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!
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.
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.
Printable 'Tax News - June Newsletter 2005' Page
