Category: Finance & Capital

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Finance & Capital

UK Tax Codes Explained

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UK tax codes are determined by HMRC, notified to employees and used by employers to calculate tax to be deducted from employee income. Inland Revenue tax codes explained as being made up of numbers or letters and usually both. When multiplied by 10 the number indicates the amount of tax free personal allowance the person is entitled to and the letter indicates the conditions which might be applicable to the UK tax code to enusre the correct Tax is calculated.
Virtually everyone in the UK is entitled to a personal allowance if they are resident in the UK which entitles them to tax free income, the amount of that tax free income being dependent on the size of the personal allowance according to the specific circumstances. Earnings above the tax free allowance are subject to the basic rate tax. The basic tax rate personal allowance was £5435 from 6 April 2008 and increased by £600 to £6,035 which effect from the first pay date after 7 September 2008. The original personal allowance tax code 543L being increased to new tax code 603L reflecting these changes to calculate tax at the new rate from 7 September 2008..
Basic rate tax for 2008 is 20 percent. For earnings above the higher income threshold which is £34.800 the basic rate tax increases to 40 per cent.
The personal allowance of people over 65 and up to 74 is £9,030 which is reduced if income exceeds £21,800 and people over 75 receive a personal allowance of £9,180 also reduced when income exceeds the £21,800 income threshold. The rate of tax allowance reduction is £1 for every £2 above the income threshold until the basic personal allowance is reached.
The number in the UK tax code is known as the prefix while the letter following that number is known as the suffix. Each suffix letter in the tax codes explained as a different meaning.
Letter L means eligible for the basic personal allowance and is also used for the emergency tax codes. Letter P is for people aged 65 to 74 and letter V for people aged 75 and over, while letter Y is also for people over 75 but who are eligible for the full personal allowance. A tax code with a suffix letter T indicates there may be issues that HMRC still need to review regarding the tax code and letter K indicates that the value of taxable benefits exceeds the personal allowance.
Where untaxed incomes, such as benefits, are received by the employee exceed the personal allowance a K code is issued by HMRC. The number following the letter K indicates the amount of benefits multiplied by 10 that are to be taxed in addition to the gross earnings received. This is achieved by adding the K code number multiplied by 10 to the gross earnings of the employee for income tax purposes.
Some Inland Revenue tax coding consists of just letters allowing the tax codes explained simply. The BR tax code means basic rate where the employee entire earnings are taxed at the basic tax rate. The BR tax code is often used when an employee has a second job and should also be applied by an employer who has not received a P45 or P46 for a new employee. The NT tax codes explained is that no tax is deducted from the employee so the basic rate tax does not apply..
HMRC are responsible for issuing tax codes and determine the Inland Revenue tax code by giving everyone the personal allowance, deducting any earnings where tax remains unpaid from the previous year and dividing the result by 10. Variations to this calculation are when other factors affect the tax code.
An emergency tax code is issued to calculate tax when the new tax code is not immediately available. That can occur when the employee does not have a P45 or completes a P46. The emergency tax code 543L is replaced with the new tax code 603L from 7 September 2008 which is the basic tax allowance but is also applied on a week one or month one basis. A week one or month one basis means the employer will calculate tax to be deducted for each pay period and not on a cumulative basis which in effect prevents tax refunds until a confirmed tax code is received to replace the emergency tax code..
It is important for employers to use the correct UK tax code in the PAYE system which is stated on the P45 an employee presents to the new employer when starting employment to deduct the correct rate of tax. If the new employee does not have a P45 for the current financial year then the employer should request the employee complete a P46. The P46 is sent to HMRC who then review the tax coding and issue an appropriate tax code for the employer to use.
The personal allowance usually changes each new tax year and the old Inland Revenue tax codes from the previous year can be used for the first few weeks of the year and replaced with the new tax code in week 7. The rate of tax deducted if the previous year personal tax allowance has been increased is common and the employee receives a tax refund when the new tax code is applied. When the new tax code is known from the start of the new tax year the tax coding can be applied from week one and as the correct tax has been deducted no refund is due.
TerryCartwrightPhoto.JPGTerry Cartwright qualified as a Chartered Management Accountant and Chartered Company Secretary in 1971. A successful business career followed as Head of Finance for major companies in the UK and several consultancy appointments. In 2006 he created DIY Accounting producing Accounting Software for self employed and small companies that use simple accounts spreadsheets to automate tax returns.

