a return.

What about the employer?

Hiring a self-employed worker rather than an employee has advantages to the employer too: –

  1. Employers pay employer’s national insurance contributions (currently 13.8% of gross earnings) and pension contributions (currently 1%) for most employees
  2. In theory, self-employed contractors have little or no employment rights in matters such as sick pay, paid holiday leave and parental or maternity pay.

Recent supreme court judgements concerning section 230 of the Employment Rights Act 1996 seems to grant protected “worker” status to the self-employed where “an individual undertakes to do or perform personally any work or services” including whistle-blower and unfair dismissal protections. This creates a fuzziness between

Commercial risk

Self-employed workers (other than those who trade through limited companies) are in business on their own account. The law does not distinguish between a creditor’s claims on their private and personal assets.

Self-employed contractors’ employment rights are curtailed as set out above.

However, employees also face significant risks. They may lawfully be made redundant with only a small entitlement to statutory redundancy pay if their employer’s business requires it.

Is self-employment a choice?

The courts have been consistently clear that merely signing a contract that states that an employee is self-employed does not automatically render that employee self-employed if the substantive relationship is one of employment.  The following factors are relevant to determining whether a relationship constitutes employment or self-employment

  1. Mutuality of obligation. This refers to the obligation of an employer to provide work and pay for it, and the corresponding obligation of the employee to personally do the work. However, the use of zero hour contracts, whose classification as employment has never been subject to doubt, does challenge this notion.
  2. A line managed worker carrying out a regimented task – particularly one carried out simultaneously by other workers such as a warehouse packer – is unlikely to be classified as self-employed. Skilled employees such as software developers enjoying substantial independence in carrying out their jobs are more likely to be construed as self-employed.
  3. Set hours and a set place of work are associated with employment.
  4. The right of substitution rather than a requirement of a worker personally carrying out work is a valuable indication of employment. HMRC have recently lost a case in which they sought to assert an employment relationship predicated mainly on a lack of right of substitution.
  5. Typical commercial arrangements such as the worker using their own tools, having multiple clients, and especially no one predominant clients, marketing their services widely, or obtaining their own insurance are indicators of self-employment.

Despite decades of different cases, exactly how these different factors are to be weighted is unclear.  Recently a number of examples have arisen of workers being granted employment rights while taxed as self-employed, which makes for a very confusing position for businesses looking to comply with the law.

Limited companies and LLPs

It used to be the case that using specific legal intermediaries – such as LLPs or companies – would make what would otherwise be an employment relationship into a contractor or self-employed relationship.

Members of LLPs are now taxed as employees unless they substantially participate in the risks, decision making, and rewards of the LLP’s trade.

Companies which provide services on what would otherwise be a contract of employment are required to pay tax as though they were an employee under the “IR35” rules. Exactly which types of relationship are caught under these rules is a complex and still evolving area of law.

 


Information security

As an accountant information security is one of the issues which is absolutely critical to our business, but which we are loathe to talk about. Our professional training is all about producing financial statements or calculating tax, and we tend to leave the technology side to the IT professionals. However nowadays securing computer systems is as important as locking the front door to secure the premises on your way out. Our clients trust us with their personal and financial information, and it behoves us to honour that trust. The audit profession has responded to the centrality of computer systems by requiring auditors to develop an appreciation of their clients IT systems and controls. As business advisors we feel a need to provide basic advice about this increasingly crucial area of business.

Passwords

  • Don’t use the same password on different website. One of the criminals’ favourite tricks is to attack a small, unprofessionally run website and then harvest millions of passwords from unsuspecting customers to try out on email, social media and banking sites. My own personal email account was hacked as I had used the same password on LinkedIn. It’s very hard to remember hundreds of passwords, which is my second recommendation is :
  • Use a good password manager. Some may be averse to putting all their cyber eggs into one password manager basket, and in fact it probably is more secure overall to simply write down passwords on old fashioned paper and keep it under secure lock and key.
  • Use longer, complicated passwords. Prior guidance encouraged the use of numbers, upper and lower case letters, and symbols as well as letters in passwords, but recent government guidance is more focussed on the overall length to ensure security.
  • Where possible use individual logins rather than a group shared password – it ensures accountability. If you must share passwords, try to send the username separately, I often email a username and text a password to clients.
  • Where available use “multi-factor” log-ins for your important accounts. These will require a password and some other proof of identification, such as sending you an SMS message, or use of a handheld authentication device to produce an authentication code.
  • Change passwords regularly. Yes, it’s tiresome. But it helps secure your system from cybercriminals who auction off lists of illicitly obtained passwords. This applies especially if you access your computer remotely without two factor authentication.
  • Don’t be one of those people who use “pa$$w0rd123” or other common variations on the same!

