We’ve blogged recently about some of our most popular tax tips for individuals and businesses, which hopefully you found useful. This week we’re covering some of the most common tax traps and mistakes that we’ve seen clients make that cost them time, money or aggravation. With a bit of planning, and regular contact with your advisor, you can avoid all of these!
Confusing you and your business
If you trade through a limited company you should always be aware that the company is a separate legal entity. The bank account is not yours to use as your own, the stock is not yours to take and use personally and there are tax implications to withdrawing money via salary or dividends. One trap here is if you withdraw too much money not only will you pay additional, perhaps unnecessary, tax on it but you could also leave the company without enough money to pay its corporation tax when it falls due. On top of that there are yet more tax implications for both you and the company if you create a director’s loan account.
We would recommend that you have a chat with your accountant each year and plan the amount of money you need to withdraw. Your accountant can then advise you on the best way to withdraw that amount, using a mix of salary and dividends to get the best tax result. Stick to this plan, and talk to your accountant if you need to make any changes or the business takes an unexpected turn.
Not saving tax money
When you receive money for work you’ve done it’s easy to fall into the trap of forgetting that not all of that money is available to spend, and that some will eventually be needed to cover your income tax or corporation tax liability. Because tax payment dates are usually so far in the future it’s also easy to accidentally spend money you should have set aside.
We recommend that every business, individual or limited company, set up a separate savings account so that each time an invoice is paid you can transfer 20% of the value into that savings account. This will ensure you have enough money set aside when the time comes, and as it’s out of sight it’s out of mind, so harder to accidentally spend!
Not registering for VAT until you exceed the turnover limit
Many people are happy to stay under the VAT limit, which is £82,000 in 2016/17, as it means their prices are 20% lower and the admin burden is lower. However, registering for VAT voluntarily before that level can actually gain you several thousands of pounds per year. If your clients are all VAT registered themselves they will not mind if you start charging VAT, and under the VAT Flat Rate Scheme you pay just a proportion of the VAT collected over to HMRC, keeping the rest.
Flat Rate VAT Scheme 1% discount
Following on from the above, don’t forget that in your first year of registration your Flat Rate Percentage is 1% lower than usual, allowing you to keep even more profit. Be careful though, the discount applies in the first year of VAT registration not the first year of Flat Rate registration.
Not claiming all your allowable expenses
When you’re running your own business it’s sometimes tempting to err on the side of caution and only claim things that you’re absolutely certain are allowable. But what if you’re missing out, and paying more tax as a result? The effect of missing something like childcare vouchers or pension contributions can be significant, so make sure you don’t find yourself in this trap and do your research or ask your accountant for details of exactly what you can claim. You should check each year to ensure there are no changes that effect what you can claim too, as tax law is ever evolving.
Not taking into account your spouse’s tax position
If you’re married or in a civil partnership you could be losing money if you’re considering your tax position as two single people rather than as a couple. You should be thinking about things like the transfer of assets prior to sale in order to reduce any capital gains tax liability, transferring any income generating assets (shares, rental property, significant bank balances) to the one with the lower tax rate and transferring any unused personal allowance if possible.
Not checking your tax code
HMRC will issue your tax code based on what they know about you, which is usually in line with your tax return or P60 & P11d submitted by your employer last year. If your tax code is wrong you will be paying too much or too little tax – this is fine if you’re filing a tax return as the reality of your position will be adjusted at that point, but if you’re an employee you may not notice and could be losing out as a result.
Forgetting to include pension contributions or donations on your return
We’ve discussed the benefits of pensions and donations in an earlier blog, so make sure you include them on your tax return in order to claim the tax reduction.
Forgetting a source of income on your tax return
You could face interest and penalties if you omit information from your return, and with penalties now being behaviour based the penalty is higher if HMRC determine that you omitted something intentionally. Remember to include bank interest on your personal and joint bank accounts, any capital gains, any rental income you receive, benefits you receive from your employment and any foreign income you receive.
Not declaring losses on your tax return
If you don’t tell HMRC about any losses you incur you may well lose the ability to use them to offset gains in the future. Sold some shares and made a loss, or made a loss on your rental property? Remember to file a return and include the details in the year it happens, even if you’ve nothing else to pay tax on.
Not registering for a UTR or Gateway Account early enough
If you need to file a tax return the onus is on you to let HMRC know. If you don’t let them know then, aside from potential penalties for late notification, you won’t be allocated a Unique Tax Reference (UTR), which is something you cannot file a tax return online without (and the days of being able to file a paper return are long gone, unless you’re Amish). It’s sadly quite common for taxpayers to fall into this trap and wait until January before deciding to notify HMRC, thinking they still have a month to file and therefore plenty of time. They then find out that they don’t have the necessary UTR to do so, and that it will take HMRC a few weeks to send it out – meaning the deadline passes, the tax return is late and there’s a £100 penalty.
On top of this you’ll need a Government Gateway account set up if you intend to file the return yourself, which again takes several weeks to set up.
Not appointing an accountant or filing your tax return late
We’ve grouped these last two together as they tend to go hand in hand – you get worried about your return, you bury your head in the sand, you file late and get penalised, you eventually appoint an accountant and then finally file your return. The eventual result is the same as you’ve still had to complete the return and pay the tax, but you’ve cost yourself money in penalties and interest by procrastinating.
What should you do?
Bite the bullet early! Talk to an accountant now and get your tax return out of the way. Not only will you sleep better at night knowing it’s done but you won’t have to worry about penalties or interest. If you file before 31st July you may also find that you can reduce your July Payment on Account from last year, if you have one.
Please note that this blog is intended as an overall introduction to the subject matter, and should not be taken to be exhaustive or specific advice. You should discuss your individual personal circumstances with your own professional adviser before taking any action.