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Finance & Capital

Sole Trader Basic Accounting

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In order for a sole trader to be able to keep basic tax accounts certain conditions regarding the status of business accounts must be satisfied. Sales turnover should be under the vat threshold limit, a balance sheet not required, a business bank account not used and no employees employed. If the conditions are met then a simple income and expenditure statement is all that is required greatly simplifying the bookkeeping.
Self employed businesses are not required to maintain a balance sheet. If a balance sheet is maintained then to produce one the business needs to operate an accounting system based upon double entry bookkeeping and involving technical features such as debtors and creditors control accounts. Sole traders who do not need to produce a balance sheet can then maintain their basic accounting using single entry bookkeeping which is basically making lists of the financial transactions.
If a balance sheet is not produced the sole trader must keep a record of all capital expenditure items as part of the basic tax accounts to enable the capital allowances to be claimed each tax year. Receipts need to be retained as part of the basic accounts to enable the annual investment allowance to be claimed in the first year and writing down allowances in subsequent years.
More detailed financial records are required to be kept by the Sole Trader if they are vat registered. The vat threshold for the financial year starting April 2008 is £67,000. Part of the vat rules state that when a business is vat registered they should maintain an audit trail of transactions to support the vat return.
A sole trader does not have to operate a business bank account however if a business bank account is used then accounting records should be kept as the taxation authority, HMRC can ask to see details of the account. This inspection is to verify the transactions support the basic accounts produced. If a business bank account is not used then HMRC do not have a statutory right to view the sole trader personal bank account and that personal; account does not have to be a feature of the sole trader basic accounts.
When a sole trader has employees then as an employer a PAYE system is required which involves maintaining accurate wages records of employees, gross wages, income tax and national insurance deductions and net pay. Various PAYE records must also be maintained such as the working deductions sheet and also payslips must be issued to employees. The payroll records form part of the financial accounts of the sole trader who would actually be better called self employed if they have employees.
In the circumstances where a sole trader has no employees, is not vat registered and does not maintain a business bank account then formal accounts are not essential and a simple income and expenditure account statement can be produced. It is still essential that those sole trader basic accounts are supported with copies of invoices given to customers or records of amounts taken plus documentary evidence to support the payments made to suppliers.
On the sales side the basic accounting can consist of a list of the sales which when totalled produces the sales turnover of the business which is the income side of the income and expenditure statement. As not all sales may be received at the time of sale it is useful to keep a record of the date of the sale, the customer, amount and when and how much the customer has paid for credit control purposes.
Similar to the income side the expenditure can consist of a list of the amounts paid out to suppliers. It is advisable to perform a small amount of analysis of this expenditure as when reported on the self employed tax return the expenditure may need to be analysed according to the type of expense. All expenditure items claimed as business expenses should be supported with documentary evidence of that expense for basic tax purposes.
At the end of the financial year the sole trader income and expenditure account statement will state the total sales with the expenditure side being a list of all the expenditure by type of expense including any capital allowances claimed. Total the expenditure and deduct the total from the sales turnover to produce basic accounting record showing the net taxable profit.
A simple method of keeping the information to produce the income and expenditure account statement is to use an accounting spreadsheet with preset columns for sales and the expenditure types. The sole trader should also consider maintaining a separate list of the assets purchased as part of the basic tax accounts.
TerryCartwrightPhoto.JPGTerry Cartwright qualified as a Chartered Management Accountant and Chartered Company Secretary in 1971. A successful business career followed as Head of Finance for major companies in the UK and several consultancy appointments. In 2006 he created DIY Accounting producing Accounting Software for self employed and small companies that use simple accounts spreadsheets to automate tax returns.

