Entrepreneurs’ Relief

2 min read

Entrepreneurs’ Relief, is available for those in business, which may reduce the tax rate on the first £10 million of qualifying lifetime gains to 10%.

This is targeted at working directors and employees who own at least 5% of the ordinary share capital of the company and the owners of unincorporated businesses.

From 6 April 2019, in a change to the previous rules, entrepreneurs’ relief is available to individuals on the disposal after two complete qualifying years of:

  • all or part of a trading business carried on alone or in partnership
  • the assets of a trading business after cessation
  • shares in the individual’s ‘personal’ trading company
  • assets owned by the individual used by the individual’s personal trading company or trading partnership where the disposal is associated with a qualifying disposal of shares or partnership interest.

New 5% rules for company shareholders

To qualify for ER, the company needs to be an individual’s personal company where the individual must:

  • be a company employee or office holder
  • hold at least 5% of the company’s ordinary share capital and
  • be able to exercise at least 5% of the voting rights.

For disposals on or after 29 October 2018, they must also satisfy one of the following tests:

  • a distribution test – an individual is entitled to at least 5% of the company’s profit available for distribution to equity holders and 5% of the assets available for distribution to equity holders in a winding up; or
  • a proceeds test – an individual is entitled to at least 5% of the proceeds in the event of a disposal of the whole of the ordinary share capital of the company.

Thought should be given to the structure of your company at the outset to ensure that the tax benefits of ER are not lost.

Investors’ Relief (IR)

If you do not meet the criteria for Entrepreneurs’ Relief you may still be able to take advantage of the ow 10% rate of tax.

Entrepreneurs’ Relief has been extended to external investors (other than certain employees or officers of the company) in unlisted trading companies. To qualify for the 10% CGT rate under ‘investors’ relief’ the following conditions need to be met:

•        shares must be newly issued and subscribed for by the individual for new consideration

•        be in an unlisted trading company, or an unlisted holding company of a trading group

•        have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016

•        have been held continuously for a period of three years before disposal.

An individual’s qualifying gains for IR are subject to a lifetime cap of £10 million.

Talk to us about your ER planning

Loucas can help you to build a tax-efficient financial plan that ensures you are making the most of the reliefs and allowances available to you. 

If you would like to discuss any of the issues raised in this guide please call 01622 758257 or contact us.

The construction industry and VAT: analysing the changes

6 min read

The VAT domestic reverse charge for building and construction services comes into effect from 1 October 2019. Given the scale of the changes, it would be appropriate for businesses to plan for the reverse charge now.

The reverse charge: an overview

The reverse charge represents part of a government clamp-down on VAT fraud. Large amounts of VAT are lost through ‘missing trader’ fraud. As part of this type of fraud, VAT is charged by a supplier, who then disappears, along with the output tax. The VAT is thus lost to HMRC. Construction is considered a particularly high-risk sector because of the potential to make supplies with minimal input tax but considerable output tax.

The reverse charge does not change the VAT liability: it changes the way that VAT is accounted for. In future, the recipient of the services, rather than the supplier, will account for VAT on specified building and construction services. This is called a ‘reverse charge’.

The reverse charge is a business-to-business charge, applying to VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). It will be used through the CIS supply chain, up to the point where the recipient is no longer a business making supplies of specified construction services. The rules refer to this as the ‘end-user’.

Broadly then, the reverse charge means that a contractor receiving a supply of specified construction services has to account for the output VAT due – rather than the subcontractor supplying the services. The contractor then also has to deduct the VAT due on the supply as input VAT, subject to the normal rules. In most cases, no net tax on the transaction will be payable to HMRC.

The charge affects only supplies at standard or reduced rates where payments are required to be reported via CIS and not to:

  • zero-rated supplies;
  • services supplied to ‘end-users’ or ‘intermediary suppliers’.

