Help, my Corporation Tax bill has increased due to a S455 tax charge. What is this and what can I do?

Many years ago, if you had your own company, it was possible to build up wealth in that company and then lend it to yourself indefinitely, thereby putting off the date it would become subject to income tax.

HMRC were long aware of this ploy and in 2016 extended the rules with all Director Loan Account (DLA) transactions in close companies being brought in to scope of the anti-avoidance legislation under Section 455 of the Corporation Tax Act 2010 (S455).


What are the rules?

If your company lends you money (posted to your DLA) and this is not repaid within 9 months of the company’s financial year end, then you will have to pay a S455 Corporation Tax charge.

The S455 charge is currently 33.75% of the loan value, ouch!

How can I avoid this S455 tax charge?

To totally avoid any charges you should clear your DLA within 9 months of the financial year end.  There are a few options to do so:

1) Assuming the company has sufficient profits, you can declare a dividend to clear the Director’s Loan Account.

2) If you don’t have available profits for a dividend, then you can repay the money into the business bank account from your personal account.

3) If you don’t have the funds personally then you may need to consider borrowing from friends / family, taking out a loan, or selling personal assets to raise funds.

Note.  If you repay the director’s loan then you cannot withdraw the funds again until after 30 days has passed, otherwise the charge still applies.

What happens if none of those options work?

In the event that the loan is not repaid within 9 months of the financial year end you will have to pay the Corporation Tax charge, which will also be due to HMRC 9 months after the financial year end.

The good news is that once the Director’s Loan Account has been repaid, perhaps by declaring dividends from future profits, then the S455 tax charge can be reclaimed from HMRC.  This can take over a year however so best to try and avoid the situation in the first place!

Why have I not seen this before?

This legislation has been around for a while and we frequently mention this in our annual salary guides, in newsletters and on the website, however within a4c we have noticed a dramatic increase in the number of directors borrowing more money than is available from their companies, possibly driven by the current cost of living crisis.

How can I protect myself?

It is important to remember that, if you are the director and shareholder of a limited company, the company money is not your money.

Whilst you might look at the company bank balance and believe that funds are available for you to withdraw, it is important to remember that your taxes must be paid first, including Corporation Tax, PAYE, CIS and VAT.  After this your suppliers will need paying along with any finance agreements / bounce back loan payments etc.

Can a4c help me?

Assuming that your accounting records are kept up to date in Xero, then we can review the available funds with you to determine if you are at risk of incurring a future S455 charge.

We can enable the account watchlist feature in Xero too, so that you can see the running balance of your Director’s Loan Account on the Xero Dashboard.

Understanding your numbers can feel daunting however we are always available to help explain how your accounts work, so that you can feel in control.

Please don’t hesitate to get in touch if you have any questions or would like to book a review meeting with Esther.

What is the VAT threshold and when do you need to register for VAT?

The VAT threshold is currently £85,000.  Your business must register for VAT at the point that your rolling 12-month turnover exceeds this threshold.

Some businesses may choose to register for VAT voluntarily before they hit £85,000.


What is a rolling 12-month turnover?

It is the total you’ve received in sales income in the last 12 months.

Many people get caught out because they think the threshold applies to a calendar year or business trading year but that’s not the case.

Generally speaking, when your monthly income exceeds £6,500 you need to keep a close eye on things.

Our advice is to create a spreadsheet which shows the monthly turnover for the last 12 months, then each month you add the latest month’s total income to the bottom of the list and then deduct the income from the month at the top of the list, you’re always getting a total for the rolling 12 months.

For example:

MonthTurnoverRolling 12-month totalRolling 12-month totalRolling 12-month total
1£5,000.00£81,920.00XXXXXX
2£5,100.00£84,770.00XXX
3£6,500.00£87,820.00
4£7,000.00
5£7,200.00
6£6,500.00
7£7,100.00
8£7,000.00
9£7,150.00
10£7,500.00
11£7,870.00
12£8,000.00
13£7,850.00
14£8,150.00
15£7,500.00
16£7,825.00Register for VAT from the 1st of this month

 

When do you need to register from?

You have to register within 30 days of the end of the month when you went over the threshold. Your effective date of registration is the first day of the second month after you go over the threshold.

 

How do you register?

There’s an online form to complete, which can be found here – https://www.gov.uk/register-for-vat

How long does the VAT number take to arrive?

Currently the VAT registration number is posted to businesses within 4 weeks of the registration submission.