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Finance & Capital

Top Self-Employed Tax Questions Preparing UK Tax

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HMRC enquire into approximately 75,000 self assessment tax return each year which often results in extra tax being payable because business turnover has been understated or non allowable business expenses have been claimed, resulting in interest and penalties on the extra tax for that year and sometimes previous years. Avoid extra taxes, interest and penalties with these top tax questions.
What is Business Turnover?
Sales turnover is the amount the business earns before deducting business expenses including receipts of any kind for goods sold or work done such as commission, tips, payments in kind, fees and insurance proceeds. The turnover to be included in your financial accounts is the date it was invoiced or earned and not the date it was received.
What is excluded from Business Turnover?
Sales turnover excludes sales of fixed assets such as premises, vehicles and plant and equipment. Also exclude business start up allowances which are entered separately on the self assessment tax return. Money introduced to the business is excluded being capital introduced and not sales turnover.
What business expenses are allowable?
All running costs incurred solely for the purpose of the business may be deducted as allowable business expenses for Tax purposes including goods bought for resale, employee wages, premises rent and overheads, administration costs, vehicle running costs. Interest on loans and overdrafts can be claimed as business expenses excluding the capital element of repayments. Higher business expense levels accurately recorded can keep taxable profit below the higher tax rate.
Can the cost of buying and repairing plant and machinery be claimed?
Repairs and maintenance costs are allowable business expenses. The purchase cost including improvements and replacement costs are not allowable business expenses, these costs being subject instead to capital allowances. Depreciation is not allowed and replaced by Capital Allowances for the purposes of calculating the tax payable.
What are Capital Allowances?
Capital allowances are designed to write off the cost of purchasing a fixed asset over the life of the asset rather than in the financial year in which it was purchased. Capital allowances on the majority of assets are based upon a higher rate of allowance in the year of purchase, First Year Allowance with the balance of the cost being written off at a lower rate, Writing Down Allowance. The full cost of any asset may be claimed as an expense in the year it is sold or scrapped less the total of accumulated capital allowances that have been claimed against taxable profits. Any sales proceeds over and above the written down value after Capital Allowances is added back to net profits and becomes taxable. Cars are subject to writing down allowances but not First Year Allowances unless they are classed as commercial vehicles. DIY Accounting has small business software templates that automate the calculation of capital tax allowances.
Can expenses incurred for both business and personal purposes be claimed?
No. HMRC only allow such expenses if the business expenses element of the cost can be separated from the personal element. If you claim the travelling expenses to buy business goods they can be claimed for tax purposes but would be disallowed if you also showed evidence of personal items being purchased on the same journey. Using your home phone is an allowable business expense if you claim specific identified business calls in which case you would also be able to claim a similar proportion of the rental cost.
Can vehicle costs be claimed when that vehicle is also used for personal use?
