Directors Loan Account – Effectively dealing with them

Directors loan accounts

If you operate your business as a sole trader, Directors loan account isn’t something you need to worry about. If you are a limited company director and shareholder then a directors loan account can be a bit of a headache. That’s because a limited company is a separate legal entity. This means you can lend it money and borrow from it, albeit HMRC would prefer you don’t borrow. The following government link gives more details. Below is a summary of the main points

What is a directors loan account?

  • If you lend money to the company
  • Any money was taken from the company that is not a dividend, salary or expense payment

If you have lent money to the company you can withdraw the entire amount without any tax implications. If you owe the company money there may be tax implications for both the director and the company

Overdrawn directors loan account

An overdrawn director’s loan account is effectively an interest free loan made to directors. The company must show all overdrawn accounts in its accounts and tax return. directors loan account

Your company and personal responsibilities are as follows:

  • The company must complete form CT600A stating the amount of the loan. If the loan was more than £5,000 and you took another loan of £5,000 or more up to 30 days before or after you repaid it. The company must pay 25% of the original loan amount as corporation tax. If the loan is repaid in full within 9 months after the year end the 25% is not payable, disclosure is still required. There are no personal liabilities to tax.
  • The loan is repaid after 9 months of the year end. Disclosure on CT600A is required. 25% is payable as corporation tax. Interest is charged on the 25% up until the loan is repaid or the 25% corporation tax is paid. Once the loan is repaid the 25% corporation tax is repaid but not the interest. There are no personal liabilities to tax.
  • The director’s loan account is not repaid and effectively written off. The company via its payroll must deduct class 1 national insurance. Income tax is payable via your self-assessment on the amount of the loan.
  • You owe more than £10,000 at any point in the year, your company must treat the loan as a benefit in kind. As well as deduct class 1 national insurance.
  • You paid interest on the loan at less than the official rate. The company must show as income the difference of the rate you pay and the official rate. The difference in interest payment must also be treated as a benefit in kind. The interest difference must also be reported in your self-assessment.

Keeping track of directors loan accounts

Overall, the key is to keep timely, accurate records and to keep the transactions relating to each of the directors separate. Poor record keeping could result in misallocation of expenses/payments. As well the incorrect amount of tax being paid. The company must disclose the amount of all director’s loan account, with the largest balance being stated. Ensuring that a balance that starts below and above £10,000 are stated.

Proper record keeping ensures that interested parties and lenders can see how responsible company directors are being. We advise all our clients to use a cloud based accounting system with a number of add-ons that allow you to keep an electronic copy of paperwork relating to transactions.

The best way to deal with a director’s loan account will depend on the numbers. In this case the tax and cash flow implication to the company and individual director. Contact us to see how we can mitigate your tax and improve your cash flow.

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Flat rate VAT scheme changes April 2017 – What to do about it

Flat rate VAT scheme changes background

Flat rate VAT scheme changes came into effect on the 1st April 2017. HMRC have now completed their consultation phase. Below are what the changes may mean for you and the type of business affected.

For eligible businesses, the Flat Rate VAT Scheme is a simplified method to work out their VAT liability by applying a fixed percentage. Under the flat rate VAT scheme method, any VAT reclaimable is restricted.  If you are an I.T. contractor your VAT liability is calculated by multiplying your turnover by 14.5% e.g. total sales including VAT £12,000 x 14.5% = £1740.

The restriction does not include the purchase of capital goods such as new equipment, food and drink, and vehicles, parts of vehicles or other capital equipment greater than £2000.

The standard rated method involves calculating the VAT liability based on VAT charged on sales less VAT incurred on purchases. E.g. you have sales of £12,000 including VAT and you have paid £6,000 including Vat in expenses. Your Vat liability will be £2,000 less £1,000 = £1,000.

The flat rate VAT scheme was essentially a great perk for those businesses that had a very small amount of purchases and input VAT.Flat rate VAT scheme changes

So what are the Flat rate VAT scheme changes from April 2017

Those businesses with a very low-cost base will be affected most by the Flat rate VAT scheme changes. These businesses are classified as “Limited cost traders” if either of the following applies.

