Is your business struggling? Would a quick tax refund help?

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All it takes is the loss of a key customer or a large bad debt to turn your profitable business into a loss maker.

There is a little used tax claim you can make when this happens that can really ease your cash flow.

If your business has a trading loss in a particular year, this loss can be carried back to offset against taxable profits in the prior year, reducing the tax liability.  If the original tax liability for the prior year has already been paid, there will now be an over payment of tax which will be refunded.  This is true if your business is in a Limited company or you are self-employed.

None of this is news, as this is a standard relief that all businesses should claim.  What is not commonly known is that you do not have to wait until you submit your tax return as the claim can be made during the loss making year.  Making the claim early is easy to do and dramatically accelerates the tax refund.

Taking a company that draws up accounts to 31 March each year as an example;

Year ended 31 March 2011 – tax liability of £20,000, due for payment 1 January 2012

Year ending 31 March 2012 – estimated tax loss

If you realise there will be a loss in 2012 before you have paid the 2011 tax, you make the claim and the 2011 liability will be reduced by the amount of the claim.  The tax payment due for 2011 is either lower or eliminated by the claim, depending on the size of the loss and you will have reduced your cash outgoings at 1 January 2012.

If you have already paid the 2011 tax, H M Revenue & Customs (HMRC) will refund the over paid tax.

Contrast the cash position between making an early claim with making the claim in the 2012 tax return.  The return can only be submitted when the accounts and tax return are finalised after the year end, 31 March 2012.  The timing for completing this process varies for every company, with some taking as long as the statutory deadline, 31 March 2013.  Assuming it takes a month for HMRC to pay the refund, you will have delayed the repayment by 15 months.

HMRC guidance is available and can be found here.

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Employees – would you like a tax refund?

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I am constantly surprised by how many people who are employees do not claim work related expenses against their tax.  The reason usually is that they are not aware that they can, thinking the rules only apply to the self-employed.

If you personally incur allowable expenses that relate only to doing your job, and the expenses are not wholly reimbursed by your employer, you can claim tax relief on the amount that is not reimbursed.

The most common expenses are:

  • Travelling you had to do whilst doing your job (this does not include travel from home to your normal work place).  If you use your own car for business travel, you can claim tax relief at a rate of 45p per mile for the first 10,000 miles and 25p per mile after that, plus 5p per mile for each passenger.  There are also rates for using a motorcycle (24p per mile) and a bicycle (20p per mile).  If you receive a per mile reimbursement from your employer, this is deducted from the per mile rates you are claiming.  You can also claim public transport fares, tolls and parking fees.
  •  Hotel and meal expenses incurred on business trips.
  •  Small tools you need to do your work (either claim the actual cost or the flat rate deduction which H M Revenue & Customs (HMRC) have agreed for your trade).
  •  Costs or repairing, cleaning and replacing uniforms or protective clothing (again either claim the actual cost or the HMRC flat rate).

Claims can go back a number of years.  If you complete a tax return each year, you can currently go back as far as 2007/2008.  If you don’t complete a tax return you can go back as far as 2005/2006.

How to make a claim depends on whether you have claimed before and the amount of expenses you are claiming.  Generally, if your expenses in a year are less than £2,500, you can complete  a form P87.   For expenses of £2,500 or more in a year, you will have to complete a tax return.

Wherever possible, HMRC will refund the tax due to you by increasing your tax free allowance (PAYE coding), but they usually refund tax overpaid from earlier years.

Form P87 can be found on the HMRC website along with detailed guidance on the rules.

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Why do 4 VAT returns every year when you can do 1?

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HMRC (“H M Revenue & Customs”) have various VAT schemes designed to reduce administration time and costs for small businesses.

Small businesses can apply for the “annual accounting scheme”.  This means they only have to do 1 VAT return each year rather than 4 quarterly VAT returns.

A business counts as small if taxable supplies (sales that should have VAT charged on them) are no more than £1.35m per year (the £1.35m is calculated without including VAT).

The benefits of the scheme are:

  • 1 VAT return per year means less administration and accountants’ fees
  • The VAT period for the return can be aligned with the company/business year end
  • You have an extra month to file the return after the year end (normally VAT returns have to be filed within a month of the VAT period end – under this scheme you have 2 months)
  • Payments of VAT to HMRC are evenly spread over the VAT year and you can choose to pay either 4 quarterly instalments or 9 monthly ones plus a balancing payment when the return is filed (but you must pay electronically)
  • Easy to apply for
  • Can be used if you use the flat rate scheme or cash accounting scheme (more about these in future blogs)

 

If you think this applies to you, contact me about how to apply.  If you prepare your own VAT returns you can obtain the form from the HMRC website – form VAT 600AA or form VAT 600AA/FRS (use this one if you also use the flat rate scheme),but make sure you read the HMRC guidance.

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Welcome to my blog

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  • Are you employed or self employed?  Would HMRC agree with you?
  • What are your business records like?  Are they good enough for HMRC?
  • Do you know what HMRC expect you to do every year?  And do you know how to do it?
  • Do you know how much tax you should be paying?
  • Do you want to avoid unexpected tax bills?
  • Would you like to submit only 1 VAT return every year?

On this site, we will be posting lots of articles and news so that you are aware of what is going on, giving you free tips and advice.

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