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FD PARTNERSHIP NEWSLETTERS

February 2009

Welcome to the edited version of FD Partnership, our newsletter for accounting and finance professionals.

With the arrival of 2009, businesses and their stakeholders are nervously looking forward as they plan their response to the economic woes our country finds itself in.

It’s an ill wind that blows nobody any good, and whilst hillwalking in Cumbria during the new year holidays, I met a sheep farmer who was optimistic that the year would be good for him as the weak pound made it less economic to import lamb and he ended off by reminding me that "people still ‘ave to eat y’know – even in bad times."

Even in bad times business doesn’t grind to a total halt and the indicators are telling us at FD that since the initial economic shockwaves have subsided people are still launching forming limited companies and establishing new ventures – but this time with a stronger capital base and free of debt. Wishing you all a prosperous 2009!

Buying & Selling Businesses in a Recession

We’re in a recession – it’s official! As usual the government figures arrive well after the reality has been felt by the punter on the street.

How has it affected the market for buying and selling businesses? Early signs are that there is still a vibrant market for business transfers but that buyers are taking longer to decide and sellers are having to take less than they wanted when they put their business on the market.

Another phenomenon is a flight to quality. Private investors are buying into professional businesses such as accountancy and dental practices, which are now being rerated because of their record on producing solid and reliable cash flows, albeit not quite as much as at the peak of the boom. People still have to deal with the tax man and they still get toothache, although which is worse is a moot point! In spite of the challenges of a professional business being subject to the rules of the relevant regulatory body, external investors are still able to team up with a member and enjoy above average returns from an investment that can be sold reasonably quickly in comparison with other businesses.

We are also seeing a number of SME owners throwing in the towel as they simply have not got the desire or drive to batten down the hatches and ride out the recession, especially if they can afford to retire or take a lower paying job that is less stressful. This means that there are good businesses out there that offer potential for growth in spite of flagging performance, with motivated sellers seeking to get out quickly.

To find out how we can help your clients dispose of or acquire a business ring FD Kensington on 0800 2800 321 or email [email protected]

Companies Act 2006 Update

Annual Return Changes from 1st Oct 2008

Amongst changes that came into force on 1st October 2008 was the removal of addresses for shareholders in private limited companies. This applies for companies whose date for making up the return is on or after 1st October. The reason for this is that since the annual return is placed on the public record any information about shareholders that is not required by statute would be in breach of the Data Protection Act.

Late Filing Penalties Increase from 1st February 2009

Section 441 of the Companies Act 2006 requires all companies to deliver annual accounts to the Registrar of Companies by the due date and section 453 specifies that a civil administrative penalty is payable if the accounts are delivered late, at a rate specified by the Secretary of State via regulations. This will apply to any accounts that are delivered late on or after 1st February 2009 when the new penalty rates come into force.

What are the changes being introduced?

  • All penalties to be increased to take account of inflation between 1992 and 2007.

  • A faster rate of increase in penalties for companies who file more than one month late.

  • A doubling of the penalty for any company which files late having also filed late in the previous year.

The new table of penalties is a follows:  

How late are the accounts delivered?

Penalty-Private Company

Penalty-PLC

Not more than one month

£150

£750

More than one month but not more than three months

£375

£1500

More than three months but not more than six months

£750

£3000

More than six months

£1000

£7500

In addition where there was a failure to comply with filing requirements in relation to the previous financial year (and that the previous financial year had begun on or after 6th April 2008), the penalty will be double that shown in the table.

Do the penalties apply to all types and categories of company?

Yes

What will happen if the penalty is not paid?

The penalty will be referred to collection agents. If it remains unpaid legal action may be taken which could result in a court judgement or decree against the company.

Do late filing penalties apply to any other documents?

Where a company amends its articles of association a copy of the amended articles must be sent to Companies House within 15 days with failure to comply being a criminal offence. The Companies Act 2006 introduces a new civil penalty of £200 for failure to comply, which is triggered if a company receives notice from the Registrar requiring it to deliver a copy of its amended articles and it does not comply within 28 days. The company would remain liable to criminal proceedings in addition to the £200 civil penalty.

HMRC Investigations - It pays to call in the experts...

It’s never too late to call in Taxact to handle an investigation. The following cases were referred to our investigations specialist when the accountant felt they had reached the end of the negotiation process and HMRC were threatening closure.

Income Tax Enquiry

This was an enquiry into a husband/wife partnership were the husband had passed away. The trade was an upmarket shoe shop and had clearly been taken up for enquiry due to a lack of means as drawings were low. The couple lived in an expensive property and HMRC had information to suggest that there was undeclared lettings income. Due to previous financial problems the couple had entered into an IVA which had been completed during the enquiry year. The original accountant was a brother of the late husband and his services were dispensed for reasons of family politics, with a new accountant being appointed.

The enquiry initially proceeded along normal lines with a couple of meetings which established the following:-

  • The records were poor and incomplete.

  • There were substantial deposits in the business bank account that had not been included in the partnership accounts, for which 2 explanations were given. Firstly, the late husband had been trading as a sole trader selling slimming pills on the internet (which had been not been declared) and secondly, he had been allowing other internet traders to use his credit card facility. He took a commission for its use, which had not been declared.

  • There had been a property let that had not been declared.

  • The shop formed part of a larger building with the balance used as private living accommodation from time to time. Add backs were agreed for various private use adjustments.

The additional tax and interest for the property income and private use adjustments was about £6,000 and an offer of £8,000 was made to settle which included the husband’s missing income. This was refused with HMRC looking to establish that:-

  • All of the additional bankings should be regarded as sales.

