this post is now on our secondary website for contractors:
http://vipcontractor.co.uk/new-tax-dividends/
Author: Mohammed Haque
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Re-register as a plc
How to Re-register as a plc
A plc status can be beneficial for privately held companies as they will improve the credit status for a business and also makes it look more prestigious. A plc can be privately owned and doesn’t have to be listed on a stock exchange.
If you currently have a limited company but need a plc, you can re-register as a plc by completing a RR01 form available at Companies House and by submitting the following items:
- amended articles for a plc
- special resolution to re-register as a plc and to adopt new articles
- balance sheet less than 7 months old
- auditor’s unqualified report and written statement
One of the main rules is that it needs to have £50k of share capital, of which at least £12.5k issued in cash.
The key rules are explained from section 90 onwards of the Companies Act 2006.
We would also have to mention in our auditor’s written statement that in our opinion, at the balance sheet date the amount of the company’s net assets was not less than the aggregate of its called-up share capital and undistributable reserves.
(The terms ‘net assets’ and ‘undistributable reserves’ have the same meaning as in Companies Act 2006, s. 831 which deals with distribution of profit.)
This means that if a company has net liabilities it would not usually pass the net asset test because having net liabilities means there is a deficit below their share capital/premium etc.
Auditor’s unqualified report and written statement: our approach
We would normally audit the most recent accounts as to determine the balance sheet we would normally need to consider the cut off and completeness accounting assertions and this means we would need to look at the P&L anyway. So we may as well produce a full set of audited accounts as a plc will need to do this anyway in future.
However, if the balance sheet is older than 7 months we could do a non-statutory audit purely for the purposes of the re-registration. Although the cost would usually be similar to auditing the normal accounts.
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Setting up company structure
Factors involved in setting up company structure
There are different factors involved in setting up company structure and it depends on the type of business, circumstances of the shareholders and their aims for the business.
Shareholders:
- if you may sell the company and re-invest the profits a holding company may be useful
- otherwise, the co-founders can be the shareholders
- for contractors and family owned businesses, husband/wife can be shareholders to maximise dividends
- ambitious startups looking to grow should setup a share cap table
- leave an option pool for key staff
- eg 2 co-founders setup a company owning 45% each and leave 10% option pool
Multiple trades:
Clients often have more than 1 business. The simple and efficient solution is to have 1 company and run the different businesses as divisions of this company.
For tax purposes, the different trades need to have separate profit and loss calculations. This is because losses from a trade can be set against the profits from another trade in the same year. But if losses are carried forward against future profits they can only be used against profits from the same trade.
If you’ll be expecting to sell a business/trade, it can be hived out into a separate company before sale. If its held for at least 1 year before sale, then there is no tax due to Substantial Shareholding Exemption.
Sometimes its better to start off with a group structure, so 1 holding company and 3 subsidiaries for the different businesses/trades, although this can also be achieved later on.
Dividends:
Profits after tax can be given to shareholders, and this is normally the most tax efficient way to extract profits.
Dividends have to be paid according to shareholding. So if a husband and wife hold 50% each, they have to receive equal dividends. Sometimes, it may make sense for 1 spouse to hold 100% shares and shares can be transferred between spouses without tax at any time (with the right paperwork) to maximise differences in tax rates and allowances.
If you’ll be receiving investment, the investors will also be able to receive dividends. So if you have a separate side business operating out of the same company, it will normally be better to hive this out before receiving investment.
Need help?
If you need more help on setting up company structure then please contact us for a free consultation.
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VAT for non-EU sellers
Is registration required for VAT for non-EU sellers using Fulfilment by Amazon in the UK?
This has been in the news recently and HMRC may have lost £2bn in recent times from non-EU sellers who have illegal evaded VAT and have recently announced methods of enforcing the VAT.