Emails

  • An email does not necessarily originate from where it purports to come. It is easy to “spoof” the sender of an email. This can be partially addressed by ensuring that your email “sender policy framework” records are correctly configured –a job for professionals.
  • Likewise, it is entirely compliant with email standards for a “reply to” to be directed to someone other than the original (claimed) sender. In a previous job, I received an email purporting to come internally from my boss at the time (whose details were presumably gleaned from the firm’s website or social media), but where the reply to address was somewhere in Russia. You can configure email servers to filter or quarantine suspicious emails of this nature.
  • Don’t click on strange attachments. Even excel files or PDFs can contain viruses – if it doesn’t smell right, check with the sender.
  • Fraudsters try to use psychological or character vulnerabilities against you. The state minister of oil hasn’t written to you personally for your help in laundering his ill-gotten gains – the fraudsters are appealing to your greed and prejudices about the greed of others. Other common targets include using your own desire to please a boss. The subject line of the email purporting to come from my boss read “urgent: I need this payment processed today.” Take your time, don’t be rushed into anything, and double check in person. If in doubt, do nothing.

Software

  • Older versions of Windows are far more susceptible to attack as Microsoft doesn’t update them for newly emerging security threats. Keep your software up to date and apply updates as they become available. This is good advice for non-Windows users too.
  • If you are involved in the software industry yourself – whether through an app, an online website, or software you sell – you have an added responsibility. If you are using third party developers, check their security credentials. It isn’t fair to expect web designers to be security experts. Have your site checked over by “penetration testers”, and deal with any vulnerabilities they identify promptly.
  • In general popular software such as WordPress, which this website uses, tends to be well tested both by malicious hackers; and by security experts – there’s no clear advantage in either arrangement.

Backups

  • Taking regular backups of your data is vital to your business. In recent years “ransomware” attacks, which encrypt your files and demand payment to restore them have become very common. If you can revert to a recent backup, the problem is negated. Paying scammers to release your files is a very dubious decision. Notwithstanding the anti-social aspects of encouraging criminals to destroy the data of others, often payment simply results in increased demands, and many of the viruses have irreversible effects.
  • You should regularly test backup arrangements to make sure they work in time of need.

Cloud accountancy

In the last decade, the world around us has changed immeasurably. Almost 25% of non-food retail items are now purchased online. While once we used to write cheques, we now pay for items with a touch of a smart watch, or a swipe on a smart phone. Entire libraries can now be stored on devices which fit into a pocket. The way we communicate with each other has changed, with the increasing ubiquity of social media giving individuals the ability to reach out to thousands. Business administration has also changed in this period, and at the heart of this change has been cloud accounting apps.

The main benefit brought about by cloud accounting is instant collaboration. A sales team can raise invoices; employees can use a telephone app to take pictures of their travel expenses and include these on expense claims for approval by managers; a credit controller can chase late payers; a business owner can consult with an accountant on the month’s figures – all working off a single, unified data set. Previous generations of software required files to be emailed or shared on USB sticks and CD drives – often the data was obsolete before it arrived, and any adjustments made by one user could not readily be integrated with another.

In addition the new generation of apps take advantage of Open Banking to automatically pull in data on bank transactions into the accounting system. This allows businesses to track which customers have paid their invoices as the cash is received, and to capture expenditure data promptly and fully. A whole “ecosystem” of specialist add on apps and systems have built up which extend upon data on accountancy apps has sprung up, offering, for example, payroll and HR management, timesheets, customer relationship management, inventory management and industry specific features. Many systems will store images and documents, enabling a business to become “paperless”.

Yet, these new systems are not without their drawbacks. Businesses now keep a remarkable amount of information – some of it personal information pertaining to employees and staff on one online system on trust. Businesses need to be responsible with how they safeguard and use this data, and business users would be well advised to thoroughly interrogate these firms’ credentials before entrusting them with it. Under the new GDPR regulations, cloud accountancy apps are likely to be “sub-processors” and there are specific requirements arising from this. The app’s financial security is also important to consider. Some of the cloud accountancy companies and add-ons, despite having glossy and beautiful websites, are relatively small and unestablished. If a cloud accounting company ceased trading, it would mean that the entire business records for all their customers would cease to be available, which could be utterly crippling. Many of these products allow you to take snapshots or back-ups of data. I strongly recommend you keep control.