  • less than 2 % of their VAT inclusive turnover on goods in an accounting period; or
  • more than 2% of their VAT inclusive turnover but less than £1000 a year.

HMRC do not recognise the following as goods

  • any services – which is anything that isn’t goods
  • expenses like travel and accommodation
  • food and drink eaten by yourself or your employee(s)
  • vehicle costs including fuel unless you are in the transport business using your own, or a leased vehicle
  • rent, internet, phone bills and accountancy fees
  • gifts, promotional items and donations
  • goods you will resell or hire out unless this is your main business activity
  • training and memberships
  • capital items for example office equipment, laptops, mobile phones and tablets

The flat rate VAT scheme changes mean all “limited cost traders” now have to apply a rate of 16.5% to calculate their VAT payable. Previously the % used to calculate your VAT payable would depend on the nature of your business. E.g. I.T. contractors would apply 14.5% to calculate their VAT payable. You still get 1% off the 16.5% in your first year of being part of the flat rate scheme.

HMRC have a tool that you can use to work out how the flat rate Vat scheme changes affect your business YOU CAN FIND IT HERE

Who is affected?

The flat rate VAT scheme changes increase the VAT bill of labour-intensive businesses that spend little on goods.

Examples of the kind of businesses that are likely affected are IT contractors, consultants and construction workers. These businesses tend to supply their labour but are not responsible for purchasing the raw materials.

Legislation was published on 23 November 2016. To prevent businesses from issuing invoices or receiving payments prior to 1 April 2017 for services provided post 1 April. Effectively, any such supply will be deemed to have taken place on 1 April 2017 and therefore subject (if applicable) to the new flat rate VAT scheme percentage of 16.5%.

Should you deregister for VAT?

You only have the choice to do this if you are below the VAT threshold. If your turnover is above the threshold then consider the additional costs of having to keep proper VAT records. Is the additional cost more than the 2% increase in VAT payable due to the flat rate VAT scheme changes?

The choice on whether to remain on the Flat Rate Scheme or move to a Standard VAT Scheme will be unique to each individual business circumstances depending on their capital expenditure. We recommend speaking to your accountant before making a decision.

Finance Equation Ltd are award winning Chartered Certified Accountants. Contact us via email or call 020 3086 7472 to see how we can make a difference to your business.

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Changes to dividend tax and contractors

Changes to Dividend tax

Changes to Dividend tax came into effect on the 6th April 2016 and again on the 6th April 2018. The effect is those paying themselves dividends and a small salary are likely to have to pay more tax. Payable via their self-assessment as well as have to make payments on account.

The Changes to dividend tax

From 6th April 2016, you can pay yourself a tax-free dividend of £5,000 anything above this amount you will pay additional tax. If you are a 20% tax payer you will pay an additional 7.5% tax on your dividends above £5,000. Below is a worked example of someone who pays themselves a minimum salary and a dividend up to the 20% tax band.

2016-17 onwards££ tax payable
Salary 8,0600
Dividend (within Personal Allowance2,9400
Dividends within Dividend Allowance5,0000
Dividend at basic rate band27,0002,025
 
Totals43,0002,025

The above illustrates that the 6th April 2016 changes to dividend tax mean an additional tax payment of £2,025 at the lower rate tax band. This tax will be payable via the self-assessment route. From 6th April 2018, there are further changes to dividend tax. The dividend tax-free allowance is reduced to £2,000 from £5,000. Resulting in an extra £225 in tax payable.

Changes to dividend tax and payments on accountChanges to dividend tax and contractors

If you have to pay more than £1,000 in tax each year you will have to make payments on account. This means that you pay 50% of next years tax in advance. In the illustration above the tax due for 2006-17 is £2,025 and payable by 31st January 2018. Assuming that you have not made payments on account for 2015-16, your payments to HMRC will be:-

 

Tax for 2016-17                                                                            £2,025

Plus 50% in advance (£2,025 x 50%)                                     £1,012.50

Payable by 31st January 2018                                        £3,037.50

 

50% payable on 31st July 2018                                      £1,012.50

 

In effect, you are paying £2,025 for your 2017-18 tax bill in advance. HMRC makes adjustments once your 2017-18 return is submitted.

