Author: Mohammed Haque

  • MAH win British Muslim Award for services to accounting

    MAH win British Muslim Award for services to accounting

    Winner Logo - British Muslim Awards 2017

     

     

     

     

     

    MAH, Chartered Accountants are pleased to announce that they have won the prestigious British Muslim Award for services to accounting. The award was announced at a glamorous black tie ceremony held at the Athena in Leicester on 25 January 2017.

    Thousands of nominations were received from the public for The British Muslim Awards, which is testament to breadth of talent and success, making it apparent that British Muslims across the nation are waving the flag of success.

    BMA_award

     

     

     

     

     

    Mohammed Haque, director of MAH, Chartered Accountants had this to say about the award:

    “Alhamdolillah, I am delighted to be a winner at the British Muslim Awards. It was a great achievement and a reward for the high quality work that we’ve done such as hedge fund audits, working with AIM plcs and claiming £100,000s of complex tax breaks for research and development credits and SEIS/EIS investment. We’ve also helped foster startups in the muslim community by sponsoring events and have recently started working with a number of muslim charities.”

    The fifth annual awards recognised a wide range of achievements, covering various aspects of society, including business, charity, sport, arts and culture and much more.

    The evening was a celebration of success as well as reflecting upon the significant role of Britain’s Muslims in society.

    Irfan Younis event organisers of Oceanic Consulting said:  “We are humbled and honoured by the support from the public who have voted in their thousands, resulting in an impressive list of finalists. The awards aim to celebrate individuals and companies that contribute in making a better Great Britain.”

  • 6 ways to legally boost your balance sheet permanently

    We use our expertise to help clients maximise their assets where legally possible in accordance with UK GAAP or IFRS. This is especially useful for companies who need to meet gross asset or capital requirements such as FCA firms or raising bank loans or complying with bank or investor covenants. However, the methods below are not always possible and there will also be tax consequences.

    The methods below are of a permanent or long term nature and do not involve window dressing or other short term methods, so the accounts should still be true and fair and have a clean audit report if all the relevant criteria are met.

    1) Recognise intangible assets

    If your company has spent time or money developing intellectual property then the chances are that it can be capitalised on the balance sheet if certain criteria are met.

    For example, one of our clients spent £200k developing an online payments platform as well as other mobile apps. We reviewed the contracts and looked at how the systems worked and after discussions with management were able to confirm that an intangible asset had been created. One of the main factors in particular was that the platform was already generating significant revenue, however, even if a company is loss making or a startup it may still be able to capitalise intangibles depending on their profit forecasts.

    Staff time can also be capitalised. For example on an FCA client, we looked at how much time a director and his staff spent on building and developing  a complex quantitative model to monitor financial trading signals as opposed to maintaining it and fixing bugs. We were then able to advise on the percentage of staff costs that could potentially be capitalised.

    Intangible assets such as those above can also qualify for tax relief on amortisation.

    We also found that a mining client had spent significant amounts on legal fees and we were able to capitalise these as exploration and evaluation assets.

    2) Turn tax losses into a deferred tax asset

    If its probable that the company will generate sufficient profits in the future to utilise tax losses then the future tax benefit can be recognised as an asset.

    This one is often tricky to convince auditors (such as ourselves!) but at the end of the day, if cashflow forecasts are good enough to satisfy going concern, then they could potentially support a deferred tax asset especially if a company is beginning to turn a corner and is close to generating profits.

    3) Make sure all income has been accrued

    If you bill clients at the end of a job then you could potentially have work in progress at the end of the year which has a value. This will often have to be brought into your revenue stream anyway to ensure that income is recognised in the period in which it is generated.

    Some companies may have intercompany fees, licences or royalties charged to foreign subsidiaries or connected companies. For example, one of our clients has a UK system and we helped them to setup a licencing fee to a foreign company under an intercompany agreement. This will increase turnover and assets as long as the debt is recoverable. For a profit making group this won’t be a problem, however, if there is no chance that the subsidiary or connected company can pay the fees in future, then the debt will need to be written off or impaired.

