Pearl Lemon Accountants

Tag: business tax basics

  • VAT on Business Expenses – What You Need to Know

    VAT on Business Expenses – What You Need to Know

    VAT on Business Expenses – What You Need to Know

    Expenses are one of the most perplexing aspects of VAT, so don’t worry if you’re finding it all a little overwhelming.

    In this piece, we’ll walk you through the minefield of VAT on expenses and highlight the types of issues you can face in real life that you may be confused about.

    VAT on Expenses: Where to Start

    It’s important to note that expenses are handled the same as any other purchase you make for your company; the fact that they’re paid for by a member of staff makes no difference.

    There is one easy guideline to remember: if the expense was incurred totally, exclusively, and necessarily for the benefit of the business, you can claim it as an input on your VAT return.

    It’s crucial to keep in mind that HMRC may have a different definition of what’s ‘for the business.’ If any of these conditions are broken, you’ll need to treat the expense differently, which is what this piece is all about.

    In general, a solid expenses system will contain all the features needed to deal with VAT; all you have to do now is make sure you’re using the functions correctly. Once you’ve got a decent system in place, you’ll need to draft and distribute a detailed yet easy-to-understand expense policy to your staff.

    Make sure your new expenses policy is distributed to all employees and that any queries they may have are answered. After all, you can’t complain if an employee violates company policy on expenses if you haven’t told them what it is.

    Should You Claim VAT on That Expense?

    This is where the majority of people experience issues, so we recommend using a layered approach.

    For the first ‘layer,’ you will identify expenses that are obviously claimable – that is, VAT has been paid, and the expense was solely for your firm.

    For example, an employee might use their own credit card to purchase advertising on behalf of the firm, perhaps to score a deal. This was obviously all about the firm, and is clearly a VAT reimbursable expense.

    The next ‘layer’ is to determine if the expense was incurred partially for the benefit of the company.

    As an example, employees frequently agree with their employers that they will use their personal mobile phones for work or that they will pay for software to use on behalf of the firm and then claim the costs as expenses. In these instances, you may be able to reclaim the percentage of the cost that is related to the quantity of business use.

    The final ‘layer’ is determining whether or not the expense is reimbursable at all.

    Is the spending solely for the benefit of the employee? Is it a matter of entertainment or subsistence? Was it a cost incurred on the client’s behalf? Other rules may apply in these situations, and that is what a big portion of this post is about.

    Understanding VAT on expenses can be simple: if the expense had VAT added to it, you can prove it, and it was solely and exclusively for the business, you can claim it as an input on your VAT return and recover the tax. However, if the expense is ‘maybe’ not a standard VAT reimbursable expense, these restrictions, you’ll need to carefully consider your strategy and ensure that you understand the guidelines.

    When we say ‘claimable, in what follows’ we’re presuming they match the ‘whole and exclusive’ requirements and that you have documentation from a VAT-registered vendor. Naturally, we’re also assuming that the VAT on the things we mentioned was applied at the current rate – remember, you can’t get VAT back at the ordinary rate if the item is zero-rated or exempt!

    Office Related Expenses

    This is a rather simple issue. Pens, folders, and other office supplies will be claimable. It makes no difference where they were purchased or utilized, so an employee might work from home and have things delivered there.

    They could even pay for an office order with their own credit card, possibly to get a discount for paying right away. This is true for both payments that are expenses and payments that are assets. In terms of VAT, there isn’t much of a difference between these.

    Services Supplied to the Business

    Frequently, company directors will pay for items that are clearly for the company, but they will either use the wrong card or use cash. Happens all the time, even in our company. They could buy ads, pay for subscription services like software, or pay the window cleaner in cash (provided he’s VAT registered, of course). All of this is eligible for VAT reimbursement.

    Travel

    This is also a common business expense to consider for VAT. The easy part is when the employee is going to a business meeting and needs to take a taxi. You should be aware, however, that not all travel includes VAT.

    Train tickets and underground tickets, for example, are exempt from VAT. Receipts are provided by all reputable taxi companies, and these receipts will include a VAT number if appropriate. Uber (and other ride-sharing companies) are a different story. Uber argues that its drivers are self-employed, therefore each has their own VAT status, despite the fact that you buy from a single platform. This is definitely one to keep a careful eye on.

