ICAS has warned that as many as a million taxpayers could face penalties for late filing of tax returns and claims HMRC has not taken enough measures to notify the public of the changes.

As from the end of this October, anybody who files their paper self-assessment form late, even if it’s only by one day, will receive an instant fine of £100. After three months, the fine will increase by £10 for every day overdue. Even larger fines will be levied if filing is six months late.

It may be time for accountants for contractors to be at the forefront of reminding people!

The same rules will apply to people who file online as from January 31st 2012. ICAS has calculated that an online return due for filing at the end of next January, but held back until August 5 2012, would attract at least £1,300 in fines.

Since self-assessment began in 1997, almost one million people file their return late each year and many of them delay by more than 12 months. Until now, HMRC could not charge a penalty as long as the taxpayer paid all the monies owing.

ICAS’ director of tax, Derek Allen, said he was concerned that the majority of people are not aware of the new penalty regime as it has not been widely publicised.

The Scottish Institute also warns that some people could miss out on tax rebates. Self-employed people in the construction industry often have their tax deducted by the contractor initially and repayments are calculated after they have lodged their return. However, if they file late, the repayment is likely to be a lot less than the fine.

Small businesses and limited company contractors are also becoming increasingly tardy in filing their year end accounts with Companies House. The executive agency recently reported that 12,739 businesses were fined for late filing last month; up from 12,154 in May.

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There are growing concerns amongst finance professionals that the government’s plans to exempt small businesses from filing accounts with Companies House might backfire.

Under new proposals, firms with an annual turnover less than £88,000 will no longer need to file statutory accounts, but experts believe this could make it harder for them to get access to trade credit. The Institute of Credit Management’s chief executive, Philip King, said suppliers rely on financial information when deciding whether or not to extend credit terms. If micro-firms do not need to file accounts, suppliers are unlikely to give them credit.

He thinks that businesses should provide more information rather than less and that rather than encouraging growth, the government’s new proposals will restrict it.

Graydon, the credit reference agency, recently conducted research that found that only 8% of businesses would extend credit if they did not have access to a company’s financial information. Martin Williams from Graydon said that most suppliers admitted they would not grant credit or finance to a small business unless its financial information was available.

He went on to explain that this is not the solution to reducing the red tape problem and there is a danger that it will actually increase the administrative burden on SMEs if they have to answer financial questions directly from trade suppliers.

A lot of entrepreneurs were no doubt relieved when the EU agreed to exempt micro-businesses from filing some reports with Companies House. Ed Davey, the business minister, said this was a significant step forward in the battle to reduce red tape. However, businesses would still have to file simplified information at the government’s discretion.

It has not been decided whether the UK coalition will actually adopt the new rules and in the meantime, financial experts hope they can convince the government that they will do more harm than good.

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HMRC has been issuing a large number of incorrect VAT penalties over the last year and a half, according to UHY Hacker Young. In fact over 50% of the penalties that were issued to taxpayers were later overturned on appeal

Official data shows that of the 28,812 late or inaccurate VAT return cases the Revenue has reviewed, 16,270 were imposed incorrectly. A similar pattern emerges when you take into consideration the penalties issued for technical reasons across all taxes. 48% were subsequently found to have been issued wrongly.

Worryingly, many people do not query the penalty, said Simon Newark, a VAT partner at UHY Hacker Young. He also pointed out that whilst businesses try their best to understand complex taxes, if HMRC’s own employees also struggle, it seems highly unjust to make businesses suffer.

In related news, thousands of firms that should have filed their accounts with Companies House by the 31st December are now studying the appeals process.

In the first two weeks of the new year, almost 1,700 appeals were lodged against late filing penalties, including one business owner who says he sent his accounts by first class mail on December 16th. This should normally be more than enough time for mail to reach its destination but the icy weather conditions in December knocked the postal system for six.

Companies House has said the adverse weather was not spread across the entire country and is therefore an exceptional circumstance for a small number of companies.

