Welcome to our fourth and final blog post for 'Enterprise Accountancy Month' in which, we look at your commonly asked book keeping and accountancy questions. Our resident ACCA Accountant, Liz Pirrie is here to answer them for you.
These questions have come from Enterprise Business Advisers, who have an array of different questions from clients about accountancy and book keeping on a daily basis.
Question - Allowable Expenses?
Andrew Mackay - Business Growth Adviser at Enterprise North East Trust says:
"I have found over the last 20 years that I am continuously asked about allowable expenses by self-employed (unincorporated) start-ups. Much of this revolves round what can they claim for working from home. Another relates to best vehicle allowances (pence per mile or % of overall costs), a particular issue if using a private car for business use."
Answer from Liz:
This is a very common question and I’m often asked this, along with “Is there a list of business expenses that I am allowed to claim?”
The general rule of thumb that our friends at HMRC apply to business expenses is “the wholly and exclusively” rule; all business expenses must be wholly and exclusively for the business only. So, think about what you are spending your money on and whether it could it be used for something other than business. There is no finite list because something that might be “wholly and exclusively” for a joiner, might not be “wholly and exclusively” for a nail technician.
The “wholly and exclusively” rule relates to working from home as well. In order to claim a proportion of your mortgage, rates, heat and light etc, the rules state that you must have a room set aside for use only by the business, so working at your kitchen table is out. You then work out what percentage of your total floor space that room takes up and you can claim that percentage of your bills.
The same applies to anything that has business and personal use, you can claim the business proportion only.
As for the car, there are 2 ways to calculate this…
- Keep a note of all the business miles that you do, the date, the destination, the purpose and the distance and pay yourself 45p per mile for the first 10,000 miles in a year and then 25p per mile for the rest. This is the rate that HMRC have set for business mileage and is intended to cover petrol, wear and tear, maintenance, vehicle excise duty and insurance, so no other motor expenses can be claimed from the business. Please note that these are the current rates and may be subject to change if you are reading this in 2020.
- As in method 1, you are required to keep a note of your business miles, but you also keep a note of your total mileage for the year. You then calculate your business mileage as a percentage of total mileage and you can claim that percentage of all motor expenses. You can also claim capital allowances for your vehicle at the same percentage rate.
For your first year, it’s worth keeping track of it both ways and at the end of the year calculating which method is better for you. Once you have chosen a method, you must continue to use that method until you change your car.
Question - Cash Book Titles?
Fiona Gammie, Business Adviser for Start Up and Growth Businesses said:
"I am always asked…. Do I need to keep the titles the same in my cash book i.e. sometimes having columns for “travel”, “stationary” etc aren’t relevant to the business in question – I reassure the clients that they can re name the columns to suit their business."
Answer from Liz:
Fiona is quite right, you can change the headings to suit your business and I would urge you to do that.
Question: How much does an accountant cost?
Did you hear about the cannibal accountant? He charged an arm and a leg!
Seriously though, as I’ve said in our previous blog - Choosing an Accountant, prices can vary hugely so it is worth shopping around. I noticed a sign in an accountants window at the weekend offering self assessment tax returns “from £150 plus VAT”.
Question: Do you need an accountant?
Again, this is featured in the Choosing Your Accountant blog post where we note that you have to recognise your own strengths and weaknesses. Do you want to be sitting tearing your hair out over a tax return when you could be out meeting customers?
Question: What does your accountant need from you?
Nice tidy records, every bank statement for the year and all your invoices either electronically or in paper form. Give the accountant these way before the self assessment deadline or your account filing deadline and you’ll have a happy accountant with plenty of time to prepare your return. Yes, we do smile from time to time!
Question: How do I claim VAT back?
You need to become VAT registered to claim VAT back. Once you are registered you will then be required to submit a VAT return every quarter. (In some cases monthly).
The VAT return will show how much VAT you have charged your customers on sales and how much VAT you have paid on purchases.
If there is more VAT on sales than purchases you pay the difference to HMRC, if there is more VAT on purchases than on sales then HMRC pay you the difference.
I’m afraid it is more likely that for most businesses you will be paying HMRC the difference as if your business is making a profit, then in all likelihood, you will have more VAT on sales than on purchases.
Question: I heard I don't have to pay tax for my first year?
For sole traders and partnerships, your tax year will always end on the 5 April. You then have until the 31st of January the following year to submit your self assessment tax return and pay your tax.
So, if you start business today, 30 September 2013, your tax year will end on 5 April 2014 and you will have until 31 January 2015 to submit your tax return and pay your tax.
Please do not leave it until the last minute though, even if you submit your return early but don’t pay your tax until nearer 31 January, at least you will know how much money you need to save/ keep aside.
Please note: That only applies to the first year. In year 2 you will have to make a 'payment on account' on the 31st of January (at the same time as you pay your year 1 tax) which will be half the amount of your year 1 tax bill.
Then on 31 July you will make another payment on account for year 2 tax. The following 31 January you will submit your year 2 tax return and pay any balance of tax due plus a payment on account for your year 3 tax (equal to half of your year 2 tax) and so the cycle goes on.
Questions: How do I pay national insurance? And tax? And when? And how much?
As a self employed person, you will pay 2 types of national insurance.
- Class 2 is paid at £2.70 a week (rate for 2013/14) and can be paid every January and July or alternatively you can set up a monthly direct debit.
- Class 4 national insurance is calculated on your profits and you pay 9% on profits between £7,755 and £41,450 and 2% on profits over £41,450.
If you have set up a limited company, you will pay national insurance through your companies payroll just as any employee would and your accountant would normally advise you to pay yourself a wage that would cover your “stamp”.
Question: When is a good month to start in business? should you wait until the 6th of April for the next tax year?
This is a good month to start your business, or October, or June, or any month with more than 20 days in it!
Start your business when you are ready, not when the tax man is ready. The only time I would suggest a small delay is if you were thinking about starting at the end of March, you might as well put it off until 6 April and give yourself a bit longer to submit your first tax return.
How much should I pay my company secretary?
A solicitor will charge anything from £100 plus VAT to carry out your company secretarial work. This consists of submitting your annual return to companies house and any other papers, such as change of directors. There is no longer a legal requirement to have a company secretary, but you do still have to submit the required documents, and in some cases, an Accountant can do this for you
Well folks, that's all from us for our month of Accountancy blog posts, however do not fret, our Business Advisers are on hand for your accountancy queries, you can call them on 01224 289725 (Grampian Office) or 01382 443400 (Tayside office). As always, they will be more than happy to help. If you would like an introduction into book keeping, you can also book on our FREE book keeping workshop by following this link.
By Liz Pirrie
We look forward to helping you and your business soon...Back to all blogs