Under the scheme a VAT-registered business, receiving a supply of specified services from another VAT-registered business, for onward sale, on or after 1 October 2019:

  • should account for the output VAT on supplies received through its VAT return
  • does not pay the output VAT to its supplier on supplies received from them
  • can reclaim the VAT on supplies received as input tax, subject to normal VAT rules.

The supplier should issue a VAT invoice, indicating the supplies are subject to the reverse charge. An end-user should notify its end-user status, so the supplier can charge VAT in the usual way.

Example

Safe as Houses Ltd is a VAT-registered contractor. It uses Brickyard Bill, who is also VAT-registered. Brickyard Bill tells Safe as Houses that the reverse charge applies.

Safe as Houses does not pay VAT to Brickyard Bill. It accounts for the VAT on its own VAT return, entering it as both output and input tax. It enters the value of the purchase from Brickyard Bill as part of its inputs. It does not include the value in its outputs.

Their VAT returns will look like this:

  • Brickyard Bill puts the value of the sales in box 6 of the VAT return, but no output tax in box 1
  • Safe as Houses uses box 1 to declare the output tax on the services from Brickyard Bill to which the charge applies. It doesn’t include the value of the transaction as an output in box 6. It reclaims the input tax on reverse charge purchases in box 4 and includes the value of purchases in box 7.

Consequences for businesses

Details of the charge have changed since it was first announced. Originally, the charge was to apply to ‘labour-only’ supplies. Now however, the charge applies to construction services, including materials. With the domestic reverse charge, the value of reverse charge supplies will not count towards the VAT registration threshold of the recipient business.

For many construction businesses, the change is likely to have far-reaching consequences. Processes will need to be in place to ensure VAT accounting systems are compliant with the unusual requirements of the reverse charge. The rules require a number of verification checks to ascertain VAT status of customers, CIS registration (in some circumstances) and end-user or intermediary supplier status.

Given that output VAT currently provides many businesses with a positive cashflow advantage, the impact on cashflow and liquidity will also need appraisal. Changing to a monthly VAT return cycle to accelerate payments due from HMRC may be of benefit. The VAT Flat Rate Scheme (FRS) may no longer be of benefit, and reverse charge transactions cannot be dealt with through the Cash Accounting Scheme.

Specified services

Construction services covered by the reverse charge are those falling within the category of ‘construction operations’ for the CIS, and include the construction, alteration, repair, extension, demolition or dismantling of buildings or structures, including offshore installations.

Works forming part of the land are also included, such as walls; pipe and power lines. So too are preparatory services such as site clearance and scaffold erection; the installation of systems of heating and lighting; and painting and decorating. The reverse charge includes goods, where supplied with specified services.

Supplies excluded from the charge, where these are supplied on their own, include the services of architects, surveyors and some consultants; and the manufacture of building or engineering components, materials or plant.

Services with reverse charge and excluded elements

Where excluded services are supplied with services subject to the reverse charge the whole supply is subject to the reverse charge. As it can be difficult to determine in some situations whether the reverse charge applies, if there has already been a reverse charge supply on a construction site, any subsequent supplies on that site between the same parties may be treated as reverse charge supplies, if both parties agree.

Where there is any doubt, HMRC recommends reverse charging, if the recipient is VAT-registered and payments are subject to the CIS.

Considering end users

The domestic reverse charge applies to VAT-registered businesses throughout the CIS supply chain, but is designed not to apply to ‘end-users’ or ‘intermediary suppliers’. ’End-users’ are VAT-registered businesses receiving supplies of specified services which are not sold on as construction services.

Examples could be a construction firm selling an interest in land as a newly built office, or a large retail business having trading premises built for its own use. Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to end-users. Examples could be landlords and tenants, or recharges of building and construction services within a group of companies.

Businesses will need to know when they are dealing with an end-user or intermediary supplier, so they can invoice appropriately. The end-user or intermediary supplier should inform the supplier of their status so that VAT can be charged as normal. If the end-user does not provide confirmation of status, the supplier should issue a reverse charge invoice.