Late filing fees, starting at £150, are automatically issued once accounts become overdue. Guidance on the Companies House website states that you can appeal the penalty but to be successful you need to prove exceptional circumstances and delays in the post do not normally qualify.

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They say that a plumber’s taps are always dripping. That’s because what he does for a living gets left behind when he stops work, and fixing a dripping tap is the last thing he’ll want to do.

I thought of that when I got three different communications this week reminding me I hadn’t done something important for my company. OK, so we can all forget to do things – except I’m basically a Project Manager by trade. Organising things so they don’t get forgotten is what I do. For example, even in the current gig (let’s just say if you wanted to represent it as a painting, you’d need Edvard Munch to do it justice) I manage to keep five work streams running and not dropping things.

So, I was more than a little irritated to have to do company work at home after a ten hour day.

First was Companies House. I got a letter a month ago saying I had not filed my annual return. No worries, I did it that very weekend. Online filing is really dead simple, most of the information is already filled in after all. And I know where I filed the magic numbers to let me log in so it only took 40 minutes to find them. Job done. Today I get another letter: file or we strike off the company. Say what? Cue frantic digging around and no sign of £15 going from the company bank account. Check the email history. Seems I signed up for PROOF (whatever that is) but no confirmation of filing a return. Hmmm… So I do it all again – pausing only to ponder just why I have to fill in “None” in a box about share restrictions when I’m the only shareholder – and this time I get all the confirmations. Phew.

Which rather begs the question though; just what the hell did I do last time round? I didn’t get any error messages, it all seemed to go as planned but clearly I missed a step somewhere. Most odd…

Next one was a VAT return. Second time I’d done one of them on line. Only took 20 minutes to find the log in details this time and once I fathomed my way through the mysteries of the Government Gateway login process I was away. No problems at all.

Then I had to do a form for the accountant. Only six months overdue on that one. And one reminder, saying this is the last reminder I’ll get. Charming, I thought, I pay your wages mate. Anyway a matter of moments to fill in the form. Didn’t even have to hunt for the log in details, I can remember my email address and company number almost every time. Although since 99% of what I just filled in is either in my company details or my accounts, why can’t the accountant look it up for himself and fill it in for me?

OK, so two hours after getting home and it’s all done. It’s time for a large vodka and tonic and collapse in front of something mindless on the telly (there’s plenty of choice, sadly). Bliss…

Oh bugger, haven’t done the blog yet. What the hell am I going to write about this week?

Alan Watts can found at LinkedIn.
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Companies House recently revealed that 10 per cent of all accounts filed have been rejected due to basic errors in regards to formatting.

The administrative body, which is responsible for holding all business records throughout the UK, has issued a request for all businesses to get their accounts properly in order or face the consequences, which could include being penalised.

Nearly 91,000 separate accounts faced rejection during the first half of 2010, with almost one third being rejected due to their statutory statements being filed incorrectly; Companies House refused to accept 33,349 accounts due to this error, while other common errors were balance sheets with signatures missing or duplicate accounts with conflicting figures.

Private companies can be hit with a late filing penalty of up to £1500 if their submitted accounts face rejection too close to the deadline for filing.

ICAEW’s Financial Reporting Committee member Kathryn Cearns stated that a percentage of the errors could have been caused by newly-enacted legislation; she said that while the Companies Act going into effect undoubtedly caused some of these technical errors, the fact that Companies House instituted some rules changes of its own could be a contributing factor as well.

In related news, the high rejection rate of accounts filings may be due to limited companies moving away from employing qualified professionals, such as online accountants, to engage in the task, some business advisers have cautioned.

Business experts have declared that a combination of a more vigilant Companies House, in conjunction with companies utilising under-qualified accountants to do any filing work for them, have contributed to the high rate of rejection.

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There’s no doubt about it, the wholesale contractor accountancy marketplace is big business and everyone wants a piece of the action.

In recent months, a new wave of online accountants have been hitting the forums and contractor portals hard in the hope of gaining a foothold in what is already a fragmented market. Their message is clear – why pay £130 a month for the ‘old school’ contractor accountants when you can get the same, if not better service for a third of the price?

