proactivepaul – Page 8

The bookkeeping reports

Every time a bookkeeping exercise is done we generate a number of reports. Amongst other things, the reports will tell you how much profit you are making, how much your tax reserve should be, and how much your customers still owe you. Dates are shown in scientific notation YYYYMMDD so that when you view a folder, files are listed first by document type and then by date.

The reports usually relate to one quarter in isolation, and this is what we normally prepare:

– 300330 VAT return
– 300335 VAT acknowledgement
– 488120 ledgers’ report
– 488160 interim balance sheet
– 488220 aged debtors
– 488240 interim profit and loss account

If you’re not VAT registered then ignore the fact that there are no 300330 and 300335 reports.

The 300330 report – A software version of the HMRC VAT return

The figures on this report are prepared in accordance with MTD for VAT and are submitted from our software directly to the HMRC mainframe. This copy of the VAT return is now the only version which is available under MTD for VAT.

The 300335 report – A software version of the HMRC submission receipt

This is the only proof you have that the VAT return was submitted.

The 488120 report – a full list of which transactions go into which ledgers

The general ledger is prepared the way that accountants and bookkeepers like to do it. The ledgers’ report lists every single transaction . . . twice. If you like double entry bookkeeping then this is the report that will show you how everything is recorded.

What you should be especially interested in are the sections of this reports that list the Debtors and the Creditors. These sections set out (on a case by case basis) who owes your business money, and who is owed money by your business.

Most importantly, if you’re a director of a limited company, then you will probably feature in this report as a Creditor. Look for a sub heading like:

Creditors: 1111111111 Your Name

It will be much nearer to the end of the ledgers’ report than the beginning. Generally, the Creditor ledger in your name shows how much you have taken out of your business. We try to keep the balance on that account as close to NIL as possible.

The report is presented from the company’s perspective. So if your Creditor balance is Black, you may owe the company money. The Company is “in the black” and that’s good from the point of view of the company. The problem is that it’s not good for you and (unless corrected with a dividend, then) you have an interest free loan from your company. HMRC does not like directors having interest free loans. When that happens they may charge you extra income tax on a benefit in kind.

If your Creditor balance is Red then that’s good for you (and not for the company) as the company owes you money.

Moreover, if our records do not wholly agree to your records, this 488120 report will help you establish any differences. Amendments to our records involve double entry bookkeeping, so if you want something changed you will need to tell us which two entries in the 488120 report are wrong and which two entries you were expecting to see. That could mean four bits of information for each amendment.

The 488160 report – an interim balance sheet – a snapshot of the business on that single day.

The balance sheet tells you where you stand with all of your various stakeholders, and it tells you what the business might be worth on the open market.

Fixed Assets – the value of the assets owned by the business (after allowing for depreciation). These items tend to be the major bits of plant and machinery. Normally, computers are not recorded here on the balance sheet, unless they are particularly hefty pieces of kit. Computers tend to appear under “equipment expensed” in the profit and loss account.

Other Debtors – For example a VAT refund, or SMP funding which HMRC sometimes pays to companies.

Customers – How much your customers owe you. If this figure is negative it will be in brackets and that means that your customers may have overpaid you.

Suppliers – How much you owe your suppliers. Negative figures (in brackets) mean that you owe them. Positive figures mean that they owe you.

Other Creditors – People you owe, like HMRC (for corporation tax) and the VAT office. This list of “Other Creditors” can include directors and employees who may be owed some money for expense claims. If any director has a positive figure by their name then they actually owe the business some money. Also, pay particular attention to the Corporation tax figures and due dates.

Total Funds – The Balance Sheet Value – the net worth of the company. If this is negative (if it’s in brackets) then technically you are insolvent. It is illegal to continue trading if you are insolvent. Talk to us because a short term deficit may be tolerated, but a persistent deficit needs remedial attention. If the Balance Sheet Value is positive, then this is the combined value of all the shares, and it’s the amount you (along with and all the other shareholders) might expect to receive if you sold the business on the open market. Don’t get too excited. If this figure is less than one million, it’s unlikely that anybody will be interested in buying you out!

The 488220 report – a list of aged debtors – customers who have not paid you

The oldest unpaid invoices are on the right. You should chase these customers and collect these overdue payments.

If there are entries in red under “unallocated creditors” then the records are showing that you have been paid by a customer, but either you have not invoiced that customer or there is a mismatch in invoicing and amounts received. Whether it’s an overpayment by them, or a missing invoice in your system, you need to correct the mismatch before the end of the following quarter.