This is a tricky subject and can get very technical as many words used in the tax legislation have very specific meanings and there are also court cases about the VAT treatment, so this post is a very basic and simplified overview. Please see the video below for further details. There may also be corporation tax considerations if selling to customers based in the UK.
If sales have a place of supply in the UK and involve consideration and are not exempt, then they will be taxable supplies.
The place of supply largely depends on the location of the goods and the identity of the importer. If the importer is also the supplier, then they will have to pay UK VAT when the goods are imported into the UK. This is because a non-EU seller who ships goods to Amazon’s Fulfilment Centre are the consignee and will be the importer and retain legal title over the goods.
Only once the goods are in the UK can they then be sold to customers via Amazon’s website. As the goods are in the UK at the time of purchase by a UK customer, the place of supply will be the UK under the VAT Act 1994 s.7.
For the purposes of VAT for non-EU sellers if they don’t have a business establishment in the UK they will be treated as a Non-established taxable person (NETPs).
If an NETP makes ANY sales, it has to register for VAT.
Therefore, all the criteria will met for VAT to be charged on sales under the VAT Act 1994 s.4, and registration for VAT for non-EU sellers will require the collection of 20% output VAT in their fixed prices charged to customers. They’ll then need to pay this 20% to HMRC, although they can offset the related input or import VAT.
Please contact us for further information as there are a number of tax issues and court cases to be considered. For example, we recently wrote a very long memo on similar VAT and tax issues for a non-EU client.
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How does the flat rate VAT scheme work?
If your business doesn’t have to pay much input VAT on its purchases, then it could make an extra profit using the flat rate VAT scheme. So even if it isn’t compelled to register as turnover is below £81,000 it could still be a good idea to register voluntarily.
Please refer to the free pdf report for full details and the key points are summarised below:
The flat rate scheme simplifies the VAT process and reduces the level of administration involved. You only have to include sales in the VAT return and don’t need to include your expenses.
To qualify, you need to have net taxable income (excluding VAT and non-UK sales) < £150k and you have to leave the scheme if total gross income (including VAT and non-UK) > £230k.
You collect 20% VAT on sales invoices from customers as normal, but you only pay the flat rate percentage on gross income to HMRC.
For example, for “Computer and IT consultancy or data processing” businesses, the rate of overall VAT is 14.5%. (with a 1% reduction to 13.5% in the first year for new VAT registrations). If annual sales before VAT are £40k, you collect 20% VAT from customers which is £8,000. But under the flat rate scheme you only pay 14.5% of the gross £48,000 = £6,960 which gives an extra profit of £1,040.
However, you cannot reclaim input VAT on purchases apart from on large capital items costing more than £2,000 incl VAT.
If you need help to register or maintain a flat rate VAT scheme then please contact us for a quote.
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Diverted Profits Tax
Draft legislation has just been released for the diverted profits tax, which was recently announced in the Autumn Statement 2014
https://www.gov.uk/government/publications/finance-bill-2015-draft-legislation-overview-documents
Effective date
The new rules will be effective in respect of profits arising on or after 1 April 2015.
1st Rule
The first rule is designed to address arrangements which avoid a UK permanent establishment (PE) and comes into effect if a person is carrying on activity in the UK in connection with supplies of goods and services by a non-UK resident company to customers in the UK, provided that the detailed conditions are met.
This only applies where the UK person and foreign company are not small or medium-sized enterprises (SMEs).:
Maximum number of staff And less than one of the following limits: Annual turnover Balance sheet total Small Enterprise 50 €10 million €10 million Medium Enterprise 250 €50 million €43 million There will also be an exemption based on the level of the foreign company’s (or a connected company’s) total sales revenues from all supplies of goods and services to UK customers not exceeding £10 million for a twelve month accounting period.
2nd Rule
The second rule will apply to certain arrangements which lack economic substance involving entities with an existing UK taxable presence. The primary function is to counteract arrangements that exploit tax differentials and will apply where the detailed conditions, including those on an “effective tax mismatch outcome” are met.
