Importance of Tax Return accuracy

Here is an example of the importance of accuracy in your tax return.

HMRC has returned the tax return to a man in Evesham after he apparently answered one of the questions incorrectly.

In response to the question: ‘Do you have anyone dependent on you?’ the man wrote: ’2.1 million illegal immigrants, 1.1 million crackheads, 4.4 million unemployable scroungers, 900,000 criminals in over 85 prisons plus 650 idiots in Parliament and the whole of the European Commission’.

HMRC stated the response he gave was unacceptable.

The man’s response to HMRC was : ‘Who did I miss out?’


Budget 2012


Well the Budget has been and gone, quite a boring Budget with absolutely no freebies.  It will take some time to unpick the stealth taxes but at the moment the most interesting points seem to be few and far between but are:


  1. Top rate of tax slashed from 50% to 45% for those earning over £150,000 from 2013
  2. Thresholds under which you do no pay tax extended to £9,205 from 2013
  3. New personalised tax statements to be produced which will be much more readable and will tell you exactly where your taxes are going although this will not come into force for another two years.
  4. There will be a full integration of the tax and NIC systems which will be much more understandable
  5. A vastly simplified tax system will be brought in for small firms turning over less than £77,000

Of course there may be more but we will only find out on detailed reading of the 104 page document.

UK Tax investigations and Enquiries

Being investigated by the Inland Revenue is extremely serious.  A major enquiry can seriously disrupt your business whilst a self assessment personal tax investigation can be prolonged, detailed and intrusive.

If you have deliberately tried to conceal information and are found out you could be fined or even sent to prison.

Most tax investigations begin because the Revenue has reason to believe that some aspect of your tax return or business accounts is wrong.  They may have received a tip off, some figures in the tax return may not tally with other information they have or the return may have been sent in late.

The Revenue also randomly selects a proportion of tax returns every year.  In the first two years of self assessment some 15,000 returns were investigated.  The Revenue will write to you to let you know that your affairs are being investigated although it will not normally give the reason behind its decision to launch an enquiry.

Under the self assessment regime the Revenue must start any enquiry within 12 months of the last filing date of 31 January but there is no requirement for an investigation to conclude with a fixed period of time.  Some enquiries can last more than two years.

Most enquiries are handled by local tax inspectors with specialist training and experience.  They know what to look for and are well versed in the excuses trotted out by wayward taxpayers who have underpaid their tax.

Whatever happens, taxpayers’ affairs will be dealt with confidentially and information will only be disclosed to people that the individual agrees it may be given to such as a tax accountant or other adviser.

If the problem appears to be a simple one of omission, the Revenue can ask taxpayers to answer specific questions or provide documents that might answer the question.  If it is discovered that tax has been underpaid the taxpayer will have to pay what is due plus any penalty or interest accrued.

In serious cases of fraud, the Special Compliance Office can be involved.  This is the Revenue’s elite unit responsible for the most high profile investigations.

In cases where minor amounts of income have been undeclared or where small mistakes have been made on the return, normally the matter can be cleared up with a few phone calls and submission of relevant paper work.

But where serious fraud (more than £50,000) is concerned, the Revenue can start to request information from banks, accountants and other parties if it is the tax inspector’s ‘reasonable opinion’ that this will help the investigation.

Individuals with complex tax affairs with a business to run may well find it easier to hire a specialist tax adviser or accountant to guide them through the process and minimise the disruption to their activities.

Prosecutions and penalties can be severe including jail sentences and stiff fines designed to recoup the unpaid tax and penalties.

How much tax do small business owners pay?


Income tax and National Insurance

Self employed business owners pay income tax and National Insurance on their taxable profits.  For the 2011/2012 tax year most self employed individuals pay income tax as follows:

  • 0% on the first £7,475 (personal allowance)
  • 20% on the next £35,000 (basic rate)
  • 40% above £42,475 (higher rate threshold)

If you earn more than £42,475 you are a higher rate taxpayer; if you earn less you are a basic rate taxpayer.

Income tax paid by the self employed is exactly the same as that paid by other taxpayers, such as salary earners.  However, the National Insurance position is completely different.  For the current tax year, self employed business owners usually pay Class 4 National Insurance as follows:


  • 0% on the first £7,225
  • 9% on the next £35,250
  • 2% above £42,475

Most self employed individuals with annual earnings over the small earnings exception limit of £5,315 must also pay Class 2 National Insurance of £2.50 per week or £130 per year.

Certain types of income are not subject to National Insurance, including interest from bank accounts (including business bank accounts) and rental income.

