balanced online:
Issue 2

International link

It will help us to give a complete service to our clients with business and financial interests in other countries by offering the best of both worlds: personalised local service and the financial expertise of a global network.

VAT flat rate scheme

If you join the scheme you will still need to issue invoices (using the normal VAT rate, not the flat rate) and submit VAT returns. You will still need to maintain proper accounting records, but you will not need to keep separate records of gross, net and VAT for each transaction.

The amount of VAT you need to pay will be calculated under the scheme as a percentage of your total gross (VAT inclusive) turnover rather than being based on individual sale and purchase transactions. The percentage will depend on your trade sector, for example vehicle retailers are charged at 7% whereas barristers and solicitors are charged at 13%. This percentage will be reduced by 1% in your first year of VAT registration if you apply for the scheme on registration.

The percentages have been derived from average VAT paid by relevant businesses in each trade sector. Your business may normally pay VAT at an effective rate that is higher or lower than the average. Depending on your circumstances, joining the flat rate scheme may save you money. If your circumstances change you can leave the scheme voluntarily at any time.

For financial years ending on or after 30 January 2004, a company will be small or medium-sized if it satisfies 2 of 3 tests:

These increases mean that more businesses (not just companies) will now qualify as medium-sized, enabling them to claim 40% tax allowances for expenditure on plant and machinery. Businesses that now qualify as small will be able to claim 100% tax allowances for expenditure on information and communication technology equipment (see In brief - Buying a computer).

In addition, companies that qualify as small and whose turnover does not exceed £5.6m (previously £1m) will no longer be required to have an audit. This applies to financial years ending on or after 30 March 2004.

But, don’t be too hasty:

Remember that financial statements are still required to be filed at Companies House, and that these still form the basis of your company’s Corporation Tax liability.

In most cases, you will need to provide up to half the working capital yourself and you will have to provide security. Banks do not like having to sell stock or collect debts when things go wrong, so they will lend only cautiously against them. You may have to give a personal guarantee in order to get an overdraft.

Overdraft finance is very suitable where funding requirements vary within set limits. It is usually an incomplete solution for growing businesses.

Invoice discounting is a specialised form of lending where typically you are paid up to 85% of invoice value within 24 hours of rendering your invoice, the balance coming when your customer pays. The lending is secured on your sales ledger so, if your business grows, the funding automatically grows with it. Typically there is an administration charge between 0.2% and 0.7% of turnover and discount charges around 2% to 2.5% over base rate. You may pay a little less for an overdraft but invoice discounting may unlock the growth of your business.

With over 50 providers of invoice discounting, this is a mature, competitive, market where professional advice can pay dividends in getting a better deal.

Buying a computer or software?
If you are a small business, buying your computer equipment before 31 March could save you money! The 100% first year allowances currently available on ‘information and communication technology’ will be reduced to 40% after 31 March 2004 (unless the deadline is extended in the Budget).

Thinking of incorporation?
We are expecting measures to be announced in the Budget later this month that will make incorporation a less attractive option for many businesses. More news in our next issue.

Payroll e-filing
Compulsory electronic filing of year-end returns starts in May 2005. Employers with fewer than 50 employees are not required to e-file until May 2010 but there are financial incentives available for joining the system earlier.

VAT invoices
A new requirement to show the unit price on most VAT invoices has been brought in, along with certain other invoicing measures. Customs will apply a ‘light touch’ until 31 December 2004. Is your business compliant?

Property investment

Perhaps you should consider the many ways apart from direct ownership that you can invest in property.

Through various collective ownership structures you can invest in a property fund which is professionally managed and spreads risk by having a broad portfolio of properties. You can invest in types of property that most private investors would not even consider. Among the possibilities are:

There are some types of property investment with special tax privileges, such as:

IHT planning requires constant review of your financial and family commitments. You need to consider all relevant matters before making inheritance tax planning decisions.

The Enterprise Act 2002 has removed the preference for Crown debts in company and individual insolvencies. This is certainly fairer to other creditors who no longer must stand behind the Inland Revenue and Customs & Excise in the hope of a payout. The practical difficulty will be a harder line from the Revenue or VATman if you are experiencing cash flow difficulties and need time to pay tax debts – if they are no longer preferred creditors will they try even harder to make sure they don’t lose out?

If you have not submitted your tax return by 31 January, you face the possibility of much more than a £100 penalty. The Inland Revenue has long had the power to apply to the General Commissioners for daily penalties of up to £60 for each day that a tax form remains outstanding. Such power has historically been used sparingly and only in the “worst” cases. This has now changed. We expect daily penalties will be sought on a far more regular basis, and sooner. The penalty will soon add up and unlike the £100 penalty it is not limited by your tax liability. Add to this the 5% surcharge if your tax was unpaid by 28 February and your tax bill really does become expensive!

Money laundering
The rules on money laundering have been tightened further. All accountants are now required to tell the authorities about any client who benefits financially from any crime (without warning the client). That includes financial crimes such as tax evasion or even false petty cash claims. There is no lower limit!

Contracting in or out?
Whether you are contracted in or contracted out of the State Second Pension, it is important that you review your decision regularly. This is even more crucial when investment returns are low and there is a danger that the replacement pension produced by investing the rebates may not match the State Second Pension benefit.

Gift Aid
Are you a higher rate taxpayer? When you make a gift aid payment, do you tell your tax adviser? If not, you may be paying tax unnecessarily. You are entitled to tax relief on gift aid payments. If you make an election in time this tax relief can be used to reduce your previous year’s tax liability.

ISAs - don't miss out!
If you want to invest in an Individual Savings Account in the current tax year 2003/04 we need to receive your completed application and cheque no later than Friday 2 April 2004. You can make an application for the 2004/05 tax year from Tuesday 6 April.