The Fizz! Blog

Is it time to actually withdraw your Director’s Loan Account?

At any point in time, most directors of small limited companies either a) are owed money by their company or b) owe money to their company.  The former is obviously a nicer place to be in general.

Money owed by a company to a director can accumulate for lots of reasons, including funds actually lent to the company to get it started, expenses or mileage not yet reimbursed, allowances for working from home and so on.  Historically, many directors have been happy to let this Director’s Loan Account build up.  If you don’t need the money in your own life right away, you might well be happy to leave it where it is rather than risk frittering it away!

That was all very well when interest rates were next to nothing.  It didn’t matter too much whether you had the £30,000 or the company had the £30,000.  Nobody was going to earn interest on it, so if its purpose was to be a rainy day fund, it was fine left in the company.  Now, however, interest is a real thing!  If the director gets her loan repaid to her and puts it in a savings account, she’ll probably earn interest of £100 a month.  And some of that’s going to be tax-free, even if it’s not in an ISA.

The company could itself put the money in an interest-paying account of course (and, if the director is going to leave the money where it is, it probably should).  But the company will pay corporation tax on all of the interest, and then when the director one day takes that extra money out of the company, she’ll pay tax too!

So, think of making savings work for you, and if you’ve money in your company that you can draw out tax-free, now may well be the time to do it.

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Worry less about whether costs are tax-deductible, more about how much profit you’re making!

One of the most common questions from people new to business is - what costs can I set against my income when working out my tax bill?  This is both completely understandable and largely wrong-headed.

It’s easy to assume that the point of keeping accounting records is to enable you to fulfil your legal obligations - your accounts, your tax return, maybe your VAT returns.  They’re useful byproducts of accounting records, without doubt.  But the fundamental point of the accounting records is to record how well or badly you’re doing.  If you’ve lots of costs, or your profits are low, that’s important information that you might want to address (by considering whether the costs are higher than they need to be, or income/margins are too low, or if you should just get a job, for example).  The fact that most or all of the costs may be tax-deductible is really a consolation prize - tracking and contemplating them is the key thing.

To put it another way - would you rather have a) £100,000 of revenue and £20,000 of costs, none of which are tax deductible, or b) £100,000 of revenue and £70,000 of costs, all of which are tax deductible?  Hopefully you’d prefer the £80,000 of profit over the £30,000, even if the tax bill is a bit higher!

In fact, most costs that you incur as a result of starting your business are going to be tax deductible, so that extreme example is a bit silly.  Hopefully, though, it makes the point - focus on profit, not tax.

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What are unaudited accounts? What are abridged accounts? What are filleted accounts?

These are three commonly misunderstood things!

A generation ago, most limited company accounts were subject to a mandatory statutory audit - a formal check by appropriately certified accounting professionals that the accounts were “true and fair”, with a positive (or otherwise!) endorsement being placed on them by the auditor. Over time (and as statutory audit has, to some extent, had its reputation tarnished by multiple scandals and failures) the thresholds for audit have been raised and raised so that only a tiny fraction of the companies in the UK need one. So 99%+ of the company accounts filed at Companies House are marked as unaudited accounts. This is completely correct and normal! You still sometimes get screening companies, letting agencies and the like saying that they need to see your audited accounts, but they don’t really mean that - they’re almost always just using “audited accounts” as a clumsy synonym for “year-end accounts prepared by an accountant”. So don’t worry about your accounts being audited! If you’ve got a small company, it would be seeing audited accounts that would actually be a red flag.

Abridged accounts are probably the most misunderstood of the three. In fact, it’s clear from what we see being filed at Companies House that lots of accountants don’t understand what they are. Under the previous accounts preparation and filing regime, the FRSSE, the standard set of accounts submitted to Companies House for a small company were Abbreviated Accounts; a set of accounts that excluded the Profit and Loss Account for the year, and included only the Balance Sheet - the snapshot of the financial position at year-end.