Businesses dealing frequently with end users may wish to include a statement, in business terms and conditions, to the effect that it is assumed that the customer is an end-user, unless they indicate otherwise.

Effective invoicing

To invoice correctly under the new rules, suppliers should mark the invoice to the effect that the domestic reverse charge applies, and that the customer must account for VAT. The amount of VAT due under the charge should be clearly stated on the invoice. It should not be included in the amount shown as total VAT charged.

The rules require that when the customer is liable for VAT, an invoice should include the reference ‘reverse charge’. Any of these are acceptable:

  • Reverse charge: VAT Act 1994 Section 55A applies
  • Reverse charge: S55A VATA 94 applies
  • Reverse charge: Customer to pay the VAT to HMRC.

Where invoices are created with an IT system that cannot show the amount to be accounted for, HMRC refers suppliers to VAT Notice 735, ‘Domestic reverse charge procedure’ bit.ly/2OsGJWK.

HMRC’s policy

HMRC has issued technical guidance bit.ly/2WHQ5R2.

There will be a ‘light touch’ approach to genuine mistakes and penalties for six months from October where businesses are aiming to comply and act in good faith. Businesses knowingly claiming end-user status when the reverse charge should have applied, however, will be liable for the tax due and may be liable for penalties.

How will the changes affect you

The new rules will have a significant effect on VAT compliance and cash flow. Key questions to consider include:

  • is the reverse charge likely to apply to supplies to and from other VAT-registered contractors and subcontractors you deal with?
  • how will your accounting systems calculate and report reverse charge supplies?
  • how will you check on an ongoing basis that supplies and purchases are treated correctly?
  • will your cashflow suffer if you no longer hold output tax, and would changing to monthly VAT returns help?
  • if you use the VAT Flat Rate Scheme, how will the charge impact you?

Overall, the change may mean that the construction sector is likely to be subject to considerable HMRC scrutiny in the foreseeable future. Under the rules, for example, some subcontractors, with VAT to reclaim on inputs but no VAT to charge on outputs, will regularly receive VAT refunds.

A regular repayment position could trigger a VAT inspection. For these reasons, we would recommend taking stock of VAT and CIS compliance across the board.

How we can help

In this blog, we have only been able to touch on some of the key issues. Please contact us for an in-depth discussion on the matter.

Extra resources

DISCLAIMER: This blog is for guidance only, and professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.

Top Three Accountants in Maidstone

By Athos Louca

1 min readLoucas have been awarded one of the Top Three Best Rated Accountants in Maidstone, Kent. Using a 50-point inspection, The Three Best Rated team based the Top Three Accountants award on reputation, history, value for money and reviews from clients.

 


Top Accountants in Maidstone Kent

The Best Three Rated team add, “we display only businesses that are verified by our employees. You can call it “Due Diligence” or “Common Sense. We call it Hard Work. Our website is updated on a regular basis for quality and latest business information. ”

Are you looking for business or tax advice? Do you need expert help in evaluating your business or personal finances? Contact our accountants team today to get startedT: 01622 758257  

Can you claim vat back on your staff Christmas party?

By Stuart Shaw

2 min readWith Christmas fast approaching many Company Directors want to thank and reward their staff for their hard work. For limited companies, there are certain tax benefits on staff annual and Christmas parties and giving gifts to employees.

Tax free staff Annual and Christmas parties

For any annual event, be it a summer BBQ or Christmas Party, HMRC provides a tax relief for all employees set at £150 per head. The total claim for any annual events combined requires being below the £150 limit to qualify per employee.

How to calculate the cost per head?

The cost per head for the whole event from start to finish can include;

  • food
  • drink
  • entertainment
  • taxis home
  • overnight accommodation

If the VAT, inclusive of cost of the event is over the £150 limit the whole benefit is taxable as a benefit in kind. To calculate the cost per head of your annual or Christmas party, divide the total cost of the function by the number of employees.