    4) Convert debt to equity (or subordinate it)

    If directors have used their own funds to finance a company then this will be a liability on the balance sheet. One simple way to boost the balance sheet and to reduce creditors is by issuing shares to the director in exchange for writing off the debt. This would also avoid a tax bill which could occur if the debt was written off to the profit and loss. If the shares are issued at market value then this will also avoid income tax for the director.

    FCA firms can also subordinate the debt for at least 5 years to include it in their capital calculations and we can advise on how to do this using a subordinated loan agreement.

    One of our clients tried to do this using preference shares, however, care needs to be taken because if they are redeemable preference shares then the debt component still needs to be presented as a liability on the balance sheet.

    5) Revalue property

    If your company owns its own premises or has investment properties then these can usually be revalued upwards based on management’s estimates. A more formal independent valuation may also be required in certain circumstances.

    6) Issue shares!

    We left this one till last as it sounds a bit obvious but many of our clients have raised funding from investors, for example £100k-£200k from angel/seed investors, £0.5m from VCs and £m’s from AIM. If you’re unsure of the process, we can help you to prepare a pitch deck and financial projectors and help you to approach potential investors.

     

    We can give you tailored advice to boost your balance sheet

    As you can see we use our specialist expertise in a joined up way to think about accounting and tax requirements. The above examples can sometimes get quite tricky so its definitely worthwhile seeking professional advice. You can contact us here for further information.

  • Brecession Watch #1

    Brecession Watch #1

    Could there be a recession?

    The Bank of England (“BoE”) has sought to calm financial markets and the UK economy by stating that there won’t be a financial crisis. They have also mentioned that UK banks are in much better health compared to the credit crisis of 2007-08 due to the new FCA/PRA regulations and increased capital and liquidity requirements. The BoE has also committed to providing £250bn liquidity (possibly supported by the ECB) to banks who require facilities to cope with foreign exchange liquidity, to continue providing credit (unlike in the credit crisis) and to supply other financial services to the real economy.

    In the worst case scenario a number of commentators are predicting that the volatility in markets could potentially last for years whilst new trade agreements are drawn up and that there could be a lasting recession.

    However, others consider Brexit to be a political event and the market volatility due to uncertainty rather than underlying economic reasons such as in the credit crisis of 2007-08.

    Foreign exchange rates

    GBP has depreciated significantly against foreign currencies. It was down by 8% against US$, which is double the loss of 4% during the ERM exit in 1992.

     

    It is not clear whether or not this is a temporary fall or the start of a permanent devaluation, but the fall could potentially have the following significant effects in the short term:

    • The cost of imports could increase due to the higher cost of goods and also energy prices if the reductions in the US$ price of oil are less than the GBP depreciation. This could then put pressure on inflation.
    • Although the UK’s exports would become cheaper and more competitive, the UK already has a significant current account deficit and this could worsen due to an unbalanced company relying on consumer spending, funded by debt. Many of the UK’s exports are also made up by services which may not necessarily benefit from a fall in GBP.

    Interest rates 

    Whilst many commentators suggested pre-Brexit that interest rates could rise, early indications are that the Bank of England will either hold interest rates at 0.5% or reduce them to 0.25% in an effort to stimulate the economy.

    Government bonds could potentially suffer from a cut in credit ratings in future, however yields have fallen due to increased demand.

    Investment

    Foreign investment in the UK could fall. We have already seen a fall in the UK stock market, and whilst the FTSE 100 has partially recovered, the FTSE 250 has fallen significantly. This could indicate a flight of capital from UK stock markets (as well as global stock markets). This would make it much more difficult for firms looking to raise equity.

    UK companies may also find it difficult to issue corporate bonds to borrow from foreign investors due to the economic uncertainty.

    Businesses are also likely to avoid making significant investment decisions until the situation clears.

    Consumption

    The increase in prices from a weaker GBP could reduce consumption. However, the psychology and sentiment of consumers may be the most important factor in avoiding recession. It is clear that Brexit is a completely different scenario to the credit crisis when there were bank runs and financial meltdown appeared to be imminent. However, if consumers are worried (rightly or wrongly) about job security or believe their mortgage interest payments could increase this will weaken private UK demand.

    Global economy

    Global stock markets have suffered with European indices falling more than in the UK and there could potentially be risks of global contagion. Although the UK’s GDP was only 4% of the world GDP and imports in 2015 the UK is a major global financial hub with the UK financial sector assets accounting for more than 8 times its GDP. This means that the rest of the EU is much more exposed to the UK due to financial and investment linkages.