Because the words sound similar, many people seem to assume that, under the FRS102 regime that replaced the FRSSE about 10 years ago, Abridged Accounts took the place of Abbreviated Accounts. They did not - they’re a totally different concept. There are two types of abridgement a small company can do, one of which is pointless and need never be used, and one of which is really helpful and should virtually always be used:

1. You can abridge the Profit and Loss Account (actually called the Income and Expenditure Account under the current system). That means that you don’t have to give a number for sales revenue, you can just start from the gross profit line. This is a) really weird and b) totally unnecessary, because (as we’ll see), nobody is likely to see this particular document apart from you, your accountant and HMRC (who can ask for whatever information they want anyway).
2. You can abridge the Balance Sheet. This has minimal effect on the appearance of the Balance Sheet itself, but means that you can ditch the supporting notes that otherwise give a more detailed breakdown of debtors and creditors. This is incredibly helpful, because those breakdowns can give rather useful information to, for example, competitors. But, it’s done far less frequently than it should be - maybe less than half the time, even. We very often download the accounts of another business, or a potential client, and find that the Balance Sheet has not been abridged, and that there’s a note that - amongst other things - shows the precise corporation tax bill for the year. From that, we can work back and figure out what the profits were, and how much was extracted as dividends. This might be information you’d rather not share with the world! And it could have been omitted very, very easily.

You might think that accountants are just being lazy by not abridging their clients’ Balance Sheets. We don’t think so - because they’re not abridging their own Balance Sheets either! It seems that, 10 years in, many accountants don’t understand the rules.

Did something take the place of Abbreviated Accounts? Yes! Filleted accounts. That’s a set of the full accounts (whether abridged or not abridged), with the Income and Expenditure Account removed. Most (but not all) small companies do fillet their accounts before filing - you occasionally hit the jackpot and find an unabridged, unfilleted set on the record, but it’s fairly infrequent. Finding unabridged Balance Sheets on the public record is the norm, though, when most likely every one of those companies would have abridged it if they’d understood what it meant.

We’ve further changes to the filing regime coming up, and in a couple of years small companies are likely to have to put some Income and Expenditure information on the public record (or perhaps just provide it to Companies House on a confidential basis). But, even then, based on the last 10 years it seems likely that many companies will disclose more than they have to. It pays to make sure that no more information is being displayed at Companies House than is necessary.

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HMRC's fuel-only mileage rates - make sure you're reclaiming all the VAT you can

Taxman-approved fuel-only mileage rates changed on the 1st June.

These are the rates that HMRC are happy for employers to use a) to reimburse staff for fuel used for company business that they've paid for and put in company cars, or b) reclaim from staff the cost of company fuel they've used for their own private motoring.  But they're also the rates that businesses can use to reclaim VAT on some of the mileage allowances paid to employees and directors.

Employers can pay a mileage allowance of up to 45p a mile, tax-free, when employees use their own car for business (plus 5p a mile if they've got a colleague with them!).  That hasn't changed, it remains 45p.  You can’t reclaim VAT on all of the 45p, but you can reclaim VAT on the part that represents fuel, as long as you retain VAT receipts covering the cost.

The new list of rates is here:

https://www.gov.uk/guidance/advisory-fuel-rates

If you're VAT registered, not on the flat-rate scheme, and failing to reclaim VAT on your mileage costs at all, you should start.  You can even reclaim some of the VAT you've missed out on in the past.

There's also an advisory rate for fully electric cars, which has gone down from 9p to 8p a mile.

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Avoiding the Child Benefit trap, revisited

The advice for parents trying to avoid being drawn into the High Income Child Benefit Charge (HICBC) has been unchanged since 2013, as none of the thresholds ever changed. Since they have, at last, been increased, here’s an update on actions you might take to avoid or mitigate the charge.

If the higher earner in a household that has received Child Benefit has income of more than £60,000, they have to start giving the Child Benefit back to the government again, on a sliding scale, via their Self Assessment Tax Return. If they have income of more than £80,000, they have to give it all back.

If both parents earn £60,000, that's therefore fine - nothing to give back, even though total household income is £120,000. But if one earns £80,000 and the other zero (or a single parent has income of £80,000) then all of the Child Benefit has to be given back, despite household income being £40,000 lower!

If you've two children, HICBC could mean giving back £2,200 of Child Benefit to the government.

The most obvious way you could avoid or reduce the charge is with pension contributions. If your income is £70,000, then paying £10,000 into a pension reduces your income to £60,000 for these purposes, and you get to keep all the Child Benefit (as well as saving £4,000 of tax too - the way the tax reliefs work means that getting £10,000 into their pension ends up costing that person only £6,000). Of course, if you're struggling with household income to begin with, or earning way over £80,000, things may not be as easy as that and HICBC may be unavoidable. But if you can stand the short-term cashflow hit, for those around the fringes of the charge, pension contributions can become very compelling - and the more children you have, the greater the saving!

