Pearl Lemon Accountants

Author: Pearl Lemon Team

  • UK Resident Meaning: Why It Might Be Harder to Define Than You Think

    UK Resident Meaning: Why It Might Be Harder to Define Than You Think

    Am I a UK resident? It’s a simple enough question to answer, right? After all, you know where you live. However, as anyone who works abroad, spends a lot of time there or otherwise isn’t in the UK 24/7, UK resident meaning, at least for tax purposes, can be rather murky to define.

    HMRC introduced the Statutory Residence Test on April 6th, 2013 to determine the tax residence status of individuals with ties to the UK.

    The Statutory Residence Test, while at times difficult to understand, is critical in determining your UK tax residence status. Being a tax resident of the UK means that your worldwide income is subject to UK tax, and failure to properly declare and pay tax on any income can result in penalties and fines.

    Because of the complexities of the Statutory Residence Test, it is always a good idea to seek professional advice from a tax expert who has experience determining your residency status correctly.

    The following information is provided for educational purposes only; you should always consult a tax professional to ensure that you fully comprehend the Statutory Residence Test and your UK tax residency status. You can, of course, enlist the help of Pearl Lemon Accountants to do that, by contacting us here.

    UK Resident Meaning: How HMRC ‘Tests’ Your Status

    The Statutory Residence Test has four essential components:

    • In a tax year, how much time have you spent in the United Kingdom?
    • Automatic Overseas Test
    • Automatic UK Test
    • Sufficient Ties Test

    In simple terms, if you meet the automatic overseas test but not the automatic UK test or the Sufficient Ties Test, you will be considered a non-UK resident for tax purposes.

    If you do not meet the Automatic Overseas Test but meet one of the Automatic UK Tests or the Sufficient Ties Test, you will be considered a UK resident.

    How Many Days Have You Spent in the UK? What HMRC Says

    In the simplest terms, you would be considered a UK resident if you spent more than 183 days in the UK during a tax year. Calculating the number of days spent in the UK, on the other hand, is not simple.

    The HMRC established a set of criteria to determine if you spent a day in the UK. If you arrive in the UK at midnight on any given day, you are usually considered to have spent a day here.

    However, there are three other factors to consider: The deeming rule; transit days; time spent in the United Kingdom due to unusual circumstances

    First, there’s the deeming rule, which considers whether you have three UK ties for the tax year or been present in the UK for 30 days or more without being present at the end of each day

    Even if you were not present at the end of the day, the deeming rule will change the number of days you spent in the UK. You should seek professional advice to determine the number of days you spent in the UK and whether the deeming rule applies to you.

    Second, there are transit days. Under the Statutory Residence Test, transit days are usually not counted as full days. A transit day is when you enter the UK from another country on your way to another.

    You must not have done any other business during your time in the UK for it to be considered a transit day, and you must depart the day after you arrive. Conducting a meeting or meeting up with business associates for lunch are examples of other types of business. Having breakfast or dinner with your Mum and Dad, on the other hand, would be considered part of your transit.

    You should seek clarification about your activities while in the UK, as they may have an impact on the number of days you spend here.

    Finally, if you are in the UK due to exceptional circumstances, such as a bereavement, you may be given special treatment in terms of the total number of days you have spent here. COVID-19 has come into play for many here recently, something we will discuss in a minute.

    The amount of time and type of work you did in the UK during your stay may also have an impact on the number of days you spent here with us. Location, type of work, and whether or not the work is voluntary are all factors to consider.

    The Automatic Overseas Test

    If you meet any of the following elements of the Automatic Overseas Test, you will be considered a non-UK resident.

    • You spent less than 16 days in the UK in the current tax year but were considered a UK resident in one or more of the previous three tax years.
    • You spent less than 46 days in the UK during the tax year AND were a non-UK resident for the previous three years.
    • You work full-time outside the UK and spend fewer than 91 days in the UK, and you work three hours or less on any given day for fewer than 31 days in the UK.

    The Automatic Residence Test

    If the Automatic Overseas Test is inconclusive or you fail all of the components, the Automatic Residence Test should be considered. You will be considered a UK Resident if you meet any of these criteria. Because complicated calculations are involved once again, you should always seek advice before making any decisions about your residency status.

    For starters, if you stay in the UK for more than 183 days during the tax year.

    Second, if you have a home in the United Kingdom and spend 91 days there in a row, including 30 days during the tax year. You will also be considered a UK resident if you have no permanent residence outside the UK and spend no more time there than is permitted.

    Finally, if you work in the United Kingdom for a total of 365 days without taking a significant break. However, there are a number of calculations and requirements to meet, so if you are in any way unsure, please seek advice (we’re here!)

    If you’re still unsure about your residency status after reviewing the previous tests, you should consider the sufficient ties test.

    Sufficient Ties Test

    The Sufficient Ties Test determines whether you have sufficient ties to the UK to be considered a resident. The following are examples of ties:

    • Family members in the United Kingdom (for example a spouse or children)
    • Accommodation defined as a place to stay that is available to you for a continuous period of 91 days (thus excluding hotels, but probably not your cousin’s house)
    • 40 working days of 3+ hours per day or more in the UK
    • In at least one of the previous two tax years, you spent more than 90 days in the United Kingdom.
    • During the tax year, you spent more days in the UK than in any other country.

    UK Residence Tests and COVID-19

    People who have been unexpectedly stuck in (or out of) the UK as a result of government policies relating to the COVID-19 pandemic’s rightfully worry about the direct impact on their tax residency status in the UK. Governments are closing borders or putting people in quarantine, which will affect where they are legally required to pay taxes.

    This disruption is causing significant concern for British expats who have returned home, as well as foreign nationals who visited the UK during the Coronavirus pandemic, as they are required to spend a limited amount of time in the UK in order to maintain their UK non-resident tax status.

    The Statutory Resident Test (SRT), as mentioned at the beginning of this article, has been used since 2013 to provide an outline of how much time someone can spend in the UK without becoming a UK tax resident. While the SRT is a complicated set of rules, if followed carefully, it is possible to avoid becoming a UK tax resident.

    Unfortunately, when authorities impose travel restrictions, lock-downs, and border closures (as they have in most countries due to the Coronavirus pandemic – especially when combined with health concerns), it is highly likely that more people will spend more time in the UK, potentially resulting in more people becoming UK tax residents when they really didn’t mean, or want, to.

    Is COVID-19 An Exception? What HMRC Says

    While the Statutory Residence Test is a strict set of rules in most cases, it does include a list of exceptions that can be used in unusual circumstances. This allows for the exclusion of certain periods of time spent in the United Kingdom. The maximum number of days that can be ignored in exceptional circumstances under the standard exemptions is 60. (sixty).

    The HMRC has defined what it considers to be “exceptional circumstances” in the following ways:

    “Days spent in the UK may be ignored if the individual’s presence in the UK is due to exceptional circumstances beyond their control. This will usually only apply to events that occur while an individual is in the UK and which prevent them from leaving the UK.”

    “Exceptional circumstances will normally apply where an individual has no choice concerning the time they spend in the UK or in coming back to the UK. The situation must be beyond the individual’s control.”

    Here’s what HMRC consider what an exceptional circumstance might be:

    “The type of events which may give rise to exceptional circumstances will be, by their nature, out of the ordinary and it is difficult to be prescriptive about what characteristics such an event would exhibit. However local or national emergencies, such as civil unrest, natural disasters, the outbreak of war or a sudden serious or life-threatening illness or injury to an individual are examples of circumstances that are likely to be exceptional.”

    Despite HMRC’s determination that the coronavirus outbreak was a “exceptional circumstance” as defined by the conflicts and exceptions to the rule, there is a risk that some individual decisions will not be considered beyond their control.

    For instance, there may not be a travel ban to a specific country, but you may choose to stay in the UK rather than travel. It’s currently unclear whether a decision based on that information would be considered an “exceptional circumstance,” especially in light of HMRC’s current guidance.