Notwithstanding all this, I believe that cloud accounting will become increasingly ubiquitous over the next decade. We will start to see a lot of “artificial intelligence” automating support and data entry business tasks, and enabling the humans to focus on wider executive and strategic issues, but the output of these algorithms must be adequately supervised to prevent them going awry. The fundamentals of business – the need to understand the workings of all areas of your business – will not. Innovations offer fantastic opportunities for efficiency and scale, but ultimately the business is dependent on the enthusiasm and talent of the people who work there.


Shareholders and partnership agreements

When entrepreneurs start a business together, it’s often a good idea to draw up an agreement beforehand. The following is a non exhaustive list of items you may want to consider when drawing up an agreement.

1) Profit split

It’s important to consider at the beginning how the business will share out profits between the partners. You may want to make allowance for partners putting in more of their own money, time or contacts. There are various ways of achieving this; for example paying interest on loans; preference shares; or an adjustment to the shareholdings; or use of differential share classes. We can advise on the full implications of each approach so you can choose what works best for you.

2) Work split

When one partner will retain an existing job, while another will work on the business full time, it’s advisable to clarify expectations with each other. Long holidays can be another source of controversy.

3) Voting rights

It’s possible to have profit share splits differ from voting share splits by using differential classes of shares. We can advise on how this can be done using differential share classes or by other means.

4) Exit strategy

What happens if the partnership doesn’t work out? Can one partner sell their share in the business to a third party? What happens if someone dies or wants to retire? We always recommend you agree on how to handle a worst case scenario gracefully.

One popular approach is to agree to appoint an independent valuer in certain situations so that the exiting partner’s interests are bought our by the existing partners. We can act as independent valuers.

5) Banking access

Partnerships are built on trust. But that doesn’t mean you cannot mutually agree to sensible controls – perhaps requiring two signatures to pay more than a fixed amount. Being a bank signatory is a highly responsible position. In an otherwise equal partnership, if one individual is a bank signatory, and the other is not, it is a significant asymmetry which may cause controversy later – we would suggest that finance is for everyone.

6) Drawings

As well as agreeing on profit split, it’s important that partners agree on when those profits will be drawn from the business and paid to themselves personally. A common arrangement is to draw anticipated profit share by monthly standing order, with a periodic distribution once the accounts have been drawn up and the precise position of each partner is known.

Expenditure on items like business entertaining and company cars can be a problem, and it’s advisable that partners agree boundaries with each other.

7) Control over expenditure

We suggest that partners may want to think about what decisions are so important that they need to be taken together. For example, hiring staff, changing bankers, or signing contracts committing the company to a level of spending over a set amount could all be items covered in a partnership agreement

You may wish to seek expert legal advice rather than drawing up your own DIY agreement – the law is full of surprises.


Dormant companies

Category : Accounting

What are dormant companies?

A dormant company is a company which does not carry out a trade. To qualify as dormant, a company must either be non trading in its first year of existence, or otherwise be non trading for two consecutive years.

What difference does being a dormant company make?

Dormant companies can file simplified single page accounts, and are exempt from audit even if they are part of a group which requires auditing.

What level of activity constitutes trade?

It’s not clear. A maximalist interpretation would find that the company trades if it incurs expenses, even if those expenses are settled by the shareholders. As every company pays an annual £13 filing fee, that would preclude any company from being dormant – so this interpretation is clearly not accepted in practice.

A more reasonable interpretation would find that a company is dormant if:-

  • All its expenses were paid by the shareholders. Even a minimal level of expenditure settled from the Company’s own resources – for example bank charges – would probably taint the dormant status.
  • It did not engage in trading activity (for example, advertising or promotion as well as making sales or incurring expenses). There will be edge cases where judgement needs to be applied.
  • Expenses paid by shareholders were purely of a recurring type such as filing fees and accountant fees necessary to maintain the company in its existence.
  • Often, but not necessarily, dormant companies have no equity other than share capital.

Note that the definition of a trading company for accounting purposes differs from that used for tax purposes.

Can a dormant company hold assets which do not generate income

Companies holding assets such as investment properties seem not to be regarded by Companies House as dormant . The online form that Companies House provide to file dormant accounts allows for only two types of asset in a dormant company – cash, or unpaid share capital owned by the shareholders.  Ultimately it is however a matter of judgement. If the investment property earns rent, clearly the company is not dormant.


