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Principles and pitfalls of the new cash accounting scheme

May 16, 2012 by Elaine Clark

cash accounting image: piggy bank and coin stacks{{}}In the recent Budget, the Chancellor committed to simplifying small business accounting by the proposed introduction of a new way of working – a cash accounting scheme.

With an introduction date of April 2013, the cash accounting scheme means recording the income and costs of the business as you pay for them and not as they are incurred.

As always the devil is in the detail and there sure are some little devils in the proposal detail of this scheme, as outlined in the recently issued consultation paper.

As well as opting to use the cash accounting scheme, HMRC have also sneaked in a new way of claiming for allowable costs. They call it a simplified expenses recording scheme. This also has pitfalls associated with its use – so beware.

Objective of this new scheme

The primary objective of the proposed cash accounting scheme is to simplify the accounting for small businesses and ease the administrative burden.

HMRC say that the cash accounting scheme means that small businesses will not “need to understand rules designed for larger businesses”.

Principles of Cash Accounting

There are a few principles of the new cash accounting scheme to be aware of, if you choose to use it:

  • A self employed, sole trader business with a turnover of up to £77,000 can use the cash accounting scheme
  • The cash accounting scheme will not be compulsory – you can choose to use it
  • Once in the scheme your turnover can increase up to £150,000 before you need to stop using it
  • If you use the cash accounting scheme you must use the simplified expenses rules as well
  • Any business except Limited companies and limited liability partnerships can use the simplified expenses scheme
  • You can use the scheme if you are vat registered i.e. if you registered voluntarily
  • Property businesses, Limited companies and limited liability partnerships cannot use the cash accounting scheme

Pitfalls

Beware of the pitfalls of this scheme though – there are a few that could very well leave you much worse off.

Electing for this scheme to reduce your administration could have a serious impact on your pocket!

  • There is no guarantee that you will pay less tax by using the scheme – in fact in some cases it is almost certain that you may pay more tax
  • A business can decide which scheme to use – so you still need to understand the ‘normal’ accounting rules anyway so that you can make an informed decision as to if the cash accounting scheme would suit your business
  • At the moment it has not be decided if a business will opt into the scheme or if it will be the default option and the business will need to opt out
  • If you have high annual business mileage the cash accounting scheme may not be for you
  • If you have a business bank loan or overdraft you will no longer be able to claim the interest on the debts as an allowable business expense
  • The banks, mortgage providers and lenders have yet to declare their position on if cash accounting accounts will be acceptable for securing finance for the business or personal finance such as a loan, overdraft or mortgage
  • If you have more than one business and elect for cash accounting, the scheme will apply to all businesses regardless of if it is the best choice for all
  • If you use large parts of your home for business then the flat rate expenses scheme proposed may leave you worse off than claiming allowable costs under the current rules
  • If your business makes a loss (a negative cash accounting balance) then you have to carry this forward to offset against future profits from the same business.

    Under normal rules you may be able to offset the loss against other income. This could mean that you pay more tax than you would do under the current rules.

 

The thing to remember is that the cash accounting scheme is just a proposal at the moment – so all of the details will need to be confirmed and may change.

Do bear in mind that this is just a summary of salient points – you will need to seek advice from your accountant to see if the scheme may or may not suit your business.

Watch this space for more information if or when it emerges!

Using 20 years’ experience spent working at some of the UK’s leading businesses, award-winning chartered accountant Elaine Clark is the founder and managing director of www.cheapaccounting.co.uk, an online accounting service aimed at small businesses with big ambitions.

France and Hollande: a lesson in self-delusion

May 09, 2012 by Rory MccGwire

Hollande French election - spilt basket of grapes{{}}In my twenties we used to enjoy discussing politics. Whatever one person said, the other would counter, and so it would go on.

But once people started paying taxes and mortgages, they generally moved to a sensible middle ground. A lot of us described ourselves as “left wing in terms of supporting the genuinely needy, but right wing in terms of running a healthy and competitive economy to pay for it all”. The people to the left of us, politically, usually had lives that were conveniently cut off from the realities of being in the private sector; while those on the right were insulated from the realities of living on council estates etc.

Then we all seemed to get bored of political conversations, as we got used to the sad fact that every single group in our society looks after themselves. The bankers, the bosses of public companies, and certainly the unions and the whole public sector have done this very successfully for years.

However, in 2012 politics is very much back on the conversational agenda. Because a lot of people, especially self-employed people and people running small businesses, are pretty worried. We don’t have a salary in the normal sense, we have to go out and generate revenue from which to pay ourselves every month. In the current economic climate that is no easy task. Looking ahead, the challenge of putting money aside for our retirement is looking increasingly tricky too.

The election of Hollande in France meant that a group of us discussed little else but politics at dinner last night. France has not had a balanced budget in 30 years. It has spiralling debt. Its economy is uncompetitive and getting worse. Yet the electorate there is still craving more public sector expenditure. Austerity is too painful, so they want to borrow more money to grow their way out of trouble. Mitterrand did that in 1981 and then promptly had to slam all his expenditure into reverse when the financial markets decided they’d prefer not to invest in his country. Hollande says that this time it will be different. Really?