Although you pay more tax on dividends it’s still better than being employed as you don’t have to pay any national insurance on dividends. These tax changes potentially impact all company shareholders.

Finance Equation Ltd are award winning Chartered Certified Accountants. Contact us via email or call 020 3086 7472 to see how we can make a difference to your business.

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Tax Refund Scams

Tax Refund “Notification”

If you receive an e mail or text message “from HMRC” informing you about “a tax refund notification” ….or indeed anything else, it’s a scam pure and simple. DO NOT RESPOND! I have had a number of client’s call me about emails they think are from HMRC regarding refunds. I even had a client tell me he received a call from HMRC saying they were taking him to court. When we checked the phone number he was asked to call it had nothing to do with HMRC or any of their debt recovery agents. If you type a number into google you get a lot of information about the owners of that number. The following government LINK looks at ways to protect yourselfTax Refund

HMRC NEVER send e mails or text messages about tax refunds. They will always write to you in the first instance. The HMRC debt recovery department may call you if you owe HMRC money and haven’t paid for some time. Even the debt recovery department will write to you in the first instance. Always make sure you are certain who you are talking to before you disclose any information on the phone or via email. If you have any doubts then don’t share your personal information.

 

The fraudster’s objectives will be to:

1) Distract you so that your guard is lowered

2) Steal as much information about you including:

  • Bank details – ie account name / number / sort code
  • Full name
  • Date of birth
  • Place of birth
  • Home / work address
  • Tax reference / UTR
  • National insurance number
  • Passport numbers
  • PINs
  • Online security information
  • Other investments
  • Family details

REMAIN ALERT

Professional fraudsters are:

  1. A) Good at what they do
  2. B) Very plausible
  3. C) Experts at extracting information over time

Don’t be their next victim. Don’t respond to email tax refund notification report them!

Finance Equation Ltd a tax specialists. the simple and the complex. Contact us to see how we could help you legally reduce your tax bill.

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Tax Return Accountant Service

 Finance Equation Ltd provide a tax return accountant service.

 Self Assessment Tax Return Service. Get It Done In Time To Allow For Tax Planning & Help Us Save You Money.

 

The following government website gives you an introduction and links to self-assessment videos. Here is the Link. Keeping records of your income and expenses is always a good place to start with self-assessment.

If you are a company director, self-employed or earn income in addition to having a job you will have to complete a self-assessment tax return. This can be daunting and complex depending on the type and variety of income you earn. Knowing what you can claim as an expense. How much dividends to take and where to show them on your return. Working out your capital gains on property sales. This can all be very stressful and time consuming, leading to mistakes and late filing penalties.tax return accountant

Our tax return accountant service

Let our team of tax return accountants take away the stress for you. Our tax experts will make sure that you claim all your allowances to pay the least amount of tax possible. We make sure your tax return is delivered on time so you don’t pay any penalties. We save you time and money so you can spend time on what you do best in your business.

All you need to do is send us the completed checklist and supporting paperwork and we do the rest for you. We can even deal with HMRC on your behalf which means that you don’t have to worry about things.

Sharing your tax information as quickly as possible will allow us to give you tax planning advice.  But if you have left things to the last Minute we definitely can help you.

Contact us to see how are our tax return accountant service can make your life stress free and easy. Our self-assessment tax return accountant service starts from just £125 + VAT. Contact us for a tax return accountant

 

 

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Residential Buy-to-let and VAT

buy-to-letResidential buy-to-let are VAT exempt. Which means VAT can’t be charged on rents. It also means that VAT can’t be reclaimed on expenses, repair costs, agents fee’s etc. The assumption therefore is that residential landlords can ignore VAT. But this isn’t always the case.