Vehicle running costs and expenses such as fuel, excise duty, insurance, repairs and breakdown membership may be claimed as business expenses if the vehicle is used solely for business purposes. Travel from home to work is not business use and disallowed. Vehicle running costs, and capital allowances on vehicles, are split between claimable costs and a disallowed cost depending on the proportion the vehicle is used for business and personal use. Parking fees for business purposes may be claimed, parking fines and penalties for motoring expenses are not claimable as business expenses for tax purposes. An alternative to claiming vehicle running costs and vehicle capital allowances would be to claim mileage allowances which at the time of writing are 40p for the first 10,000 miles and 25p per mile thereafter a feature of which the DIY Accounting small business software automates
Can Business trips be claimed?
Travelling expenses and modest lunch expenses may be claimed. Hotel and reasonable costs of subsistence may also be claimed. A subsistence allowance can be claimed if staying with friends or family as an alternative to an hotel. The cost of lunch may not be allowed when staying away overnight. Lunch with clients is regarded as entertainment and is not allowed. If you are accompanied on a business trip by family only your cost is allowable and specifically only if the trip was purely for business purposes. Expenses on combined business and personal trips are not allowed to be deducted as business expenses on tax returns.
Can home costs be claimed?
If part of your home is identifiable as solely for business purposes then running costs can be claimed. The cost allowed is the proportion of the total area of the home the business area occupies. For example, excluding shared facilities of kitchen and toilet if the home has three bedrooms, living and dining room and one bedroom is used solely as an office then 1/5 of home costs could be claimed. The costs to claim would be heat and light, insurance, general and water rates and mortgage interest excluding repayment amounts. Where mortgage interest is claimed the revenue might also claim as a capital gain the increase in value of that proportion of the home, such Capital Gains Tax being subject to tapering relief over time.
How do I treat business goods taken for my own use?
Any business goods taken for personal use should be added to sales at normal selling prices including items supplied to family and friends at less than normal prices. He cost of providing services for family and friends is not allowable as a business expense.
Can I deduct my salary or drawings as a business expense?
You cannot deduct your own wages, personal national insurance or drawings from the business as a business expense as these are distributions of the business income after net taxable profit has been calculated and not allowable expenses before tax..
Can I deduct my partners wages?
Yes partners wages can be deducted as a business expense although there are rules which would be applied in such circumstances to ensure the amount paid is both real and reasonable. The business would need to operate a PAYE scheme for that employee, deducting income tax and national insurance, the work carried out must be real not invented and the rate paid reasonable for the nature of the work and the time spent. Evidence may also be required that the amounts were actually physically paid to that partner, for example in the form of a cheque.
Should Tax Credits be included?
No these are excluded from business profits although the level of credit received may subsequently be changed in the light of the actual business profit earned compared with the amount declared when the Tax Credit was applied for. HMRC do check that the net taxable profit shown on the tax return is the same as that declared when the Tax Credit was claimed.
Can I claim expenditure incurred prior to trading commencing?
Yes business expenses incurred up to seven years prior to trading commencing can be claimed. The actual date of the expenditure should be recorded although all pre-trading expenditure is treated as having been incurred on the first day of trading.
Are pool cars taxable?
Company cars are taxable as a taxable benefit while pool cars are not taxable. To qualify as a pool car, private use should be incidental to business use, the vehicle should not normally be kept at the employee home and the vehicle must be available and used by more than one employee.