Do not ignore aged debtors – they owe you money! If your records show that the old amounts have actually been paid before the end of the quarter date, then you need to let us know how and when the payment came in, because we didn’t see it arrive in your company!

The 488240 report – an interim profit and loss account for the year so far

The first set of columns gives the figures for This Quarter. That is normally a three month period which fits in with the VAT quarters.

The second set of columns shows the whole trading Year To Date. That’s provided so that you can asses the activity in the current quarter and see if it is in character with all the data we have since day one of this trading year.

The Expense categories are the ones that we know about. It’s worth having a proper look at these in case something obvious is missing, or in case expenses are being categorised incorrectly.

A forecast of the Corporation Tax due. You should keep a tax reserve to one side so that you’re ready and have enough funds on the due date. Corporation tax does not appear on self employed accounts, because income tax for the self employed depends on many factors and not trading profit alone.

The bottom line – this is your Net Profit or loss.

Disbursement or Expense?

What is the VAT treatment on recharged expenses?

There is little logic in VAT legislation, and so the system is set out here for your information. Whether we like it or not, we have to follow the rules!

If you are VAT registered, then you charge VAT to your clients, on top of the cost of your product or services.

If in the course of doing that you incur expenses and you want to recharge those expenses, then you have to charge VAT on top of the expenses as well. The rate is the same rate that you would use for charging VAT on fees (and that can vary). The absurdity of this “VAT on recharged expenses rule” means that (for example) the cost of a train ticket which is normally exempt from VAT, becomes a VATable item the moment you recharge it to a client. The same applies to a postage stamp, or a carton of milk, normally these are non-VAT items, but they become VATable items the moment you recharge them to a client.

Any expense which you “modify” or “process” or “consume” before you recharge it to your client falls into this VAT trap. The only time you can avoid charging VAT on an expense is when it falls into the narrow definition of a “disbursement”.

That’s for things that undergo “no change” as part of your service, but which you pass on intact to your client, or on behalf of your client. In the case a solicitor handling a house purchase, the stamp duty is a disbursement and not an expense. It is not “modified, processed or consumed” as part of the service which the solicitor has provided.

Likewise, if I recharge the costs of providing my clients with tea, coffee and milk, then I need to add VAT to the bill (even though food is not normally subject to VAT). Whereas if I bought a carton of milk for you and handed it over, unused and unopened, then it would be classed as a disbursement.

Crazy, but true. As a general rule add VAT on top of all the expenses that you recharge to your clients!

Please also bear in mind that if you want money from your customer then it is always done on invoice. The expression “expense claim” is something that employers and employees use. On a business to business level you do not claim, you invoice. A full run down of “Invoicing and Sales” is set out at step 2 on this page.

VAT Payments

VAT is normally due within one calendar month of the VAT quarter.

Even though the quoted date may be 7 days later than the month end, it still makes sense to think of the payment as being due at “the end of the following month”. The reason for this 7 day grace period is that HMRC’s bank does not operate the “faster payments service” and it can take up to 7 days for your payment to reach them!

Please make the payment to the “VAT Controller” in good time, based on our quarterly email. The 300330 report which we prepare also shows this figure at line 5

Your bank may list the VAT controller under HMRC or under VAT. It may also show either the SHIPLEY address or the old SOUTHEND address. If the online banking facility is not clear, then you should specify these details:

• HMRC VAT SHIPLEY
• sort code 08-32-00
• account no. 11963155
• ref – your VAT number

The other way to pay is to set up a direct debit, so that they can simply take the money off you when they like. Debits are normally taken one month and 11 days after the end of the VAT quarter. Be sure to have funds available in your account by the 11th of the relevant month.

Approval of Formal Accounts

In the old days traditional paper accounts were sent out by post, for approval and signature. Nowadays, HM Revenue & Customs will accept authorisation electronically and that speeds things up. That means that we now prepare PDF files and email instructions for clients:

4xx600 full accounts
4xx610 abbreviated accounts (Limited Companies only)
4xx660 letter of representation
4xx770 tax computation (adjusted profit for tax purposes)
6xx700 corporation tax return (Limited Companies only)

Please check the PDF files you receive, because they are based on the records that you provided. By responding with the relevant “approved” message you are signifying that you are in agreement with all the reports that have just been sent for approval.

The formal process of preparing accounts for all businesses, no matter how small, ensures that no steps are overlooked. That way, when self assessment tax returns are finalised, we can be sure that we have each and every business recorded correctly.