    Conclusion: Brecession?

    The uncertainty could reduce consumption and investment. Although BoE could cut base rates and provide liquidity to banks this doesn’t necessarily mean that banks will lend to businesses and consumers, and could hold onto capital to boost their own balance sheets. This could result in falls in the growth rate, which was only 0.4% in Q1 2016 so a contraction in GDP could be possible.

    Although, it is too early to say with any uncertainty but businesses should definitely consider the possibility that the UK could be in a recession as a result of Brexit in the near future. Important business decisions may need to be delayed in the near future until there is further clarity for example, hiring staff, moving premises or committing to large R&D projects or capital expenditure.

     

    Unemployment?

    A number of UK employers have made statements that they could have to cut staff levels whilst others have stated that they won’t need to. Historically, however, a recession is normally followed by increases in unemployment. We could also be in the unusual situation of low/negative growth and inflation at the same time.

  • BREXIT: A GUIDE FOR SMALL BUSINESSES

    BREXIT: A GUIDE FOR SMALL BUSINESSES

    DOWNLOAD THE FULL BREXIT REPORT HERE

    Background

    As readers are no doubt aware the UK voted to leave the EU in June 2016. We were shocked that Brexit actually happened and were worried about the impact on our clients.

    The long lasting effects are unknown and much will depend on the negotiation of trade agreements with the EU. Some commentators have suggested that the UK could be in recession for many months whilst others have suggested that this will all blow over and the UK will rapidly recover.

    We have attempted to evaluate the worst case scenarios and impact on our small business clients.

    We all need to be aware of the potential threats to the UK economy and our clients/customers and take appropriate steps in order to survive and to thrive.

    Summary

    The Bank Of England is likely to cut interest rates and provide liquidity facilities to banks in order to prevent another credit crisis and to calm the markets. Financial markets could be due to political or financial/economic reasons and its too early to predict what could happen in the future.

    However, there is a potential risk of recession due to the fall in exchange rates, inflationary pressure and uncertainties affecting business and consumer confidence. Foreign investment may also fall.

    The full impact of Brexit is not yet known and one of the key factors will be the negotiations of a new trade agreement with the EU. If the Norway/Swiss models are followed and UK businesses can access the Single Market for imports/exports and financial passporting then the impact of Brexit may be limited.

    However, we have considered the worst case scenarios for our core sectors:

    Financial services: In the short term, FCA firms should re-check financial forecasts, risk assessments and capital adequacy requirements. In the medium/long term they will need to consider whether they will need to migrate to the EU or setup a subsidiary to ensure passporting.

    Tech startups: In the short term, cash burn and forecasts should be re-assessed as it could potentially become more difficult to raise finance if investors are nervous about the UK economy. In the long term, restrictions on movement of labour could reduce the talent pool and some of the infrastructure and benefits of operating in the UK.

    Fintech: Could suffer the same problems as tech startups but could also be affected by lack of passporting or reduced demand from the financial services sector if they are suffering from Brexit.

    Import / Export: Amazon sellers could suffer from double layers of taxation and tariffs if they’ll now have to export goods to both the UK and EU separately, depending on how trade agreements are negotiated. Foreign goods could also become more expensive to UK customers, reducing to demand.

    Contractors: Economic uncertainty could increase demand for temporary contracts if businesses are adverse to hiring new permanent staff. However, financial services could potentially suffer from job losses and temporary staff could also be affected. EU citizens need to check if they can stay in the UK and may be able to apply for permanent residence.

    AIM/ISDX plcs: Equity markets have suffered and existing plcs may find it difficult to raise new capital. If the credit crisis of 2007-08 can be used as a guide then it may be difficult for new firms to list or to reverse in the near future, as many deals collapsed after the credit crisis.

    DOWNLOAD THE FULL BREXIT REPORT HERE

  • New tax on dividends

    this post is now on our secondary website for contractors:

    http://vipcontractor.co.uk/new-tax-dividends/

  • 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.

    If you would like a free initial consultation on how to re-register as a plc then please do contact us.

  • 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.

  • 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.

  • 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.

  • 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.