TerryCartwrightPhoto.JPGTerry Cartwright qualified as a Chartered Management Accountant and Chartered Company Secretary in 1971. A successful business career followed as Head of Finance for major companies in the UK and several consultancy appointments. In 2006 he created DIY Accounting producing Accounting Software for self employed and small companies that use simple accounts spreadsheets to automate tax returns.

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Finance & Capital

Introduction To Vat Registration And Accounting For Value Added Tax

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Value added tax is the tax amount added to the value of goods and services by a vat registered business when sold or transferred. Vat is not charged by businesses that are not registered for vat. This guide covers the vat threshold, accounting for value added tax, registration and submitting the quarterly vat tax return online
When the sales turnover of a business reaches the vat threshold, currently 64,000 pounds per annum until reviewed in April 2008, then registration for vat is compulsory. If financially beneficial, businesses can register for vat prior to sales turnover reaching the vat threshold.
When a business registers for vat it becomes responsible for charging vat at the correct percentage on every sales invoice and transfer of goods and services and also maintaining accurate financial accounting records of the vat charged hat are subject to vat inspections. If the sales turnover has breached the vat threshold that business is liable for the vat on sales even if it has not charged the customer.
The vat charged to customers is called output tax and the vat on purchases is called input tax. When a business has registered for vat in addition to maintaining records of sales and input tax it must also keep accurate financial records of purchases and input tax in order to calculate the vat payment to be made. The amount of vat to be paid each quarter is the difference between the sales output tax and the purchases input tax and is paid quarterly to HMRC.
Specific types of business transactions are exempt from vat such as insurance and loans. If the business only supplies exempt items then the business cannot register for vat to reclaim the input tax paid on purchases.
Registering voluntarily for vat when the sales turnover is below the vat threshold is a financial planning decision that each small business should consider. There are both advantages and disadvantages to a voluntary registration and the timing of the registration may also be a feature to be taken into account.
The advantages include being able to reclaim the vat input on purchases which is otherwise lost as a financial cost to the business. However as a consequence of a voluntary vat registration that business would also have to charge vat on all its sales invoices.
If the business has mainly vat registered clients then charging vat would probably not affect sales volume and has the advantage of enhanced credibility within the business community in which it operates. Charging vat to non vat registered clients such as members of the public would increase the amount being charged and make the small business less competitive.
When a business moves from being non vat registered to being vat registered changes may have to be made to the bookkeeping records being maintained. Not normally a problem if accounting or bookkeeping software is being used provided the financial system employed can fulfil the enhanced requirements being vat registered.
The accounting requirements of being vat registered require the business to issue vat invoices which show the name and address of the business, the vat registration number, sales invoice date and the vat being charged. An accounting record must be kept of all sales invoices issued in a format that permits a subsequent audit check when the customs and excise visit to conduct an audit check of the vat records.
In relation to purchase invoices and reclaiming the vat input tax vat may only be reclaimed on those invoices for which the business has a vat purchase invoice. A valid vat purchase invoice contains the vat number of the supplier who issued the invoice. An accounting record must be kept of all purchase invoices showing the vat output tax being reclaimed.
Vat returns are normally required to be prepared on a quarterly basis and submitting to customs and excise before the end of the following month. If registered for the online service vat returns can be filed online. There are benefits to filing the tax return online in that many businesses may receive up to 7 days longer than normal to file the vat return if the vat payment is being made electronically.
There are penalties for failing to submit the vat tax return on time and interest may be charged on the outstanding amount. When a vat return is not submitted on time an assessment may be raised which has to be paid as a legal debt until such time as the return is submitted and the amount due corrected.
It is important to submit the vat return on time even if there is a problem paying the full amount. Failing to submit on time brings the business to the attention of the tax authority that is more likely to inspect and investigate persistent offenders. A business can be expected to receive an inspection every three years however in the worst case scenario of a delinquent vat registered business the customs and excise could inspect every quarter.

TerryCartwrightPhoto.JPGTerry Cartwright qualified as a Chartered Management Accountant and Chartered Company Secretary in 1971. A successful business career followed as Head of Finance for major companies in the UK and several consultancy appointments. In 2006 he created DIY Accounting producing Accounting Software for self employed and small companies that use simple accounts spreadsheets to automate tax returns.