We have one or two legacy cases still, and any paper documents which you sent to us are batched up at this stage and are returned to you by regular post. These need to be kept safe for a period of 6 years after the end of the trading period. If you have any queries on the accounts, then please let us know before the accounts are approved. Thank you.

Getting things right

The last thing we want to do is to disappoint our clients and that’s why we have systems and processes in place. However, there is an established saying in accounting circles which goes:

“The information you get out

is as good as

the information that you put in.”

That’s another way of saying “give us incomplete information, and you’ll get an incomplete answer”. Software developers refer to this as GIGO.

Nobody wants to build a jigsaw puzzle with missing pieces or with the wrong pieces and if we give you an incomplete picture of what’s happening, you’re not going to be happy.

Our systems and processes are supposed to help prevent problems! It all starts with collecting the right information at the right time and we use simple checklists like this one to do just that:

https://www.proactive.ly/news/?p=92

We have to rely on the details that you give us, because it’s your business, and you are in control. Unlike some mythical accountants of old, we cannot “invent” things.

A black and white street map of central London, with half of the road names missing, this is a scanned image from an advert which Informix placed in the UK press in 1988 in the days before the web, and back when scanners were low quality

Of course, we all sometimes make mistakes, and we know that sometimes work does need to be redone. It’s our normal policy not to charge extra for reworking things when genuine mistakes have been made. However, if we find that we have to do things twice on a regular basis you will find that we will start charging you twice.

Let’s try getting things right, first time around!

Capital allowances and depreciation

Often there’s little logic in tax law!

If you ever look closely at your accounts and tax return (you do look closely, don’t you?) you may notice that they include depreciation and/or capital allowances. And you may notice that the bottom line figure for depreciation and/or capital allowances is usually different.

That’s because depreciation is calculated based on established accounting practices, and capital allowances are based on the rules set out in the Taxes Acts. And no matter which method you are following, these rules only apply to the major items in your business, the things that last for several years. That means things like motor vehicles, furniture and significant computers.

Generally speaking, accountants will take the cost of a capital asset (like your new £5,000 super computer) and spread the cost equally over 5 years. Whether or not that truly reflects the depreciation of this item the accounts will show a depreciation figure of precisely £1,000 in each and every one of the consecutive 5 years.

HM Revenue and Customs do things differently. So at the outset, they ignore the depreciation figure in the accounts and treat the accounts as if that amount wasn’t there. They term this “adding back the depreciation”. And then they take off the capital allowances.

Ordinarily, capital allowances are calculated on an 18% reducing balance system. There are a few other special rules (as you might have guessed), but for now we’ll take that £5,000 super computer and write off 18% of it. That gives you a capital allowance in year 1 of £900 and a balance of £4,100. In year 2, the 18% allowance on £4,100 will be £738 and so on.

Under the capital allowances method, you never quite get down to NIL . With depreciation you know that the annual adjustment is a uniform figure, and that you’re going to hit a value of NIL after 5 years.

Smaller items of equipment can be written off when they are bought, as a revenue expense rather than a capital expense. You may not see these capitalised in your accounts, and hence you may have no figures for depreciation or capital allowances. These smaller assets are in your profit and loss account under “equipment expensed”.

If you ever wanted to compare the capital allowances figures to the depreciation figures, you would need to do a reconciliation every year, starting with year one of the business. The records should be there in all the copies of the accounts and the tax returns.

Why bother with depreciation then, if HMRC uses capital allowances? The bigger your business gets, the more important your balance sheet becomes. And the biggest companies want the balance sheet to truly reflect the net worth of the company, and so they need show exactly how the assets depreciate and what their residual value is.

The Cardboard Box Game

This is a team game about a cardboard box, imaginatively called:

“The Cardboard Box Game”

It may have been variously advertised as “The Mysterious Mystery Game”.

Overview

Attendees are divided into equal sized groups of around 5 to 10 people.

Each team has a small cardboard box containing some stationery. Teams are invited to share stationery if at all possible. The box is what Royal Mail calls a “small parcel mailing box” and it measures 35 x 25 x 16 centimetres.

This box is flammable!

Rule 0 – Do not be on fire!

A poster from HackSpace Nottingham which looks like a traffic sign. A person is running away from a fire, the border has a large red circle, with a large red diagonal line. Beneath the circle, in big bold capitals it says DO NOT BE ON FIRE. The poster is edged with black and yellow tape, commonly used to fence off danger.

