New game of give and take

Re­cent pieces of leg­is­la­tion have given SMES a po­ten­tial boost – but red tape looms, writes Rob Stokes

The Herald Business - - Commercial Feature -

THE Lord giveth and the Lord taketh away. So do the Chan­cel­lor of the Ex­che­quer, The Trea­sury, and HMRC. Tak­ing: April 6 will bring new Real Time In­for­ma­tion (RTI) rules on PAYE, which ex­perts warn will place a heavy bur­den on small busi­nesses.

Giv­ing: Jan­uary 1 brought a ten­fold rise from £25,000 to £250,000 for two years un­til De­cem­ber 31 2014 in the An­nual In­vest­ment Al­lowance (AIA) limit to how much in­vest­ment in qual­i­fy­ing as­sets such as com­put­ers and ma­chin­ery may be set against tax.

What with wide­spread HMRC pub­lic­ity about crack­downs on this or that, ac­coun­tants report ris­ing dis­quiet among clients.

“They are be­com­ing more wary of deal­ing with HMRC,” says Kirsty Wil­son, se­nior tax man­ager at Glas­gow ac­coun­tants Aber- crom­bie Gem­mell. “En­quiries from HMRC are in­creas­ing a lot and many clients con­sult us be­fore deal­ing with th­ese, even with sim­pler is­sues such as PAYE.”

Cur­rently, firms make monthly PAYE pay­ments to HMRC which nor­mally in­clude ag­gre­gate to­tals for tax de­ducted, stu­dent loans de­duc­tions, and em­ployee and em­ployer na­tional in­surance con­tri­bu­tions; full per­sonal data for each in­di­vid­ual is usu­ally submitted in the an­nual P35 and P14 re­turn.

But from April 6, em­ploy­ers and pen­sion providers will have to sub­mit in­for­ma­tion to HMRC re­gard­ing de­duc­tions made for PAYE, NIC and stu­dent loans per em­ployee ‘ when or be­fore’ the pay­ment is made.

Soem ploy­ers, or their ac­coun­tant, book­keeper or pay­roll bureau, will have to: send de­tails to HMRC ev­ery time they pay an em­ployee, at the time they pay them; and use pay­roll soft­ware to send elec­tron­i­cally.

“Most com­pa­nies are hav­ing to up­date PAYE sys­tems,” says Wil­son. “They need the usual rel­e­vant in­for­ma­tion such as name, ad­dress, na­tional in­surance num­ber, date of birth and so on. This may not nec­es­sar­ily be in one place: it may be split be­tween Hu­man Re­sources and PAYE.”

“RTI will put a lot of busi­nesses

off ex­pand­ing,” warns Chas Roy­Chowd­hury, head of tax­a­tion at the Lon­don based As­so­ci­a­tion of Char­tered Cer­ti­fied Ac­coun­tants (ACCA) and who sits on the HMRC RTI Cus­tomer User Group.

“ACCA has pressed for changes to be re­ported on the 19th of the month when you make PAYE re­turns. It would have no ex­tra cash-flow or bor­row­ing re­quire­ment for the (UK) government and would lift an enor­mous bur­den off many smaller busi­nesses,” he adds.

Based on the ex­pe­ri­ence of par­tic­i­pants in the RTI Cus­tomer User Group, he fears many small busi­nesses will strug­gle to track with­out in­stalling more so­phis­ti­cated IT than they cur­rently pos­sess or feel com­fort­able us­ing.

“Some ex-mem­bers of the User Group are sub­mit­ting RTI re­turns on a daily ba­sis in or­der to deal with the ‘on or be­fore’ is­sue, which is not really ten­able for any busi­ness,” Roy-Chowd­hury says.

“We’ve taken the mat­ter up with of­fi­cials at (the UK) De­part­ment of Busi­ness, In­no­va­tion and Skills, but we find it very dif­fi­cult to get through to have a real con­ver­sa­tion with the De­part­ment of Work and Pen­sions (DWP). HMRC are pig-in-the-mid­dle.”

