Entries Tagged 'Tax tips' ↓

Often people incur business start up costs (and VAT) before they get round to setting up their limited company and registering for VAT.  So, how far back can you go in reclaiming this type of VAT?

A VAT registered company can recover VAT incurred before registration on its first VAT return as long as:

• the person who paid for the item becomes a shareholder, employee or director of the company
• the company reimbursed the individual for the whole cost
• the goods or services in question were acquired for the business
• if goods, they must have been purchased within 3 years of the start of registration and still be owned, e.g. computers.  Items that are consumed (petrol, electricity, gas) do not count.
• if services, they must have been purchased within 6 months of the start of registration

As a director/shareholder, the most common ways to extract cash from your limited company is to pay yourself a bonus/salary or vote yourself a dividend. 

However, if you do neither of these and simply take money out you will make your director’s loan account (DLA) overdrawn.  Often people will sort this out with a dividend at the end of the year although it will mean your loan account has been overdrawn for many months.

The Taxman will treat an overdrawn loan account as earnings and charge PAYE tax on the balance - very costly for you!  You can avoid this if you can demonstrate that your intention was always to clear the overdrawn balance with a dividend or introducing your own funds to the company.  The best way of doing this is to get the company to minute a policy that overdrawn directors’ loan accounts must be cleared by either a dividend or personal funds introduced by the director. 

If you still get problems from the Taxman, refer him to para 29 of his own leaflet - CA44 National Insurance for Directors which confirms the above get out.

Don’t be fooled by those guys wanting to just check your PAYE records.  Actually their mission is to discover untaxed payments to employees and benefits in kind.

Often you will receive a letter out the blue giving you two weeks notice of a visit and not even specifying which days they will turn up!  We say don’t stand for it - write back saying that some days are inconvenient and can they please confirm what time and day they would like to visit otherwise there may be no-one in when they knock.

The visit usually last for a day but if you are prepared and can find requested documents quickly you should be able to reduce this to half a day.  The tax inspector has a list of questions to ask you and the good news is that they will believe your answers!  For example, if they ask about company cars, gifts to staff etc and you say there are none, they will simply move on to the next set of questions.

Typically the inspector will want to examine your nominal ledger, cash book and evidence of payments to staff members such as expenses claims, sickness records, staff entertaining. Don’t be surprised if they ask for a breakdown of costs described as Cleaning, Repairs, Motor expenses and Entertainment.  Also, be ready for them to ask to see invoices where you have made payments to payees with personal names rather than business names.

You may need to check that someone’s VAT registration is valid for various reasons, e.g. if a customer is EC resident but outside of the UK you should not charge them VAT or if a supplier charges you VAT you may want to make sure it is genuine.

You can check the validity of a VAT number by visiting this website or phoning Direct Gov on 0845 010 9000.

Where work clothes qualify as a uniform or protective clothing, the employee can claim the cost of cleaning the clothes against his tax bill. The taxman has published agreed flat rate for some industries but if you don’t fall into these the standard flat rate is £60 (2008/09).

So, what is a uniform? Obviously, the police, fire service and nurses will qualify here along with several banks and airline staff. Shirts, blouses, socks and shoes do not fall into this category. However, if you fix a permanent company badge to the item of clothing this should make the cleaning of it tax deductible.

Protective clothing is typically overalls, boots and hard hats.