You should inform your customers straight away that you’re registering for VAT.

Can invoices be sent before the VAT number arrives?

Yes, you should start including a 20% uplift in your sales prices from the date of your VAT registration, however you cannot issue a VAT invoice until you have your VAT number.

The best way to manage this is to send customers a pro-forma document, this should include the VAT element.  Then once your VAT number is confirmed you can re-send a VAT invoice.

For example:

Proforma Invoice

Net£1200
Total£1200

 

VAT invoice

(re-issued once the VAT registration number is confirmed)

Net£1000
VAT @ 20%£200
Total£1200

 

When will the first VAT return be due?

At the point of registering for VAT you will have selected which quarters you want to work within, these are the three months ending as follows:

  • March, June, September, December
  • April, July, October, January
  • May, August, November, February

 

Your first VAT return will be at the end of the current quarter.  You have a month and 7 days to prepare and file your VAT return.  For example, a VAT quarter that ends on 30th June will need the VAT return to be filed by 7th August.

How are VAT returns filed?

HMRC requires all VAT returns to be prepared and submitted using Making Tax Digital compliant software.

At a4c we provide clients with Xero accounting software.

We love this software for its ease of use and efficiency when recording accounting transactions and having key business reporting at your fingertips.


More help

If you need to register for VAT or have any questions about the VAT registration process then please feel free to get in touch on 01737 652 852.

The advice that we give will only be as good as the information, upon which it is based. 

We respectfully request that as a client of a4c you commit to the following, in order to give us the best chance of providing you with relevant advice and first-class accounting services:

  • Please ensure that you provide accurate and complete data regarding your sources of income and expenditure, for trading businesses, this includes bank statements to confirm balances at the financial year end
  • Where applicable, book-keeping software, such as Xero, will need to be kept up to date, with bank feed connections maintained
  • Receipts / supporting paperwork for purchases and loan agreements should be provided electronically by email or submitted to Dext / Xero, as appropriate
  • If you are bound by the rules of the Construction Industry Scheme, then we require evidence of payments in the contractor / subcontractor chain 
  • From time to time we will raise queries with you by email / telephone in relation to our accounting services and we request that you respond to these requests for information within a timely manner (ideally within a day or two).

Don’t be afraid to ask…

Often people are embarassed to ask questions, due to a fear that they should already know the answers.  At a4c our approachable team will ensure that your queries are dealt with in a sympathetic and understanding way.  We do our best to remove the stuffy accounting jargon, to explain things to you in clear terms.

If you need clarification on any of the above then get in touch on 01737 652 852.

The Government Gateway is a central place where you can register to use online government services.

This registration system was changed on 07/07/22 to allow driving licenses to be used to verify your identity, which has made registering for a Government Gateway account far easier for you.

Do I need one?

It is not mandatory, but we would recommend creating an account to all our clients.  It’s free to do and gives you visibility of your tax position.

You may find that you need to create one automatically in the following circumstances:

– You are required to send a self-assessment tax return

– You have set up a private limited company that needs to pay corporation tax

– You operate a business where you have started to employ people

– You operate a business that needs to charge Value Added Tax because your taxable revenue is over £85,000

 

How do i set up my Government Gateway account?

  • Visit the HM Revenue & Customs – GOV.UK website
  • Search Government Gateway then select HMRC services: sign in or register
  • You’ll need at 2/6 of the following identifications to verify you to register:

– Tax credit claim details

– P60 or most recent pay slip

– UK passport

– Information on credit file (such as loans, credit cards or mortgages)

– A self-assessment tax return (within the last 3 years)

– GB driving licence (from DVLA or DVA)

  • Remember your log in ID and password! This is VERY important as you are only shown your Government Gateway login number once, so we strongly recommend that you take a screen shot or write it down.

 

What are the benefits to me?

A Government Gateway account enables you to have full access of HMRC online services, which lets you view your:

– Personal tax account

– Business tax account

– Pay As You Earn (PAYE) tax

– Pension schemes

– VAT

– And more…

Having a Government Gateway login will also ensure that all submissions made online are secure, so no more hassle of mailing important documents to HMRC only to find they have been lost in the post.

This online service provides a free, simple and quick method of submitting your important documents to HMRC.

For more information feel free to call the a4c Team on 01737 652 852.

Running your own business is extremely exciting, but can also seem a little daunting.