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Finance & Capital

Accounting Software Can Be Sophisticated Or Simple Bookkeeping Software

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Accounting software records the financial transactions of a business and provides financial control to achieve the profit and loss performance required. The correct choice is dependent upon the size of the business and degree of sophistication and financial control required.
Accounting software is a system of recording financial transactions on a computer across a full range of accounting options almost invariably dependent upon the size of business being catered for. Accounting software can vary from multi million pound solutions for major public companies to simple managed lists of income and expenses.
The requirements from accounting software are diverse with the most complex and comprehensive financial accounting packages incorporating financial reporting information and managed by teams of qualified accountants supported by accounts clerks, bookkeepers and substantial input from automated data sources. At the other end of the scale a self employed sole trader might use accounting software themselves and produce a set of financial accounts for the year in an afternoon.
Different accounting standards are required from accounting software dependent upon the fitness for purpose and client needs. Double entry bookkeeping automated through a database system and probably arranged in financial modules would normally be the choice of the majority of public companies. Single entry bookkeeping would not be an acceptable accounting solution for a limited company due to audit requirements and statutory obligations.
Single entry bookkeeping does however have its place in the market place for the smaller less complex businesses who maintain financial control through a close intimate knowledge of every financial transaction. The main objective of a sole trader is more likely to be the production of the tax accounts and complete the periodic and annual tax return forms.
The most sophisticated level of accounting software in the largest companies mirrors the accounting functions in those organisations with various financial modules for accounts receivable, accounts payable, stock control, general ledger and fixed assets. These accounting modules may also be integrated with non accounting functions such as production and dispatch functions and also divided into separate modules within the accounting function.
In larger companies the sales daybook and data entry of sales turnover would often be the responsibility of one department while the accounts receivable function might be split with a specialist credit control function within that accounting module. A further division may also include sales administration and customer records. Similarly the accounts payable function might be split between the purchasing department, accounts purchase invoice department and a legal function for overdue payments.
Accounting software for smaller companies and organisations is commonly a system of data entry of prime transactions which include sales income, purchase expenses and cash and bank transactions. The prime entry of these documents being to a database which automates the double entry accounting principles and produces both accounts receivable, accounts payable and general ledger databases.
Some accounting knowledge is usually required tom operate a database accounting software system and that financial knowledge is usually available within the company as most companies that use database accounting software also employ a bookkeeper or accounts clerks to input data and in slightly larger small companies also qualified accountants to manage the accounting function.
The need for accounting knowledge in a database system is partially to understand the data entry principles and the relevancy of the rules that need to be followed but essentially understanding of accounting principles is required to understand what is happening ton the information after input. And most important, a qualified accountant has the financial knowledge, training and experience to know what the system should be producing and how to query the database to retrieve that information.
In addition to inputting the prime income and expenditure details the most benefit of a database accounting system is the level of financial control the information it contains can provide the company management and financial directorship. The accounting function also has the security of producing trial balances, periodic profit and loss accounts, balance sheets and other financial and statements for tax and control purposes.
Accounting software packages requiring little or no accounting knowledge are available.
Small limited companies must obtain accounting software based upon double entry accounting principles as in addition to producing a profit and loss account and a trial balance to demonstrate accuracy and integrity of the financial records plus a balance sheet is required for reporting purposes. Accounting standards require the limited company to have a system of financial control and accounting software is an essential tool in achieving this.
Some accounting knowledge either from the management or outsourcing the bookkeeping services is usually required with even the simplest database accounting solutions eve3n if this requires the understanding of what accounts receivable ledgers, accounts payable ledger and control accounts mean.
There are other possibilities and those businesses with a minimum of accounting knowledge can consider spreadsheet based accounting software. Accounting software compiled from spreadsheets is less flexible and often does not have the range of options a database system has due to the lack of database queries available. These disadvantages of flexibility being compensated by the fact that all entries are visible, transparent and changes can be made more easily.
Financially at the sole trader and self employed end of the business spectrum then the requirements from accounting software may be completely different. Gone are the sophistications of control accounts, trial balances and many aspects of financial control. The most important aspect of self employed accounting software is often to produce a set of accounts for tax purposes.
Self employed small business that do not require a balance sheet can use accounting software based upon single entry bookkeeping rather than double entry and with the reduced requirement for financial control then less financial queries to the system are required. In these respects the simpler an accounting solution the better and in this market an accounting solution written on spreadsheets that can produce the net taxable profit would meet the requirements.

TerryCartwrightPhoto.JPGTerry Cartwright qualified as a Chartered Management Accountant and Chartered Company Secretary in 1971. A successful business career followed as Head of Finance for major companies in the UK and several consultancy appointments. In 2006 he created DIY Accounting producing Accounting Software for self employed and small companies that use simple accounts spreadsheets to automate tax returns.