The Fizz! Blog

Xero (or FreeAgent, QBO, Sage or Kashflow) should match your accounts!

The older members of the Fizz team have essentially gone through three phases of preparing year-end accounts.

Phase 1 - 90s: most businesses use physical books. At the end of the year, they give those books to the accountant, and start using a fresh set. The accountant uses last year’s books to prepare the accounts.

Phase 2 - 00s: most serious small businesses use Sage or QuickBooks on a desktop computer. At the end of the year, they take a backup, and put it on a disk and give it to the accountant who restores it on their own Sage. The business owner carries on inputting to their live (e.g.) Sage, which from this point is diverging from the data the accountant is working on. When they are finished, the accountant takes the adjustments they’ve made as part of their process and duplicates them on the client’s live Sage, so that the position per the software at the last year-end matches the accounts. 

Well, that’s what is supposed to happen. Often, that last bit is forgotten about, or put to one side because of the pressure to crack on with the next job (one of the multiple evils of timesheets), and the first task for the accountant next year is to update a fresh backup with last year’s adjustments (sometimes multiple previous years!) before preparing the new year’s accounts and generating another year’s adjustments to be overlooked. So, it’s fairly common for a business’ live Sage not to match the accounts filed at Companies House and with HMRC for extended periods of time. Often, the first job when taking on a new client from another accountant is to figure out the wild differences between the two. That’s annoying for the new accountant, but more importantly means that the business does not have a reliable guide to its own financial position!

Phase 3 - 10s onwards. Cloud accounting means that there’s only one live set of data. The accountant can be entering their adjustments as they go, on the live Sage (more likely Xero or FreeAgent with us). There need be no mismatches of any sort between the accounting records and the accounts filed at Companies House/HMRC.

Problem solved, right? Wrong! Many (maybe even most) accountants seem to be still operating as if we’re in phase 2, and doing some or all of their work outside of the live data, and never incorporating it into the actual accounting records. When we take on a new client, it’s more common than not for there to be material differences between the accounts filed at Companies House and the position on the client’s (e.g.) Xero at the same date. They should be identical. Last year, we took on a client where on handover the old accountant supplied us with a set of accounts signed by the client - but it turned out that the accounts filed at Companies House didn’t match them, the set submitted to HMRC were different again, and none of the three remotely matched Xero! Completely farcical.

If you have a limited company, have a look at the balance sheet of the last accounts filed at Companies House. Then run a balance sheet report in your software for the same day. Is the number at the bottom the same? If not, something is wrong. Best case scenario, you’ve a technically accomplished but phase 2 accountant. Worst case scenario, you’ve got the guy who handed that client over to us last year!

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Why is everyone still obsessed with Entrepreneurs’ Relief?

Back in 2008, a new Capital Gains Tax relief called Entrepreneurs’ Relief was introduced.  At the time, the higher rate of CGT was 40%, but if you sold your business ER could reduce that bill to just 10%.  It applied to the first £10m of the sale proceeds.  That could save someone up to £3m!  It was a very valuable relief indeed to those who benefited from it and they’d generally be very cautious about doing anything that would jeopardise their entitlement.  For example, they would be super careful to make sure that their company couldn’t be considered to be an investment company, and would avoid active investment activities, which had the potential to mess up the entitlement to the relief.

The relief was probably excessively valuable in fact - many or most (or all!) of the people who built and sold those businesses probably would have done so anyway, so it’s far from certain that the relief encouraged any entrepreneurship at all, let alone the level that its cost merited.  Over the years, its generosity has quite sensibly been chipped away at again and again.  From next year, Business Asset Disposal Relief (which replaced Entrepreneurs’ Relief in 2020) will reduce the 24% higher rate of CGT to 18%, on up to £1m proceeds.  That means that the most it can save someone, even if they sell their business for £1m+, is £60,000 - the maximum potential saving has dropped by 98%!

However, it somehow remains an obsession for a lot of business owners and accountants.  The fact that many people still refer to it as Entrepreneurs’ Relief, which hasn’t actually existed for five years now, suggests that they haven’t got the memo about how things have changed.  You even see people on forums discouraging one another from putting their company’s excess funds in a deposit account to avoid earning any interest, lest HMRC decide that it’s become an investment company!  This never would have been the case anyway, but now you have company owners foregoing five-figure amounts of bank interest each year to avoid losing a relief that, in the context of selling a valuable business, is nice to have but hardly life-changing.

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Time for some year-end tax planning?

The end of 2024-25 isn’t too far off now. Although we generally favour saving throughout the year in a steady way, some people prefer to save lumps towards the end of the year. The most important thing is to do something!

You could argue that now that the Capital Gains Annual Exemption has been reduced so drastically (from £12,000 to £3,000) the benefits of taking advantage of it have become minimal. Or, you could argue that it’s become more important! If you’ve shares in a General Investment Account sitting at a profit of £10,000, you used to be able to sell them all and realise all that profit in one year, tax-free. These days, it’ll take you four tax years to do it without a CGT bill (of course, over that period there’ll be more profit or loss, but you get the general point). So you might think about starting to realise gains now.