Business Profits over £100,000

When your taxable income exceeds £100,000 your income tax personal allowance is gradually withdrawn.  For every additional £1 you earn, 50p of your personal allowance is taken away.  So when your income reaches £114,950 your personal allowance will have completely disappeared.  It also means that self employed taxpayers who earn between £100,000 and £114,950 face a marginal tax rate of 62%.

Older Self Employed Taxpayers

Older self employed taxpayers face a broadly similar burden to their younger counterparts but there are a few differences to be aware of:

  • Taxpayers over state retirement age are exempt from both Class 2 and Class 4 National Insurance
  • Taxpayers aged over 65 at the end of the relevant tax year are entitled to a higher personal allowance.  These higher allowances are however withdrawn at the rate of 50p for each £1 of income in excess of £24,000 (2011/2012) Any taxpayer with income in excess of £29,230 does not benefit from these higher allowances at all.
  • Married taxpayers and those in civil partnerships, where one spouse or partner was born before 6 April 1935, may also be entitled to a married couples allowance yielding a tax saving of up to £729.50 for 2011/12.

Employing children in your business

Paying salaries to your children is a good way to reduce your taxable profits but which children can you legally employ?

With some limited exceptions, it is generally illegal to employ children under 13. The position for 13 year olds depends on local by-laws.  Some areas allow them to do limited work, some allow them to do the same work as a 14 year old and some do not allow them to work at all.

Children under school leaving age may do ‘light work’ (ie office work) provided that it does not interfere with their education or affect their health and safety.  Certain types of work (ie factory work) are prohibited and any business employing children under school leaving age must obtain a permit from the local authority.  Subject to this, children still attending school can work up to two hours a day.  On saturdays and weekdays during school holidays this is increased to eight hours (five hours if aged under 15).  Working hours must fall between 7am and 7pm and are subject to an overall limit of 12 hours per week during term time or 35 hours during school holidays (25 hours if aged under 15).  The child must also have at least two weeks of uninterrupted holiday each calendar year.

16 and 17 year olds over compulsory school age can generally work up to 40 hours per week and can do most types of work, although some additional health and safety regulations apply.  In essence you can generally employ any of your children aged 13 or more and pay them a salary which is deductible from your own business income.

How much can you pay?

A salary paid to a child must be justified by the amount of work which they actually do in your business.  If you employed your 15 year old daughter to answer your office phone one hour each evening, you could not justify paying her a salary of £30,000 but a salary of, say, £1,500 should be acceptable.

The National Minimum Wage applies to any employee aged 16 or more, with reduced rates for those aged under 21 or undergoing training.

However, there is no fixed rate of pay which applies to children.  The rate paid must, however, be commercially justified – in other words, no more than you would pay to a non-family member with the same level of experience carrying out unskilled work, the national minimum wage for 16 to 17 year ods (£3.68 per hour) represents a good guide.  Where the child has some experience, or the role requires some skill, a higher rate will often be justified.

Assuming that a rate of £5 per hour can be justified, the maximum salaries which a child could earn would be approximately as follows:

13/14 year olds                              £3,780

15+ but still school age                  £4,380

Over school age but under 18       £10,400

Subject to this, a salary of up to £7,475 could be paid tax free to a child aged under 16 with no other income.  For those aged 16 or more, any salary in excess of £7,075 will give rise to employer’s National Insurance at 13.8% and any salary in excess of £7,225 will also give rise to employee’s National Insurance at 12%.

There are several different ways to save tax by effectively passing some of your business income directly to your children.  It is vital to remember that the income must be the child’s to keep.  Any arrangements requiring the child to pass the income back over to you will mean that the planning is ineffective and the income is taxed on you.

How to claim a big Home Office Tax Deduction

Many businesses start in a spare bedroom or on the dining room table.  Even when they’re well established most business owners work from home at least part of the time, for example during the evening or on weekends.

Working from home means you can claim part of your household costs for tax purposes. But who can claim, how much and which costs? It is amazing how many people think that they are not entitled to the ‘use of home’ deduction.  Many people think they can’t claim because they’re already claiming for an office, shop or other business premises.  Not true! Although the amount of the claim is likely to be less, a ‘use of home’ claim is still possible as long as some work is carried out at home.

How much can you claim?

Claims should be based on the proportionate use of the property for business.  The main factors to consider are time and space: how much spaceis set aside for business use and how much time is spent on business.

There are many possible methods for calculating the business proportion.  In practice, the most popular method is to simply take the number of rooms used for business as a proportion of the total number of rooms in the house.  Hallways, bathrooms and kitchens are excluded from the calculation.

What expenses can be claimed?