    It should also be noted that HMRC’s current guidance does not consider travel delays/cancellations to be “exceptional circumstances” under the rules. As a result, if a travel issue could have been predicted (e.g., it’s logical that other countries’ borders would be closed), it wouldn’t be considered an “exceptional circumstance.”

    Even with the restrictions and the pandemic being a clear “exceptional circumstance,” it’s easy to see how the HMRC could rule that certain amounts of time spent in the UK due to the coronavirus are not exceptional if you take the guidance literally.

    To help clarify whether the “exceptional circumstance” rules should be applied in a specific situation, we created the case of Simon:

    Simon works and lives full-time in another country, but he has family in the United Kingdom.

    Simon is a lawyer who lives and works in Dubai. Simon’s family remains in the UK because he works full-time in the UAE while also maintaining his non-resident status in the UK (using the “full-time work overseas” test).

    Simon would have to work full-time overseas to meet the requirements of this test (with no significant gap from his overseas work exceeding 31 days). He’d also have to stay in the UK for less than 90 nights and work for less than 30 days.

    He carefully manages his residency status on a year-by-year basis with the help of an accountant and is classified as a non-resident of the United Kingdom, which means he owes no UK tax.

    Simon has already spent 55 nights in the UK this tax year due to his wife’s illness and hospitalisation due to Coronavirus. Thankfully, his wife recovers completely after 55 days, but travel restrictions have been imposed during Simon’s time in the UK, resulting in him spending an additional 90 nights in the country, bringing his total time in the UK to 145 nights for the tax year.

    Overall, Simon’s return to the UK to care for his wife and family, as well as his continued presence in the UK due to travel restrictions, will be automatically accepted as “exceptional circumstances.” As a result, Simon can skip up to 60 nights in the UK, which is the maximum allowed under the “exceptional circumstances” rule.

    Simon would have only spent 85 days in the UK if the 60 days had not been removed due to “exceptional circumstances,” meaning he would still be classified as a non-resident. The exceptional days test, however, does not apply to the 31-day/significant break test for working full-time overseas under current law.

    As a result, despite the clear exceptional circumstances that brought him to the UK and forced him to stay, Simon would have failed the test and thus likely triggered UK tax residency.

    If this is the case, Simon may face additional UK tax liabilities on his employment income that he would not have faced otherwise, due to current tax laws.

    That the “exceptional circumstances” rules were not designed with such a large-scale pandemic in mind.

    HMRC has confirmed that the “exceptional circumstances” rules will apply to people trapped in the UK as a direct result of the current pandemic, given the truly exceptional circumstances surrounding Coronavirus.

    Furthermore, a specific Coronavirus exception could be introduced in the future, making it clear that any disruption during a specific time period will be treated more leniently. While we are optimistic that this will happen, it hasn’t yet.

    As you can now see, UK tax resident meaning is anything but clear-cut. It’s open to interpretation and to be being affected by things like COVID-19. It can be really tricky to figure out every tax year. That’s why the most sensible thing anyone who spends time in the UK, but does not want the tax liabilities that might come along with it, should make working with an experienced in the field tax expert a priority. You can enlist Pearl Lemon Accountants to do that for you by contacting us here.

    FAQs

    What defines a UK resident?

    A UK resident is someone who has physically lived in the United Kingdom for 183 days or more in the current tax year.

    Are you a UK resident?

    You are a UK resident if your only home is in the UK and if you have lived in the home for at least 30 days within the tax year or if you have physically lived in the UK for at least 183 consecutive days.

    If you would like more information, feel free to book a call with our experts!

  • Tip Pooling, Troncs and a Fairer Workplace for Everyone

    Tip Pooling, Troncs and a Fairer Workplace for Everyone

    Tipping dates from the 18th century, when customers in pubs would attach coins to notes handed to the barkeeper. The purpose of this monetary incentive was “to ensure promptness,” hence the term “TIP.”

    Tipping, like the industries in which it is found, has changed dramatically since then. In fact, few would have predicted the same generosity when enlisting the complimentary services of a hotel concierge or saying “thank you” to a home removal company when those coins were first attached to notes in pubs.

    Tipping has unfortunately been subjected to a great deal of criticism and regulation. Employees have not received their fair share in some cases, and businesses have  inadvertently implemented tip policies that are neither a reward nor an incentive.

    There is, however, tip pooling, which can be a fantastic solution for employees who receive tips on a regular basis. And when such a system is legally implemented under a tronc it can solve and prevent lots of financial and legal hassles too.

    What is Tip Pooling?

    When a portion of – or all – of the tips collected during a shift are put into one ‘pot,’ it is known as tip pool distribution. After that, the contents of the pot are redistributed among all employees.

    The advantage of a tip pool is that no one is left out; all employees are fairly compensated for their efforts based on the overall level of gratuity provided by customers. It can often reduce competition, especially among servers, and result in better customer service overall (or so we are told by industry experts.)

    Tip Pooling and the Law

    When it comes to tipping laws in the United States and the United Kingdom, things get a little more complicated. 165,000 businesses in the latter, for example, pay tips to their employees, demonstrating how what was once a friendly ‘off-the-record’ transaction between customer and server has evolved into a common, monitored form of remuneration.

    In the United Kingdom, tip pooling is referred to as a ‘tronc,‘ which is thought to be derived from the French phrase ‘tronc des pauvres,’ or ‘poor box.’

    A tronc is a pay arrangement used by restaurants to evenly distribute trips, service charges, and gratuities among their employees. They can be used for tip pooling and tip sharing (or a combination of the two).

    Payments made through a tronc scheme may be exempt from National Insurance contributions in some cases (NICs). This is the case if the payment is made in the following manner:

    not directly or indirectly allocated to the employee; or

    not paid directly or indirectly to the employee and doesn’t include or represent wages already paid.

    To run a tronc in your company, you should appoint a troncmaster (more on that later) to be in charge of tip distribution. By doing it this way, you’ll be able to meet the two requirements listed above while also ensuring that the payments can be made without NIC deductions.

    Aside from the odd name, HMRC recognizes a tronc as good business practice, and it is highly recommended if you want to follow the law (and who doesn’t?), as well as ensuring that employees are fairly compensated through tips. A good tronc can be key to attracting and hanging onto the best talent, another big plus for your business.

    Why is Tip Pooling Fairer?

    Consider a busy coffee shop with multiple employees who have varying levels of responsibility.

    John is in charge of taking drink orders, which are then forwarded to Jennifer to brew. Lydia and Paul, on the other hand, deliver the order to the table and check in to make sure everything is in order before passing the bill to John, who processes it through the POS.

    What happens if a customer tips Lydia? What happens to the rest of the chain? By putting that tip into a pool and evenly distributing it among all team members, everyone is fairly compensated.

    Isn’t it difficult to argue with logic?

    Tip pooling is also recognized by the UK government, and as such is subject to a set of rules (which we’ll go over later), ensuring that neither the employer nor the employee can take advantage of the system.

    Is Tip Pooling and Tip Sharing the Same Thing?

    You might be thinking to yourself at this point, “Well, this just sounds like tip sharing, which we already do.” They aren’t, however, the same.

    Tip pooling is not the same as tip sharing, as it turns out. When tips are distributed among employees at a set rate for each person, it is referred to as tipping out  in the United States (how long before that term makes its way over here?).

    These rates are usually defined by the employer as a percentage of the total tip pot, broken down by tips, sales, or category receipts.

    Tip sharing and tip pooling aren’t seen as adversarial; they can coexist peacefully in the same business.

    In Tip Pooling, How Should Tips be Distributed?

    So, you’d like to start a tip pooling program at your company, but how do you distribute the funds fairly?

    Thankfully, there are a variety of tip distribution methods to choose from, the benefits of which will vary depending on your operation and how your team is set up to work.

    Worked hours This is a method of evenly distributing all tips across the entire staff based on the number of hours worked. So, if you have £1,000 in tips and your team worked 1,000 hours, they will each receive £1 for each hour worked.

