Payments on account: make sure you don't slip up!

Tax returns can be hard work. Sometimes, especially in today's business climate, finding the cash to pay the tax can be the biggest problem. Why do some of us have to make payments on account and others don't? How is it calculated? And, can it be avoided? Let’s take a look at the basics.

Who makes payments on account?
If HM Revenue & Customs ask you for ‘payments on account’ (POA), they’re asking you to pay an estimated bill, based on last year’s bill. It’s similar to the way many electricity boards base estimated bills on past usage.

POA is applied to anyone with a tax bill of over £1,000 where 80% (or less) of the tax is paid from income deducted at source. That’s usually those with self-employed income, letting income, or other income where tax is not being paid at source.

How is it calculated?
POA assumes that your next tax bill will be the same as the last. Thus, someone with a £3,000 tax bill for 2011/12 would have to pay £1,500 on 31st January 2013, and another £1,500 on 31st July. The obvious problem is that very few of us have such evenly spread earnings. Rather, many businesses move between bad years and good years. There are two scenarios:

• Your earnings are up this year: in this case, your POA may be too low and you’ll have to make up the shortfall at the end of the year. As long as you put aside enough to cover a higher tax demand, you’ll be fine
• Your earnings have fallen in the current year: your payments may be too high, and you could struggle to pay the estimated tax bill.

What should you do if you can't make your payment on account?
Firstly, if your income has actually dropped – you could reduce payments, so they’re closer to your actual tax liability. Taking the above example, if the taxpayer thinks his 2012/2013 bill will actually be £2,000, his January and July payments could be cut to £1,000.

• If you already know that your profit for the next year will be lower, you should make a note in boxes 10 and 11 of page TC1 of the ‘Tax calculation summary’ form. You also need to include an explanation for the reduction in box 19 of TR7.
• Otherwise the procedure for reducing the due payments is to fill in a form SA303 - 'Self Assessment claim to reduce payments on account'.

Tax reductions are made to the January and July payments equally. However, if you have already made a full January payment, you can have your July payment reduced to compensate you. Again, our example taxpayer’s July payment would be £500 if he had reduced his payments to £2,000, but already paid £1,500.

What happens if you don't pay?
The consequence of not making a POA will be interest charged from the due date (3% p.a. at the time of writing) and reminder letters from HMRC.

Other options
If you can’t make payments, and don’t want the stress of reminder letters, you can always enter into a budget payment plan. Budget payment plans have to be paid by direct debit, but must be agreed by HMRC in advance on an individual case basis. You’ll still be charged interest though.

For further information/advice please contact Ward Williams: enquiries@wardwilliams.co.uk

PRESS RELEASE: REALISING THE START UP DREAM – THE IMPORTANCE OF FIRM FOUNDATIONS

Over 400,000 businesses were started in 2012*, yet 1 in 3 start ups fail within the first 3 years of trading and 50% fail within the first 5 years.  Ward Williams Creative – the business advisers for brands and people in the creative industries, believes that while it is encouraging that many budding entrepreneurs are taking the plunge and following their commercial dream, with continuing economic turbulence, it’s more important than ever to start with firm business foundations and practical solutions.

Erin Walls of Ward Williams Creative comments, ‘A successful business is about more than a great idea, and you can learn a lot by looking at companies that haven’t succeeded.  For example, a technology company in the medical sector had a very good and viable idea for a product that could significantly reduce costs in the health service arena, whilst at the same time improving patient service. Statistics backed up all their claims and they had several high ranking NHS individuals supporting them. The projected returns for the product roll out looked huge.  It sounds great, so you would think raising finance to get the prototype built and tested would be easy.  The company made a good start with a thorough business plan and a pitch honed to perfection, delivered to their network of some very wealthy and connected investors.

So did they get the funding and is the new service coming to a health service near you soon?

Well, this case proves that even if an idea or product is amazing, there is no guarantee of success:

Obstacle 1: the high risk label

Any new technology and product connected to it are automatically classed as high risk investments as there are a lot more unknowns. Just being labelled as high risk, regardless of what the offering is, can stop many investors looking any further, so immediately the pool of potential investors has been greatly reduced. With a new product using existing technology but in a very innovative way, this company was labelled as high risk.

                                                                                                                                                                               

Obstacle 2: early commitment from your team

When you have a new business idea and approach people to help you build it, everyone is excited and enthusiastic, however when you want people to sign up as a key team member, which no doubt includes hours of work and very little guarantees of an early return, suddenly people lose their enthusiasm. For this particular company, some of the key players were high earning developers and medical consultants who wanted to be involved, but wouldn’t commit unless funding was in place to pay their wages and fees. It's very hard to get funding when some vital resources are not already locked in, so the company found itself in a frustrating loop - key players wouldn’t sign up without investors and investors wouldn’t sign up without key players.

Obstacle 3: economic confidence

Timing is very important; the company knew the economy was on its knees and the stock markets were lacking confidence, but their new idea could be reproduced by others, so they needed to get it to market before someone else did. This means they were pitching to investors an untested product, labelled as high risk, in an economy with no spare cash to lose.

Obstacle 4: industry politics

The company’s offering would be perfect for the NHS, private health services and pharmaceutical companies alike, however it required cross communication. At top level this seemed fine, but when trials started, they encountered a lot of politics and red tape, not only between different organisations, but within them too. This stalled trials, which unnerved potential investors as the likelihood of a quick return looked impossible.

The Outcome

Sadly the company didn't achieve the necessary funding and the company and its dreams are now dormant, waiting to resurface when the time is right and the world is ready.’