This only applies where the two parties to the arrangements are not SMEs (the SME test will apply to the group).
For more details, please look at the pdfs at the link above, or get in touch with us if you need advice.
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Is tax evasion haram?
Tax evasion has a significant impact on the economy and has greatly contributed towards the £35bn UK tax gap between what should be collected in tax and what is actually paid for. As a result HMRC is stepping up its campaign against this criminal activity; prosecutions rose by 29 percent from 2012/13 to 2013/14 and again is aiming to rise by 50 percent next year 2014/2015.
Against this backdrop, the question of whether tax evasion is halal or haram is a sensitive issue and greatly impacts a person’s religious life.
Obviously, as a firm of chartered accountants, we believe that tax evasion is illegal and would never condone it. However, the disciplinary pages of accountancy magazines are often dominated by firms with Muslim sounding names and we often hear stories of Muslims who evade taxes. We have also had to turn potential clients away because they wanted us to “fudge the books”!
Therefore, we decided to look into the matter of whether tax evasion is halal or haram. In our personal opinion, its pretty clear cut, however we are not qualified to advise others on Islamic matters.
So we have prepared a report to discuss the key issues, which appear to be that tax evasion may be haram if:
1) a person should obey the laws of the land?
2) tax evasion may involve lying or fraud?
3) unpaid tax could create a debt?Please read the report and make up your own mind about whether tax evasion is halal or haram.
If your accountant isn’t forthcoming about which accounting or tax practices are illegal or you have some doubts about a certain strategy, then please feel free to contact us and we will do our best to advise you on:
a) how to ensure compliance with UK tax and accounting regulations
b) how to minimise your tax liabilities in a legal manner
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Bitcoin audit
Why would a Bitcoin audit be required?
The New York State Department of Financial Services have proposed Bitlicense regulations which would require licensees to submit audited annual financial statements. If these regulations are passed it is possible that authorities in other jurisdictions would implement similar requirements.
For example, we note that online gambling was initially illegal in many jurisdictions around the world, but one by one, governments have been licensing operators and subjecting them to heavy taxes.
However, even if Bitcoin audits do not become mandatory, it could become best practice for Bitcoin businesses to undergo an audit of their financial statements. Many Bitcoin exchanges have already had independent tests to prove their level of Bitcoin reserves so the next step could be to have their financial statements audited.
A Bitcoin audit could be also be required in the UK if a company exceeds the small company limits or is deemed to be an ineligible company.
What does an audit of financial services generally involve?
In the UK, a company has to produce a set of annual accounts in accordance with generally accepted accounting principles (eg UK GAAP or IFRS) and Companies Act 2006. However, if a financial director produces a set of accounts, how would a user or reader of the accounts know whether or not they can trust its contents?
An auditor will independently verify whether the accounts are true and fair and in compliance with the applicable laws and regulations. The auditor will need to be suitably qualified, be named on the Audit Register and will need to perform the audit in accordance with International Standards on Auditing.
An auditor will obtain a full understanding of the business and the industry in order to perform a risk analysis and to plan the audit. They’ll need to consider what the key balances and transactions are and which ones are most susceptible or fraud or error.
Once the audit has been planned they’ll work through the accounts to verify and corroborate the assets, liabilities income and expenses that have been included in the accounts and also to test for any significant transactions or balances which have been omitted.
Key risks for a Bitcoin audit
A Bitcoin business would have assets, liabilities and transactions denominated in Bitcoin. Key risks would include whether Bitcoin assets (eg reserves in cold storage) and liabilities (eg customer deposits) exist, are correctly valued and whether they are complete.
It may be possible to obtain sufficient, appropriate evidence about existence and completeness for exchanges by using an approach similar to that used by Stefan Thomas and his tools such as Easy Audit. Other Bitcoin businesses may need different techniques. Depending on the type of Bitcoin business and the complexity of its transactions, an auditor may require a cryptographer or IT specialist to perform such procedures in order to comply with ISA 620.