    Business Entertainment

    This is a tricky one that produces a slew of issues for people. Let’s be clear about something. Business entertainment isn’t subsistence. When a company employee is required to work away from the office for an extended period of time, the company can pay them for their meals. This is subsistence. Business entertainment occurs when a company pays for an evening dinner or an event for employees, potential suppliers, or consumers.

    Companies frequently supply food for meetings, which is acceptable as long as it is of a basic kind. If, on the other hand, the firm decides to engage a Michelin-starred chef and supply tons of bottles of champagne, this definitely does not fit within the category of being “reasonable.”

    Similarly, if a meeting is held outside of the office, this can be accommodated, regardless of whether the meeting is entirely for workers or not.

    However, general entertainment is a different story.

    For instance, your business might invite suppliers or customers to a golf outing or a football game. Because HMRC believes that these types of events are unlikely to be strictly business-related, you will not be able to claim VAT.

    Of course, you could argue that the event served multiple functions. Perhaps you leased a room at the golf club for a business conference and then went golfing afterwards. In that situation, the portion of the business meeting would be permissible, but the golf outing would not.

    Employee Entertainment

    This is another issue that requires cautious attention. If the person being entertained is an employee of the company and the entertainment is relevant to their job, it is VAT-deductible.

    An example of this would be if the company pays for a meal out in exchange for excellent performance. You can claim VAT back on everything you provide for your employees (excluding an annual event). Some companies, for example, arrange for pizzas to be delivered on the last Friday of the month. The food must be offered to all employees and cannot be limited to only the directors, but as long as it is, you can claim back the VAT.

    Another example? If the firm organizes a team-building day away from the office and provides food, the food is also acceptable because it is classified as subsistence.

    However, there is one caveat: these cannot be restricted to only the firm’s directors or partners; they must be open to all employees. Restricted events are not eligible for reimbursement. Also, keep in mind that the requirements for VAT and income tax are frequently incompatible. For tax purposes, for example, there is a restriction on the amount that can be spent on yearly employee activities.

    Goods For the Business

    It’s possible that the employee purchases items that the company needs to do its business. Let’s say a web design firm sells a bundle that includes site design, development, and content. One of the directors creates the design and then uses their credit card to pay freelance developers, photographers, and writers from a freelancer marketplace to add to the package. To put it another way, these are products that would be considered “cost of sales.”

    The expense certainly fulfills the business purpose test in this scenario.

    It’s also common for a senior employee to need to buy items from a local supplier on short notice in order to complete a job, and they do so and then claim the money back later. Again, this is all totally legal, and you are entitled to a refund of any VAT paid.

    Final Word

    In actuality, most sorts of expenses are rather straightforward when it comes to VAT. The majority of expenses recur on a regular basis. So you just need to think about the principles once, and the next month when the identical expense arises, you’ll know exactly how to handle it.

    Where things go off the rails, or where there is a mix of private and commercial use, things get a little more complicated. This is where you should think about your strategy, and, if you don’t have one, consider hiring an accountant to do the financial thinking for.

    VAT on business expenses is just one of the many areas why having a firm like Pearl Lemon Accountants makes so much sense. To learn more about just how we can help your unique business, contact us today.

    FAQs

    Do you pay VAT on business expenses?

    Yes. VAT is charged on all expenses, even if the specific item is exempt.

    Can you claim VAT on business expenses?

    Yes, you can! But you can only claim it on the products or services used solely for the company, and the organisation has to be registered for VAT. Still unsure if your goods qualify? Let’s chat!

    What business expenses are VAT deductible?

    Business expenses that are VAT deductible include vehicles, fuel costs, travel expenses, and assets acquired for the business with a value of £50,000 or more. 

    Are business expenses exempt from VAT?

    No, they are not. Even if the specific item is exempt, VAT will still be charged. 

    How much VAT can a business claim back?

    Up to 20% of the VAT on the company’s utility bills can be reclaimed if your work-from-home office takes up 20% of the floor space. However, you have to have valid VAT invoices and keep records supporting and proving that the claim you’re trying to make is valid. 

    How far can you backdate VAT?

    You can backdate VAT as far as 6 months for services and 4 years for products. You can reclaim VAT on products and services as long as they are related to the company.

    Do I need to register my business for VAT?

    No, you do not. The only businesses that need to register for VAT are those that sell any products or services that happen to be “out of scope” or specifically exempt from VAT. Need more clarification? Let’s chat!