There is plenty of information available to you online, but knowing where to look and trawling through irrelevant content can be very time consuming, not to mention confusing.

At a4c we have created this simple, straight-talking guide to highlight the most important things you need to know as a business owner, but we are also on hand to answer any questions you may have.

Record-keeping

There is a legal requirement for businesses to keep financial records (money spent and money received, assets owned, debts or loans, stock levels etc).

Evidence is required in original format, i.e. the receipt or invoice, and records must be kept for at least 6 years.  Failure to do so can result in a fine from HMRC.

Calculating Profits

You may have heard the phrase ‘income less expenses equals profits’.

This is the foundation that your trading accounts are built on. The tax you pay will be calculated from the profit.

Income

Income is also referred to as Revenue or Turnover.

This is the value of sales made for the provision of your products or services.

The simplest way to record these transactions is by issuing invoices and checking that funds entering your bank account match the invoice total.

Expenses

There are a wide-range of items that can be classed as expenses.

These could include items used by the business such as equipment or materials, it might cover the purchase of postage stamps, or paying bills such as insurance premiums and accountancy fees.

The key with expenses is that they are incurred ‘wholly, necessarily and exclusively’ in the line of business. (This is a HMRC term you will come across frequently.)

Managing your time

Most business owners would agree that the downside to running your business is the administrative burden.

At a4c we aim to relieve as much of the stress as possible but there will still be elements that rely on your input.

The key to success is being organised from day one and putting simple processes in place that you can stick to, such as Xero Accounting Software and  the Dext receipt management app.

If in doubt…

Remember that a4c offer our clients unlimited accounting support, therefore if you have any questions about your accounts or business transactions then please don’t hesitate to give us a call on 01737 652 852 or email info@a4cgroup.co.uk

Probably the question we get asked the most within a4c!

Small Business Tax Relief

The government has plenty of tax reliefs available to small business owners​ and so we’ve listed below those most applicable to you….

(And remember, where we prepare your tax returns, we’ll include any tax reliefs applicable, as part of our tax return production process.)

Capital Allowances​

You can claim Capital Allowances when you buy assets that you keep to use in your business. This includes equipment, machinery and business vehicles (known as “plant and machinery”). You can deduct some or all of the value of the item from your profits before paying tax.

Annual investment allowance​

Annual Investment Allowance is a form of Capital Allowance. You can deduct the full value of an item that qualifies for AIA from your profits before tax. One major exception is business cars. The criteria is strict, so be sure to research thoroughly.

Business rates relief​

Some business properties may be eligible for discounts on business rates. There are eight possible reliefs, which you apply for through your local council.

Employment Allowance​

Employment Allowance allows eligible employers to reduce their annual National Insurance liability by up to £5,000. If your employers’ Class 1 National Insurance liabilities were less than £100,000 in the previous tax year, you may be eligible.

Creative Industry tax reliefs​

If you are a creative business, you may be eligible for one of eight corporation tax reliefs. These allow eligible companies to claim a larger deduction or, in some circumstances, claim a payable tax credit when calculating your taxable profits.

Business Asset Disposal Relief​

You may be able to pay less Capital Gains Tax when you sell all or part of your business. Business Asset Disposal Relief (previously known as Entrepreneur’s Relief) enables you to claim 10% on all gains on qualifying assets.

R&D tax credits​

Research and Development (R&D) is a tax relief that can reduce a company’s tax bill or provide a cash sum based on how much a company spends on R&D. The scheme specifically looks at businesses that are advancing science or technology.

 

For more information on these reliefs, or other ways to save tax, then get in touch:

 

01737 652 852

info@a4cgroup.co.uk

 

I am sure you are aware of what a company car is and how it can benefit you. But this guide will break down the options you have when owning a company car and whether electric is the way to go…

Types of electric cars

There are three different types of electric cars:

  • PEV / BEV (Battery Electric Vehicle). A Vehicle that purely runs on an electric battery which gives out zero emissions.
  • HEV (Hybrid Electric Vehicle). A Vehicle that runs on a petrol- or diesel-powered engine and also a small electric battery which usually has a range of only a few miles.
  • PHEV (Plug-in Hybrid Electric Vehicle). A Vehicle that has a large electric battery which needs to be charged from a source, but in turn has a higher range of up to 280 miles.

 

Benefits of having an electric car

Road Tax

Not only is it good for the environment it is also good for your bank account!