Can you bring a guest?

The events are mainly for entertaining employees. If the company has several branches then the event is open to all staff in their location. The £150 threshold is per employee and is split between any employees’ partners or guests who attend too. The cost of the whole event is an allowable expense for your business.

Can you invite suppliers or customers?

When inviting customers or suppliers to the Christmas party, VAT relief may be restricted as non-employees are also being entertained. Event’s for only directors, partners or sole proprietors,  will not be tax deductible as all employees are required to be invited for it to qualify.

What gifts can you give that are tax allowable?

Employers can give gifts listed below to employees as tax deductible, trivial benefit, as long as it does not exceed £50.

  • Turkey,
  • a bottle of wine
  • a box of chocolates

Unfortunately, a hamper with food and wine will not be classed as a trivial benefit. Christmas presents paid in cash to staff are taxed as earnings with tax and national insurance. This also applies with gift vouchers in excess of £50 which are exchangeable for goods and services too.

Record keeping for your annual and Christmas parties

For all events, keep the receipts. By make a note of the employees who attended keeps records organised too.

From Loucas we hope you enjoy your Christmas festivities and that your employees also enjoy their seasonal gifts.

Have a great time.

For more advice on trivial benefits read more on trivial benefits and what they are?

Do you have a networking strategy?

By Athos Louca

3 min read

Do you have a networking strategy?

It takes time and commitment to build up and maintain an effective network, but in our experience these are resources well spent. As with so many aspects of business life, it pays to approach networking in an organised, strategic manner. Read our guide on tips to networking.

Networking

Before the Networking Event

Researching networking events before you attend to find out who will be there and what industries they are from is key.  This will help you decide if the event is the right one for you. Will attending likely yo introduce you to the types of customers you are looking for?

One tip to stand out from the other networkers is by offering some invaluable information. This could be useful advice, a contact or information the person you are talking to  is interested in. To help you break the ice and start conversations with others it’s a good idea to give some thought to possible conversation starters you could use.

During the event

Introducing yourself and approaching people you don’t necessarily know can be daunting. Aim to make a personal connection though talking about your hobbies or even better about their hobbies and interests. Don’t feel the need to rush into talking about work related topics or trying to sell something and when you do get round to talking about your business refrain from using jargon.

When contacts are talking, listen intently and show interest in what they are saying.  Avoid getting distracted by just thinking about what to say next. This will help the conversation flow better and you to connect with the potential customers or contacts.  Individuals like talking about their businesses so asking thoughtful questions is a great way to make a lasting first impression.

Remember to smile.  Not only does smiling make it easier for people to connect with you because you are more open and welcoming, it also helps them remember you and your company.

If a fellow networker hands you their business card, make a positive statement rather then putting it in your pocket.  By commenting on their business, it will show that you are interested in them, as opposed to just trying to making a sale.

After the event

Having done the hard bit, it is important to maintain a database of all the contacts you have met.  They should be put into different categories such as potential customer, referral contact or professional advisor.  This will also help you prioritise those contacts that perhaps will be the most useful to you in the future.

After the event, take the time to  email the contacts you made and connect with them on LinkedIn.  If you are able to make reference to their business or the service they are providing it will again demonstrate that you were listening. You stand a far better chance of developing the relationship further.  This is also an opportunity for you to more formally introduce your business and explain how you could work together in the future.

Future growth

To maintain successful business relationships you will need to ensure that you keep in regular contact.  Consider arranging further meetings every few months, even if it is just to grab a quick coffee together. The relationships forged from networking can be invaluable to start a collaboration, partnership or take advice from someone who you consider knowledgeable. Networking doesn’t necessarily have to be frequent or time consuming. If you want your business to grow then it is something business owners need to invest time in. If you don’t, the chances are they will simply fall by the wayside.