  • Simple Guide to CIS Tax For Construction Pros

    Simple Guide to CIS Tax For Construction Pros

    CIS isn’t a new tax law; it was enacted in 1971 to address what was considered to be a major tax evasion problem in the construction industry. Several adjustments have been made over the years, with the most current developments being announced by the UK government at the end of 2020 that took effect on March 1, 2021.

    The CIS scheme lays out how contractors in the construction industry and certain other businesses must handle payments to subcontractors for construction activity. It works in a similar way as PAYE for employees, except it’s only for subcontractors.

    All payments made by contractors to subcontractors under the system must take into account the subcontractor’s tax status as established by HMRC. This means that contractors may be forced to deduct a percentage of the money owed to subcontractors (less materials costs) and pay it to HMRC. This money is then used as an advance payment on the subcontractor’s tax and NI obligations.

    How the CIS Tax Affects Those Working in Construction

    So, why is it important to grasp the basics of CIS tax , and what does it mean for trade business owners? If you’re self-employed in the building or construction industry, you’ll almost certainly have to pay CIS tax.

    Failure to register as a contractor could result in tens of thousands of pounds in fines (irrespective of whether workers are registered as self-employed and have paid their tax bill). Contractors must register for CIS.

    Subcontractors are not required to register, but if they are not registered, their payments will be deducted at a higher rate (30%). (versus 20 percent if they are). That’s a lot of money to waste when you could be expanding your trade business in other ways.

    The Difference Between Contractors and Subcontractors According to CIS

    The CIS clearly defines who is considered a contractor and who is labeled a subcontractor. According to the scheme:

    A Contractor: Pays subcontractors for building work, or owns a company that doesn’t undertake construction but spends more than £1 million a year on it in any three-year period.

    A Subcontractor: Is paid by a contractor to undertake construction work on their behalf.

    Some businesses may find that they fall under both categories, in which case, for CIS purposes, they must register as both.

    Types of Work Covered by the CIS Scheme

    Contractor is a very broad term, but, once again, the CIS does get specific about just what kind of work is covered by the scheme.

    Legally, the CIS tax rate applies to all the following activities:

    • Building or erecting a permanent or temporary structure
    • Civil engineering projects such as road or bridge construction or repair
    • Preparation of the site (e.g. laying foundations and installing access works)
    • Dismantling and demolition
    • Modifications, repairs, decorating
    • Heating, lighting, power, water, and ventilation systems installation or repair
    • Cleaning the interiors of structures following construction.

    CIS, however, does not apply to any of the following construction like activities :

    • Surveying and architecture
    • Scaffolding rental (with no labour)
    • Carpet-fitting
    • Manufacturing of construction materials
    • Materials delivery
    • Work on building sites that isn’t explicitly related to construction, such as operating a canteen or maintaining site facilities in other ways.

    CIS in Action: A Practical Example

    Fred, a mate, asks you to help him with some repairs on his private residence. You enlist the assistance of another self-employed tradesperson named Phil to complete the job.

    Because Fred is a private homeowner, when he pays you, he does not have to pay CIS tax. You then compensate Phil for his contributions to the project.

    In this case, you’d have to register as a contractor with the CIS before paying Phil. You’ll also need his UTR number, as well as HMRC’s CIS registration status.

    If HMRC tells you that Phil is enrolled under CIS, you’ll set aside the required 20% CIS tax rate and pay it to HMRC on Phil’s behalf. If he is not, it will be up to Phil to either choose to do so or pay that extra 10% mentioned earlier.

    You could face fines for failing to keep CIS records, as well as a monthly penalty for each missing CIS return (which are due monthly) if you fail to register as a contractor under CIS and pay subcontractors properly.

    The Impact of the New VAT Reverse Charge

    The way Value-Added Tax (VAT) works has changed as of March 1, 2021. In the construction industry, VAT is no longer transmitted between VAT-registered enterprises. It is no longer necessary for suppliers to charge or receive VAT from their contractor clients.

    Instead, principal contractors essentially charge themselves VAT for the services of subcontractors and pay HMRC the money that would have been paid to the subcontractor in their VAT returns. The new requirements also apply to commodities when they are offered in conjunction with CIS-specified services.