Owning a PEV / BEV means you do not have to pay any road tax (Vehicle Excise Duty) and for HEVs and PHEVs the road tax is likely to cost between £0 – £150 depending on Co2 emissions.

Capital Allowance Tax Relief

When buying an electric car, you can claim 100% of the cost of the vehicle to be offset against Corporation Tax or Income Tax in the year of the purchase.

You can also claim a 100% first year allowance for Charging-Ports, meaning that your business can pay for the installation of a charging port for your electric car at your house! But only up until the 31st March 2023 for corporation tax and the 5th April 2023 for income tax.

Running Costs

With the cost of fuel increasing weekly it is proving far more cost efficient to travel by green power (albeit electricity costs are also on the rise!)

Congestion Charges

The daily charge for driving within central London is now £15 per day, including weekends!  Where a car is pure electric or Co2 emissions less than 75g/km you  can receive a 100% congestion charge discount.

London’s Ultra Low Emission Zone

The ULEZ came into force a couple of years ago and requires drivers to pay a fee to drive within the zone.  Electric cars are exempt from this.

 

Company Car Tax – P11d Reporting

As you may be aware, a P11d is used to report to HMRC instances where employees (including directors) have received a personal benefit in kind, this includes company cars.

The employee then pays tax on the benefit in kind (BIK) value and the business pays Employer’s NIC.

Cars with petrol engines have a BIK rate, based on their Co2 emissions, this can be anything up to 37% of the value of the vehicle.

For diesel engines the BIK rate is as above, but with a 4% surcharge!

Hybrid cars have a lower BIK rate, depending on their mileage range.

Pure electric cars have a BIK rate of 2% (this was 0% for a few years but has recently increased and is set to hold at this rate until April 2025).

Here are some popular brand examples and their BIK rates:

37%  VW Golf GTI 2.0 TSI

31%  BMW 120d M Sport

12%  Toyota Prius Plug-in Hybrid

2%  Tesla, any model

 

So how much will a company car cost you in tax?

For an example on how to calculate the benefit in kind tax due on your car visit our online company car tax guide.

Simply take the value of your chosen vehicle, apply the BIK rate and use the formulas to calculate the potential Tax and Employer’s NI due.

For further information, or if you have any questions then do not hesitate to contact us:

  • 01737 652 852
  • info@a4cgroup.co.uk

The benefit of Air Miles

Have you considered rewarding yourself with tax-free Air Miles (or other credit card reward schemes)?  Particularly if all you have to do is help spend the company’s money! 

So how does this work?


With your regular expenditure, points or Air Miles slowly accumulate on your credit card statement.  But if you settle business expenses on the company’s behalf using on your own credit card the rewards can soon mount up.

The company reimburses your expenses, leaving you with, say, Air Miles to convert into free flights, etc.

But is this really tax-free?

You would have thought that this benefit in kind, obtained through your employment with the company, would have already been picked up by the Taxman. This is especially so as the Air Miles, when used, have a clear market value for possibly charging you income tax and the company employers NI. But he hasn’t – yet.

If an Inspector did call and does take an interest in such benefits, what could you say?

Consider mentioning a piece of case law called Pepper v Hart. The decision from this case applies to benefits not specifically covered by legislation, and states that the value of the benefit is calculated as the extra cost to the company of providing it, not its market value.

In the Air Miles example there is a benefit but there is no extra cost to the employer in obtaining them. Hence there is nothing to tax.

Warning! Check that the company has not had to pay a supplementary subscription fee for the employee to benefit from such a scheme. It is likely that such a subscription fee would be taxable.

In the coming weeks, we will be preparing and filing the P11d reports for 2021/22 for those Employers that need it.


What is a P11d and who needs to submit one?

As you may be aware, a P11d is used to report to HMRC instances where employees (including directors) have received a personal benefit in kind.

Where this is the case additional National Insurance needs to be paid, at 13.8% on the value of the benefit.

Examples of such benefits include:

· Medical insurance / treatment
· Gym membership
· Company car
· A loan to a director over £10,000
· Relocation expenses in excess of £8,000

For more information on P11ds visit https://www.gov.uk/employer-reporting-expenses-benefits/overview.

If you have submitted a P11d previously then HMRC will expect a return each year, even if there are no further benefits.  Failure to report may result in you receiving a penalty notice.

Even if you don’t receive a letter, it is your responsibility to report any benefits paid to employees and so please get in touch if you think you might need to make a submission, or if you have any questions.

The filing deadline is 6th July 2022.