    Percentage based on the number of hours worked. You can distribute the pool according to a percentage associated with each role. For example, if the tip pool is £1,000 and the waiting staff receives 5% of the total tips, the waiting role will receive £50 in tips. Each employee in that bracket is then paid a percentage of the funds based on the number of hours they worked.

    Percentage, regardless of the number of hours. This is the same as the previous method, but it divides the tip pool evenly among the team members based on a predetermined percentage based on their role, regardless of how long each person worked. Regardless of the time of day. This eliminates all percentages and evenly distributes the tip pool among all players, regardless of other factors.

    The percentage method is the most popular method above, regardless of the number of hours. The best method for your business, however, is determined entirely by the makeup of your operation, your own attitudes toward tipping, and how your team is most likely to be motivated.

    The Advantages and Disadvantages of Tip Pooling

    Not convinced that tip pooling is a good idea? It isn’t appropriate for every business, which is why we’ll summarize the main benefits and drawbacks of this method of tip distribution

    Advantages of Tip Pooling

    Here are some reasons why you might want to use tip pooling:

    • It promotes teamwork because, by pooling tips, each employee will realize that their unique role in the overall process is valuable to customers, but that they can’t do their part without the help of others;
    • It eliminates table conflict, in which two or more servers argue over who deserves a tip based on the amount of time they spent dealing with a specific table; and it reduces income inequality by evenly distributing all tips among the front of house team, effectively eliminating disparities in earnings.

    The Disadvantages of Tip Pooling

    If you’re concerned about the following, your fears about tip pooling may be realized:

    • Resentment among the best-performing wait staff: why should they receive the same amount of tips as others when they are clearly doing more?
    • A drop in service quality – could a tip pool relieve the pressure to serve to your best ability if you’re a member of the waiting staff who knows the quality of your service is determined by the total tips you receive?
    • Low performers are rewarded – is it really fair that Sarah, who has consistently performed poorly during a given month, receives the same level of tips as Dave, who has smashed it?

    Tip pooling is a great way to fairly compensate employees, but it comes with its own set of issues. Each business will have its own too. Overall however, many find it’s the best way to go.

    How to Keep Your Employees’ Tips NI and VAT-free Via a Tronc

    Employers must comply with the Income Tax (Pay As You Earn) Regulations 2003. This means you must notify HMRC if you have a tronc that was created on or after April 6, 2004. Furthermore, you must supply the name of the troncmaster and keep it up to date at all times.

    When you’re establishing a tronc, you should keep the following in mind.

    • Confirm that there is a system in place for sharing tips, and figure out what it is.
    • Determine how the tronc will be paid (for example employees paying in cash tips or an employer paying in credit card tips)
    • Who and how does the tronc money get held (is there a tronc bank account, and if so, who manages it?)
    • What is the basis for tronc distributions, and who decides what that basis is?
    • Which employees are members of the tronc?
    • Whether the troncmaster accepts and comprehends his or her role (including the obligation to operate PAYE)

    Choosing a Troncmaster

    Establishing a tronc means choosing a troncmaster. This is something that HMRC insists upon, but has specific rules about. A troncmaster has to be independent of management. They can be an employee, but that often leads to big trouble, both in terms of distrust by other tipped staff and if they leave.

    There is a growing demand for troncmasters who are not employees of the company and thus cannot be influenced by their boss. Businesses value someone who is up-to-date on tronc rules and acts fairly and ethically – without bias, favoritism, or personal friendships or motivations.

    This is where Pearl Lemon Accountants can be a big help. Not only can we guide you through setting up your tronc, but also we can act as troncmaster, ensuring that everything remains fair, consistent and is compliant with HMRC regulations. We take care of the tips, you take care of the customers. Contact us today to learn more!

    FAQs

    How common is tip pooling?

    Tip pooling is not as common as one might believe in restaurants. Only 45% of restaurants today participate in tip pooling, which applies to restaurants of all kinds. 

    What is a valid tip pooling arrangement?

    Proper tip pool arrangements are regulations that surround the tip pooling concept. For example, with tip pooling, the employee is obliged to receive the minimum wage for their region. 

    This means that between their tips and salary, they should be reaching the minimum wage limit; if this does not occur, the employer is obligated to make up the difference.

    If you would like more specific information, feel free to book a call with our experts!

    Can a manager participate in a tip pool?

    No, they cannot. Supervisors and managers are not allowed to participate in tip pools, and they are not allowed to claim any portion of an employee’s tips as their own.

  • How the Employment Allowance Can Help Your Business Grow?

    How the Employment Allowance Can Help Your Business Grow?

    How the Employment Allowance Can Help Your Business Grow 

    The Employment Allowance – referred to, inaccurately, by some as the employer’s allowance – reduces the amount of National Insurance that businesses must pay by up to £4,000 per year, a possible real boon for a small business. Is it possible for your small business to benefit from this incentive? Let’s take a look.

    The Basics of Employment Allowance

    The scheme was put in place to help spur economic growth and encourage UK small businesses to hire more workers. All businesses with a total NI bill of £100,000 or less in the previous tax year are eligible to participate in it.

    A company can use the scheme to write off the first £4,000 of its annual Employers’ NIC bill (from April 2020).

    The Allowance is ‘claimed’ each month as the liability arises through your company’s payroll process. As a result, no Employers’ NICs are due until your company’s £4,000 allowance has been exhausted.

    So, is your firm eligible for this helpful break?

    • Companies are eligible for the Allowance if they pay Class 1 Employers’ National Insurance Contributions. This is, however, true for all limited companies.
    • Because they pay Class 2 and Class 4 Contributions, self-employed people are ineligible to claim against any profits they take personally. They can, however, make a claim if they employ people and pay Class 1 NICs.
    • If your company serves the public sector, you won’t be able to claim.
    • The Allowance is not available to sole proprietorships with no additional employees. The EA’s entire purpose is to encourage businesses to hire more people, so this only makes sense. As a result, if you’re a one-man-band with no employees, you won’t be able to claim the EA. This eliminates many professional contractor firms.
    • If your business employs one or more people, at least one of them, in addition to the director, must be paid more than the secondary NIC threshold of £8,840 per year.

    Setting Salary Levels with Employment Allowance in Mind

    Importantly, you will only benefit from this Government measure if you pay yourself (and your employees) enough to incur and claim Employers’ NICs.

    Furthermore, as salary levels rise, so do income tax and employee NIC liabilities, so there are several factors to consider when determining the ideal salary level.

    From April 6, 2021, the personal allowance (the amount you can earn before paying any income tax) is £12,570, and if your salary is £9,568 or less during the 2021/22 tax year this is known as the ‘Primary Threshold,’ you will not pay any Employees’ NICs.

    Employers’ National Insurance is paid at a rate of 13.8 percent on salaries above the ‘Secondary Threshold’ of £8,840 per year.

    How the Employment Allowance works in practice – £12,570 salary

    Is it worth paying an employee a  £12,570 salary during the 2021/22 tax year, as opposed to £8,840, if your company is eligible for the EA? Here are some numbers to help you decide.

    • The EA will offset the £514.74 Employers’ NI bill if the company pays its employee(s) a £12,570 salary.
    • In our example, no income tax is due on either salary because the Personal Allowance for 2021/22 is £12,570.
    • The company saves £708.70 in Corporation Tax by paying a salary of £3,730 more than the £8,840 salary level.
    • However, the employee has an additional Employees’ National Insurance bill of £360.24 to pay.
    • So, assuming your company is eligible to claim the EA, paying a £12,570 salary in 2022/22 will save you £348.46 compared to paying an £8,840 salary.
    • From 2020/21 onwards, the EA must be claimed each year in order to receive it, and it can no longer be carried over from year to year as it could previously.

    Confused? We’re not surprised. There’s more to the ‘simple’ employment allowance than people realise. Yet get it right, and it could benefit you, your employees and your firm’s chances of attracting top talent.