    Help with CIS : Why You Might Need It

    One minute you’re knee-deep in mud or power wires, the next you’re busy quoting new work, sending out invoices, and pursuing payments as a trade business owner/operator.

    Paying CIS tax can make your administrative tasks more difficult. Even understanding it can be a big headache. Yet, it’s crucial you do pay CIS the right amount of attention, or you could end up in serious trouble (and face big fines.) If you don’t really understand who should be paid what, when and by whom, you can also cost yourself money.

    Which is why having an accountant on your side who really understands CIS, and can take it off your hands – along with other tax complications like VAT and day to day tasks like payroll – can be an investment that offers excellent ROI while also allowing you to get on with the business of construction, rather than deconstructing piles of paperwork and dealing with HMRC to determine if every subcontractor you hire had a CIS card, or should be employees.

    These are accountant hassles, and if you are interested in passing them on to Pearl Lemon Accounting, we’re here to help. Contact us today to discuss just how we can.

    FAQs

    How much tax do you pay on CIS?

    The amount of tax you need to pay depends on whether you are registered for CIS or not. If you are registered for CIS, the tax rate is about 20%, which is the standard rate. However, the deduction is about 30% if you are not CIS registered.

    Who is exempt from CIS tax?

    A few things are exempt from CIS tax, including facilities that may be onsite but are not related to the construction, catering, onsite delivery of materials, architecture work, carpet fitting, survey work, etc. 

    Looking for more information? Let’s chat!

    Do you get the CIS tax back?

    Yes, you can! However, to do so, you must file a Self Assessment tax return. 

    What happens if the contractor does not deduct CIS?

    If the contractor does not deduct CIS, HMRC will let the contractor know how much CIS is due and will send an agreement detailing the total CIS due.

    What happens if you are not CIS registered?

    If you are not CIS registered, the tax rate is higher. A 30% tax deduction must be withheld from the overall amount of any work invoices.

  • All About Companies House Late Filing Penalties

    All About Companies House Late Filing Penalties

    Limited companies, whether private or public, are required to file annual accounts with Companies House and HMRC. Companies House can and will impose a late filing penalty if you fail to file your accounts on time.

    Penalties for late filing were first imposed in 1992 in order to reduce the number of businesses that filed their accounts late or did not file at all. The Companies House late filing penalties have since been increased in order to encourage more directors to file their accounts on time.

    How much will missing the deadlines cost you? At the time of writing, Companies House late filing penalties for annual accounts are as follows:

    Private Limited Company (LTD)

     

      • Less than 1 month late: £150

      • More than 1 month but not more than 3 months late: £375

      • More than 3 months but less than 6 months late: £750

      • Over 6 months late: £1,500

     

      • Public Limited Company (PLC)

      • Less than 1 month late £750

      • More than 1 month but not more than 3 months late: £1,500

      • More than 3 months but not more than 6 months late: £3,000

      • Over 6 months late £7,500

    We should also note here that failure to file proper accounts can, and sometimes is, construed as a criminal offence.

    After missing the September filing deadline last year, more than 25,000 businesses were hit with automatic late filing penalties, according to Companies House themselves. So, how do you avoid becoming one of them this tax year? Here are some of our top tips.

    Plan Early

    Know when your company’s accounts must be filed and start planning ahead of time. If you’re a small business, keep in mind that you can no longer file abbreviated accounts. You may have other, simpler choices than filing a full set of accounts – such as filing micro-entity accounts – but the faster you work out how and what you are going to file, the better.

    Ask the Government to Remind You

    Ignorance is no excuse when it comes to tax filing deadlines. To that end HMRC have set up a handy service that will send you four different email reminders about when your accounts are due to be filed. Signing up for these may help you remember, no matter how busy you are. After all, there’s nothing like a note from the taxman to remind you they want their money…

    Do Things Right the First Time

    If you file your accounts on time, but then they contain errors and/or omissions that need to be corrected, the clock does not stop. To avoid facing a late filing penalty, even though you filed on time (but with errors) ensure that everything is right before you file.

    Allow Extra Time for Paper Filing

    Most firms file their accounts electronically and that really is the best way to go. Some businesses, however, will have to file paper accounts, which take longer to process than online accounts.

    Paper accounts must be manually checked by Companies House. This can take up to a week in some cases. Companies House will reject your accounts if they are incorrect or lack some essential information, and again, that may end up leading to late filing penalties even though, technically, you got them in on time.