“RTI will be a good thing longterm,” Wil­son con­cedes. “It will track changes be­fore the end of the tax year, which can cut down on the need to pay ad­di­tional tax or to get a re­bate. But ini­tially, it means a greater ad­min­is­tra­tive bur­den for SMEs.”

Ricky Mur­ray, a part­ner at John­ston Carmichael agrees: “From


the rev­enue’s point of view it’s look­ing for a more trans­par­ent sys­tem, one that will let them de­tect over or un­der pay­ments more quickly. It’s more red tape, and a fur­ther cost to em­ploy­ing peo­ple in your busi­ness.”

Ex­ist­ing staff will, he says, have to take on that bur­den or get ad­di­tional re­source and he adds that some com­pa­nies are al­ready look­ing at out­sourc­ing their pay­roll sys­tems.

On the en­hanced AIA Mur­ray says that rais­ing the an­nual limit to £250,000 is an im­prove­ment but notes the un­cer­tainty about when it will come back down again.

“That doesn’t help busi­nesses with their cap­i­tal ex­pen­di­ture plan­ning. So I’m con­cerned that peo­ple will en­ter into a com­mit­ment like that for a tax rea­son rather a good busi­ness rea­son.”

In the main, though, he says it is a pos­i­tive mea­sure in that any­one who has to spend money “is at least get­ting that en­hanced al­lowance and it will help some com­pa­nies kick-start the busi­ness with some or­ders or in­vest­ing in ma­chin­ery.

“En­hanced AIA is not driv­ing in­vest­ment much, es­pe­cially among SMEs,” Kirsty Wil­son says. “Re­mem­ber that when the government re­duced the al­lowance down to £25,000, they es­ti­mated that 95% of busi­nesses would be un­af­fected by that, so that tells you some­thing. We have many clients who were not even us­ing the £25,000 al­lowance.”

A typ­i­cal in­vest­ment need for a small firm might only run to a new IT sys­tem or a ve­hi­cle, both of which qual­ify for the al­lowance.

For the small pro­por­tion of com­pa­nies ac­tively look­ing to in­vest, en­hanced AIA does ac­tu­ally en­cour­age them to do so in the de­sired pe­riod, says Wil­son.

“For some larger clients, par­tic­u­larly in con­struc­tion and man­u­fac­tur­ing, the £250,000 limit is of in­ter­est and really can have an im­pact on their tax bill for the year,” she adds.

“A key point to con­sider is when the in­vest­ment is made. If an ac­count­ing pe­riod spans Jan­uary 1, 2013, then firms need to look at ag­gre­gate in­vest­ment for the year and to un­der­stand rules around time ap­por­tion­ing. It can get slightly com­pli­cated as to what al­lowances are avail­able in the pe­riod.”

Wil­son cites the ex­am­ple of a hy­po­thet­i­cal com­pany with a yearend of July 31, 2013, and which in­curred qual­i­fy­ing ex­pen­di­ture of £50,000 on IT and ve­hi­cles up to De­cem­ber 31, 2012, and a fur­ther £100,000 on ma­chin­ery in the seven months to July 31 this year.

The AIA limit for the com­pany’s fi­nan­cial year would be £156,250 (for the five month pe­riod Au­gust 1 to De­cem­ber 31, 2012, five twelfths of £25,000 = £10,417: from Jan­uary 1 to July 31, 2013, seven twelfths of £250,000 = £145,833).

Un­der the pre­vi­ous limit, only £25,000 of the ex­pen­di­ture on IT and ve­hi­cles would qual­ify for AIA. The re­main­ing £25,000 of that in­vest­ment would be al­lo­cated in the ac­counts to plant and ma­chin­ery and would re­ceive Writ­ten Down Al­lowances at 18%.

The bal­ance of AIA avail­able for the seven months to July 31 this year would be £131,250 (£156,250 - £25,000), more than cov­er­ing the £100,000 of qual­i­fy­ing ex­pen­di­ture on the ma­chin­ery. The £31,250 ex­cess of the AIA (£131,250£100,000) would be lost, as it does not roll over into the com­pany’s next fi­nan­cial year.

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