    Needed help with your accounting? Pearl Lemon Accountants work with businesses of all sizes and in all kinds of niches. Contact us today to discuss how we can help you.

    FAQs

    Is my business eligible for employment allowance?

    Your business needs to meet certain criteria to be eligible for employment allowance. An employment allowance can be claimed by a charity or business with less than £100,000 in National Insurance liabilities before the current tax year. 

    If you would like more information, feel free to book a call with our experts!

    How far back can you claim employment allowance?

    You can claim employment allowance as far back as 4 years.

    What is employee allowance?

    An employee allowance is a form of payment made to employees. It can be made to compensate employees for certain working conditions or even to cover expenses.

    If you would like more information, feel free to book a call with our experts!

    When can you not claim employment allowance?

    You cannot claim employment allowance if more than half of your business’s work is done in the public sector. An example of this would be NHS services or even local councils. 

  • Everything You Need to Know about Micro-entity Accounts

    Everything You Need to Know about Micro-entity Accounts

    A micro-entity (also known as a micro company) is a very small, privately held limited company. If you’re the director of a micro-entity, submitting micro-entity accounts to Companies House can save you time when it comes to preparing and filing your accounts. Micro-entity accounts are a simplified format that contains all the information that all statutory accounts must include. They are, however, not always the best option, as we are going to explain in further detail here.

    What are Micro-Entity Accounts?

    Despite the fact that all businesses must file a Company Tax Return with HMRC, small firms have options when it comes to their statutory accounts. You can submit them in a simplified format known as a “micro-entity account” if you want to save time and money.

    A limited company is classified as a micro-entity under the Companies Act 2006 if it meets two of the three conditions during the financial year in question. There can’t be more than one of the following in a company:

    • More than £632,000 in annual revenue
    • A total of more than £316,000 on the balance sheet
    • More than an average of more than ten employees in the calendar year.

    Micro businesses are exempt from some financial reporting requirements when preparing their year-end Companies Act accounts, thanks to the Small Companies (Micro Entities’ Accounts) Regulations 2013. Some businesses are not eligible for the micro-entities exemptions, such as:

    • Non-profit organizations
    • Public limited companies
    • Limited-liability partnerships (LLPs)
    • Investment projects (which look after a collective pool of investor assets)
    • Financial intuitions (such as banks)
    • Subsidiaries of larger parent companies that are included in the financial statements of the group

    This new micro-entity regime was created, HMRC claims, to ensure that the UK’s smallest businesses were not subjected to the same time-consuming requirements as larger businesses. Which in many ways makes sense.

    Should My Company File Micro-Entity Accounts?

    Filing micro-entity accounts has both advantages and disadvantages. On the one hand, filing a micro-entity will save you time and stress because you won’t have to include documents like a director’s report.

    If your limited company is just you and a couple of employees, you probably don’t have any shareholders who need to be kept informed about your progress. Your year-end accounts may simply be a compliance stumbling block that you’d like to clear as soon as possible. In this case, micro-entity accounts were created with you in mind.

    You can also choose to file ‘filleted’ accounts with Companies House, which limits the amount of information about your company’s performance that is publicly available. This can keep information about your financial situation private or prevent competitors from learning about it.

    Micro-entity accounts, on the other hand, may hold you back if you’re actively seeking new shareholder buy-in or funding to help your company grow. You may have a harder time securing additional investment or loans to expand your business if you don’t have a detailed financial picture of your operations to offer to interested parties.

    In fact, most of them won’t even look at your proposals without them. They might be called angel investors sometimes, but that does not mean they are not interested in making money, and as much of it as possible. A company without the ability to supply a detailed snapshot of their finances is often just not taken seriously by these folks.

     What’s the Best Way to Prepare Micro-Entity Accounts?

    If you want to prepare micro-entity accounts, you’ll need the following items:

    An abbreviated profit and loss statement (starting from gross profit rather than turnover)

    A simplified balance sheet (minus main heading such as debtors, creditors etc.)

    A report from an auditor (unless you choose to claim the Small Companies audit exemption)

    You won’t need to file a director’s report, unlike abridged accounts that small businesses can file. Many micro-entities are also exempt from auditing, so you won’t have to submit an audit report.

    You can also choose to fillet your accounts for public record to limit the amount of information available to the public. You’ll only need to file a balance sheet with footnotes in this case. Make sure to include a statement stating that the profit and loss account has not been filed and that your annual accounts have been delivered in accordance with the Small Companies’ regime.

    Even if you do file micro-entity accounts, it’s critical that you give your company’s members and shareholders as much information as possible in a private setting. They’ve invested time and/or money in your company, and they deserve to know how it’s doing.

    How Do You File Micro-Entity Accounts?

    Micro businesses can file their micro-entity accounts in a variety of ways, including through the Companies House WebFiling service. You can also use the Company Accounts and Tax Online (CATO) service to file your accounts with HMRC and Companies House at the same time. To do so, you’ll need your Government Gateway credentials as well as a Companies House company authentication code. You can also file your accounts on paper and post them in if it’s easier, but make sure you leave plenty of time.

    Should I Have an Accountant Handle My Micro-Entity Accounts?

    Filing micro-entity accounts can be difficult because you must adhere to the FRS 105 Financial Reporting Standard. Even if you’re used to preparing a profit and loss account and balance sheet, the abridged versions may leave you scratching your head. It’s best to use an accountant to file micro company accounts in order to ensure compliance and save time and hassle.

    An experienced accountant can also help you decide if micro-entity accounts are even right for you. As touched on earlier, they may not be the right option if you have big growth plans. Speaking of which, an experienced accountant is one of the best people to advise you on the financial moves to make to achieve that growth, making the investment in professional accounting services potentially priceless.

    Need help with micro-entity accounting? Contact Pearl Lemon Accountants today to discuss just how we can help you.

  • Basic Guide to Benefits in Kind: What You Need to Know Now

    Basic Guide to Benefits in Kind: What You Need to Know Now

     It’s possible that you’re receiving a benefit-in-kind if you receive any other benefits as part of your job in addition to your salary (BIK), or, if you are an employer you are offering them to your employees.  

    You may – often rightly- think of them as a workplace perk, or you may hear them referred to as “fringe benefits”. But you should be aware that while they may appear to be quite a nice bonus, even a reason to choose one position over another, they may not always be free. Not at least as far as HMRC is concerned.

    That means that it’s important that employers who offer benefits in kind, and the employees that receive them, understand the tax obligations attached to them. Nothing kills the pleasure of a perk faster than a notice from HMRC demanding unpaid tax when you may not have realised it was owed in the first place.

    What Counts as Benefits in Kind?

    Access to a company car that an employee is also allowed to use for personal purposes – such as driving their children to school and going shopping – private medical insurance, or even free canteen meals are all examples of BIKs. In other words, anything given to an employee that isn’t “wholly, exclusively, and necessary” for them to perform their job duties is considered a BIK.

    Why Offer Benefits in Kind?

    Although they are perhaps not as generous as they were back in the 1970s and 1980s, benefits in kind are usually used by employers as a tool to attract, and then retain, the top talent they need to help their businesses grow and thrive.

    Salary matching is a common practice in lots of business niches, so it is often the benefits in kind on offer that help a top employee prospect decide between two different positions. They might also be the reason they decide to stay, so, even though they technically represent an additional expense on the part of the employer, their ROI is often rather high in terms of staff retention and reduced turnover.

    Which Benefits in Kind Can Be Offered Tax Free?

    For the simple reason that they are tax-free, tax-free BIKs are one of the most common benefits you’ll come across in today’s work environments.  As a result of these benefits, neither the employee nor the employer are required to pay any additional taxes, and as no-one likes to pay a penny more in tax than they really need to, this makes these BIKs even more popular.

