Here , we look at some of the common areas where it can go wrong or you can pay more tax without the help of an accountant.

1.     What are you driving ?

Is it a van or a car? This question sounds simple enough but some vans are actually technically classed as cars for tax purposes. Don’t expect the garage to know the difference. This can be a very costly mistake.

2.     Have you considered going VAT registered?

Most small businesses will be trading below the threshold of compulsory registration which is currently £68k per annum.However, there are a number of different VAT schemes and a review of these with someone who understands your business, may mean that you are better off.

3.     If you use your car for business, do you know how to maximise the cost for tax efficiency?

Cars that are very low in C02 emmissions can be 100% tax deductible.Do you put fuel receipts into the books or keep a mileage log and claim the HMRC rate?

Example: £50 of fuel bought for 386 mile trip v 386 miles at 40p = £154

 4.     Use of home as office

Even if you are out on the road, you can claim for use of home as office.

5.     Do you lease your car?

Recent changes to tax legislation mean that some of your lease payments may not qualify for tax relief. Again, it is the CO2 emmission of the car which will determine how much tax relief you can get.

6.     Did you undertake a course before you started up in business?

Training is one of the expenses specifically highlighted on the self assessment form as not being allowable. Note that this refers to initial training only. If you are required to upgrade or keep your skills and knowledge up to date thereafter, this is allowable.

7.     Do you have any business loans?

If so, do you know the interest and capital element of each re-payment. Are you claiming the interest element as a business cost?

8.     Do you entertain employees/customers/suppliers?

You are able to spend £150 incl VAT per person on staff parties provided that all staff are invited. If you spend more than this, the whole amount is disallowable for tax.The entertainment of customers and suppliers will usually be disallowed for tax purposes.

9.     Did you have any expenditure before you started trading?

Purchases before you started trading can be shown as part of the business costs in your first year.Don’t forget any personal items that you now use in the business: computer/laptop/printer

10.  Does your partner help you in the business?

You may be able to pay them wages from the business.

11.  Avoid penalties and fines

Not only are they a waste of money, they are also not tax deductible. So your late filing fee of £100 will not be classed as a business cost for tax purposes.

There are a number of issues to consider and this article highlights some of these.

Options

Essentially, there are three routes to choose from:

1. PAYE – here the contractor is an employee of the agency and so all earnings will be subject to PAYE and NI in the usual way. This route offers no tax advantages but does mean that there is no requirement to complete a self assessment return provided you have no other income.

However, clients and agencies will typically require contractors to provide their services either through a limited or umbrella company. One of the key reasons for this is that both options provide their own legal identity and so offer some protection to the clients and agencies from employment rights and tax liability transfers.

1. Limited Company – this can often be a tax efficient method of trading for individuals provided that they fall outside the IR35 legislation, as earnings can be taken in the form of a salary and dividends. For individuals who offer services and are essentially “disguised employees”, earnings will be subject to a calculation called the “deemed payment” as set out by HMRC. This effectively means that 95% of income will be subject to PAYE and NI. This does often beg the question about the advantages and disadvantages of this route. We look at some of those here:

ADVANTAGES

1. As already mentioned, this structure can be a tax efficient one as no NI is payable on dividends paid out. This will be the preferred route if you are genuinely operating outside of IR35.
2. As you are trading in your own right, you can register for the flat rate VAT scheme which effectively means that you can add VAT onto your invoices at the prevailing rate of 17.5% but pay over a lower amount to HMRC.
3. In addition to travel costs, you will be able to claim use of home as office, computer equipment costs, mobile and internet costs. Company set up costs and accountancy fees will also be tax deductible.
4. You can grow the business by allotting more shares or selling some of your existing shares to bring like minded directors in to work alongside you.
5. A company is a separate legal entity which protects you and your personal assets from any litigious activity

DISADVANTAGES

1. The cost of set up and compliance in terms of filing statutory accounts to Companies House and Corporation Tax returns to HMRC can be in the region of £1,200 per year.
2. Paperwork involved – raising invoices and debt collection are the key ones to consider here.
3. Any profit after your “deemed” wages will be subject to corporation tax of 21% (small companies rate)
4. Will require careful consideration and tax planning before closing down

1. Umbrella Company – this will provide you with the flexibility of joining and leaving normally without any charge and with no/minimum notice periods.

