Budget Update and How You Can Save Tax

The budget was well received in the small business community, and there are changes that you can make FROM TODAY that will mean that you pay less tax:

MILEAGE RATE

The maximum mileage rate that HM Revenue & Customs has allowed for many years has been 40p. This rate has been increased to 45p, effective from 6 April 2011. To implement the change in My Bookkeeping Online, go to My Users (in My Settings on the main navigation bar) select each of the Users in turn and then, in the mileage rate box, select 45p and hit save. With the change made, the mileage claim calculator in My Purchases will calculate the claim based on the 45p rate.

DIRECTOR SALARIES

The salary that directors can draw without paying income tax or national insurance has increased from circa £5,700 per annum to £7,000 per annum (or £584 per month).

INCORPORATE

The further bit of good news is that the Corporation Tax small companies rate has reduced from 21% to 20%, and this will feed through into tax returns for years that end after 1 April 2011.

In addition, National Insurance rates have increased, thus being a sole trader will be more expensive.

The benefits of incorporating have, in my view, now improved to the point that it can be considered to be sensible tax planning. For the last few years, the tax benefits of incorporating have generally been offset by increased administration costs. Therefore, in deciding whether to incorporate or not, it was necessary to consider the commercial benefits as well as the tax benefits. As a result of the 2011 budget, the tax and NI benefits are significant enough to make incorporating a bit of a no brainer.

HOW MUCH YOU SAVE IN TAX

Overall, if you do 1,000 business miles per year in your own car, you are a company director and you pay, say, £5,000 per year in Corporation Tax, the tax benefits will total £508 per annum which, as they say, is better than a poke in the eye with a sharp stick.

It is nice when a budget delivers some good news!

Wayne Rooney, his “2% tax liability” and why HMRC won’t be losing sleep

The Sunday Times ran a front page article this weekend about how Wayne Rooney pays  just 2% tax on a portion of his earnings.

The article says that a company 100% owned and controlled by Rooney (“Rooney Ltd”) receives a portion of his pay from Manchester United that can be fairly attributed to his image rights.

Thus, the payments are made to the company on invoice, and with no deduction for PAYE or Employees National Insurance. In addition, Manchester United pays no Employers National Insurance.

Rooney Ltd has apparently lent Rooney £1.6m in two years, and the Sunday Times article made a big deal out of the fact that the only tax that Rooney has personally paid on this income is at 2%.

This is true, because the loan will be treated as a Benefit in Kind. As a result, an assumed interest rate of 4% will be applied and Rooney will pay tax at 50% – thus 2% overall.

However, I doubt HM Revenue & Customs (“HMRC”) is losing sleep over the loans. Why?

Rooney Ltd will pay corporation tax at 28%. This is akin to income tax because the company is 100% owned by Rooney.

In addition (and this is the bit that the Sunday Times article overlooks) if the loan made to Rooney is not repaid within 9 months of the year end in which it was made, Rooney Ltd will need to pay 25% of the loan outstanding as additional corporation tax.

So, to run the numbers: To be able to loan Rooney £1.6m out of taxed profits, Rooney Ltd must have received income of £2.22m and paid corporation tax on this amount at 28%, therefore £622k. In addition, the company will pay £400k of additional corporation tax when the loan is not repaid. Add these two amounts to the 2% Rooney will pay individually on the benefit in kind (£32k) and the total tax handed over to HMRC is £1.054m – an effective rate of 47.4% on the £1.6m, just 2.6% less than Rooney would have paid anyway.

There are a lot of good points made in the article, but it is a shame that the facts were not fully researched, because the receiving of loans from an image rights company is not the huge scam it is made out to be. The scandal is probably more the whopping fee advisors will have charged Rooney for largely ineffective advice.

HMRC are actively hunting down these image rights companies, but this is because of the National Insurance that is lost – but that is a different story…

Contactless Cards – Good for retailers and consumers

Contactless cards are here to stay. Reports over the weekend say that 12 million will be in issue by the end of the year, primarily marketed by Barclaycard.

So what are contactless cards? If the scheme is supported by the retailer, it allows goods up to the value of £15 to be purchased using a debit or credit card without the need for:

• Either a signature, or
• For the card to be inserted into a terminal for the chip and pin process.

The card simply needs to be held up against a secure reader positioned by the till in the shop, and the payment is processed automatically in less than a second.

The payment process uses the same technology used in the Oyster card– the electronic payment system used on the public transport network in the Greater London. So there is a track record of the software working, and of consumer acceptance. The process is also widely used in continental Europe.