    While it’s not an exhaustive list – you can find one of those provided by HMRC here – here is a look some of the most popular options:

    • Employer contributions to a workplace or personal pension plan that has been approved as such by the government.
    • Subsidized canteen meals as long as they are available to all employees.
    • Leisure facilities such as a gym, pool table, or other forms of entertainment are available on-site, again, as long as they are offered to all employees.
    • Other on-site services, such as childcare, mental health services or other incidentals like personal fitness training.
    • Staff parties as long as all employees are invited and the cost per person does not exceed £150 per year.
    • As part of the Cycle to Work program, bicycles and cycling equipment (helmets, knee pads etc)
    • Gifts for non-work-related occasions such as birthdays, weddings, or retirement (but the total value of these gifts should not exceed £250 in a single year)
    • Trivial benefits worth less than £50 that are not cash or cash vouchers. Free coffee and tea provided in a break room is a common example of such a perk.
    • The use of the office car park, provided all employees are offered a space (you can still maintain better parking for executives though)
    • Uniforms or safety equipment that is required to complete the job.

    What Benefits in Kind are Taxable?

    So which BIKs does the government expect tax paid on? All the following benefits in kind, while often very desirable, are also taxable:

    • A company car that an employee can also make use of for personal purposes. The total value of this benefit will be calculated using the car’s list price, its carbon dioxide emissions, the type of fuel it uses (with the exception of pure electric vehicles), and the car’s registration date.
    • Fuel for a company car which an employer provides and which employees are free to use for personal purposes.
    • Accommodation that is provided for free or at a reduced rate AND where employees are not required to live in order to perform their job duties.
    • Non-specific regular clothing, also known as clothing allowance, referring to clothing that isn’t required for an employee to do their job, such as protective goggles. This is frequently defined as clothing that could also be worn outside of work.
    • Private medical insurance
    • Employees’ children’s school fees
    • Interest-free or low-cost loans provided by a company or business to an employee for amounts greater than £10,000
    • Holidays or holiday vouchers

    How is the Tax Calculated on Benefits in Kind?

    Depending on what benefit is being offered/received and how it has been administered, there are different and complex rules about what kind of tax must be paid and by whom. In general, BIKs are subject to income tax, employer’s national insurance, and employee’s national insurance.

    You will be charged income tax if you receive a BIK as an employee. To figure out how much, multiply the taxable value of the benefit by your personal income tax rate band (20% for basic rate, 40% for higher rate, and 45 percent for additional rate), which HMRC defines as the cash equivalent. This means that if your gym membership costs your employer £600 per year and you are a basic rate taxpayer, you will have to pay 20% of £600 in income tax on this benefit.

    Employers who offer BIKs to their employees must also pay tax in the form of employer’s NI, which is currently 13.8 percent. This is applied to the benefit’s taxable value once more. The cost of providing BIKs, on the other hand, is a tax-deductible expense that can be deducted from profits for corporation tax purposes. Employers may choose to offer BIKs as a less expensive alternative to paying employees a higher salary.

    Although an employee may be required to pay income tax on the BIK, they will not be required to pay NI on it in most cases, resulting in a tax savings. To avoid attracting employee NI, it is critical to administer BIKs in such a way that the employee does not receive cash or an equivalent, such as vouchers, as this will be considered earnings and subject to both income tax and employee NI.

    How is Benefits in Kind Tax Reported and When is it Due?

    It is the employer’s responsibility to declare the BIKs that have been received by employees. They must do so by completing and submitting the P11D form to HMRC by the 6th of July following the tax year in which the benefits were received. If an employee received BIKs between April 6, 2019 and April 5, 2020, the P11D form deadline would be July 6, 2020. The form provides a list of all possible benefits from which the employer can choose the ones that are relevant to the employee and state the value of the benefit provided. A copy of this form should be given to the employee as well.

    Employers must also fill out the P11D(b) form, which is available on the HMRC Government Gateway. Employers can pay their National Insurance contributions on the BIKs if they submit the P11D(b) form along with the P11D.

    The BIK is subject to income tax for employees. There is no need for you to do anything because the payment will be deducted automatically from your paycheck. When you receive a copy of the P11D from your employer, you should double-check that the benefits and value have been reported correctly. If there are any discrepancies, you must notify your payroll department as soon as possible.

    Benefits in kind, while great for lots of reasons, can cause some serious tax headaches if not managed properly, both for the employers that pay them and the employees that receive them. To avoid these professional help is always the best way to go if you are in any way unsure about what you are doing. Pearl Lemon Accountants can offer such help. Contact us today to learn more.

    FAQS

    What is a benefit in kind?

    A benefit in kind (BIK), also known as “fringe benefits”, are considered additional pay or allowances (a non-cash benefit) that have monetary worth but are excluded from the wages in a paycheck.  

    What  are some examples of benefits in kind?

    Examples of benefits in kind include the use of a company vehicle, housing allowances, childcare expenses, health insurance, life insurance, relocation expenses, etc.

    Are benefits in kind classed as income?

    Yes and no. Some BIKs are considered non-taxable. However, other BIKs are included in tax returns and are treated as taxable income. A few BIKs that are not considered taxable include disability insurance, adoption and educational assistance, health insurance, etc. Want more detailed information? Let’s chat!

    Which are the most common in-kind benefits?

    The most common BIKs are:

    • private health insurance, 
    • pension contributions, 
    • childcare expenses, 
    • education subsidies, 

    relocation expenses, and many more.

  • 10 Reasons Your Contract May Fail the IR35 Test

    10 Reasons Your Contract May Fail the IR35 Test

    10 Common Reasons Your Contract Might Not Pass the IR35 Test

    Are you a contractor, or representative of a personal service company trying to keep your contracts outside IR35 and pass the tough IR35 test? If so, this blog post is for you.

    If, as an entity we just described, you sign a contract that falls under IR35, you could end up paying a significant amount of extra tax and National Insurance Contributions, either during the contract or later if HMRC investigates you.

    Nearly all IR35 issues that could mean your contract is caught could be resolved before they become a problem if you get your contract reviewed for IR35 before signing it and in good time to allow negotiation with the agent or client.

    Here are ten things that contractors should look for in their contracts to see if they are IR35 compliant:

    Position History

    Contractors should attempt to double-check whether the advertised position is for a legitimate contractor or an employee. If the contract is to cover a role that was previously filled by an employee, there’s a good chance that the contract, and the client’s expectations, will be for a worker who shares all of the characteristics of an employee, rather than a genuine contractor working outside of IR35 and on their own dime. Check the background of the contract, or it may fail the IR35 audit.

    Past Status Rulings

    HMRC may have already left its imprint on the client’s business, having looked into previous contractors in specific roles and ruled that they fall under IR35. The contractors may have moved on to a new role outside of IR35, and the client may have re-advertised for a contractor, but will not want to advertise that the position is within IR35.

    Because this type of IR35 trap is difficult to spot, it’s critical that the contractor receives a watertight contract; otherwise, the contractor will fail IR35.

    Contract Creation Woes

    HMRC has a finely tuned nose for contracts that have been cobbled together from various sources in order to save money on legal fees – this is often an instant IR35 fail. A contractor may get a contract like this past an agent or client (who aren’t subject to the IR35 penalties), but tax inspectors see thousands of documents like this every year and will immediately place a contractor under the IR35 umbrella.

    When contractors must draft their own contracts, they should obtain a framework or draft from a reputable source and, at the very least, have it reviewed by an expert before sending it to the agent or client. If they don’t, the contract is likely to fail IR35.

    Control Issues

    The traditional tests of employment that will place a contractor inside IR35 are supervision and control. Control can be found in contracts under the headings of:

    • The contract specifies the start and end times.
    • The contract specifies which days the contractor should work, as well as lunch break times and duration.
    • Specific clauses stating that the client is in charge of the contractor’s supervision and control.

    All of these clauses are common in employment contracts, but they should never appear in a contractor’s business-to-business services contract, as it will most likely fail IR35 tests. True contractors, not the client, decide when and how they work.