    Can I Appeal Late Filing Penalties If They Are Assessed?

    We all know that life surprises us in less than good ways from time to time, and events can throw us off track. This past year has amply demonstrated that. HMRC outlined what it considers a “reasonable excuse” for late filing or payment even before COVID.

    If you receive a late filing penalty, you may be able to appeal it if you were unable to file your tax return on time due to extenuating circumstances.

    Reasonable excuses include the following:

     

      • You had an unexpected hospital stay that prevented you from meeting your obligations.

     

      • Your partner or another close relative died shortly before the deadline for filing a tax return or payment.

     

      • You were afflicted with a serious or life-threatening disease.

     

      • Despite your best efforts to keep it up to date, the software you use to complete your returns failed just before the deadline.

     

      • HMRC had technical issues, such as the accounts filing portals going down.

     

      • Fire, flood, or theft prevented you from filing your return on time.

     

      • Your delay was due to a disability.

    HMRC will still want to see that you took ‘reasonable care’ to meet your tax obligations, so your case will be looked at on an individual basis. I forgot is obviously not an acceptable excuse, especially when you should have signed up for those emails…

    The Best Way to Avoid Late Filing Penalties

    The very best way to avoid Companies House late filing penalties is to have an accountant in charge of your finances, including the filing of company accounts. As a small business especially, you may be looking for ways to save money, but there are better ways to do so than trying to keep up with company finances all by yourself. In fact, if you hire an accounting team like Pearl Lemon Accounting, we can help you discover what those are. Contact us today to chat about how we can help you.

  • Understanding – And Using – a Director’s Loan Account

    Understanding – And Using – a Director’s Loan Account

    Understanding – And Using – a Director’s Loan Account 

    If you own a business, you’ve probably come across the term “directors loan account.” Directors loan accounts (DLA) are one of the many tax provisions that you should be familiar with when you start a business of your own. That’s especially true of DLAs, as, if done right, they can offer you personally some significant financial benefits.

    What is a Directors Loan Account?

    A director’s loan account is not a real bank account, it exists only in your accounting records to keep track of the money flowing between you and the limited company. A directors loan account requires you to be a director of a company, as the name implies.

    When you form a limited company, unlike when you operate as a sole trader, the company is treated as a separate legal entity, and the money in the company does not legally belong to you. You can withdraw this money in a variety of ways, and the director’s loan account keeps track of who owes what.

    You are borrowing from the company via the DLA when you take money out of the company that is not a loan repayment, expense repayment, salary, or dividend. Personal spending from the business bank account, cash withdrawals for personal use, or money transfers to your personal bank account are examples of this.

    Putting Money Into Your Business

    The DLA is also used to keep track of any money you lend to your company. In addition, any money you spend on behalf of the company (business expenses) is recorded in the DLA as owing to you. The previous credit entry in the DLA will be cancelled once the company makes payment for the expenses.

    What To Keep In Mind About Directors Loan Accounts and Taking Money Out of Your Business

    Too Much Becomes a Benefit in Kind

    If your DLA account is overdrawn by more than £10,000, it’s considered a benefit in kind because you’re getting a loan with no interest. This must be declared on a p11d prepared by the company, and you must pay income tax on this benefit in kind on your personal tax return. To avoid this, you could pay interest on the money you have borrowed, in which case the loan is no longer a benefit in kind.

    You May Owe the Company Money at Years’ End

    Dividends are paid from reserves as a return on investment, and they are paid after corporation tax. A dividend declaration can be used to settle a directors loan account that is still outstanding at the end of the year, but you must ensure that there is enough profit left over after taxes to settle the account with dividends. If you have an overdrawn director’s loan account and owe money, you must report it on your corporation tax return, and you may have to pay tax on it.

    There is no tax to pay if you repay the loan within 9 months and 1 day of the end of your accounting year; if this is not possible, the company must pay 32.5 percent s455 tax on the loan, which is recoverable after the loan is repaid.

    And by the way, The director’s loan includes what HMRC classifies as associates, which includes husbands, wives, civil partners, relatives, business partners, and investors.

    Why Would I Need a Directors Loan Account?

    There are a variety of reasons why you might need a loan from your company, such as unexpected repair costs or even paying for a personal holiday trip.