The new system is great news for retailers, for a number of reasons:

1. It is quicker than either cash or chip and pin. This will mean less queues and lower staff costs.
2. There will be less cash to store, manage and bank.
3. The outlets will be able to get away with lower floats (A “float” is a reserve of coins and notes kept in store so that change can be provided to customers when they buy using cash). This may sound like a minor point, but if you are in retail, you will know what a nightmare floats are. Large floats are needed to get through busy trading periods, and it is a nightmare when you run out.

Consumers will be happy because you will be out of the shop, or away from the bar, faster.

Some security concerns have been voiced by consumers, but Barclaycard has built in what it considers to be an acceptable level of security:

1. If a certain number of purchases below £15 are made in a certain time period, a safeguard will kick in that requires the chip and pin to be used on the following purchase.
2. It will refund any fraudulent purchases.

Barclaycard are the first provider to circulate the cards widely in UK. MBNA will be next, and no doubt the rest of the providers will follow suit.

I think the idea is great – anything that saves the retailers money and improves the shopping experience for customers has got to be good!

No Purchase Ledger Required

Purchase ledgers have two functions:

• Record invoices received from suppliers, and payments made to them.
• Monitor amounts owed to suppliers.

The degree of complexity required of a purchase ledger depends on the size of the business.  For example, a shop that receives 30 supplier invoices a month will have very different requirements to a national chain of shops that might receive 2,000 supplier invoices a month.

My Bookkeeping Online is designed to help the significant proportion of businesses that are at the smaller end of the spectrum, and have simple bookkeeping requirements. There are over 3 million of them in the UK.

As a result, to keep the software simple, there is no computerised purchase ledger – instead we set out in the support library a simple paper-based purchase ledger that any small business owner can use.

The following points under-pinned our decision to go down this route:

1. Small business owners with no bookkeeping experience will not have the time, the energy or the inclination to run a computerised purchase ledger. They are after a simpler solution.
2. Those that run a purchase ledger on accounting software will either require expensive training, or get it wrong, or both! If they get it wrong, then their accountant will have to fix the mistakes, leading to further costs.
3. Paper-based purchase ledgers were valid before computers and they continue to be valid now. Using a computer does not generally simplify the process for small businesses.
4. The most important reason for maintaining a purchase ledger is so that the business can keep a handle on its liabilities – IE know exactly what it owes its suppliers at any time. This can be just as easily done using the paper based filing system we recommend.
5. It is much simpler to record purchases on accounting software once they have been paid (either through the bank statement or by the business owner personally) and then, when required, draw up a list of creditors at the relevant date and enter the summary details into the software as a journal. The journal might take 10 minutes.

Don’t get me wrong – computerised purchase ledgers are essential in larger organisations, where business owners are a step away from the day-to-day operation of the business, and it is vital to ensure that details of all purchase invoices are recorded, completely and accurately.

However, for small businesses, where it takes 10 minutes and a calculator to add up the total value of the invoices in the unpaid invoice file, a paper-based purchase ledger is a far more practical solution.

 

Recording sales if you are in the retail or hospitality industries

Occasionally, I pick up on bits of functionality in My Bookkeeping Online that are really valued by users.

On this particular occasion, an accountant brought it to my attention that some rivals do not offer the ability to record a cash sale in the sales ledger without raising an invoice – so I thought it would be worth passing on in a blog how My Bookkeeping Online works, just to make sure that business owners in the retail and hospitality sectors – and their accountants – are aware of what the software can do.

In My Bookkeeping Online, we have a button in My Sales (the sales area) called Add Cash Sale. Click on this button to record details of a transaction where an invoice is not required – for example the day’s take for a coffee shop, or for a market stall.

In addition, we have thought long and hard – and I have applied my experience as a pub owner – to make the bookkeeping around a day’s take as simple as possible:

1. Whether you enter the net or gross amount, the VAT is calculated for you automatically
2. You can break down the cash sale into different categories – for example a pub might want to record wet sales and dry sales on a daily basis.
3. The ability to analyse a take into different categories is also very useful if you have stock lines that attract different rates of VAT. For example, if a portion of the daily take for a coffee bar is take away food sales (on which VAT is not charged).
4. Once the cash sale has been recorded, you can allocate against it:
   1. Multiple amounts paid into the bank (IE cash paid in and amounts paid in by your credit card merchant provider)
   2. Expenses paid from the till (e.g. staff or the window cleaner). The clever bit here is that the software will update the relevant expense account in the P&L at the same time.
   3. Cash taken from the till by the business owner for private use. Again, the software will update the business owner’s drawings account at the same time.

A final note on recording a cash sale: Overs and unders – or the amounts by which the cash in the till differs from the z-read – are simply dealt with too. In Add Cash Sale, add a category called “Overs/Unders” or something similar and record the details for each day. This will ensure that the till always reconciles to the cash received, and that you can to monitor and summarise the overall affect of overs and unders over the course of a week, month or year.

Simple, efficient bookkeeping.