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You should want your VAT bills to be really, really big

For some reason, the league table of taxes that businesses and their owners resent paying, from most to least, appears to be:

1. VAT
2. Corporation Tax
3. PAYE

In actual fact, anyone who thinks about it rationally will quickly come to the conclusion that, rather than wanting to minimise them, they should want them all to get bigger and bigger every year. And, despite appearing to be the most resented tax of all, VAT is the purest example of why that is.

The VAT you pay over to HMRC is never your money to begin with - it’s only ever resting in your account, Father Ted style. Every time a customer pays you, £5 of their money is for you, and £1 is VAT. You’re just looking after the VAT, and every three months you add up all the VAT that customers have given you, and hand it over to HMRC. It should be clear that:

1. Ideally you’ll have collected masses of VAT, because if there was £1 for HMRC there was £5 for you! You want countless fivers coming in if possible.
2. Over the quarter, you’ve had the benefit of using the VAT money in your own business as working capital. You’ll hand over the VAT you collected in January, February and March in early May and won’t have the use of it any more, but even then you’re still left sitting on the VAT you collected in April. We recently met someone who told us that their big VAT bills were terrible for cashflow. It’s the total opposite. You’ve a rolling interest-free loan, and the bigger your VAT bills, the more it is!

Of course, you don’t hand over every penny of VAT you’ve collected to HMRC. The bill is reduced by the VAT you’ve paid out to others over the quarter. But, in that case, for every £1 of VAT you’ve paid out, you’ve paid out £5 to a supplier. This time, if you’re trying to maximise profit, you want to hand out as few fivers as possible! If you’ve little VAT to offset against the bill, you must have spent little on overheads, hopefully indicative of a profitable quarter.

PAYE is two-thirds Father Ted, too. Three things are being handed over to HMRC - Employer’s National Insurance, Employees’ National Insurance, and Income Tax (and potentially, other bits and pieces like Student Loan repayments). Only the first of those is a cost to you. The rest has all been withheld from your employees’ salaries to be passed on to HMRC on their behalf. The payment terms for PAYE aren’t as generous as those for VAT, but you still get to use other people’s money in your own business for a while, and if you’re struggling to find your employees’ money to hand it over to HMRC just three weeks later, that’s a sign of a problem somewhere, not a sign that PAYE payments are somehow bad or unfair.

Corporation tax? £1 for them, £3 or £4 for you. Again, you want as much of the latter as possible, and the former is just the other side of the coin.

Businesses with big profits have big tax bills, and growing businesses have growing tax bills. Welcome them!

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Is it time to start claiming Child Benefit again?

There was a big change in the Budget to the High Income Child Benefit Charge (HICBC), which obliges high earners to repay Child Benefit via their Self Assessment Tax Return. Since the initial threshold for being a high earner (£50,000) was not changed for 11 years, more and more people were dragged into its net, most of whom would not have been considered high earners in 2013. At long last the thresholds have been increased, though. Previously, a household where the higher earner had income over £50,000 had to begin repaying the Child Benefit on a sliding scale - if their income was over £60,000, all of it had to be repaid. This year, HICBC doesn’t start until the higher earner has income over £60,000, and the sliding scale is more gentle - it’s not until income of £80,000 that the whole lot must be repaid.

In practical terms, many households with someone earning over £60,000 just opted not to receive the payments in the first place, knowing they’d only have to give them back again.

What do the changes mean in practical terms?

If the higher earner has income between £50,000 and £60,000

Hopefully, you’ve been claiming all along, because you’d only have to repay part of it via a Self Assessment Tax Return, and would still have been better off. Now, you won’t have to repay anything at all. If you were only in the Self Assessment Tax Return system for the purpose of paying HICBC, good news - you won’t have to submit tax returns any more.

If the higher earner has income between £60,000 and £80,000

You may well have stopped claiming, knowing you’d only have to repay the whole lot to HMRC in the end. You should probably start claiming again! Some of it will need to be repaid, but not all. If the higher earner isn’t presently submitting Self Assessment Tax Returns, they’ll have to start, though, so if you’re going to have to repay 95% of what’s been received it’d be understandable if you decided to carry on not claiming.

If the higher earner has income over £80,000

Nothing has changed - if you claim, you’ll have to repay it all.