FRS105 Micro-entity Accounts

Category : Accounting

Do you like to understand the detail behind your annual accounts? At Somers Baker Prince Kurz we like to take the time to explain what we do (we’re accountants after all) to our clients, so that the accounts are meaningful and useful documents rather than an administrative drudge.

The UK government has recently introduced a relaxed accounting standard for “micro entities”. This allows smaller business to produce shorter, more readable accounts without pages of complicated accounting policies and detailed notes on small points.

What is a micro-entity

The three main criteria are: –

  1. Turnover of no more than £632,000
  2. Gross assets (i.e. – without subtracting any liabilities) of no more than £316,000
  3. No more than 10 employees

Two of these three criteria need to be met for two consecutive years (for a newly incorporated company it suffices to meet the criteria in its first year). There are certain companies which cannot qualify as micro-entities regardless of their size: –

  • Members of a group preparing group accounts.
  • Investment undertakings
  • Financial holdings undertakings
  • Credit institutions
  • Insurance undertakings
  • Charities

What is FRS 105?

FRS 105 is the Financial Reporting Standard applicable to the Micro-entities Regime, issued by the Financial Reporting Council (FRC).

How do micro-entity accounts differ from other accounts?

There are two broad categories of difference between micro-entity accounts and other small company accounts:

Valuation differences

The starting point for assets valuation is the original cost , and never at their current market value. This is particularly significant for companies with holdings of publicly traded shares and investment properties.

Where the tax valuation (“tax base”) and the accounts valuation (“net book value”) of an asset differ, there is no need to calculate the “deferred tax” effect of the difference.

For example, if some publicly traded shares purchased by the company have increased in value between the purchase date and the financial year end, there is no need to account for either the increase in value of the shares or the tax that would be payable had the gain in value of the shares been crystallised.

Disclosure differences

The format of micro-entity accounts is quite rigidly set out in law (Section C of Part 1 of Schedule 1 to the Small Companies Regulations) . There are no detailed notes of various items – for example splitting current assets between trade receivables, cash held, and other debtors. The only notes required are for matters specifically required under the Companies Act 2006: –

  • Cash advances, credits or guarantees made by the company in favour of the directors (where the director has lent money to the company, this need not be disclosed). Detailed information must be given on the the
    • Amount.
    • Interest rate.
    • Other main terms of the transaction.
    • Amounts written off, waived or repaid.
  • Other guarantees, contingencies or potential liabilities that the company may be exposed to.

FRS 105 accounts do include a profit and loss (or income) statement, but this can be removed (“filleted”) from the accounts filed publicly at Companies House.

What are the advantages of FRS 105?

FRS 105 accounts are less technical  and easier to prepare and understand.

What other accounting standards apply to UK Companies

Use of FRS 105 for qualifying companies, LLPs, partnerships and sole traders is optional but not compulsory. These entities can optionally choose to adopt FRS 102 section 1A.

  • The accounting standard applicable for small companies is FRS 102 section 1A.
  • Medium or large private companies and groups apply full FRS 102.
  • Publicly trading groups report using “EU adopted IFRS”
  • The subsidiaries of these groups can use FRS 101 or full EU adopted IFRS.

Making Tax Digital

What is making tax digital for business?

It’s a government scheme to change the way that accounting information is recorded and transmitted to HMRC.

How does it affect my business?

The earliest impact on businesses will be the requirement for VAT registered businesses to file their vat returns using Making Tax Digital (MTD). This means that you will need to do your bookkeeping and vat returns on MTD compliant software, and you can no longer use the existing (free) HMRC website.

What do I need to do?

You need to work with your software provider to ensure that the software will be compatible with MTD. If your bookkeeping software will not be compatible, you will need to change providers.

Can I carry on using my existing bookkeeping software and just put summary totals into the MTD compliant software to file my return?

No. HMRC require that the MTD system must have digital access to the underlying transactional records. Automated (API) links between existing software and an MTD compatible system are acceptable and may be useful for individuals with specialised or excel software.

Typing in summary totals with your digits does not count as a digital link!

When does it start?

The changes take effect for VAT returns covering a period beginning on or after 1 April 2019.

How can SBPK help?

We are delighted to be able to offer you training on a variety of modern cloud and standalone systems which are compatible with Making Tax Digital.

We can help move your data over from legacy systems to newer MTD compatible systems.

We also provide a complete outsourced bookkeeping and VAT service which will of course be MTD compliant.


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