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Pay (too much or too little) As You Earn!

There are around 1.4m people who have underpaid tax and 4.3m who have overpaid tax through the PAYE system.

About Accounts is regularly contacted by worried individuals who have received new, but still incorrect, Coding Notices from HMRC. With yet more Notices scheduled to be sent out between now and Christmas it seems the situation will get worse before it gets better.

Our advice is still the same.

Check the information in the letter (also known as a P2) very carefully and if it is not what you expect you must call HMRC (the telephone number you need is on the form) and ask why not.

Alternatively, get an expert, such as About Accounts, to check the details and make the call on your behalf!

The PAYE system was set up in 1944 to replenish government coffers being drained by the cost of WW2. People at this time tended to work for the same employer for the whole of their working lives. Employment patterns have changed significantly since then and the PAYE system has simply not kept pace. We now regularly change jobs and often work for 2 or more different employers at the same time. With employee benefits being offered and withdrawn all the time it is easy to see why a single tax code that’s updated annually might not be able to correctly take account of all the potential variations.

About Accounts are delighted to be supporting the first Wycombe Business Expo on Thursday 28th October. Deborah, Jacqui and Alison will be available to help and advise on personal tax and any other accounting issues you may have. Just come along to the new £31m Cressex Community School between 10am and 6pm and look for our stand. Entry is free and we’d love to meet you!

If you can’t make it to the Expo but have a question please contact us on……(usual contacts)

As many as six million people may have paid incorrect amounts of tax and national insurance through the PAYE system.

According to figures from the Treasury, some £2 billion has been underpaid due to errors in the way that HM Revenue and Customs’ PAYE calculation system works.

This has resulted in about 1.4 million taxpayers owing some £1,400 each for underpayments over the past two years.

The money in many cases will be reclaimed through an amendment of their PAYE tax codes which will be introduced in the next tax year.

But there have been a series of miscalculations affecting people who have overpaid their income tax and national insurance contributions too. As much as £1.8 billion in overpayments may have been collected from 4.3 million people.

They will be entitled to a tax refund and a cheque in the post. Rebates could be as much as £400.

The errors came to light following a ‘reconciliation’ review of the PAYE system which found widespread underpayments by employers.

But figures indicate that the total number of people affected could hit 18 million because there are still open historic cases of under- and overpayment for the years pre-dating March 2008.

Those taxpayers affected by errors in the past two years will be receiving letters between now and Christmas informing them of the scale of the miscalculations.

Employees who have moved jobs or accepted company cars or cash benefits from their employers are more likely to have been caught up in the system’s inability to cope with modern employment practices.

Many of the problems arose and were identified because, where HMRC once conducted manual checks to ensure that the amounts deducted in tax and national insurance tallied with the information on the tax authority’s records, the process has now been computerised.

Treasury Minister, David Gauke said that, given the current economic climate, moves would have to be made to recoup the lost tax take and that the government was not in a position to “wave goodbye” to money owing.

Some taxpayers may find that they have both under- and overpaid their tax, with the two amounts more or less cancelling each other out.

In certain cases, HMRC said that it would consider waiving demands for extra money if taxpayers could demonstrate they had provided all the information necessary to calculate their tax liabilities accurately.

Mr Gauke said that the government intends to move sensitively and cautiously on the issue: “At the moment we have said that those who owe more than £2,000 – those who are obviously in the most difficult position – we’re reviewing exactly how we’re going to do that.

“For those who owe less than that we will be seeking to recover that over the course of the 2011-12 tax year through tax codes.”

A HMRC spokesman added: “The overwhelming majority of PAYE cases – over 40 million – are right, so most people have paid the right amount of tax.

 “But for a variety of reasons in some cases there will be a discrepancy. The government accepts that the way we go about deducting tax at source needs to be much more accurate and the introduction of the NPS [computer system] paves the way for a real time system which in turn boosts accuracy.

“The roots of this are in the fact that PAYE came in during the Second World War in 1944, at a time when many people stayed with the same employer during the whole of their working lives. It’s not like that anymore.

“We have to reflect that and have new systems. Because circumstances change during the year there will always be a minority who have paid either too much or too little. This year, and going forward, the new IT system will mean more people paying exactly the right tax at the right time than ever before.”

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Sole Traders – a great place to start

For many, self employment as a sole trader can happen organically. A good idea becomes a business venture and before long your order book is up and running, creating a buzz and generating a ‘to do’ list that never seems to end.

But beware! Although the sole trader route is a great way of dipping a toe into self employment with little in the way of administration and expense, there ARE things you must do to avoid problems later.

Did you know that you must register yourself as self employed within 3 months of starting up? It’s easy to do using a CWF1 form but even easier to do online at www.hmrc.gov.uk/selfemployed. And you’ll save yourself a £100 penalty!

It’s also worth setting up a direct debit for your Class 2 National Insurance Contributions – it’s only £2.40/week and will entitle you to state benefits should you need them.

Take your business seriously. It’s more than a hobby so do the groundwork. A separate bank account can help you separate your business dealings from your household expenses. This in turn ensures you take account of all your expenses and keep on top of your credit control. A simple spreadsheet can help – a basic accounting package such as QuickBooks may be even better.