It’s a pretty compelling argument and their proposition is almost too good to be true.

Lets dig a little deeper.

Was is an online accountant?

An online accountant offers contractors an ‘end-to-end’ accounting service. This usually combines a bespoke web-based accountancy package that is backed up by a team of accountants and personal account managers. The idea here is that the contractor or freelancer is able to create invoices, manage their expenses and calculate a real-time view of their business. This then enables them to work out how much they can pay themselves (in PAYE salary, expenses and dividends) without having to produce in-year accounts or time-consuming reconciliations.

Obviously there is an element of work required by the end-user but certainly no more than you are asked to do when working through a traditional contractor accountant, and in some cases much less. The technology is also impressive. Real-time feeds into HMRC, Companies House and the government Gateway make online accountants the perfect choice for any time-precious contractor.

Of course, the more challenging aspects of accounting are managed by the online accountants who will submit VAT, corporation tax and personal self assessment returns on behalf of their clients. They will also handle the Companies House annual return and accounts as well as advising on complex issues such as IR35, family business tax, ESC 16 and the agency workers directive.

How much does an online accountant cost?

Most online accountants pitch their monthly fees around the £50-£60 mark. This includes all of the above services as well as unlimited telephone support and free company setup.

Why are online accountants so cheap?

One word – volume. Most high street accountants are happy with 100-200 clients and are therefore keen to maximise their return on investment for what is a relatively small client base. By making their business scalable, online accountants on the other hand are able to service more and more contractors without taking an enormous hit to their margins. This is why their fees are way cheaper than some of the more well-known contractor accountants.

Where can I find out more?

We have a selection of online accountants in our top 10 directory although companies such as Crunch and My Accountant Friend are definitely worth a closer look. A quick search in Google will throw up at least another 20 providers at the time of writing so take the time to do your research. My guess is that this is just the start of a new and exciting time for the contractor accountancy marketplace……I shall watch with interest.

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The Companies Act 2006 was introduced on 1st October 2009 as a way of bringing UK companies into the 21st century. It consists of 1300 sections and is the single largest piece of legislation ever made.

The 2006 Act effectively replaces almost all of the Companies Act 1985, the Companies Act 1989 and the Companies Act 2004.

Most of the existing legislation was written back in the days of the quill pen and it was generally accepted that it needed modernising. Smaller businesses form the vast majority of companies registered with Companies House, and were being bogged down with excessive administration due to the out-of-date legislation. Something had to change.

Following the arrival of the Companies Act 2006, a new Annual Return was introduced. Now given the fact that every company registered in the UK has to file an Annual Return, one could quite reasonably expect it to be;

easy to understand,
easily completed,
with good guidance
and completion online.

How does one out of four (online completion) grab you?

Lets take a closer look at the form itself:

One of the first questions it asks is whether you are a ‘traded company’. I suspect the vast majority of directors would answer ‘yes’ – we are not dormant so are trading….right?. A closer inspection of the guidance notes shows that you should be answering ‘no’. A traded company is one in which its shares are publicly traded on the stock markets.

Moving on…

Next you are asked whether you have a SAIL address (or a Single Alternate Inspection Location). I foresee some blank faces but if you ignore the question it goes away, which is probably the right answer.

You are then required to confirm the addresses of directors. Same as before you might think. But if you confirm that, you are confronted with an error message saying that you need to enter the Country of Residence. You need to enter when you changed your Country of Residence as well. ‘But I haven’t’ you might say, but you cannot progress without giving a date on which you did move, even though you have not! It seems safest to use the same date as the made-up date for the Annual Return.

You are then given a number of options for Country of Residence. The most popular options are;

* United Kingdom
* England (seems to be the safest choice, if you do live in England
* UK
* Great Britain

At this point you may also catch sight of notes asking whether you are an EEA Company, or maybe a Non-EEA Company? Don’t worry as these do not apply but it is a little tricky to know that they do not apply without reading the First Company Law Directive (68/151/EEC). Don’t have that to hand? – ignore the note, that is easiest.