Most people don’t realise how many costs can be claimed if they work from home.  A self-employed person working from home is entitled to claim a proportion of most household costs, including:

  • Mortgage interest or rent
  • Council tax
  • Water rates
  • Repairs and maintenance
  • Buildings and contents insurance
  • Electricity
  • Gas, oil or other heating costs
  • Cleaning

Telephone and internet costs may also be claimed, where relevant, although this tends to form a separate claim as the business element of these costs is usually a far higher proportion than for other household costs.

A proportion of general repairs and maintenance costs relating to the whole property, such as roof repairs or gas maintenance costs may be claimed.

Capital allowances may also be claimed on any furniture and equipment used for business, with immediate 100% relief usually available thanks to the annual investment allowance, subject to a reduction for any private use.

Changes to the planned increase in State Pension age


Changes to State Pension age

Under current legislation, State Pension age is planned to increase to:

  • 66 between November 2018 and October 2020
  • 67 between 2034 and 2036
  • 68 between 2044 and 2046

The government has announced that the increase to 67 will now take place between 2026 and 2028.  This change to the timetable is not yet law and will require the approval of Parliament.

Who is affected by the announcement?

This will mean that people born after 5 April 1961 but before 6 April 1969 will have a State Pension age of 67.

People born after 5 April 1960 but before 6 April 1961 will reach State Pension age between 66 and 67.  Under the Pensions Act 2007, people born after 5 April 1969 but before 6 April 1977 already have a State Pension age of 67.  For people born after 5 April 1968 but before 6 April 1969, their State Pension age would have been between 66 and 67.  Under the announcement these people will now have a State Pension age of 67.

Changes to State Pension age beyond 67

State Pension age is planned to start to increase to 68 from 2044 and this would affect anyone born after 5 April 1977.  The government is considering how the State Pension age could better reflect changes in life expectancy in the future.  This is likely to mean that the existing timetable to increase State Pension age to 68 will be revised.

Top Financial Mistakes made by Start Ups

1. Not preparing a cashflow budget

Cash is King. This is especially true for businesses operating in today’s economic climate. It is therefore imperative to accurately keep track of your cashflow. The best way to do this is by preparing a monthly cashflow statement showing payments and receipts. This will allow you to predict periods where additional cash may be required. Knowing when you are likely to need cash means you can explore different funding options in good times.

2. Debtor Collection

Ensuring debtors pay on time is crucial to businesses. The outstanding debtors list should be reviewed regularly and reminders sent to any balances overdue. Debt collection is a part of business that most people do not enjoy but time must be dedicated to this to ensure your survival.

3. Monthly Purchases

For businesses that sell goods, efficient buying of the goods is vital. Clearly, it
is important that you avoid over and under stocking goods as both can be costly
to the business. It is also important to ensure you avail of any rebates on
offer for bulk purchasing of stock and that you avoid the possibility of
surcharges on late orders.

If stock purchasing is a major expense, monthly or quarterly management accounts should be prepared to monitor the stock levels and the average number of days it takes to sell the stock once it is purchased. Calculating your gross profit margin will also give an indication if stock is being purchased efficiently.

4. Not registering for VAT in time

Where a start up business plans to incur significant start up costs (rent, computers, machinery etc) it is important for the business to register for VAT as soon as possible. Registering early will enable you to reclaim any VAT incurred on purchases which can provide significant cashflow savings.
Backdating a claim for VAT can only be done in some circumstances and generally
requires approval from the Inland Revenue.

5. Not keeping purchase invoices

Businesses that are VAT registered can reclaim VAT incurred on expenses incurred in the business. However, VAT can only be reclaimed where the business has kept a purchase invoice from the supplier. Failure to keep all purchase invoices can lead to business overpaying VAT.

6. Ignoring taxes

It is important to ensure the business is in compliance with all taxes to avoid Revenue interest and penalties. A business has certain tax obligations from the first day of trading not just when it becomes profitable. A sole trader must also budget for payment of income tax. Tax payments should be included in the cashflow budget to ensure sufficient cash is available to meet the liability.

7. Not including own expenses

Another common error made in the preparation of business plans is forgetting to include provision for your own expenses. For a business to survive it must generate enough profits for the owner to live off.

Business Savings – top tips!

As much as we dislike it the reality is that ongoing cost monitoring is something you ignore at your peril. Here we take a look at some ways to lower small business costs.
Paying pre-recession prices for stock is still way too common. Dig out your suppliers price lists and compare them to 2009/2010 prices. Are you paying the same price but selling for less? If so, start looking around requesting quotes from at least 2 other outlets.

Discounts may be available for bulk purchasing or for paying invoices within a certain number of days.