If you have some spare cash, an obvious tax planning point might be to maximise your ISA allowances for the 2024/25 tax year (currently £20,000 per person). Cash ISAs used to seem pretty dull when interest rates were minimal. Now, though, sheltering the interest on £20,000 from tax is more interesting. If you are 18 or over, but under 40, you can open a Lifetime ISA to save for your first home or retirement. You can put in up to £4,000 each year, until you’re 50, but you must make your first payment into your ISA before you’re 40. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year. The £4,000 Lifetime ISA limit counts towards the £20,000 ISA allowance.

You might also want to consider increasing your pension savings before 5 April 2025. Under the current rules, the government adds to your pension contributions at the 20% basic rate. For instance, if you save £4,000 in a personal pension, the government tops this up to £5,000. If you are a higher rate taxpayer there is a further £1,000 tax relief when your tax liability is calculated, reducing the net cost to £3,000.

If you have income in excess of £100,000, your £12,570 personal allowance may be tapered. For every £2 of income in excess of £100,000, the personal allowance is reduced by £1, reducing to nil where net income is £125,140 or more. This means that additional pension contributions can be even more effective if your income is between £100,000 and £125,140; the gross pension contribution reduces net income for the purposes of calculating the reduction in the personal allowance. This is effectively a 60% tax saving - £5,000 in your pension pot at an effective cost of £2,000!

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Bank interest received by kids

It's very common for kids to have bank and building society accounts containing money that their parents have saved for them. If the interest on those accounts is less than £100 a year, the parents don't have to worry about that in terms of their own tax return. But if it's more than £100 (and it’s not in a Junior ISA), it's treated as the parents' income and they have to pay tax on it themselves.

Of course, for many years, interest rates were so low that very few adults were receiving £100 a year of bank interest, let alone kids. However, that’s not the case now, and plenty of people are earning a decent chunk of interest. The historically generous tax-free allowances (at least £1,000 of interest a year is tax-free for basic-rate taxpayers, £500 for higher-rate taxpayers) don’t go as far now. Do remember to tell us about any interest received by minor children on cash that you gave them, as well as interest received in your own name.

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Are any of your employees missing out on tax relief on their pension contributions?

If any of your staff are making pension contributions and are higher rate taxpayers (i.e. income from all sources of more than £50,270), they might be missing out on some tax relief. When an employee puts money into a pension, the amount they contribute effectively becomes tax-free. There are two main ways in which that’s achieved. One method is for the contributions to be taken off the employee’s gross pay before tax is calculated. Where that’s the case, no further tax-relief is due.

However, the more common method is for the contribution to be taken out of the employee’s net pay. This is the method used by NEST, which is by far the most common workplace pension provider among our clients. For every 80p the employee contributes, the government puts an extra 20p into their pension fund. For basic rate taxpayers (who pay 20% tax), this method means they’re effectively getting all of the tax back on their pension contributions already. But for higher rate taxpayers, there’s another 20p still to come. Taxpayers can get a refund by calling or writing to HMRC, or by including the pension contributions on their tax return. As an example, a higher rate taxpayer making pension contributions of £150 a month could be entitled to a tax refund of £450 for the year.

It’s in no way your responsibility to advise your staff on their tax affairs of course, but if you’ve got any employees who you know to have income over £50k and who are making contributions to a workplace pension, you might like to mention the possibility of tax relief to them, in case they’re not aware of it.

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Wise Stocks and Interest Accounts - Watch Out!

Early last year, the popular online bank Wise started offering a couple of new options to customers. They look very simple, and lots of businesses signed up. However, most (perhaps even none) of them are likely to have fully understood what they were signing up for.

If you say yes to their Stocks option on one of your accounts, then you are agreeing to immediately use the entire balance to buy an investment fund (domiciled in Ireland, investing in a bundle of different stocks and shares). All of it - you no longer have any actual money in the bank account at all! A company owner who chose to invest every penny in his company’s bank accounts in shares would generally be considered to be making an extraordinary choice. But in this case most of the company owners who have done it don’t even realise - they just ticked a box or two and then clicked OK.

From that point on, every time money comes into that bank account, Wise immediately uses it to buy more of the investment fund. And every time you spend from the account, Wise sells some of the investment fund so as to create just enough real money to cover the purchase. If you use the company debit card for a £2.80 coffee, Wise sells a tiny little portion of the investments to release the cash.

This has a number of implications:

• The first is just risk. If you want to invest some of your company’s reserves in something other than cash as part of an intentional financial plan, great. If you’ve accidentally invested all of your funds in stocks and shares and you don’t even really know which ones, not so great.
• The second is tax complications. If the company makes 500 payments in a year, that’s 500 separate sales of the investment funds, and 500 capital gains, with the profit on each gain to be individually calculated based upon the per-unit cost of the underlying fund, based upon the original investment, plus all the new investments that have been made when money has come in, less all the disposals that have been made when money has gone out. At this point, the tax report that you can request from Wise appears to do a good job of the calculations - but extra work still has to be done to reflect them on the company’s tax return so that those 500 capital gains are taxed appropriately.  As you can imagine, that's likely to have an effect on your accountancy fees.
• The third is accounting complications. Investments need to be revalued in the year-end accounts, and any profit or loss that’s yet to actually be crystallised reflected. This doesn’t impact tax at this point - but it can impact the company’s ability to pay dividends. The accounting records might show that the company has total reserves of £20,000 - but if £5,000 of that is down to investment gains, then only £15,000 is actually available for dividends.