Each team selects one advice slip from a hat. The slip contains a word or phrase.

The challenge is to develop a product, based on the word or phrase, and use the Cardboard Box as the prop. You are trying to sell your product. Either as some type of box, or where the box is a key feature of your offering.

You have 20 minutes to work on the project.

The box may be modified and/or decorated in order to support your story. One or two team members (a maximum of two) will give a 60 second presentation about the product. Keep it simple, just basic dialogue and/or role playing. No Powerpoint, etc!

The Rules

0. Do not be on fire.

1. The cardboard box must be the focal point of the presentation.

2. No Eiffel Towers or origami frogs. The cardboard box must remain clearly identifiable as a cardboard box.

3. The storyline for your product must remain faithful to the expression on the advice slip. The more amusing the better. Derivations on the theme, or the development of tangential ideas are permitted. For example, if your expression was “Outer Space”, then a project about “Star Wars” would be fine, along with a chunky “cardboard box version of R2D2”. There must always be a clear and obvious link between the expression and the product.

4. Presentations may not exceed 60 seconds.

Points

Gained for	Lost for
Artistic creation Cardboard engineering skills Coherent storyline Positivity Humour Imaginative team name	Boxes which do not resemble boxes Deviation from the expression

The decision of the judges is final.

This document can be found at:

proactive.ly/box

A fixed asset register

Claiming tax relief on the big things

All businesses can claim tax relief on business expenses. That can include items that you bought before the business started! Do you have a laptop, and any other IT kit? Is your office equipped with a desk, a chair and a book case? Here’s a typical list of things that you might be introducing. There may be things on this list that you should ignore, and there may be other special things (in your line of business) that we haven’t thought about.

All of these things are “the big things”, the sorts of things that will serve the business over a number of years, and not be used up all in one go. Use this list as a guide, and please compile your own. The descriptions under “model” and “serial number” should be sufficiently clear so that one Dell laptop can be distinguished from the next Dell laptop that you buy, if you see what we mean!

If you run a limited company you should avoid having a company car. Keep you car as a private asset. If you have a self employed trade and the car is a fundamental requirement, then include it in this list.

* make *	* model *	* serialno*	* Date Acquired *	* total cost *
Car 1
Car 2
Desktop 1
Desktop 2
Printer 1
Printer 2
Laptop 1
Laptop 2
Fax machine
Copier
Shredder
Scanner
Air con
Digital camera
Video camera
Desk 1
Chair 1
Filing cabinet 1
Book case 1
Desk 2
Chair 2
Filing cabinet 2
Book case 2
Other specialist equipment

Once your list has been prepared, please let us have a copy.

New company reference numbers

When a new company is incorporated, both Companies House and HMRC will issue reference numbers. This may take between 14 and 28 days. In order to submit documents electronically, we need to ask you to let us know the reference in each case.

HM Revenue & Customs call it a Unique Taxpayer Reference or a UTR. Companies House talks about an authentication code. Examples of the tax office form and the Companies House letter are shown below. In each case, please let us know the reference or the code. We don’t need the letter, just a simple email with the reference or the code, thanks.

Once we have the reference number from HMRC we will complete the form CT41G for you using our own electronic proforma. You do not need to do anything with the original paper form. File it in your system just in case you need the UTR later.

We will check that the Companies House authentication code works on their web site, and then we’ll keep it safe pending the submission of various forms in future.

The VAT Controller postal address

We send correspondence to the Revenue and the VAT office by Special Delivery. Even when we do that, Royal Mail can still sometimes fail to deliver.

Whilst most VAT returns are submitted by us electronically, some still have to go in on paper. We posted 4 VAT returns by Special Delivery on 30 Jul 2009 within a guaranteed delivery date of 31 July 2009. If you were affected, the tracking number was ZW 2614 4011 7GB. The letter apparently arrived at the VAT Central Unit on 3 Aug 2009. We are still trying to resolve the fallout from that, and Royal Mail have refused the claim for the refund of the Special Delivery fee as (they say) the post code was wrong!

Having raised this with the VAT central unit, we will no longer use the address on the envelopes:

VAT Controller
VAT Central Unit
BX5 5AT

And, instead we will be using the full postal address (and recommend that you do the same):

HM Revenue & Customs VAT Controller
Accounts Office
Salts Mill Rd
Shipley
Bradford, BD98 1YY

Let’s see if that helps Royal Mail to do things properly.