If a landlord owns another business which is VAT registered they must take rental income into account when completing VAT returns.

Example

David owns a retail business and sells on Ebay. He also own a residential buy-to-let property which he rents out. David is VAT registered. In quarter 2 he decorated the residential property for £5,000 + £1,000 VAT. No other VAT was paid on the residential buy-to-let in quarter 2. In the same quarter his purchases for the retail business were £35,000 + £7,000 VAT. David must show both VAT payments in his VAT return.

Reclaiming VAT on residential buy-to-let

The general rule prevents David from recovering the £1,000 VAT on the redecorating costs. However as he has a VAT registered business he is regarded as making a partially exempt supply on rents. VAT on expenses relating to rents can now be reclaimed. Provided that in the return period VAT on rent expenses doesn’t exceed.

  • £625 per month on average: and
  • 50% of all VAT on purchases the business makes in the VAT return period.

Therefore David can reclaim the entire £1,000 VAT paid on decorating costs. This is because on average it is only £333 per month and less than 50% of the VAT on total purchases. ((£7,000 + £1,000) x 50% = £4,000).

Even if the above limits are breached for a single VAT period there is a second point of VAT recovery. You must review the calculation for tax as a whole. This annual review of calculation gives you a chance to apply the above rules again. Therefore again giving the possibility of VAT recovery.

Finance Equation Ltd are property tax specialists and preferred suppliers for the Essex property network. Our aim is to help our clients keep more of their money. We use every legal tax route to do this. Contact us for a buy-to-let

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Family Investment Company & tax planning

Family investment companiesA family investment company and tax planning go hand in hand. Years ago trusts were a tax efficient way to deal with Inheritance tax. Changes in trust tax law means trusts may no longer be a preferred vehicle. Since 2006 most trust property is listed as “relevant property”. What are the tax implications of these changes?

  • The settlor makes an immediately chargeable transfer with each asset into any relevant property trust.
  • A 6% exit charge on distributions or dispositions from the trust. In the first ten years since property was first added to the settlement.
  • A 6% ten year anniversary charge.
  • Trusts can also pay up to 45% on income.

You can get further information on trusts from the following link on the government website.

What is a family investment company?

A family investment company (FIC) is a corporate structure. FIC’s are designed for immediate family members considering succession planning and wealth preservation. They are designed to work in a similar way to a discretionary trust. family investment companies are all different. As each is tailored to the specific needs of the family.

Each FIC has a memorandum of association and shareholders agreement. In addition they can also have a family constitution. These documents provide family governance procedures.

Benefits of a family investment company?

  • family investment companyIf cash is paid into the company there are no tax implications.
  • Assets are protected in the case of divorce.
  • In the case Prest Vs Petrodel 2013. The Supreme Court ruled that family courts could not seize assets of a company in divorce.
  • Ex-spouses cannot hold shares in a family investment company. The shares will have a value. But considering their sale is highly restricted their value is highly negotiable.
  • Dividend income received is not subject to tax.
  • Other income and gains are currently taxed at 20%, from April 2017 at 19%, from April 2020 at 18%.
  • Indexation allowance can be claimed for capital gains.
  • On incorporation shares can be gifted. Treated as a potentially exempt transfer for Inheritance tax purposes. So there is no immediate tax charge. After seven years the gifted shares are exempt from IHT.
  • Family investment companies are controlled by the board of directors. Investment decisions and profit distribution. So there is no need to hold majority shares.
  • Shareholders can receive different levels of income at different times.
  • Minority shareholders benefit from a substantially discounted share value for Inheritance tax purposes.

Some down sides to consider

  • A non-cash transfer into the company may incur a capital gains tax charge.
  • There is a double tax charge implication. Profits are subject to corporation tax. Then to income tax when dividends are paid to shareholders.
  • The company will have to comply with companies’ house filing regulations.

 

Finance Equation Ltd work with specialist lawyers to help structure your family investment company to your best advantage. Contact us for more information.

