Accruals made easy
YOU MAY, if you follow inflated thingies, have heard about measures to help football clubs adjust to new accounting standards - "FRS 10", apparently - and have thought it was nothing to do with you. How wrong you can be...
Most people except high-earners - who form limited companies - have traditionally done their accounts on a cash basis. Add up what you put in the bank in the year. Take away your expenses. Pay tax on the difference.
Now, accountant Eric Ashby told the July Branch meeting, we all have to work on an "accruals basis". This means we have to record income for the date when we issue an invoice, not when the client paid. And we have to record expenses for the day the bill was due, not when we paid it.
The Inland Revenue probably won't be too fussed about the fine detail of this for people whose net profit is under £40k. The effect of accruals accounting is to get in tax payments earlier - to pay for the next election. And we also pay in having to think harder about our book-keeping - about as hard as for a small limited company.
If you form a limited company, however, and if its profits are £10k or less, they are taxed at only 10%. Say its trading surplus was £20k. You, as Chair of the Board, decide to pay yourself a bonus of £10k. This gets the company's profit under the ceiling. You pay income tax on this bonus. Then your company pays you, as shareholder, £9k as a dividend, with the tax deemed to be paid. So you save £1170. The cost of feeding and watering a limited company should not be more than £200 a year - no formal audit is required if your profits are under £300k.
But: the government has fought back against this cunning ploy. It has declared that a limited company can be an employee. That might leave you worse off, taking away most of the expenses deductions you get as a "sole trader" freelance. Double-but: if Woodstein Exposés Limited offers to provide the services of journalist Jo Woodstein or a deputy, it all still works.
So: get thee to Companies' House?
What about those deductions? You subtract from your taxable income everything "wholly and exclusively laid out for the purpose of the trade, profession or vocation". A barrister failed to claim deductions on black clothes because they were not exclusively professional - they were also for modesty and warmth. But normal people should claim everything reasonable and see what the Inland Revenue allows.
If you go to the USA for two weeks' research, claim it. If, however, you take the whole family as an afterthought, get separate tickets - and, strictly, claim the proportion of your ticket that wasn't relaxing. "If you don't take the mick and you don't wave a red flag at the Revenue," says Eric, "you can be quite positive in your tax planning."
The Revenue can, however, now pick people for auditing and investigation randomly.
If you rent, claim a fair proportion - and a proportion of light and heat. If you have a mortgage, don't (in general) claim on the interest. If you move your laptop around from room to room you won't have an "office" on which you'd have to pay capital gains tax when you sell the house.
Keep all receipts - for seven years, since if the Revenue ask and you don't have them it could cost £1k. If you don't have a receipt - if, say, a train ticket got eaten by a machine - a memo to yourself and other evidence that you paid for and made the trip should be adequate.
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