ADVANTAGES

1. There are no set up costs as the company already exists – this has the added advantage that you can start working as soon as you have completed the joining paperwork.
2. Umbrella companies will normally provide you with insurance cover. Make sure you understand exactly what insurance they have and what is covered. This means you do not have the hassle and expense of arranging this for yourself and again, this can facilitate a speedy start to your new assignment.
3. If you are new to contracting, you may want to consider this option initially. If you decide that contracting is for you in the longer term, it may be worthwhile incorporating into a limited company.
4. As with the limited company, your personal assets are protected from any litigious activity which will be directed at the company and not you personally.

DISADVANTAGES

1. You have no control over the running of the company as you are not a director or a shareholder.
2. You will pay a monthly charge for the services provided by the umbrella.
3. You are reliant on the umbrella company to complete the invoicing and payroll in a timely manner to ensure that you get paid.

Which One is For Me?

Here are some considerations before you make this decision:

1. IR35 status – if your contracts are such that you will be operating outside of IR35, then the limited company will offer you the most tax effective route.
2. Control – if you want to retain complete control and be seen as the company director, then you will choose the limited company option over the umbrella route.
3. Paperwork – if this is not your thing or you don’t have the time, go for an umbrella company that will process everything for you and charge a weekly/monthly fee for doing so.
4. Your intentions – a limited company may be more preferable if you intend to stay contracting in the longer term.
5. Flexibility – an umbrella company is easy to join and leave. You can always start a limited company later. It is much more complicated and lengthy to shut a limited company down once it is up and running. It will also involve additional filing fees at Companies House and accountancy charges.
6.  If you are after the maximum tax efficiency and a long term high earner, then you should consider the limited company route.

There is no absolute right answer. However, we will be happy to discuss these options with you further so that you choose the route which suits you.

Please note that the choice of trading route does not influence your IR35 status which is determined by the conditions and practicalities of your contract. Your status in relation to IR35 should be reviewed with each new assignment.

Want to Know More?

For general start up advice or help with starting your own limited company, contact C & M Services, email info@candmservices.co.uk. Website: www.candmservices.co.uk.

For local contractors in Bristol who want local support from an umbrella company run by a finance professional see www.easy2contract.co.uk or email Kath Docherty FCA at admin@easy2contract.co.uk.

1. Make sure you have a separate bank account for your business and ensure that only business transactions go through it – whilst this is not essential for sole traders, it will mean that the accountant does not have to review your personal bank accounts looking for business costs and income. A separate bank account increases the probability that the accounts and therefore the tax return are going to be complete and correct.
2. Date and number your sales invoices. Make sure you mark up each sales invoice with the date that it is paid. This will help your accountant identify which ones are outstanding at the end of the year and which ones, if any should be considered for bad debts.
3. When sales invoices are paid by cheque or cash, mark paying in slips with either the customer name or invoice number. Again, this helps in ensuring that the debtors at the end of the year are correct.
4. Provide your accountant with a complete set of bank and credit card statements. This is one of the key reasons why there is a delay in completing accounts. Go through all the statements  yourself to check they are complete. Request duplicates or download any that are missing before you pass them to the accountant.
5. Keep supplier statements, in particular those dated at your year end as this will validate the creditors figure in the accounts.
6. Keep all paperwork concerning amounts paid on credit, Yell statements, loans etc
7. Always complete the cheque stub and mark the invoice with the cheque number used to pay it.
8. If you have debit or credit card receipts and no invoice or other paperwork, write on the receipt what it was for – don’t let your accountant have to guess or ask you.
9. If you give your accountant your paperwork and they do the book keeping for you, you can organise your expenses into envelopes by type of cost, add them up and put a total on the envelope –  it will save your accountant doing it. So, for example, if you are a driving instructor, collect all your fuel receipts for your trading year, add them up and put them in a separate envelope marked “fuel”.
10. Do consider doing the book keeping yourself, you can either use a book or an excel spreadsheet. Book keepers can cost anywhere from £10 – £25 so why not put aside an hour a week and do it yourself.
11. Have a chat to your accountant – again, even those charging fixed prices will be recording how they are spending their time and should be able to tell you what they spend most of their time on when preparing your accounts. Ask them for advice on how to keep your books in a better state and it will be a win win all round!   And remember, time is money!

There is a big difference in selling unwanted personal items and selling as a business activity. In deciding whether your selling activity is just a hobby or a business, take a look at the “badges of trade”.