Family investment company

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Tenants in common | Saving Tax | Tax Planing

Being tenants in common with joint property ownership could save you tax. It will save tax if one partner has no income or is not fully using their 20% tax threshold. HMRC have special rules for married couples and those in civil partnerships. So if you own a property in single name you can make a transfer to your partner without incurring any type of tax liabilities. The Income tax Act 2007 s836 allows married couples and civil partners who are living together to have their income taxed on joint property in equal shares. So if you have bought property in joint names and done nothing else s836 applies to you automatically. Unfortunately s836 does not apply if income is from a furnished holiday let.

Tenants in common

The above situation describes what is known as joint tenants. There are some interesting features to being a joint tenant.

  1. Each tenant has equal right to the property
  2. Tenants cannot put their share in a will
  3. On death of a tenant their share automatically goes to the living tenant
  4. A tenant cannot sell or re-mortgage without the others consent

Holding property as tenants in common | Saving Tax | Tax Planning

You can agree to allocate income in an unequal way. If you do this then you are called tenants in common. There are other things to consider than tax. Some things to note about tenants in common.

  1. A tenant can sell their share without consent from the other tenants
  2. A tenant can re-mortgage their share without consent from the other tenant
  3. On death of a tenant their share does not automatically go to the living tenant
  4. It’s important to have a will in place to ensure that a tenants share is passed to the right person as well as save on inheritance tax.
  5. Tenants in common ceases on divorce or separation for a whole tax year
  6. You can change the profit split by submitting a new form 17, very useful as a tax planing tool.

You can become a tenant in common by informing HMRC using form 17. In this form you should tell HMRC in what shares you intend to take profits. You also have to send documents that evidence your agreement to share profits unequally and this is normally done via a deed of trust.

A case study of how becoming a tenant in common can save you tax.

Partner 1 earns £40,000 and partner 2 earns £6,000 part time. Profits from property are £15,000.

In this situation it doesn’t benefit the couple to split profits equally as it will take partner 1 into the 40% tax bracket. Partner 1 should only receive profits of £3,000 so that they remain in the 20% tax band the rest should go to partner 2. So the profit share should be partner 1 – 20% and partner 2 – 80%. This new profit split will save the couple £1,800 income tax.

This article is meant ONLY for those married or in a civil partnership.

The Finance Equation Ltd are property tax specialists and commercial property finance brokers. We are preferred suppliers for the Essex Property Network. Call us on 020 3086 7472 to see how we can help you save money and increase your wealth

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Protecting Property – Title Theft

Protecting Property Title TheftProtecting property title theft will become increasingly important over time. In the old days title deeds were confidential documents. You could only see them with permission from the owner. Now everything has gone online. You can log on to Land registry, obtain title deeds without the title owners even knowing that you have their information. The old paper documents have now been replaced by electronic title deeds.

Since 1990 land registry has made title deeds public information and since then title theft has increased steadily. The problem has gotten worse since 13th October 2003 when Land and Charge certificates were abolished. Impostors now do not have to provide certificates as proof of ownership, making it easier for them to commit fraud. Making protecting property title theft increasingly important. Since 2012 £59m of claims, in respect to fraudulent deeds, were made against land registry of which they paid out £31m. You can read more here.

Who is venerable to Title theft?

  1. Those people who own property outright i.e. do not have a mortgage.
  2. 1 above and those that do not occupy their properties are most at risk
  3. 1 above and even those that occupy their properties can be at risk

Who suffers the loss?

Protecting Property Title TheftRegistered owners may be able to claim compensation from land registry. The compensation will be reduced if the owner did not take reasonable steps to protect themselves. If the land has not been sold then land registry can correct the register. If however your property has been sold to an innocent third party then restoring title may not be possible. If a loan has been secured against your property then the lender has the right to crystallise their charge to recover its monies. So effectively you lose your property. Protecting property against title theft is essential if you own unencumbered property.

Protecting property title theft – what to do?