    Watch Out for Substitution

    Another common employment criterion is whether the contractor can provide a replacement. If they truly can and do so on a regular basis, the contract is almost certainly outside of IR35.

    However, if there is no right of substitution clause in the contract, or if the client explicitly states in correspondence, such as emails or other records, that the contractor should never consider sending in a substitute, the contract will almost certainly fail IR35.

    MOO

    Under the contract, is it possible for the contractor to work on projects for multiple clients at the same time, or does the client have the right to veto other contracts? If the contract seems to specify exclusivity, stating x hours per week at y rate on an ongoing basis and requiring the contractor to take whatever work the client throws at them, IR35 is almost certainly violated as it implies MOO is present aka a ‘mutuality of obligation’.

    Financial Risk

    Regular, guaranteed weekly or monthly work specified in a contract often appears to be more akin to an employee’s wage contract than professional fees paid to a contractor’s service company.

    To stay IR35 compliant when project milestones are met, a contractor should issue an invoice. If the client requests a weekly invoice, it should include information about the work done, as well as the hours worked and the rate. Any contract errors must be corrected by the contractor on his or her own time, as stated in the contract.

    Equipment Issues

    Contractors are frequently required to use the client’s equipment, possibly for reasons of safety and security. If there is a good business reason why the contractor cannot use their own equipment, this is usually not an issue that will cause a contract to fail IR35.

    Contractors should, however, buy their own equipment if possible and use it whenever they can; if necessary, a contract clause highlighting this point should be included.

    Too Many Organizational Ties

    If a contractor becomes so ingrained in a client’s organization that they appear on phone lists, organizational charts, are volunteered to be a fire marshal, or have staff reporting to them, the contract fails IR35.

    The contractor should maintain a professional distance from the client’s corporate structure and only take on responsibilities that are not specified as part of the project in their contract when it is industry standard, such as safety responsibilities in construction or offshore work. No matter what their contract says, a contractor can be found to be inside IR35 if they appear to be an integral part of the client’s business.

    Implied Intentions

    The contract should always state the contract’s and client’s or agency’s intentions. Not stating in the contract that the client and contractor’s intentions are that of a supplier and customer, rather than employee and employer, is not an IR35 fail, but it does not help the contractor’s case when and if HMRC uses the contract to try to prove they are outside of IR35.

    The importance of evaluating the IR35 status of every contract before signing it is demonstrated by these common IR35 fail points. HMRC will be looking for evidence that your contract falls within IR35, so make sure you do your homework and don’t give the taxman the proof they need to force you to pay tax as a “disguised employee.”

    IR35 has become a highly complex area of employment and tax law after two decades of case law and legal precedents, so you should always seek expert advice. Pearl Lemon Accountants can act as those experts, ensuring that every contract you sign is compliant with IR35 regulations. To learn more, please contact us today.

    FAQS

    What happens if IR35 catches you?

    If IR35 catches you, you must pay NICs (National Insurance Contributions) and income tax.

    How do I pass an IR35 assessment?

    To pass an IR35 assessment, a few things need to be confirmed.

    • First, any task changes need to be included in a new contract.
    • Second, the client is not allowed to provide input or contribute to the overall work at all.
    • Third, the client cannot determine where the work is done. That is only determined by the task itself or you.

    Can a contractor appeal the IR35 determination?

    No. If a contractor disagrees with the IR35 determination, they need to bring it up to HMRC if they wish to challenge the decision further.

    If you want more specific information, feel free to book a call with our experts!

  • Personal Service Company: What It Is and Why You Might Want to Form One

    Personal Service Company: What It Is and Why You Might Want to Form One

    When then-Chancellor Gordon Brown used the phrase “personal service company” to introduce the well-known legislation IR35 in 1999, it caught everyone’s attention in the world of business (and especially accounting)

    There is no clear definition of a personal service company (PSC), though it is commonly used to refer to the limited company director who owns the majority, if not all, of the shares when discussing contracting. But here we are going to take a closer look at what a PSC is, why the exist and whether it’s right for you.

    Why Work Under the Personal Service Company Umbrella?

    Many recruitment agencies and private clients across all kinds of business niches will not hire self-employed individuals unless they own their own limited company, so personal service companies are most commonly used for contract jobs.

    This is for a number of reasons, the most important of which is risk. When a client hires someone for contract work, they don’t want to sign a contract with them and, as a result, they don’t want to be in an employment relationship with them.

    This isn’t meant as a criticism of the individual or their skills; they simply don’t want the added responsibilities of a full-time employee, such as holiday and sick pay. As a result, they use recruitment agencies, not only because they can quickly hire in skills, but also because they have another layer of “protection” between them and the contractors.

    There are numerous benefits to contracting through a limited company, some of which are listed below:

    Working via a limited company means that you may be able to increase your take-home pay. Limited liability companies (LLCs) or personal service corporations (PSCs) are widely regarded as the most tax-efficient way of doing business for individuals or small groups of contractors.

    The process of forming a limited company is likely to be much faster and easier than you think, and can often be completed in a single working day. Pearl Lemon Accountants offers limited company formation as part of our accounting services and often when you tell us in the morning you need it done we can have it done by the end of business.

    Because they have their own registered company name, limited companies are thought to appear more professional. Having the word “limited” in your company name will give you a more respectable air, which may give you an advantage when it comes to landing new contracting jobs.

    Contractors who work for a limited company can claim a broader range of business expenses. You can claim a cost as a business expense if you can define it as solely and exclusively for business purposes. And with the right accountant to guide you, that can apply that to a lot.

    Personal Service Companies and IR35

    As previously stated, the term “personal service” was coined as a result of the implementation of IR35. IR35 was enacted in April 2000 to combat the practice of misrepresenting one’s employment status.

    In a nutshell, IR35 prevented full-time employees from working as a limited company contractor on Fridays and returning to their desks on Mondays, reaping the tax benefits of running their own limited company without the risk.

    If you consider your limited company to be a personal service company, you must be fully aware of IR35 and ensure that all contracts you enter into are reviewed for IR35 status. If your contract falls within IR35, you’ll have to pay more tax. However, there are still many benefits available for your company’s operating costs; but, beginning April 1, 2017, the government implemented changes affecting contractors working in the public sector that eliminated the 5% tax relief that used to be offered to personal services companies.

    How Will Hiring a Personal Service Company Accountant Help?

    Many contractors who work through limited companies or personal service companies hire an accountant who specializes in the contractor market to assist them with their tax and financial matters. A personal service company accountant will handle your business and personal tax needs, as well as provide ongoing tax advice and assist you in contracting in the most tax-efficient manner possible.

    And we mean more than just helping you stay on the right side of HMRC. Working with Pearl Lemon Accountants will also give you access to expert financial planning advice to help grow your personal service company income, and who doesn’t aspire to that? Get in touch with us today to chat about just how we can help you.

    FAQs

    What is a Personal Service Company (PSC)?

    A Personal Service Company (PSC) is an organisation that provides personal services by a single contractor, usually the primary shareholder of the business. A PSC is customarily known to be a limited company, meaning that the proprietor or the company director works through the organisation rather than directly with clients.

    What qualifies as a personal service company?

    A company can qualify as a personal service company if they provide services in certain industries. For example, they can work in industries like accounting, consulting, performing arts, engineering, law, etc.

    If you would like more detailed information, feel free to book a call with our experts!

    Are personal service companies illegal?

    No, they are not. As long as the personal service contract includes the actions that will be performed i.e 

    What is the difference between a personal service company and an umbrella company?

    Well, a PSC is an organisation that provides personal services. In contrast, an umbrella company is a business that acts as an intermediary between two parties (usually a client and a contractor). 

    Looking for more information? Book a call with our experts today!

    Who should set up a Personal Service Company?

    Anyone who doesn’t mind doing at least 20% of the overall personal services offered by the organisation by themselves. 

    Self-employed professionals own most PSCs, so if you’re looking to start your own business and provide personal accounting, engineering, or even law services, this might be a good option.

