What do we actually do? Produce accounts, you might say, but what do we do with them? On this page we will explain the basics of what we do with the help of diagrams. This may help also to demystify some of the jargon and the bureaucracy we have to deal with. We will add to this page as we see the need, so it will be a work in progress for some time to come. We will start with the simplest way to start up in business, the sole trader: At the end of the business year, business records need to be handed in to us, or e-mailed to us. Typical records are a cash book, bank statements, cheque book stubs, any invoices issued, any VAT records, any hire purchase agreements, and so on. From these we prepare accounts to work out how much profit you have made. This profit needs to go on your income tax return along with any other income you have received, such as bank and building society interest from private accounts, or dividends from shares. All this information needs to be included even if you have already paid tax. We keep on file a master copy of the accounts signed by you. We will give you copies of the accounts for your records, and will forward a copy to a bank or building society or some other interested person if instructed by you. We may need to send a copy to HM Revenue & Customs if requested. Otherwise sole trader’s accounts are confidential. Your total sales for a year are also known as turnover. If turnover for the last twelve months exceeds £85,000 then you must register for Value Added Tax. You must also register if it is likely to exceed £85,000 in the next month. You must then add 20% VAT to all your sales unless a sale is known to be zero-rated, reduced-rated or exempt (we can advise you on this). If you fail to register, then VAT will be charged retrospectively at one sixth of your sales (20%/120% = 1/6) and you may also be required to pay a penalty surcharge. VAT has some terminology of its own which we introduce in this diagram: We said that you must register if turnover for the last twelve months exceeds the VAT threshold of £85,000. This turnover is assessed on a moving window basis looking back over the last twelve months, which can catch you out. If you are using our spreadsheet system and you are anywhere near the VAT threshold, then you can e-mail the spreadsheet to us once a month and we will work it out for you. This is a free service for our clients to give you peace of mind. Use of a spreadsheet system makes it easy for us to do. VAT at 20% is quite a burden, and between an unregistered business with a turnover of £84,000 and a registered business with a turnover of £86,000 there is likely to be distortion of competition. There is a VAT scheme called the Flat Rate Scheme which may help a little here, and as a matter of principle we will monitor your VAT return statistics and advise you if a switch to the Flat Rate Scheme would be a good idea. Again this is the power of the spreadsheet. From time to time, we may need to contact HM Revenue & Customs on your behalf. We tend to telephone at a time when things are quiet, and we will have in front of us a VAT Supervision Account which looks like this example: /p> This doubles up as a telephone script, and it includes known returns and payments to discuss with the Revenue. This has of course been prepared on a spreadsheet, and in addition the Up and Down buttons at top right allow us to move transactions around to match liabilities with payments and to show that the account gets settled or closed from time to time. In the example shown, the payment made on 5/2/2015 has been made very late but then moved back by the Up button, while the payment made on 15/5/2015 contains an obvious error which is corrected by the next payment. The VAT threshold has been £85,000 since 1st April 2017 and did not change in 2018. It is possible for two or more people to get together and trade as a partnership, with an agreement to split the profits: A partnership requires a partnership tax return to be filed on form SA800. In addition, each individual partner needs to have an individual tax return filed on form SA100: This is getting a bit more complicated. Individual partners may also have individual income such as bullding society interest or dividends from shares. Sometimes they may also have individual expenses. For example, a loan may be taken out to pay for a share in the partnership, or for an asset to be used by the partnership. Interest on this loan is a tax-deductible expense for the individual partner. If you employ somebody, then from their gross pay, if it is large enough, you will need to deduct income tax and national insurance: In addition to this, you may need to pay additional national insurance as the employer. This can be reduced by Employment Allowance which is given to the employer, though not to the employee. An alternative name for income tax is P.A.Y.E. which stands for Pay as You Earn. Employee’s national insurance is also known as Class 1 primary contributions, and employer’s national insurance is also known as Class 1 secondary contributions. Notionally income tax pays for the general expenses of the State (defence, roads, education etc …) and national insurance pays for employee benefits (National Health Service, State Pension etc …) although this is not guaranteed in any way. Under the Real Time Information system, every time you pay an employee, you must make an online electronic submission of pay details on or before the date of payment. That means every time. If you have both weekly-paid employees and monthly-paid employees, you could be doing 64 submissions per year. You can get an accountant like us to do it for you. This diagram sums it up: The reporting month runs from the 6th of one month to the 5th of the following month (this fits in with the tax year ending on 5th April). For each payment, you need to make a Full Payment Submission over the Internet, or we can do it for you. If there are no payments in a month from 6th – 5th, you must still submit a NIL return as an Employer Payment Summary by the 19th of the following month, which is something which can catch you out. You can also use the Employer Payment Summary to submit other information. We have all these dates noted in our diary for our payroll clients. We also maintain a PAYE Supervision Account like the VAT account above. Finally, any income tax and national insurance which is payable to the Revenue on behalf of employees is payable once every three months by small employers, or every month by larger employers. To be continued …