Articles this month for eBay traders, professional
partnerships and husband and wife businesses. Also a short
note for restaurant owners on the tax and national insurance
consequences of staff receiving tips!
Trading on eBay
Will the tax man take an interest in your eBay trading? The
answer is yes and no!
Yes it is a topic which may arise during any self assessment
enquiry - the Inland Revenue may take an interest if:
-
You are an established trader.
-
You buy goods at other sales, or on eBay, with the intention
of selling them on at a profit.
-
You sell sets or collections to an individual or connected
individuals where the total proceeds exceed £6,000.
-
You sell a personal car registration number, classed
as an intangible and therefore fully liable to CGT.
The taxman will NOT be interested in sales of your own personal,
unwanted, household items either bought and sold for less
than £6,000 or where their life is less than 50 years. Such
disposals are covered by the "chattels exemption".
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!
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.
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.
Tax Diary June/July 2005
1 June 2005 - Due date for corporation tax
due for the year ending 31 August 2004.
19 June 2005 - PAYE and NIC deductions due
for month ending 5 June 2005. (If you pay your tax electronically
the due date is 22 June 2005)
1 July 2005 - Due date for corporation tax
due for the year ending 30 September 2004.
6 July 2005 - Ensure forms P11D(b), P9D
and P11D are submitted to the Revenue.
19 July 2005 - PAYE and NIC deductions due
for month ending 5 July 2005. (If you pay your tax electronically
the due date is 22 July 2005)
19 July 2005 - Employers Class 1A National
Insurance is due for payment, year to 5 April 2005
31 July 2005 - Second payment on account
due for self-assessment tax 2004-2005.
Summing Up
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Summing Up - PLEASE NOTE: The ideas shared with you in this
email are intended to inform rather than advise. Taxpayers
circumstances do vary and if you feel that tax strategies
we have outlined may be beneficial it is important that you
contact us before implementation. If you do or do not take
action as a result of reading this newsletter, before receiving
our written endorsement, we will accept no responsibility
for any financial loss incurred.