    If you would like more detailed information, feel free to book a call with our experts!

    Is a limited company a personal service company?

    Yes, it is. PSCs are actually the most common type of limited companies that focus on providing personal services, usually from only one individual – the owner or primary shareholder.

  • Do You Need a Self-Employed Accountant?

    Do You Need a Self-Employed Accountant?

    Starting out as a freelancer or contractor can be intimidating, and there are numerous factors to consider, including whether to hire an accountant to handle your tax obligations and other financial issues. As you probably already know, outsourcing has a lot of benefits and drawbacks, but should your tax and financial matters be one of them?

    Let’s take a closer look.

    Limited Company vs. Sole Trader

    You have no legal obligation to hire an accountant if you work as a sole trader. You may believe you don’t need one if your business is relatively straightforward, and you keep track of your invoicing, receipts, and have a good idea of the expenses you can claim. The amount of work – and financial knowledge and expertise that calls for – is a big shock to some. A shock that quickly sends them on a hunt for a good self-employed accountant.

    Contractors, on the other hand, have more complicated tax obligations. As a result, most contractors who work through their own limited company choose to outsource this aspect of business ownership to a trusted accountant, even though it is not required. The legal hassles – and potential financial hits bad accounting can result in are often just not worth the risk.

    What Can a Self Employed Accountant Offer That Software Can’t?

    When you decide to go it alone, either as a sole trader or a limited company, you’ll see 1,001 ads and articles about finance software that would be perfect for your needs. Run your business on QuickBooks! Sounds great, as many of these softwares are pretty cheap, but the reality is that they are just that, software, and they come with a pretty steep learning curve much of the time too.

    So should you invest in the services of a self-employed accountant? We think in many cases the answer is yes, and not just because, as self-employed accounting experts, we are biased, but because doing so offers all the following benefits (and more)

    Qualified Tax Experts, You Need Them

    Tax is complicated at the best of times, whether it’s VAT, income tax, IR35, or corporation tax. To ensure compliance, you must have a thorough understanding of complex tax legislation and stay current on any reforms that are implemented. It goes without saying that this takes a lot of time.

    Self-employed accountants are experts in their field and can not only advise you on a wide range of tax issues, but also provide you with peace of mind when it comes to filing your tax returns. To put it another way, they’ll keep their ear to the ground, know the rules inside and out, and can handle everything on your behalf. Because nothing spoils the joy of self-employment faster than a nasty letter from HMRC.

    Proper Financial Planning

    If you want to expand your business, make investments, buy a house, or start putting money aside for retirement, an accountant can help you with both personal and business matters.

    They can recommend money-saving strategies, connect you with mortgage experts, and assist you with other aspects of wealth management.

    Time Savings

    Bringing on an accountant to save time is likely to be cost-effective. It will free you up so you can focus on your work – work for which you are compensated and which will cover your accountancy fees. You can spend more time doing what you do best, whether it’s coding, developing, marketing, or engineering, by hiring a specialist self-employed accountant.

    The bottom line is that you’re always learning as a self-employed person. In addition to making sure your business stays on track financially, it’s always good to have a helping hand to refer to when you’re learning something new. A good accountant can be that.

    Need an accountant to help you navigate the sometimes choppy financial waters of self-employment? Pearl Lemon Accountants can be that helping hand we just mentioned. Contact us today to learn more.

  • Simple Assessment Explained

    Simple Assessment Explained

    Important Note: Simple Assessment was halted in May 2018 as resources were reallocated to prepare for the United Kingdom’s exit from the European Union. Because of the coronavirus outbreak in 2020, the rollout is likely to be further delayed (factual as of May 2021) and so some of what follows is based on the intention of the scheme, not the way in which it is being implemented right now (May 2021)

    Hear about Simple Assessments replacing Self Assessments but not really sure what that means? Here we are going to take a closer look.

    Individuals in Simple Assessment are not required to file a tax return in order to pay tax on their taxable income. Rather, HMRC sends the individual a tax calculation for the tax year (PA302). This should be viewable in the taxpayer’s Personal Tax Account as well.

    The Simple Assessment is based on data provided by the Department for Work and Pensions (DWP) and other organizations to HMRC. As a result, it’s critical to double-check the figures on the Simple Assessment calculation to make sure that HMRC has the right information and has made a fair assessment.

    Who Will Simple Assessment Be Applied to?

    For the 2016/17 tax year, HMRC introduced Simple Assessment for certain taxpayers with only a state pension.  HMRC also plans to use Simple Assessment for other straightforward cases, such as certain individuals with multiple sources of income who would normally receive a P800 (a PAYE reconciliation).

    If you have already received a P800 and the first letter requesting voluntary payment of the tax due, Simple Assessment is not used.

    If HMRC needs to reconcile your income tax for more than one tax year, Simple Assessment is not used.

    Individuals cannot register for Simple Assessment on their own behalf; HMRC uses Simple Assessment at their discretion and has sole power over who it applies to.

    What Will Simple Assessments Look Like?

    Simple Assessment is intended for taxpayers with straightforward affairs, where HMRC believes they have already received all the information required to calculate the taxpayer’s liability, either directly from the taxpayer or from third parties. Individuals and trustees can get one from HMRC.

    Simple Assessment will be applied to the following taxpayer groups:

    • New state retirees who earn more than their personal tax allowance.
    • PAYE-eligible taxpayers who are unable to have the tax collected through their tax code

    HMRC will issue a SAC, which will be in the form of a P800 or PA302 calculation.

    This will figure out how much tax a person owes based on their:

    • PAYE earnings, state pension, and employer pension
    • As reported by their employer, their benefits and expenses
    • Interest on savings

    All of this will come from information as reported to HMRC directly by a taxpayer’s employer, pension provider, government, or banks.

    Unless there is chargeable income or gains that must be declared under Self Assessment, an individual who receives a SAC does not need to notify HMRC of tax liability (SA).

    • If HMRC intends to issue a SAC, they can withdraw a notice to file a Tax Return.
    • If a person receives a withdrawal notice, they will not be charged a late filing penalty.
    • The SAC will show the amounts that are subject to income tax and capital gains tax, taking into account any applicable relief or allowance.

    Is it Possible to Appeal a Simple Assessment?

    If you disagree with the Simple Assessment, you have 60 days from the date of the Simple Assessment to file an initial appeal.

    If you do not object to the Simple Assessment within 60 days of receiving it, it will be finalized automatically. That’s why going over it as soon as it becomes available is important (unless you don’t mind potentially being taxed unfairly.)

    When is a Simple Assessment Tax Payment Due?

    Tax due under a Simple Assessment is due on the 31st of January following the end of the tax year – the normal Self Assessment income tax payment date – or three months after the date of the Simple Assessment, whichever is later.

    Payment can be made online through your Personal Tax Account, or by mailing a cheque made payable to ‘HM Revenue and Customs only’.

    On the back of the cheque, write the reference number from the Simple Assessment letter. There is no payslip to send with the cheque, but HMRC will send you one if you contact them as the lack of one can be disquieting. A lot of cheques are sent to HMRC, so this failure is a little puzzling.

    Make sure you submit this request in advance to avoid being late with your payment. You could also enclose a brief covering letter with the check, explaining that the payment is being made to settle a Simple Assessment tax bill for the relevant tax year. It’s also a good idea to staple the check to the letter.

    Do Simple Assessments Attract Interest and/or penalties from HMRC?

    In the case of Simple Assessments, HMRC has the authority to charge interest and penalties for underpaid tax as well as penalties for late payment of tax.

    They are currently not doing so, according to our information, as the program is on hold for most people. It’s almost a certainty that they will do so when it begins to roll out in earnest again, though.

    What Records Should I Keep for Simple Assessments?  

    People in Simple Assessment are not required by law to keep records.

    However, you may want to keep some records for your own purposes. Actually, you should, especially in the case of an appeal.

