“Tax” and “inspector” may seem like two dull words, but when combined, they can frighten company directors everywhere. Nobody wants to visualise grumpy HMRC officials ransacking their office and leaving a trail of retrospective fines and tax charges behind them.
While this may sound extreme, people do tend to fear tax inspections and that fear is often unnecessary.
To comfort you, we have assessed past inspections and the reasons behind them, and we’ve come up with 5 straightforward rules to keep you in the tax collectors’ good book!
1. Examine Your Contracts For IR35 Responsibilities
Determining whether you’re compliant or not with IR35 regulations can be a real nuisance, especially when HMRC itself cannot tell you with confidence. Having said that, an IR35 issue is still one of the main reasons why HMRC initiates tax inspections, so you need to make sure that you are on top of it.
In short, the IR35 rules are used to verify whether your clients have ‘employed’ you when you provide services through your limited company. As with any employment law, the rules are complex. If you are not sure about your employment position with your client, it may be time for an IR35 review.
2. Record And Use Dividends In A Proper Manner
Give HMRC a half-inch to reclassify your dividend as a director’s loan and they will make an effort to. This means that if you owe your business more than £5,000, at any time during the tax year, it will qualify as a benefit in kind. As a result, it will start attracting additional taxes and national insurance liabilities.
You must declare the loan on your personal self-assessment tax return, and you may have to pay taxes on the loan at the official interest rate.
To keep the inspector away from you, it’s wise to take dividends only when you have available profits to do so. You could also cancel the loan by receiving dividends from your company. Or, you can repay the amount to your company account. You should keep in mind that HMRC are observant of the use of company funds for personal purposes, so try to keep it simple and clear.
3. Don’t Pay Personal Expenses Through Your Company
When you create a limited company, you create it as a separate legal entity from yourself. So you must remember that your business isn’t a personal bank account that you can use whenever you want.
There’s some discretion with regards to personal expenditure that adds up to less than £10,000 in your director’s loan account, but it’s best to avoid bad habits as much as possible.
4. Record Your Expenses And Mileage As They Occur
Yes, while this may seem like a simple suggestion, it is an important task that people often overlook. You don’t want to sit there thinking what that £60 train ticket was for last February.
This is not just a best practice, but HMRC requires you to keep receipts for six years just in case they come knocking on your door.
5. Be Prompt and Up to Date
Late or non-payment of taxes will attract tax inspectors like bees! Make sure you plan properly. Know when your tax returns to HMRC and Companies House are due, and ensure you have enough time to complete them.
Search all your debts and keep your records as accurate as possible. This means issuing invoices, recording expenses, and regular bank reconciliations. Stay on top of these and hope the tax officer never tries to knock on your door.
To Wrap Up
Making sure that you have all these rules in check will help you avoid tax penalties and inspectors from coming into your establishment and causing chaos. If you’re still feeling confused or unsure of how to check what responsibilities and expenses you have to record, contact one of our taxation experts here at Count.
To see what other services we offer at Count, check out our website for more information!