    The most important thing to remember is that the loan was not subject to personal or corporate tax, and HMRC does demand what is due!

    What happens if I owe money to my company?

    If you owe your company more than £10,000 (interest-free) at any time, the loan is considered a benefit in kind, and you’ll need to report it on a P11D because it’ll be subject to both personal and corporate tax. On top of that, you’ll have to pay Class 1A National Insurance on the entire amount.

    What if my business owes me money?

    Your company does not pay Corporation Tax on money you personally lend it, and you can withdraw the entire amount at any time, regardless of whether the company is profitable or not.

    If you charge interest on the loan, it will be considered a business expense for the firm and personal income for you. There are specific rules governing the timing of repayments and any interest charged or received, which can result in a tax benefit for both the company and the director, with careful tax planning.

    How Do I Set Up a DLA?

    Setting up – and then properly paying back – a DLA is something that should be left to an accountant, to avoid tax hassles for you or your company. Don’t have one yet? For more information on how a DLA could benefit your company, contact us here.

    FAQs

    How does a director’s loan account work?

    A director’s loan account or DLA is essentially a way to virtually monitor all the funds you have either loaned to or borrowed from your organisation. If the account has credit on its account, the organisation borrows more funds than it’s lending.

    What type of account is a directors loan account?

    It’s just a record of every transaction that has occurred between the director/s and the organisation.

    Is a director’s loan a benefit in kind?

    Yes, but only if it meets specific qualifications, such as not paying interest on the loan, if the interest you’re paying is less than the average beneficial loan rate established by HMRC, and if it’s £10,000 or more.

    Is a director’s loan an asset or liability?

    The director’s loan is considered an asset. Want more detailed information, contact us here!

    Do you pay interest on a director’s loan?

    Yes, however, it is considered an expense on the company’s accounts. This decreases the amount that the Corporation Tax can charge.

  • 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. 

  • 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!

  • What are CIS Deductions and How Do I Make the Right Ones?

    What are CIS Deductions and How Do I Make the Right Ones?

    Do you operate in the construction industry? Then this post if for you, especially if you have ever been confused by the rules, and practices, surrounding mandatory CIS deductions. 

    Contractors deduct money from subcontractor payments and send it to HM Revenue and Customs under the Construction Industry Scheme (CIS)  If the subcontractor is not registered as a gross certificate holder, the deductions of 20% or 30% are made.

    Subcontractors are usually paid for, and invoice the contactor they are working for, for their time, materials, travel, and lodging. If the subcontractor is VAT registered, VAT will be added to the total as well.

    The problem is, that when it comes to CIS deductions, too many contractors and their advisors apply the rules incorrectly, allowing only deductions for the labour component of a subcontractor’s bill. And while this may fly under HMRC’s radar for some time, if and when they do determine that CIS deductions have been made incorrectly, to put it bluntly, the s**t will hit the fan.  

    (And by the way, for the reminder of this informational piece FA stands for Finance Act, not Football Association.)

    What is the CIS Scheme Anyway?

    Before we outline what is often done wrong, if you are new to doing the books as a construction company then you may need a basic explanation of just what the CIS scheme is.

    The Construction Industry Scheme (CIS) is an HMRC scheme that applies to anyone who works for a company as a contractor in the construction industry but is not an employee, such as a self-employed individual. According to CIS rules, the supervising contractor is usually required to withhold tax on these individuals’ payments, at a rate of either 20% if they are “registered” or 30% if they are not.

    Other self-employed individuals who are not in the construction industry, on the other hand, usually receive their payments gross, meaning no tax is deducted.

    The CIS includes work such as demolition, site clearing, repairs and decorating, and power system installation, in addition to what you might think of as typical building and civil engineering work. The HMRC CIS manual explains what types of work are covered by the Construction Industry Scheme.

    Where People Go Wrong with CIS Deductions

    As mentioned, on the labour and materials issues most contractors get their CIS deductions right, because the rules are pretty clear and straightforward, and so are the expenses themselves.

    Where people usually get things wrong – unintentionally most of the time but HRMC will rarely see it that way – is when it comes to CIS payments for involved expenses relating to travel, subsistence (food and drink) and accommodation.

    When a construction contract requires a contractor to pay a subcontractor’s expenses (such as travel and lodging), these payments are included in the contract’s overall value. As a result, they will result in a deduction under the CIS Scheme, according to government rule FA04/s60.

