Business and Commercial Finance from Adept

Tips - Tax and National Insurance consequences.

If you work in a business where customers pay tips for good service, the receipt of the tip is always related to your employment and therefore potentially taxable!

National Insurance is somewhat different.

If the tips are paid direct from the customer to employee, generally no national insurance is due.

If the employer collects and distributes the tips, national insurance will be due.

If the tips are pooled and passed to an intermediary (a "tronc master") to distribute to the staff, national insurance may be avoided if the employer takes no part in the distribution of the tips.

For employers the risks of ignoring their responsibilities to deduct tax and national insurance can be severe. If deductions were due and not paid on the due date, certainly by the end of the relevant tax year, then both employees and employers deductions become a liability for the employer. Interest and penalties may also be applied.

If you have concerns that you may not be applying correct procedures to the payment of tips in your business do call.

Husband and Wife Companies (including partners registered under the new Civil Partnership Act)

Arctic Systems Judgement

Some of you may have heard of this recent judgement in favour of the Inland Revenue regarding a husband and wife team who have been deemed to owe tax relating to their relative salaries and dividends and how they were declared on their tax returns.

Basically the husband was paid a salary below the market rate for the work he did in the business. This facilitated additional payments being made to his wife, in the form of salaries and dividends, which were excessive if commercial rates of remuneration were applied to their respective roles. The Revenue have powers to treat this excessive remuneration as belonging to the husband in this case, and to adjust their relative tax positions accordingly.

If you are a husband and wife team and wondering whether this will make a difference to you we must wait for a definitive judgement. This case may be taken to the Court of Appeal.

Certainly it would seem sensible to review cases where the underlying commercial value of respective remuneration packages, is out of sync with the salaries and dividends actually being taken. The judge in the recent case suggested that where a true market salary was being paid, then the Revenue would be unlikely to launch an investigation. But this whole concept of market salary raises more questions than it answers!

Please call if you have questions to ask on this topic, but do bear in mind that until the matter is finally settled in the courts we can only address unresolved interpretations of the law.

More on this as and when the possible appeal is decided.

Record Your Assets

If you're a small business owner, you probably know by now how important it is to efficiently manage your assets. This fact is most evident at tax time each year. Whether you're talking about cash or other physical assets, managing them doesn't have to be difficult.

The main thing you need to remember when dealing with your cash accounts and assets is that good book keeping and accounting practices will save you time and money in the long run. You need to keep exact track of income and spending, no matter how small or insignificant the dollar value may be. A few cents here and there can add up to hundreds of dollars in no time.

Following of a good accounting practice and asset management is extremely important, especially when you are required to submit tax to the government. There are numerous cases where small issues that appear insignificant come under the eye of scrutiny and can haunt you for years with the IRS on your back.

Good record keeping will also benefit you any time you need to apply for a loan or grant. You will have to know each of your assets and provide documentation and accurate records.
Besides securing the loan, these practices will also identify you as a responsible member of the business community.

Often, small business owners tend to overlook certain items, not realizing that they are actually assets. Anything worth money, or that can be sold, is considered an asset. For instance, most of us know that our computer equipment is an asset, but we may overlook the desk or even the chair we're sitting on. Take a look around and see if you've missed any assets in your reconciliation.

Managing and properly reporting your physical assets needs to take several things into account. One of these is depreciation. When we talk about cars, the concept of depreciation becomes very clear. When you buy a car brand new at $15,000 you can't expect to sell it five years later for the exact same price. As soon as car is driven off the lot it deprecates in value. Mileage, wear and tear, and any accidents also play a role in the depreciation of the car.
The same goes for almost anything else you may be considering an asset. Property is an exception to this rule and in many areas goes up in value.

Therefore, small businesses need to cater to depreciation in value of the office equipment and most other equipment that has been purchased when undertaking asset valuation and management. While this process sounds overwhelming, it actually is fairly easy when assisted with the required tools and guides.

The mature business market offers numerous software programs that can assist you with your asset management and book keeping. While most of these are heavily documented and are very user friendly, some assistance from a software expert can get you customized solutions too. However, when choosing to seek external assistance for your asset management and accounting, then the right choice would be a qualified CPA.

The main point to remember that asset management in small businesses is just as important as it is in large ones. Be sure to take this into consideration and document everything. You may end up paying a high price if you don't.

Work In Progress (WIP) - new basis of valuation.

This issue is about to become a real thorn in the side of any business that invoices their customers based on a chargeable rate per hour. Even accountants will be affected by these changes!

Basically, new accounting regulations dictate that sales must now include work done not billed - valued on a sales basis and not on a cost basis. This will include all the unbilled chargeable time of staff and partners or directors. Strictly speaking this is not a work in progress adjustment but a sales adjustment. The most immediate effect is that in the year in which this adjustment first takes place firms will see an increase in profits, and therefore tax, due to a change in accounting policy. No more funds will be generated by the adjustment and cash flow will suffer as the extra tax bills become due for payment.

For professional practices carrying large unbilled time ledgers the extra tax charge could be significant. For example, if in the past a firm of solicitors has valued work in progress at cost (salary costs) say £100,000, the true sales value of this asset may be nearer £250,000. This would increase the taxable profits of the partnership by £150,000 in one year - for self-employed business owners this could cost an additional £60,000 of extra higher rate tax!

There will be a period of grace before this comes into effect as it will apply to accounting years ending after the 22 June 2005.

A number of practical problems arise:

When do you introduce the change in valuation into your accounts?
How big is the additional reserve and how is it calculated? Do you have the systems to cope with this?
For partnerships, in what partnership profit sharing ratio is it to be apportioned?
How big a tax bill is it going to create for this first year - a significant amount for most businesses, and needs planning.
Clients need to take into account that the accounting information we will require for next year onwards will be on a different basis and also needs planning. Do you have the systems to cope?
As this is a sales adjustment will you need to pay VAT on the total value of the new reserve? The answer for most businesses will be no. Fortunately as long as you can argue that you are providing a continuous service, then the tax point is date of payment or invoice date which ever comes first.

A number of possible mitigating solutions:

If you have been undecided on the incorporation of your business, this may be the clincher! Companies with profits under £300,000 will only pay tax at 19%.
If you have work done not billed at the end of the year maybe this is the opportunity to move to monthly billing? Invoice all chargeable hours at the end of your year and this will generate the cash to pay the additional tax.
Possible spreading rules - the Inland Revenue may introduce rules that allow you to spread the tax cost over a number of years. As yet this is speculation although similar changes to the tax code in the past have included the right to pay over an extended period.

Remember to call us for advice on all the above points, whether you are a company, partnership or sole trader. If you bill your clients on a time basis it's time to start the planning process now!

Pensions

The rules surrounding pensions will be changing significantly from 6 April 2006. The idea is to simplify existing rules and encourage people to save in their pensions. For some people these rule changes will be advantageous, for others not so. Whilst the fine detail of the changes is still being hammered out with the Inland Revenue the broad thrust of the changes is clear. For example, a major change is that residential property can be held in a pension. In many cases reviewing your pension, or setting up a scheme now, will allow you to take advantage of rules which will disappear after April 2006. If you would like to know more about this or understand how the changes will affect you please contact us for more information.