On to Capital : Update/Amend. That is ok, share capital and shareholders are the same as last year, so this section must be easy, right? I am afraid not. You are asked to free-type the ‘Prescribed particulars of rights attached to the shares’. I wonder how many directors of small companies know these rights?

Most companies operating with ordinary shares will be safe with the following answer;

‘Fully voting, fully participating, non-redeemable shares’

I hope the above allows you to get through your Annual Return without too much pain, if you are due to make one. It is disappointing though, that a simplification exercise immediately makes things, more difficult and confusing.

John Mumford is the Accounting Director of Carrington Accountancy
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If for any reason you want to close down your limited company, there are a number of things you have to do. The full details can be found on the Companies House website but the basic process for the average freelancer’s small business is as follows.

Tell People

Before starting the process to close the company, you need to inform your shareholders, if you have any and any outstanding creditors, who may object to the company being closed.

Pay your debts

Ensure all outstanding debts and routine payments have been cleared in full.

De-register for VAT

If you are registered for VAT, you need to inform HMRC using Vat Form 7

Finalise the payroll

Run the final payroll for yourself and any other people you employ (and pay them). You will need to issue P45s to all employees, including yourself, and submit a P35 to HMRC

Finalise the Accounts

Prepare a final set of accounts for the company and submit them to Companies House. Clearly you should do this a few months after the closure date to ensure all monies are fully accounted for.

Pay your Corporation Tax

This is due no more than 9 months (and one day) after the closure date. The company will not be closed until all tax liabilities have been settled with HMRC

Pay out the Remaining Funds

Assuming there is any money left in the company at this point, it should be distributed to the shareholders either as a dividend or as capital under the provisions of ESC 16.

Strike off the Company

Thee months after the closure you should apply to Companies House to have the company struck off using Form 652a for a fee of £10.

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Having made the decision to work through your own limited Company, there are a few steps to take to set it up. Always remember the Company is a separate legal entity and never mix its affairs up with your own.

Choose a Name

The name has to be unique, obviously, and not likely to be confused for someone else’s existing name. The best reference point is the Companies House website which has a simple search facility so you can check your chosen version. Also, try to avoid names that are specifically related to your line of work, just in case you want to change careers later: imagine selling cars though a company called Al’s Bakery.

Decide on Share Ownership

Is this just you, or you and your spouse, or you and two or three other people? This is important, because it defines how to allocate the Ordinary Shares In the company. Dividends are paid in direct proportion to numbers of shares held. A husband and wife typically have 50% each, for example, but if one is already earning money, be aware of the impact of the share income on their tax position. Share allocation can be changed after the event. There are several variations on share management; but for anything other than a simple allocation of ordinary shares, get expert advice.

Register at Companies House

There is an online system you use to set up your company and pay the registration fee. It is fairly simple to use. One question it will ask is who the directors are. For a typical small contractor company you only need one but there’s no reason not to have more. Although not strictly necessary any more, it also helps to nominate a Company Secretary: this could be the same person, but it’s more sensible to have someone else, a partner or relative for example.

Register a Memorandum of Association

Something else to do while you are at Companies House. At its simplest this is a document describing what your company is for and how you wish to run it. You can do it yourself, but the document can have legal implications in a tax investigation so do some online research for a suitable template from sites such as Simply Docs or Click Docs.

Set up a Bank Account

This has to be a business bank account. Banks are increasingly wary of new business bank accounts, so you will have to answer some detailed questions and it will help if you have some professional references and a signed contact to demonstrate you actually will have an income.

Register for VAT

You have to do this if your annual income is in excess of a set amount (currently £67,000 pa) but it Is advantageous to register anyway. VAT and the Flat Rate Scheme are discussed in more detail elsewhere.

And that’s it. It sounds complicated but is in fact quite straightforward. You can also take the easy way out; either use a company formation agent, or there are several accountants who specialise in contractors who will set up all if the above for you for a small fee, or even for free, as well as providing expert support. Finally keep track of all your various expenses setting the company up, since you can reclaim these once you start trading.

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