To help evaluate and improve your networking approach why not take our Network Strategy Test.

Ratio Analysis: Measuring Business Performance

By Athos Louca

2 min read

Ratios are calculated from an organisation’s financial statements and are an effective business tool in measuring its performance. By comparing the ratios to those of the previous year it is possible to determine whether a business is doing better this year than last year.

It is also possible to compare ratios of one organisation against those of another in a similar industry, a practice known as Benchmarking.  This helps identify areas in which one business is either under performing or indeed is out performing another.  Undertaking ratio analysis and making comparisons to market leaders within your industry will help focus on areas which require attention. It is important not to simply calculate as many ratios as possible, but to identify those most relevant to your business.

Ratio Categories

There are many different ratios that can be calculated and which can be grouped together into five main categories:

  • Profitability
  • Liquidity
  • Operational
  • Solvency
  • Gearing

Different interpreters of the financial statements will be more interested in certain ratios than others.  For example, lenders will be interested in Gearing ratios such as interest cover and debt to equity. Whilst other business owners are likely to concentrate on Profitability and Operational ratios.

Measuring Business Performance and Target Setting

By carefully selecting the most suitable ratios business owners and managers can use the results to gain a better understanding of how their organisation is performing.  The same ratios can also be used to set future targets.

For example, a business may be experiencing cash flow problems.  The business owner believes that his customers are taking too long to settle their accounts.  By calculating their debtors days and recording the results, it will be possible not only to establish what the current position is, but also to set targets for the future.  This may be to reduce the debtor days from thirty five to twenty five days.  A reduction in debtor days will help ease cash flow and reduce the risk of bad debts.

An organisation should select a number of ratios which provide key information about its performance.  These are known as Key Results Indicators.  Whilst these will vary from business to business some of the most common are listed below:

  • Gross Profit Margin
  • Net Profit Margin
  • Trading Overheads as percentage of Turnover
  • Debtor & Creditor Days
  • Current Ratio
  • Debt to Equity
  • Return on Capital Employed

The calculated ratios should be recorded in a concise format and form part of the management information reports.  The use of graphs will allow trends to be easily identified, avoiding the risk of getting lost in the numbers.

We have helped many clients design and implement effective ratios as part of their business key performance indicators to help them assess where their business is.  If you would like any assistance on selecting the right ratios and other key performance indicators, please do not hesitate to contact us.

Financing Your Startup – Part 1 working out how much you need

By Athos Louca

2 min read

If a new business is going to stand any chance of surviving then it is essential that you have sufficient financial resources in place to see it through its early stages and beyond.

Those setting up in business have a number of different options available to them when it comes to sourcing funding for their venture.  Understanding what these mean for your business will help ensure you choose the most appropriate type of finance for you.

Working out how much you need

Before talking to any investors you must first establish exactly how much money will be required.

Too often business owners only consider how much they will need to actually set up the business such as buying computer equipment or building a website, it is also vital that consideration is made for the ongoing running costs of the business.  This is known as working capital.  It is likely to take sometime for revenues to grow as the business establishes itself, during this time funds will be needed to fund ongoing costs such as rent, wages, stocks etc.

A cash flow forecast should be put together for the first 12 months of the business which will show the monthly opening and closing cash position of the business based on your budgeted business activity.

There are many free excel cash flow templates available online to use but consideration should be given to taking professional advice to ensure that the forecast is as accurate as possible.

Of course a forecast is just what it says a forecast and until you start trading you do not know how things will work out.  However, if this document is going to be used to establish how much money you need to run your business it is worth doing right.

 

A few thoughts to help…

  1. Be realistic with your revenue forecasts
  2. Consider any seasonal variations that may affect revenues
  3. Remember if you are going to be offering customer credit terms they may not always pay on time
  4. Ensure you remember to account for all costs
  5. Do not forget about employment taxes and VAT

 

For some startups it may be necessary to produce a cash flow forecast for longer than 12 months.  This is often the case with tech startups looking to develop technology beyond proof of concept.  A cash flow for 24 or 36 months should be considered.