The Badges of Trade

The following are used by HMRC as indicators of trading:

• Profit seeking motive – if you are simply selling unwanted personal effects and having a clear out, that is not viewed as trading. If you are actively buying items with a view to selling them, this is trading.
• Number of transactions – if it is a one off or occassional sale, then this would not be viewed as trading. Regular/frequent sales would indicate that there is a business activity.
• Interval between purchase and sale – goods being traded are normally bought and sold within a short timescale. Items that are being sold as part of a clear out have usually been acquired and held over a longer period of time.
• Original acquisition – goods acquired by inheritance or gift are less likely to be the subject of trade. Purchases from wholesalers or in bulk would suggest trading.

I think I am trading – what should I do?

• You will need to look back at your trading activity and, using the badges of trade, decide when you think you started trading. HMRC will need to know this date and there are penalties if you have not informed them within 3 months of starting.
• Keep good books and records of everything that you buy and sell – normally there are reports from ebay about your trading activity so this may help you on the sales side.
• Make sure you keep your business and personal trading on ebay separate
• You will need to add the profit from your trade onto your personal tax return each year

What costs can I claim for my ebay activity?

There are a number of costs that you can claim to offset against your income from ebay trading. Here are some examples:

• The cost of the item that you are selling
• Postage and packaging to the seller
• Monthly ebay fee for your shop if you have one
• Seller fees
• Marketing/advertising fees
• Accountants charges

You may also be able to claim:

• The market value or cost of a new PC
• Part of your internet connection
• Travel costs when you are purchasing/delivering items
• Use of home as office

What about VAT?

If your income from trading on ebay is £68,000 or more ( from 01/05/09), then you will need to register for VAT.

What about capital gains?

Capital gains can arise when you sell goods for more than the cost.

If you are selling personal effects (known as chattels), and they are individually worth less than £6,000, then you are exempt from capital gains tax.

The selling of private cars is also exempt from capital gains.

What about customs charges?

Remember that if you buy goods from outside the EU, you may incur customs duty, import VAT and possible excise duty.

Customs duty is not payable on goods from EU countries.

The latest rates which are effective from the 1st January 2010 can be found on the HMRC website using the following link:

 http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm

First Year Reduction

The reduction of 1% for the first year of registration still applies.

You will have received a payment reminder during the year from HMRC with a pay slip at the bottom. This will let you know which accounts office you need to pay and their bank account details . There are two accounts offices and it is important to get the correct one to avoid delays in processing your payment.

Use these bank account details to pay by internet banking using your unique tax reference (UTR) as the reference for the payment. Again, this is important to ensure that HMRC can trace the payment to you.

You can also take the payment slip to your own branch of your bank or a post office. If using your own branch of your bank, cheques need to be made payable to “HM Revenue & Customs only” with your pay slip reference after “HM Revenue & Customs only”.

If paying at a post office, cheques must be made payable to “Post Office Ltd.”

Electronic payments are a secure and efficient way of paying your tax bill. We would not recommend that you put a cheque in the post.

Take Care: HMRC changed their bank accounts in April 2009 so, if making payment on line, please check that you have the correct bank details!!

Further information on how to pay can be found on the HMRC website:

http://www.hmrc.gov.uk/payinghmrc/selfassessment.htm

In essence, if a dispensation is in place, then it relieves the employer (Umbrella company) from reporting these expenses either on the P11D (Benefit in Kind declaration) or processing them through payroll.

All receipts must still be kept but are not required to be forwarded to HMRC.

Some umbrella companies have been using the dispensation route as a marketing tool to advertise that they can obtain a higher level of take home pay for the contractor. They do this by processing round sum daily amounts for subsistence without receipts.

Our advice is as follows:

Claim for legitimate expenses and make sure you know what you can and can’t claim for

Keep all receipts

Finally, if it sounds too good to be true – then it probably is!

If you would like furter information on contractors expenses then please contact admin@easy2contract.co.uk.

The increase of 0.5% in National Insurance planned for 2011 has been further increased to 1.0%. Many did speculate that we would see this increase implemented a year earlier in 2010. Instead, Darling has announced the further pain but maintained the original timescale. It is expected that this measure will raise about £7 bn in 2011-12.

The bank bonus tax was an element of this report that became news over the weekend. The measures announced today apply to all bonuses over £25,000 payable from today up until the 5th April 2010. The effective rate of tax on these bonuses will be 68% and will add to pressure for banks to defer bonus pay outs.

The small rate of corporation tax will remain at 21% until April 2011, thereby benefiting 850,000 small businesses.

Finally, as part of the continuing commitment to a low carbon economy, the pre budget report set out support for electric vehicles such that electric cars will be exempt from company car tax for a period of 5 years.