If you are already trading, you are probably thinking about completing your tax return for the year which ended in April. Getting this done soon means you can reduce your on account tax payment which will be due in July if your profits are lower. It’s straightforward to organise but you need to have completed your tax return. Conversely, if you find your profits are better than before ,you have plenty of time to save for the balancing payment which will be due in January 2011.

About Accounts can help you choose accounting software solutions and offer a comprehensive tax return service if you want support.

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VAT – know the rules!

VAT can seem like a bit of a minefield but investing some time researching the subject can really help a small business.

Did you know that some of the rules are changing from April 2010?

If your turnover is more that £100,000 or you register for VAT after 1/4/2010 then you will have to file your VAT returns online AND pay electronically. There will also be new fines for not doing so correctly or on time.

Many of our clients continue to have to keep a close eye on their cash flow. Business conditions seem to be improving for many but, as activity levels grow, it often means building stock or investing in technology before any customers can be invoiced. In this case we usually suggest that they use the Cash Accounting Scheme – a system specifically for small businesses with turnover less that £1.35m. It means that you’ll only pay over VAT to HMRC if you’ve been paid by your customers (remember though that you’ll only be able to claim VAT on what you’ve bought if you’ve actually paid for it!).

Benefits for small businesses don’t stop there. The ‘flat rate scheme’ allows a business to pay over a pre-determined percentage of its turnover. The record keeping requirements are vastly reduced leaving a small business owner more time to run the business and less stress and worry over the bookkeeping.

By creating an annual budget you will know in advance whether you should be registered for VAT or not. A rolling 12 month turnover above £70,000 means an immediate need to enrol. However, nobody likes mid-year price changes so a voluntary registration in advance of breaching the VAT limit can help everyone and ensure your advertising literature and marketing material will last longer!

If you’d like help deciding whether the flat rate scheme would benefit your business or whether a switch to cash accounting would help please get in touch……

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BUDGETS ARE NOT JUST FOR THE MAJOR PLAYERS

Now that Christmas, New Year Resolutions, credit card bills and tax payments are out of the way, many of our clients use February/March to plan their business activity for the next financial year – setting a budget.

It’s not just the big multinationals that do this, after all a budget is just a plan with numbers to show you what success looks like.

Warren Buffett the world renowned investor has two golden rules of business success

  • Rule Number 1 – Never lose money
  • Rule Number 2 – Never forget Rule Number 1

So how do you, as a small business owner, ensure that you adhere to this very simple strategy?

The first step is to invest some time. Reserve a day in your diary and use it to complete a review of the current financial year. Who are your customers? Will they change next year? What do you expect them to buy from you? What are your big cost items? See where you can get better value, make time to collect alternative insurance quotes for example. Do you have any one-off costs coming up say vehicle renewal or major machinery servicing? What other unusual events do you need to plan for?

Use this data to build a monthly income and expenditure summary – you’ve got your budget!

Now use it to compare to your actual performance through the year ahead. You will soon see where gaps are forming and you’ll be able to act immediately to prevent a crisis. Share it with your accountants and your bank – they will be impressed how professional and confident you are. Nobody understands your business the way you do so make the most of this knowledge to beat the competition.

If you need any more advice about preparing a budget, please contact us.

This column is written by Jacqui Wingfield and Deborah Garvey from About Accounts. If you have any questions you want answered in future columns then please contact them on 01494 520801 or info@aboutaccounts.com.

 

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NEW YEAR’S RESOLUTION NUMBER 1 – make 2010 the year to save for the inevitable tax bill

So we have all heard the quotation about nothing being as certain as death and taxes but how about this one

 

“Death, taxes and childbirth! There’s never a convenient time for any of them!” – Margaret Mitchell, Gone with the Wind 1936

 

January is always a month full of bills, whether you run your own business or not, as that wonderful Christmas and New Year break has to be paid for. Many of the small businesses we hear from also have to find the money to pay their tax bills each January too – the price businesses have to pay for their good trading record is a positive way of looking at it!

 

With a bit of forward planning and a regular saving regime starting now if you don’t already you can avoid a cash flow disaster for your business.

 

So make 2010 the year you start keeping proper records that enable you to calculate a rough profit at the end of each month. You can use a simple spreadsheet system or an off the shelf package such as Quickbooks and transfer 21% of this profit figure from your current account to a separate savings account. With rates of income and corporation tax so similar at the moment this basic calculation will do whether you’re a sole trader or limited company.

 

Whilst you’re busy setting this up you could also put a note in your diary to send your records to your accountant before September/October (if you have a March year end or are a sole trader). Having your accounts finalised and your tax bill calculated well before Christmas will leave you, and your accountant, to enjoy a stress free Christmas secure in the knowledge that there will be no nasty surprises to greet your business next New Year!

 

So what about your tax liabilities that are due now? If you haven’t planned ahead and are worrying about how you will pay then you can contact the HMRC Business Payment Support Scheme (0845 302 1435) and apply to defer your tax payments.

 

This column is written by  Jacqui Wingfield and Deborah Garvey from About Accounts. If you have any questions you want answered in future columns then please contact them on 01494 520801 or info@aboutaccounts.com.

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