  • Any additional sales were treated as partnership income. This was crucial as a penalty could not be levied on a dead person.

  • They wanted a total settlement of about £50,000.

Our experts became involved at this stage and arranged an early meeting. HMRC were prepared to negotiate but only to the extent of an offer around £40,000.

As is usual with cases like this a majority of HMRC Inspectors try and adopt a hard line stance. The General Commissioners were used as a threat and the client copied into all correspondence. At Taxact we have experienced ex- HMRC staff and know exactly how far to push them. We were able to convince them that the omitted income was the husband’s and the bulk of the deposits related to other traders. Eventually a settlement figure of £11,500 was agreed.

The main lesson to be learned from this case is not to be bullied. Knowing how far to push HMRC is a skill and if you have not got it then call in the experts at Taxact straight away.

Employer Compliance Review

This involved a limited company that dealt with drainage and all types of groundwork. The turnover was in excess of £1 million and substantial amounts had been claimed for in the accounts for both wages and subcontractor costs. Don’t forget that HMRC have details of all amounts paid under the new Construction Industry Scheme and wages shown on the P35. All cases taken up for a Review are targeted and don’t just happen - there are no random reviews. It was clear the amounts shown in the accounts for subcontractor costs and wages did not agree with Returns submitted.

The following was established:-

  • The records were poor, particularly cash control.

  • Payments had been paid to unknown staff and claimed as wages.

  • Payments had been paid to unknown subcontractors and claimed.

  • There was large numbers of cheques written in round sums where the payee was unknown.

The risks to HMRC were that both CIS and PAYE procedures had not been operated correctly and monies could have taken by the director under the guise of an expense. If proven for the current year they would attempt to go back to all in-date years.

The starting point for HMRC was that anything that could not be substantiated would incur tax and if appropriate both employers and employees national insurance. To be fair to the accountant he chipped away at the figures, however he did this in a piece meal fashion although he did get the expected settlement down from £350,000 to £200,000. It got to the stage were HMRC actually issued a letter of offer thinking they had an agreed settlement.

Because of the amount involved there were some delays at this point and HMRC threatened closure of the case, at which point our expert was appointed. There was obviously going to be a financial settlement as cash wages had been paid, however the bulk of the settlement related to payments to subcontractors.

We felt there were 2 specific areas that could be challenged and at the very least sow seeds of doubt in the Inspectors mind if he used the threat of the General Commissioners:-

  • HMRC can only seek to tax payments to subcontractors in respect of wages. If any payments relate to materials tax cannot be deducted.

  • Under Regulation 9(4) Income Tax (Subcontractors in the Construction Industry)Regulations 1993 relief can be claimed of the potential additional tax due if HMRC determine that the payee has declared the amount in his accounts.

We were able to demonstrate that on the balance of probability materials were included in some of the payments, so clearly the amounts were open to negotiation. We also obtained names, addresses and UTR`s of some contractors and ask HMRC to review under the above regulation, following which it appeared that a considerable number had declared the amounts received.

After a short period of negotiation we were able to agree an overall settlement including tax, national insurance, interest and a penalty of £60,000.

The major issue here is that even if a letter of offer has been issued and agreement reached it is still not too late for us to act and make a massive difference.

If you are handling an investigation and want the reassurance and expertise of Taxact call us on 0800 2800 322 or email us on [email protected]

Lifting the Veil: Staff Training

Staff training has always been at the heart of FD. Whether it is ensuring that people know how to get the best out of their software or preparing for an externally recognised qualification we are always right behind our personnel.

Out of hours study is encouraged and time is given for pre-exam revision leave to enable staff to further their careers. FD has found this approach to be a valuable investment which is appreciated all round in the office.

Everybody’s requirements are catered for and they are encouraged to maximise their potential to bring out the best in them. This voyage of self discovery is supported by senior and more experienced members of the team who are happy to assist and guide those who have spent less time in a business environment.

Questions are encouraged and managing director Norman Younger often gives up his valuable time to actively encourage junior staff members to think for themselves by challenging their thought process in a constructive environment.

As trainee Morris, aged 18, explains "I have learnt so much since joining last year… I am looking forward to picking up more skills this year."

Time to say "Thank you & Goodbye"

FD has a low staff turnover rate so it was quite unprecedented when this quarter saw the departure of not just one, but two, members of staff.

After five years of employment Ian has moved on to new pastures as a field sales manager for a food company. He started out by knocking on the director’s home door (true!) and asked for a job. Six months later when a vacancy arose Ian received “the knock” in return, as he had made an impression by showing initiative. His time at FD saw him start in the company sales department and eventually assuming responsibility for trade marks and credit control. So far he has popped in to see us on no less than a dozen occasions, so we think he enjoyed it here and misses us.

Our postmistress, Ruth, left after almost ten almost ten years of sterling service, and we thought that she may even be considering retirement but the active sixty-something grandmother has opted to work with children instead. Ruth has an enviable record of only four jobs spanning around 35 years, which is not commonly found these days.

In the custom of FD both leavers were treated to an office party and gifts as a token of our appreciation for their respective parts played in our success over the past years.  

 

Countdown to penalties

In case you had forgotten, from 1st April HMRC’s new penalty regime is in place. The main change is that the taxpayer now has a duty of care, with the minimum standard being "reasonable care". Guidelines cover matters such as the standard of record keeping, storage of records for the future, whether you clarified a matter you did not understand and prompt disclosure of errors. No doubt there will be some interesting cases going to appeal later this year.  

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