Hollande plans to put tax for the very rich up to 75%. We all loathe fat cat pay, but hasn’t every bit of analysis shown that super-high taxes simply don’t work? He also wants to limit executive pay in public companies to 20 times the salary of the lowest paid employees in those companies. That sounds like a more pragmatic approach and it will be interesting to see what it means in actual numbers.

But the most interesting aspect of the current developments is that France’s (and Greece’s) problems, as they grow, will spread to other weakened European countries and this in turn will impact the UK. The irony is that the resulting economic step backwards will be seized on as evidence of the failure of the UK’s austerity measures. So we can then all kid ourselves that borrowing yet more money will somehow make things better. But it won’t. Massive debt does not work for individuals. Nor does it work for small businesses or large businesses. There is no reason to suppose that massive debt, year after year, is somehow going to create a healthy economy in France, Greece or the UK.

Many commentators have uses the word “hangover” for our current economic situation. It’s a good metaphor. And having sworn we’d “never drink that much ever again” we’ll soon be opening another bottle of wine. But I think for now I’d prefer an Aussie Shiraz to a Bordeaux.

Rory MccGwire is CEO of BHP Information Solutions, publisher of the Donuts

Why business and government must act to combat the UK's late-payment culture

April 26, 2012 by Gordon Skaljak

Gordon Skaljak of Graydon UK{{}}The late payment of trade invoices is threatening the profits, growth and survival prospects of small firms – but few use formal procedures to tackle the problem. These were the headline findings of a report Graydon UK published recently, in partnership with the Forum of Private Business.

Of the 500 UK small businesses we surveyed, 51% said late payment of trade invoices was a problem and 23% of these described it as a serious problem – while 16% said they have almost been put out of business as a result.

Highlighting the ‘domino effect’ of late payment down the supply chain, 56% of those respondents not paid on time have been forced to pay their own suppliers late. Furthermore, 45% said late payment has eroded their profits and 23% said it has undermined their ability to invest in growth through innovation.

Changing terms without consultation

Another problem is customers persisting in changing payment terms without consultation. 65% of respondents reported customers extending their payment terms without notice or consultation. 27% said suppliers had universally changed terms and conditions and a quarter said customers had withheld final payments – without consent – to first assess the quality of work. 14% reported customers demanding discounts for prompt payment not agreed at the outset and 12% said supplier credit had been withdrawn without notice.

Our research also shows that businesses with credit control procedures are significantly less likely to suffer as a result of late payment. However, only 44% employ formal credit control procedures, with 38% instead relying on a mix of formal and informal processes and 16% juggling payments on an ad-hoc basis.

Only a third of respondents offer prompt payment incentives, while just 30% use existing legislation to charge interest on overdue invoices and 40% use cashflow management software. Debt-collection agencies are employed by 42% of respondents; while 43% keep a reserve in the bank to offset late payments. Invoice discounting is seen as a solution by just 26% of businesses.

Understanding the risks

The current economic climate makes it more important than ever that businesses clearly understand the risks and opportunities associated with their operations. This includes identifying cashflow and other risks triggered by late payment of trade invoices.

Businesses cannot achieve sustainable growth if they aren’t paid on time. This is why having a formal credit management process based on reliable, accurate customer payment behaviour information is essential for businesses who want to transact with confidence and fulfill their sustainable growth potential. The business community and the government must join forces to stamp out the UK’s late payment culture.

Graydon is a credit-referencing agency specialising in company credit checking, credit reports and credit risk management services.

National debt and tax dodges - is HMRC guilty of using a loophole in common sense?

April 23, 2012 by Elaine Clark

I’ve just received an email from a Government department telling me that they are making some website screen changes based upon the feedback from users. It said ....

“Companies House will be improving the look of the WebFiling screens from the 22nd April 2012. The new screens have been based on customer feedback, and are aimed at providing a clearer and simpler experience for WebFiling users.”

A good use of funds?

Maybe I think this way because I am an accountant but it seems to me that when the country is up to its eyeballs in debt, spending money to fancy up a few web pages is not the best use of limited public funds.

How about using the money to reduce the nation’s debt, prevent cuts elsewhere, stop job losses or some other common sense solution.

A lesson in setting a budget

Does the Government need a little lesson in how to set and operate to a limited budget?

When I took some time out, a while back, to go back to college, I knew that I was going to be living on a tight budget – no benefits, grant or any income whatsoever meant that I needed to tighten my belt. So during this austere period I reviewed my spending ..

What did I really need and couldn’t live without? The answer was food, light, heat etc. In true 'hierarchy of needs' style I knew that I needed to fulfil my basic physiological needs.

Other needs were optional at that time – I was willing to compromise the fulfilment of them for my desire to go back to college.

I made spending choices.

Isn’t that what the Government should be doing? Maybe they are but, how can choosing to make these cosmetic systems changes be a good choice given the current state of the nation?