You should also allow for some contingency funding to cover unexpected events such as a slower start to generating revenues, delayed product launch and even bad weather.  It is far better to be prepared as opposed to having to raise further funds in a very short period of time which will also always be at less favourable terms.

If funding is going to be required at different stages, depending on the type of finance it may be better to arrange the entire funding at the outset.  For example, angel investors may be happy to release further funds when certain milestones have been reached.

 

In part 2 of the post we look at the different types of funding.

If you are looking to start a new venture or securing additional investment to help grow you business and require any advice about how to do this in the best possible way to suit your circumstances we would be happy to help.

Contact us

T: 01622 758257

How does Receipt Bank work?

By Becky Morgan

3 min read

Technology is constantly changing. New tools are designed to assist business owners with the day to day management of their business’ finances.  Receipt Bank makes the gathering, storage and processing of expenses a seamless and efficient process.

What is Receipt Bank?

Receipt Bank is a platform that automatically extracts data from your receipts and imports that data into your Cloud Accounting software. Not only that, it also retains copies of your receipts in the cloud so there is no need for you to retain the original hard copies.

Receipt Bank integrates with a number of cloud accounting systems including Xero, Quickbooks Online, MYOB, Sage Accounting, Kashflow and FreeAgent. For the purposes of this post we will be looking at the integration of Receipt Bank with Xero.

 

How will Receipt Bank benefit my business?

Using this automated software brings a number of benefits to businesses:

  • Using the Receipt Bank app on your smart phone you will be able to scan receipts and invoices on the go.
  • You will no longer need to retain copies of your receipts as once they are in Receipt Bank they are stored in the cloud.
  • The risk of losing receipts will be reduced as you can upload copies of your receipts into Receipt Bank as soon as you have purchased something.
  • The automated data extraction process will avoid the need to key in data.
  • Add your team to Receipt Bank and keep control of their expenses.
  • Human error is minimised as the data is automatically extracted from the receipts.
  • It’s free to our clients!

 

How does it work?

There are a number of different ways in which you can upload copies of your receipts into Receipt Bank ready for importing into your cloud software.

 

Using Receipt Bank:

App

The Receipt Bank app is simple to use.  A picture is taken of your receipt and the data is automatically extracted in real time and upload to Receipt Bank.  It is possible to scan in receipts individually or combine multiple receipts on one page.

Using the Receipt Bank App, you can check the data has been extracted correctly. It also ensures it is being coded to the correct cost centre.  When satisfied this is then published to Xero straight from the App ready to be paid/matched to bank payments.

The App is very easy to use and is a free download from Google Play Store or Apple App Store.

Email

Once you are set up, a receipt bank email address will be assigned to you. If you receive emails with copies of invoices in the body of the email or as an attachment, you can simply forward this email onto your receipt bank email address and it will appear there ready to be imported into Xero.

PDF Documents

Using your Receipt Bank online account, you can drag and drop PDF documents into Receipt Bank. The data will then be extracted by Receipt Bank in the normal way ready to be published into Xero.

 

What will Receipt Bank cost me?

To use the software you will need to pay a monthly subscription fee to Receipt Bank. To all of our clients, Receipt Bank will be provided free of charge!

 

Get started with Receipt Bank?

Using Receipt Bank with Xero will allow you to save administration time and reduce risk of error. It is helpful as it avoids missing tax relief on lost receipts.

Loucas have a dedicated team with an extensive knowledge of both Xero and Receipt Bank.  If you would like to discuss the benefits of Receipt Bank and how it can help your business, please contact us and we will be happy to assist you.

Please note: The information contained in this site is provided for information purposes only and is of a general nature. It is not a substitute for specific professional advice related to your own circumstances therefore you are recommended to obtain specific professional advice before you take any action.