  1. Check the Land registry regularly to make sure there are no changes without your consent.
  2. Take out land title insurance. Click here to see a list of providers. We do not recommend any of the insurers, you should do your own research and obtain professional advice.
  3. Put a restriction on your unencumbered property. Click here to download the from.
  4. You can get more advice from this government link.

 

The finance Equation Ltd are property accountants and property tax specialists. This article has been written to help our present and future clients protect their property wealth. Click here to find out more about our property tax services.

 

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Brexit property sector impact

Brexit property sector impactBrexit property sector impact remains uncertain. However most indicators do suggest that property prices will fall. The extent of the fall in prices no one really knows. Before we look at the Brexit factor on the property sector, let look at preBrexit predictions.

In January 2016 Royal Bank Scotland issued a warning that 2016 was going to be a year like 2008. It made this prediction at a time when the EU remain camp were ahead in opinion polls. It’s also interesting to note that RBS were the first bank in the UK to predict the 2008 crash before it happened. RBS advice, in January 2016, to their clients was to “sell everything” as deflationary crisis nears. You can read more here. In January 2016 Societe Generale agreed with the assessment of RBS and went as further in predicting the collapse of the Eurozone. You can read more here.

If you give credence to the above the UK irrespective of Brexit was predicted a rough ride. No doubt Brexit will speed the crisis spoken about above. In February 2016 “tenants referencing UK” disclosed that a National Association of Landlords study predicted landlords would sell 500,000 properties in 2016/17. This prediction was a direct result of the Clause 24 tax changes by George Osborne. You can read the tenants referencing UK article here.

Post Brexit property sector impact

As I said at the beginning of the article, indicators suggest that property prices will fall generally. However it seems that while the pound is weak more foreign investors may buy up prime properties in central London. One central London estate agent I spoke to are expecting to be busy because of this reason. Another estate agent that has 11 offices throughout the greater London area have told me that sales overall have dropped. They are concerned that this slowdown will continue for some months.

Mark Carney, the Governor of the Bank of England, plans to deal with Brexit in the following ways.

  • Increase QE
  • Reduce interest rates, possibly even have negative interest rates
  • Ask lenders to set aside £150 billions to lend to businesses.

You can read an analysis of Carney’s comments here.

Lower interest rates may stoke prices higher in the short term as people with money divert funds into property that gives a higher return than government bonds. This money is likely invested in prime London property. Japan currently has negative interest rates and this is stoking property prices in some area’s, creating a bubble. The same may happening in the UK. You can read the article on Japan here.

Brexit property sector impactSweden maybe a better example of how zero or negative interest rates create property bubbles. Sweden also illustrates that a recession with low interest rates ultimately creates a slide in prices. You can read the full article on Sweden here. Zero or negative interest rates can have dangerous side effects as money flows to higher interest rate countries/regions. The following article from March 2016 goes into a little more detail.

The biggest Brexit property sector impact seem to come from a UK recession and clause 24. Some people are suggesting that Clause 24 will be reversed if Andrea Leadsom is leader or Chancellor within the conservative party. I have my doubts about clause 24 being reversed.

So given the uncertainty of the Brexit property sector impact what should a property investor do. Age is likely to be a factor here, if you are in your 20’s, 30’s or 40’s you should look to hold long term and should not be concerned about short term dips in prices. If you are looking to retire and cash in your investments then a drop in prices will have a negative impact on you. Stick to the basics of investing. Do the opposite of what the market is doing. If prices are going down, as a professional property investor, you should look to buy. As the serious property investors drum into their property mentee’s if your property generates cash flow then you should invest.

Here is what the professionals say

An interview with Ranjan and Jim Haliburton AKA the “HMO daddy”

An interview with Ranjan and Richard Greenland

The Finance Equation Ltd are property tax advisers and property accountants. We help clients to keep proper records, save them tax and help them source commercial finance for their property transactions.

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I have been a contractor client with The Finance Equation for a number of years and I am delighted with the service. The Staff are always professional and courteous and take the time to explain things. I am set up on a system that means I spend less than 15mins a month on my company Continue Reading

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