In starting a company, you can’t second guess every obstacle you’ll face along the way, but you can make sure you have a firm foundation for growth.  Ward Williams Creative offers the following tips to start ups:

Don't expect your business to take off over night. Some very fortunate people have this experience, but most work at it for years before they gain success.  A software company may take two years or more getting their product to a stage where it’s ready to go to market, so make sure your funding will last until you reach revenue stage.

Check your business idea for sustainability. You may be great at what you do, or have a product that delivers excellent benefits, but if it’s not significantly different or cheaper than what's already out there, it won’t have a future.

Know the market and your position within it. Many entrepreneurs are so busy doing what they do, that they don't look at figures, research or market findings which can help make vital decisions like when would be a good time to launch a new product.

Identify the skills your business requires.  Work out which ones you don't have and go and get them; it's vital that you build a team covering all basic business skill sets.

Get to market as quickly as you can.  If you have a new product or technology, the speed of getting to market is going to be very important as someone will have the same idea at some point, so make sure you get there first.

Get everything in writing -funding, shareholders agreements, employee contracts, supplier agreements, everything!  When you start out it’s very exciting and a bit overwhelming and people may say they will do something to help.  However, if the business struggles, people can change their mind very quickly and with nothing in writing you will have no protection.

Network and maintain marketing activity It’s no use being busy now and having no work in two months time. Always find some time to keep in contact with people and do some basic networking; it may seem pointless but it will pay off over time.

Use the many free resources available for start ups.  The government site, www.gov.uk/browse/business, has lots of links to advice and potentials grants or mentors.  If you are in London why not come to one of the Ward Williams Creative free drop in business clinics at 81 Rivington Street, London, EC2A 3AY every Tuesday in September & October 2013 (meeting room 7). No appointment is required - just pop in or email a query in advance to creative@wardwilliams.co.uk.

Anticipate any possible political situations with industry partners or clients and think how you could alleviate them.

Don't be afraid to fail - it happens, you can come back from it and if you don't try you will never succeed. Many very successful entrepreneurs have failure in their past.  If it happens to you, learn from it and move on.

Why choose Ward Williams Chartered Accountants?

Watch the video here: http://www.youtube.com/watch?v=drLD1PWed9Q

Cash Accounting for Tax

In an attempt to simplify the tax process for smaller businesses the government has recently introduced a new cash accounting scheme. 

Qualifying businesses will now be able to use a simple cash basis when calculating the figures to be included on their tax returns rather than the traditional more complicated accruals basis currently used by all businesses....

Click here to watch our Corporate Tax Director - Sarah Brock in action!

New Employee Shareholder Status

Would you feel more motivated if your employer gave you a stake in their business?

The government think you would and first announced plans for a new “employee shareholder” status in October 2012.

The basic idea is that, in exchange for giving up certain employment rights, employees will be given tax-efficient shares in the company they work for. 

Click here to watch our Corporate Tax Director – Sarah Brock in action!

Low emission cars - 100% first year capital allowance

Imagine you are in the market for a new company car. What drives your decision? What are the key factors you are looking for? Is it about the cost, the performance, the image, the reliability? In an ideal world cost would not be an issue, but in current economic times cost is the key factor in most decisions.

If you buy a new car for your business that has CO2 emissions of 95g/km driven, or is electric, you can qualify for a 100 per cent first-year capital allowance (FYA). This allows you to offset the whole cost of the investment against taxable profits in the year you make the purchase until 31^st March 2015, saving you tax and helping the environment at the same time.

Over 1 million company cars are purchased each year, making up half the UK car market, with those vehicles that qualify for 100% FYA making up around 5% of this figure. As such, the potential tax savings are immense.

Now you may be thinking that this only really applies to electric or hybrid cars, but it does in fact cover a large range of ‘normal’ cars.

Manufacturers have been working hard since the rules were introduced to reduce the emissions of their vehicles to make them more attractive to business users, and there are now a wide range of cars available that meet the criteria, which is ever increasing.

These range from the budget models from Kia and Hyundai, to mid-range vehicles such as the Ford Focus and the Renault Megane, but do not yet stretch to the higher-end manufacturers. Under the old rules there were offerings from BMW and Audi, and it is expected that there will be new models available soon in order to appeal to this market.

So, let us have an example of the potential tax savings:

If you compare the capital allowances available to you on the Ford Focus 1.6 TDCI Econetic, with a similar petrol version, there is quite a large saving to be had.

Both vehicles can be purchased for around £20,000. If the petrol version was purchased, only 8% of the cost could be offset against taxable profits, reducing the tax by £320. In contrast with the eco version a company can claim the full purchase cost against its taxable profits, reducing the tax charge by some £4,000.

If you take this example and apply it to a sole trader, making a good level of profits, and paying tax at 40%, then this doubles up to £8,000 versus £640. And when applied to additional rate tax payers, and those in the marginal, 60 – odd % band, the savings stack up even more. 

Tax rate	Potential tax saving
20%	£4,000
40%	£8,000
45%	£9,000
60%	£12,000

There is also scope for using this at the lower-end of profits, and it being more beneficial. If you are claiming tax credits, paying around £100 per week for childcare, making a profit of around £20,000, you may be entitled to around £2,500 per year in tax credits. But if you purchased a low emission car for your business, and claimed the 100% FYA, you could be entitled to around £8,500 in tax credits. 

 The extra £6,000 would more than cover the monthly repayments on your new car!

I think you will agree that when it comes to buying a company car there is a lot to consider, and there are considerable tax advantages to making the right decision. 

www.wardwilliams.co.uk, enquiries@wardwilliams.co.uk