    A payment designed to cover a subcontractor’s expenses is covered by FA04/s60, whether the contractor pays or reimburses the subcontractor, pays their expenses directly or through a third party.

    The total amount deducted by the contractor should correspond to the gross amount of the contract payments due. This will include paying expenses on behalf of the subcontractor.

    When CIS Deductions Should Not Be Made

    When a contractor allows a subcontractor to use the contractor’s own facilities, such as vehicles or lodging, CIS deductions are not required. These arrangements, however, are uncommon.

    What is the reason for this? Such arrangements could imply a contractor/subcontractor relationship does not exist, but rather it is an employer/employee relationship , which is subject to PAYE which is a very different matter.

    Confused yet? We thought so. Here are some practical examples of what we mean:

    The Hotel Example

    A construction contract is worth £10,000, which includes the payment of the subcontractor’s lodging expenses.

    The subcontractor’s hotel room costs £1,000 per night. The contractor makes a direct payment of £1,000 to the hotel, leaving a balance of £9,000 owed to the subcontractor. As a result, the contractor should deduct the CIS at the appropriate rate – in this case, 20%. Based on total payments of £10,000, the deduction will be £2,000.

    The contractor should then provide a PDS to the subcontractor that shows a gross payment of £10,000 with deductions of £2,000 for CIS and £1,000 for lodging. £7,000 will be payable in ‘cash’ to the subcontractor.

    The Fuel Example

    A construction contract is worth £10,000, which includes the payment of a subcontractor’s fuel costs. The subcontractor pays £2,000 in fuel costs using a credit card. The contractor pays the subcontractor’s credit card provider £2,000 directly. The subcontractor is still owed £8,000.

    The contractor should deduct CIS at the appropriate rate, which in this case is 20%. Based on a total payment of £10,000, the deduction will be £2,000. The contractor should provide a PDS to the subcontractor that shows a gross payment of £10,000, with £2,000 for CIS and £2,000 for fuel deducted. The subcontractor will be paid £6,000 in ‘cash’ after that.

    More Hotel Considerations

    A construction contract is worth £9,000. Hotel accommodations are pre-arranged and unrelated to the subcontractor’s construction contract. The contractor pays the entire cost of the accommodation provided to the subcontractor, which is valued at £1,000. In these circumstances, the payment for the accommodation does not result in a deduction and does not appear on the subcontractor’s PDS.

    The contractor should deduct CIS at the appropriate rate, which in this case is 20%. Based on a total payment of £9,000, this will be £1,800. The contractor should provide a PDS to the subcontractor that shows a gross payment of £9,000 with £1,800 in CIS deductions. £7,200 will be paid to the subcontractor in ‘cash’.

    As you can now see, CIS deductions, especially those related to things considered a bit incidental; like lodging and fuel can be complex and easy to get wrong. If you’re not sure what to do about your CIS deductions, then at Pearl Lemon Accountants we’d love to see where we can help you with this sticky issue. Contact us today to learn more.

    FAQS

    How do I claim back CIS deductions?

    CIS deductions need to be claimed through the monthly payroll scheme of the company. You will need to send two things to the HMRC if you want to claim the CIS deductions:

    1. The monthly FPS (Full payment submission)
    2. EPS (Employer payment summary)

    If you are still unsure on the procedures you need to take to claim your deduction please reach out to us! We can help!

    What is covered under CIS?

    The type of work covered under CIS includes:

    • Demolition;
    • Site Clearing;
    • Repairs;
    • Decorating;
    • Power system installation; and
    • Other types of building and civil engineering work.

    What do I deduct CIS from?

    The CIS deduction amount is removed from the subcontractors’ payments. You will be informed by the HMRC (HM Revenue and Customs) how much the deduction will be. However, the CIS rates are as follows: registered subcontractors get deducted 20%, while unregistered subcontractors get deducted 30%.

    What happens if you don’t deduct CIS?

    If you don’t deduct CIS, HMRC may reach out either asking to change your claim or requiring evidence for your deductions. They will also give you a deadline; if it is not met, HMRC will take over and correct your claim. If this happens, you won’t be able to make any additional claims during the same tax year.

    If you need services regarding HMRC Tax, all you have to do is hire our experts.