Wise also offers an Interest option, which you’d probably think was simpler, right? Not so fast! There’s certainly less risk - you’ve agreed to get rid of all your cash, and invest it in a bond fund, which is almost certain to be less volatile than a stocks and shares one. And therefore there’ll be less of an effect on reserves at year-end, all things being equal. But the tax is even more complicated! With the bond fund, not only does each payment out of the bank account generate a capital gain (or loss) to be tracked and taxed, the same as with the Stocks option, but the revaluation at year-end is also a tax event, and there’s tax to pay on any growth in value. Also, because Wise are investing via a particular type of offshore fund, there’s tax to pay on interest that’s earned within the fund but not distributed out to you (“Excess Reported Income”). So this route introduces three more corporation tax elements every year, not just one!

Note also that these options can be chosen with sole trader business accounts too, in which case all of these things will inform your personal tax calculations and bill, rather than your company’s.

If you’ve got that considered financial plan that involves investing some of your business funds, think very carefully before doing it in this opaque and complicated way! It’s more visible and vastly more simple from a tax point of view to transfer the money you want to invest to a separate provider and do it there.

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Can my company pay for this cost? A useful heuristic

If you’re wondering whether it’s appropriate for your company to pay for something, think back to a time when you were employed by someone else.

If you’d made an expense claim for it, would they have repaid you without thinking twice?  If so, in most cases it’s going to be fine for your own company to be paying it.

Or would they have told you where to go?  In that case, it’s probably not fine for your own company to be paying for it!

Someone recently told us of someone they know who is always finding some conference or other in the vicinity of a place they want to go, on the grounds that attendance for a day will make their entire holiday legitimately payable by their company and tax-deductible.  Of course it won’t!  And the technique we’ve outlined here works perfectly.  If you tried to claim that from a third party employer, not only would they not pay it, they’d probably take disciplinary action!

Maybe you had a mean employer before, who’d outrageously refuse perfectly legitimate expense claims.  But if you had a normal, reasonable employer, something they’d not have paid for is generally unlikely to work as a cost for your own company.

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If you have a limited company, avoid using the word “claim”!

Often, people trading through a limited company will say “I am a limited company”. They are not a limited company, they are a human who owns a limited company. Their accountant should keep picking them up on it and correcting them, not to be pedantic, but because cementing the difference in your mind is important.

Company owners early in their “journey” (sorry) will often ask “can I claim cost X?”. A better perspective is to think “is this a cost which should properly be paid by my company?”. The rent on the Fizz offices isn’t somehow “claimed” against tax. Fizz just pays it, obviously! Fizz doesn’t “claim” the salaries of our staff. It pays them. Equally, when the directors are out and about travelling for meetings and the like, we just pay for our train tickets with a company debit card to begin with, straight out of the company bank account. Job done. There’s no reason, in the limited company world, for the word “claim” to be used, other than in the specific context of employees making formal expense claims for things that they’ve necessarily paid themselves and need to be reimbursed for.

Companies don’t claim things, they pay for them. If you can separate the company and yourself in your head, then life becomes a lot easier.

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How can I find out how much bank interest I’ve received?

Earning interest on cash in the bank is a good thing for savers, needless to say! But it does mean that a lot of people do now have to disclose interest to HMRC on their tax return, never having done so before. And, based on the frequency with which we’re asked about it, it can be quite tricky to figure out how much you’ve received in a tax year. In the olden days, banks would generally send you a paper certificate giving you the numbers. That’s pretty rare now.

There’s a good chance you can get the equivalent certificate/numbers from the banking app on your phone, but that’s not always the case. Based on a small sample at the time of writing, we reckon two of the three mainstream banking apps we looked at could provide an annual interest summary, though in neither case was it exactly where we’d expect to find it. A fourth told us via chat that they could post a certificate out on request, but also told us we could download it from a particular bit of the app - it wasn’t there, though.

If it’s not on the app, you might well be able to get the certificate/summary from online banking.

If not, then - you’re just going to have to look at your bank statements for the year and add the interest up! Sorry.

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Can I save tax on my Audible subscription?

Are you a sole trader who only listens to things related to your business? You can save tax on the entire cost.

Are you a sole trader who listens to both things related to your business and other stuff? You can save tax on the percentage of the subscription that you think fairly reflects the business part.

Are you a limited company owner who only listens to things related to your business? The company can pay for the whole subscription and save tax on the lot.

Are you a limited company owner who listens to both things related to your business and other stuff? Unless the personal element is more or less incidental, you should just pay the sub yourself; there’s no provision equivalent to the sole trader one for somehow splitting it, and if the company pays for it then you’d have to pay tax on the cost. Fortunately, it’s hardly an expensive thing to have to pay personally.

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