Tax Loopholes

Instead of these fancy new web screens, how about dedicating some money to reducing some of the tax loopholes that we keep hearing about? At the end of March, George Osborne sent a letter to the new head of HMRC, Lin Homer, laying out five key objectives for the next tax year. Read it at http://www.hmrc.gov.uk/news/cx-remit-letter.pdf

See if, like me, you think that these are possibly the most woolly set of objectives that could be set. But only last week Osborne was telling us how shocked he was at the tax avoidance loopholes being used by the rich. So why then has he not set some SMART - specific, measureable, attainable, relevant and timely - objectives for the new head of HMRC aimed specifically at eliminating these tax loopholes?

Biggest slice of the prize

Over the last few weeks I am sure that we have all seen numerous articles about tax avoidance. You’ve probably been annoyed at how the rich have used these obvious tax loopholes to pay less tax. Let’s not forget that many of these loopholes have been around for a few years and are not recent introductions.

One thing that has been conspicuous by its absence in many of these tax avoidance stories has been the quantification of the ‘slice of the prize’. Just how much are these tax loopholes costing the country?

Objectives

If I had to set the objectives for tackling these tax loopholes they would be:

  • Tell me what the top ten (twenty – you pick the number) tax loopholes are in UK tax law?
  • Tell me how much these loopholes costs the country each year?
  • Tell me who you need on your team to fix / close them?
  • How much would this team cost and what would the net gain to the country be if these people were on board to fix the loopholes?

The simple approach

Will someone come along and say “that won’t work, it is too simple, you don’t understand all of the very complex tax laws that these avoiders are using”.

Is there a tendency to hide behind something being complex to avoid fixing it?

Is it time to stop kicking the tax avoiders and accountants and kick the people who are in charge of running the very department who have the power to make the changes to reduce and eliminate these loopholes?

If they can’t fix them then get the people in who can – maybe the very people who are using them to save the rich the tax should be on the team!

Maybe I just think this way because I am an accountant!

But when I see a problem I go fix it – else it will always be there!

Using 20 years’ experience spent working at some of the UK’s leading businesses, award-winning chartered accountant Elaine Clark is the founder and managing director ofwww.cheapaccounting.co.uk, an online accounting service aimed at small businesses with big ambitions.

Are you taking on staff for the Olympics? Check you're not using illegals or the exploited

April 19, 2012 by Georgina Harris

As small firms gear up for the Games, HMRC are reminding all employers to check the job agency or labour provider they use is legitimate. Labour providers are agencies that supply temporary workers for seasonal and one-off jobs, and are routinely used by catering, food processing, construction, hotel, leisure and security firms.

Known somewhat forbiddingly as ‘gangmasters’, labour providers are usually entirely respectable firms. But HMRC and others have come across rogue ‘agencies’ using the cover of honest gangmasters to profit from exploiting illegal immigrants and paying their teams well below the minimum wage, if anything. The crooks also dodge tax and as resulting investigations can be time-consuming for their unwitting business clients, you are advised to verify a new labour provider before taking on their temps.

Check your labour provider is legitimate by asking them:

  • Does the labour provider need/have a Gangmaster Licensing Authority (GLA) licence?
  • What is the history of the business - is it a live company on the Companies House register?
  • Have you visited the trading premises? Do they look as if they are really in the business of finding and employing workers? 
  • Do they use workers from other labour providers?Are their proposed fees realistically high?
  • Do they have Employers’ Liability Insurance?
  • Are you making payments to a third party, for example a factoring agent? If so, why?
  • Is the business VAT registered and set up for PAYE?  .
  • Is the business paying its workers the National Minimum Wage?
  • Do the workers being supplied have the right to work in the UK?

If in doubt, ask to see directors’ passports and official papers such as Certificate of Incorporation and their GLA licence. Then check their VAT registration certificate by calling HMRC to make sure the details match. Finally, ask for their bank details.

More on employment law

Struggling for extra finance - get £4,250 tax free with a lodger

April 16, 2012 by Elaine Clark

For many people, making ends meet is a challenge at the moment. Add to this the challenge of trying to find funds to start or support a business and the household finances could reach boiling point. Elaine Clark explains one easy way that can help.

In hard times, all opportunities (well, legal ones) to earn extra money do need to be seriously considered – no matter whether they are ideal or not.

If it means raising enough finance to get your business off the ground and realising your dream then maybe a compromise need to be made – short-term pain for long term gain.

Rent a Room scheme

In the ‘good old days’ when some fell on hard times or extra money was needed, the household would take in a lodger. The prospect of sharing your home or renting out your spare room may fill you with dread.

But did you know that it can earn you up to £4,250 tax free a year? That’s over £80 a week.

The allowance is available under HMRC’s Rent a Room tax break which applies to owner-occupiers and tenants who receive rent from letting out furnished accommodation in their home.

Make the checks – and go

First, you should check that there are no restrictions on subletting your home, such as restrictions from your mortgage provider or landlord. It would also be a good idea to check your home insurance.

As usual with any tax scheme there are a few rules to follow, but these are not too onerous – check the full details on DirectGov here.

Using 20 years’ experience spent working at some of the UK’s leading businesses, award-winning chartered accountant Elaine Clark is the founder and managing director of www.cheapaccounting.co.uk, an online accounting service aimed at small businesses with big ambitions.

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