Bitcoins are likely to be treated as a cash equivalent/ foreign currency or as an investment, depending on how the business uses them and its intentions. In order to ensure they’re correctly valued, they would need to be translated into the base currency used in the financial statements (eg £ in the UK) and an adjustment may be required depending on the accounting policy.
A Bitcoin business is likely to be involved in online transactions and the transfer of funds, so internal controls and anti-money laundering procedures are also likely to be key areas for a Bitcoin audit.
We can help
Our team have audited both financial services businesses and e-commerce businesses and can use this experience to help us audit a Bitcoin business efficiently and effectively.
For example, a large online gaming businesses had millions of customer accounts and we had to verify the total liabilities owed to customers, as well as testing a sample of individual deposit/withdrawal transactions and interactions with payment gateways.
The financial services businesses we audit have complex accounting/tax rules such as mark to market/fair value and also strict rules for anti-money laundering and dealing with client money.
Please contact us for assistance and we’ll be happy to offer a free consultation where possible.
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Xero Accountants
We are certified as Xero Accountants
As Xero accountants we specialise in tech startups but also have experience of many other types of businesses from creative agencies to contractors to restaurants.
What is Xero?
Xero makes it very easy for businesses to do their bookkeeping, for example by automatically feeding in transactions from your bank and using plugins to connect with your business.
Tax
We can review what you’ve done in the cloud as your Xero accountants and provide expert tax and VAT advice to make sure that:
1) everything is in compliance with tax legislation
2) tax savings are made wherever possibleBusiness advice
Xero also has lots of great charts and reports and we’ll run through your business with you to analyse your performance and discuss how you can grow or face challenges.
Save 15%
Did you know that Xero offers a discount on all cloud accounting packages signed up by Xero accountants? We pass on those savings to our clients whilst many other firms keep the discount to boost their own profits.
Our fees start from £50/mth + VAT for dealing with accounts and corporation tax (excluding the Xero fee) for simple startups.
Contact us
Please contact us for a free, no obligation consultation to discuss your requirements and to setup or switch your Xero account. Our base at Liverpool Street is just a short walk away from Silicon Roundabout.
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VAT and financial services
VAT and financial services:
Are you losing out on VAT?
VAT and financial services is a very tricky area and this video presentation gives a brief overview:
https://www.youtube.com/watch?v=IaYzGej4p0c
The main points covered are:
1) VAT and financial services exemptions under VAT Act 1994 Schedule 9 Group 5 (eg money, loans, securities, advising collective investment scheme)
If a firm is making exempt sales, then it doesn’t have to pay any VAT on income to HMRC, however it also cannot reclaim VAT on its expenses.
2) Standard rated items, mainly looking investment management/advisory. If a firm is providing advice or is using its discretion to manage investments or funds and isn’t merely executing transactions according to clients’ instructions, then these services are taxable at 20%. Either the client has to pay an extra 20%, of the firm has to take a hit of 20% on its fees.
This may be avoided by carefully structuring the services with an SPV so that the investment manager has an interest in the trading profits of the fund, as a principal. Therefore, its share of profits would be exempt.
If the investment manager is an external entity providing services as an agent, then even if its consideration is contingent eg 20% of trading profit if hurdles met etc, then they would still be subject to VAT
3) The place of supply rules need to be checked. If the client is located outside of the UK, then the sales may be outside the scope of VAT. In this case, no VAT is due on sales and the firm may be able to reclaim VAT on its expenses if the sales would normally have been subject to VAT if supplied in the UK.
Contact us
This is a brief summary. VAT and financial services is a very complex area and we can discuss your circumstances and look at your contracts, as well as the legislation and VAT cases to design a VAT strategy. Please contact us for a free, no obligation consultation to discuss your requirements. Our base at Liverpool Street is within easy reach of the City, Canary Wharf or Mayfair or we could also visit you at your offices.