Two final things:

1. Even if you know the higher earner will have income over £80,000, it’s still advisable to claim Child Benefit, but then opt out of the payments. A claim means that a primary carer will get State Pension credits (aka their National Insurance stamp) until the child is 12, and that the child will automatically get their own National Insurance number at age 16.
2. We say the charge is based on income, but it’s more complicated than that - for instance, benefits in kind need to be added on too, but personal pension contributions are knocked off the figure. Someone with a salary of £59,000 but company car and medical insurance benefits of £6,000 has income for these purposes of £65,000 and on that basis will have to repay 25% of the Child Benefit received - but if they make personal pension contributions of £5,000 that’ll take their income for HICBC purposes back down to £60,000, meaning no HICBC need be paid.

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Camping pods, and how tax can be grey

It’s nice to think that everything in tax is black and white.  As this recent questioner says of two accountants’ advice over a garden office, “But surely they can't both be correct. Either it's an allowable expense, or it's not.”  It’s genuinely not always as straightforward as that, though.  Our UK system is essentially principles-based, not rules-based.  Many things will be clear from the legislation, but some will not.  When something isn’t clear, some dispute between taxpayer and HMRC will eventually reach the courts, and then we might get a precedent, indicating the appropriate treatment.  But there’ll then be some other situation that’s similar-but-not-quite-the-same and the thing starts again.  Sometimes there’s no 100% correct answer, and both accountant and client have to weigh up the evidence and decide how comfortable they are with an approach.

The recent Acorn Venture Ltd case is a good example.  The taxpayer provided adventure holidays.  They housed kids in basic camping pods, and teachers in slightly less basic camping pods - the latter were plumbed in and had toilets.

The tax treatment of those things depends on what they are - broadly, were they moveable plant or were they buildings?  A taxpayer would like them all to be plant.  HMRC would like them to all be buildings.  In the end it was a draw - the kids’ pods were plant, the teachers’ pods (not moveable because they were fixed to the plumbing infrastructure) were buildings.

Some cautious accountants might have advised that they were all buildings, with a minimal tax deduction.  Some more gung-ho ones might have advised they should all be claimed as plant, with a much more generous deduction (of course, so might some accountants who were not technically aware enough to even realise there was an issue to consider in the first place).  A cautious client might have decided not to claim, a less risk-averse one might have been happy to go ahead.  The outcome of the case doesn’t in itself mean that an accountant who recommended a claim for the teacher pods would have been “wrong” in some objective way, as long as they explained the grey area to their client, the factors pointing in each direction, and the risks of HMRC looking at a contentious claim.  In fact, we need those accountants in order to get to the interesting and useful verdicts!

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HMRC 1 Honest Burgers 0

HMRC got a lot of stick for their actions in respect of the Honest Burgers chain a couple of months ago, but you can actually look at it another way and say they did a good job.

Honest Burgers had a Time To Pay arrangement to pay their taxes over an extended period of time.  They were negotiating to extend that, but talks fell through, and HMRC issued a winding-up petition in order to force Honest Burgers to pay up in full, the alternative being compulsory liquidation.  They received payment in full two days later.

It seems like the general reaction to this was surprise at HMRC’s sudden action.  However - Honest Burgers had the money!  They just wanted to use it for something else for the time being.  Maybe we should give HMRC a pat on the back for this one, for making sure they fund their business from commercial sources, not from hanging on to taxpayers’ money.

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Your business probably isn’t going to pay for your retirement

It’s really common for business owners to believe that selling their business is going to be, or should be, what pays for their retirement. It’s very rare for that to really be the case.

First, most businesses are worth little or nothing. There’s nothing wrong with that! It’s just a fact of life. Your business may make a nice living for you, but that doesn’t mean that someone else is going to give you money to take it over - the revenue stream may be very much reliant upon your personal relationship with the customers, or it might just be a fair reward for the work and hours you put in. Some businesses are more or less jobs, and it’s unlikely anyone wants to buy your job.

Second, businesses that are worth something are rarely worth life-changing amounts. A typical rule of thumb is that a small business that generates steady profits that aren’t reliant on its owner and are above and beyond a normal commercial wage for them could be worth three or four years’ worth of profits. If you build up your business over 20 years, it’ll be nice to get a bonus of another three years’ worth of income at the end, for sure. What are you going to do in year four, though?  OK, if the income generated by your business is miles in excess of your domestic spending, the money you get from selling it might last much longer. But if you’ve got to a place where your business was generating a lot more money than you're spending personally, you’ll have plenty of money saved up anyway and won’t be so reliant on selling the business.

We often hear people expressing concern that they won’t be able to sell their business when they retire. Someone with a well-paid job doesn’t have anything to sell when they step away from it either, but should be able to plan for retirement regardless. As a business owner, you are not immune from having to save up like everyone else!

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