    There is no announced date yet for the continued rollout of Simple Assessments. If you might be subject to them in the future, it’s a good idea to keep an eye on financial news about them so that you – and your accountant – aren’t taken by surprise by the change when it does apply to you.

    FAQs

    How do you query a simple assessment?

    You have 60 days from the day you received the simple assessment to query your assessment with HMRC in writing or over the phone. 

    If you would like more information, feel free to book a call with our experts!

    When was Simple Assessment introduced?

    Simple Assessment was introduced on September 2017 by HMRC.

  • Credit Control – How to Get it Right Every Time

    Credit Control – How to Get it Right Every Time

    One of the most important aspects of running a successful business is effective credit control. Your business’s cash flow can be severely impacted if money does not come in on time, and the resulting problems can quickly spiral out of control.

    Effective credit control is an important process that begins with getting to know your customers before selling to them and ends only when you’ve been paid. Here we are going to take a step-by-step look at credit control best practices to help you ensure you get paid on time, every time.

    Before the Sale Credit Control Best Practices

    Credit checks on potential customers are a must, as are strict credit control procedures that your sales and credit control teams understand and adhere to.

    The Importance of Setting a Credit Control Policy

    Your accounts receivables team should implement a coordinated and professional credit control procedure by clearly laying out a day-by-day strategy from the time the order is placed until the invoice is paid. From there make sure that the appropriate levels of training are provided so that all stages are properly completed, communicated, and adhered to. No special favours to certain people, no ‘we’ll let it slide this time’, or everything will fall apart.

    Get to Know Your Customer’s Payment Profile

    Before committing to credit terms, it’s becoming increasingly important to get to know your customer. The first step is to collect all the necessary business data by having new customers complete an application form.

    Using this information, you can ask a credit expert to check the credit risk posed to your company using one of the many credit rating services available on the market. Banks do this before they issue business or consumer credit, and you should too.

    Check Your Customer’s Terms

    It’s critical to check for any onerous terms imposed by your customer that may override your company’s own Terms & Conditions of Sale. Before delivery, if at all possible, send out an order acknowledgement to reaffirm your terms.

    To demonstrate your seriousness, use this opportunity to explain your credit control procedure in the event of late payment, such as charging interest, taking legal action, or referring the debt to a specialist commercial debt collection agency.

    Keep a Stop List

    It can often help to put persistently late-paying customers or those with a poor credit rating on a “stop list” or a “watch list” to ensure due diligence when selling to these companies in the future.

    Businesses on the stop list should be notified and should not be supplied with any additional goods or services until at least all outstanding invoices have been paid, while those on the watch list should no longer be offered credit terms without an up-front payment or deposit.

    Credit Control After the Sale

    This is the most crucial stage of successful credit control, from timely invoicing to maintaining regular contact with your customers.

    Send All Invoices in a Timely Manner

    It may seem pretty obvious, but sending invoices to customers as soon as an order is fulfilled is critical, as any delays in invoicing will generally result in delays in receiving payment. The process can be sped up even further by faxing or emailing the invoice rather than mailing it.

    It’s also crucial that the invoice is addressed to the correct person and that the information it contains is correct. Make sure to include purchase order numbers or vendor references whenever possible, as such things are great for both parties to reference later.

    State Your Terms and Conditions Clearly and Firmly

    Your invoices must be clear and easy to understand, with your credit terms, the actual payment date, and the acceptable payment methods and details prominently displayed. Make sure you don’t make the mistake of choosing fancy looking invoices over easy to read and accurate ones.  

    Work on Positive Customer Relationships

    Having a pleasant and positive relationship with your customers has a number of benefits. It will not only encourage them to buy more goods and services from your company, but it will also increase your chances of getting paid on time; the more they like you, the less likely they are to keep you waiting.

    It’s always a good idea to call ahead of time to ensure that your invoice is in the system, to avoid any disputes, and to make sure that your payment is at the top of the payment queue.

    Dealing with Difficult Beyond Terms Issues

    Chasing customers for past-due payments can be difficult and uncomfortable, but you must act quickly and decisively to achieve the best results.

    Review Your Sales Ledger Often

    Knowing when an invoice exceeds its credit terms is a crucial aspect of credit control. Your accounts department or credit controllers should review your sales ledger on a regular basis to ensure that your customers’ payment activity is always tracked.

    Begin the Chase Early

    When an invoice exceeds its credit terms, the pressure is on to collect the debt in full, as the likelihood of collecting the debt in full decreases as the debt matures. As a result, it’s critical to speak with the person in charge of your invoice right away to find out why you haven’t been paid and when you should expect to be.

    Don’t Be Afraid to Get Tough

    Asking customers for money they owe you, despite the fact that it is rightfully yours, can be a daunting task – especially for those larger than you. It’s important to remember that by not paying on time, they’ve harmed your company’s cash flow and exploited the trust you put in them by offering credit terms. You have a right to go hard.

    Call in the Professionals

    When you’ve done everything you can to recover the debt, it’s critical to make the most of every resource available to you.

    Specialist commercial debt collection agencies excel at recovering particularly outstanding debts, devoting the time and attention that you may no longer be able to afford to each individual debtor.

    Ongoing Credit Control Best Practices

    From benchmarking to insuring against bad debts, there are always things you can do behind the scenes to ensure your credit control process is as efficient as possible.

    Keep an Eye on Collections Performance

    Always examine your company’s credit control performance, determining whether the process can be made more efficient, whether the team is too big or too small, and how your credit terms compare to those of your competitors. The comparison of your average debtor days to the industry average is crucial to this process. You can keep your company on the front foot by reacting to the latest trends.

    Insure Against Late Payments

    Credit insurance safeguards a company’s cash flow from the effects of late payments and bad debts by protecting it from non-payment due to insolvency or prolonged default, and policies can be tailored to meet your specific needs.

    Stay in Your Bank’s Good Books

    Because late payments can cause serious cash flow problems for your company, it would be great to be able to turn to your bank for short-term funding to bridge the cash flow gap. To stay in their good books, it’s crucial to keep in touch on a regular basis, attend all scheduled meetings, and let them know right away if you’re having any short-term cash flow issues.

    Remember to Thank Your Good Paying Customers

    Remember to send a thank you to all of your on-time paying customers! It not only shows you appreciate their punctuality, but it also improves customer relations and may lead to additional sales.

    Consider Getting Credit Control Help

    Given its importance to the success of your business – particularly for those with a large debtor book – credit control should be an everyday business task. As a result, hiring a full-time credit controller who spends all of their time keeping the business’s sales ledger up to date, building rapport with your customers’ accounts departments, and performing basic credit control tasks could be a serious plus.

    Pearl Lemon Accountants can help with your credit control issues. Get in touch today and let’s chat about how we can help you.

    FAQs

    What is credit control?

    Credit control is a business strategy that allows credit to be given to customers (usually those with a good credit standing) to purchase products and services.

    How do you do credit control?

    The are a few steps you can take to do credit control.

    1. Make sure procedures, and payment terms are agreed to from the beginning.
    2. Be sure to check up on aged debtors regularly.
    3. Confirm that your customers have received the necessary invoice, and be sure to remind them of the upcoming due date.
    4. Late payments should be pursued every 7 days until the payment has been received. You can also automate this to make it easier to pursue multiple late payments at once.

    If you would like more detailed information, feel free to book a call with our experts!

    What are the types of credit control?

    There are three kinds of credit control, each with its own risk. Restrictive, moderate, and liberal are the three most common types of credit control.

    Why is credit control necessary?

    Credit control is necessary for every business as it decreases the chances of racking up bad debt and the accumulation of unpaid invoices.

    What are the benefits of credit control?

    Credit control has a few benefits, including increasing your organisation’s cash flow and reducing negative debt, among other things.

    What are the limitations of credit control?

    For starters, having poor credit control can compromise the overall cash flow of the organisation, thus making it tough to pay anything you owe, such as employee salaries, suppliers, etc.

    If you would like more detailed information, feel free to book a call with our experts!