Monthly Archives: February 2015

Selecting a Legal Entity for Your Buisness

One of the first major decisions you will have to make as you start your new business is the form of legal entity it will take. To a large degree, this decision may be dictated by the way you have organised your operations and whether you intend to work on your own or in conjunction with others.

The form of entity you choose can have a significant impact on the way you are protected under the law and the way you are affected by taxation rules and regulations. There are four basic forms of business organisation. Each has its own benefits and drawbacks and is treated differently for legal and tax purposes.

Sole Proprietorship

A sole proprietorship is typically a business owned and operated by one individual. A sole proprietorship is not considered to be a separate legal entity under the law, but rather is an extension of the individual who owns it. The owner has possession of the business assets and is directly responsible for the debts and other liabilities incurred by the business. The profit or loss of a sole proprietorship is combined with the other income of an individual for income tax purposes.

A sole proprietorship is perhaps the easiest form of business to own and operate because it does not require any specific legal organisation, except, of course, the normal requirements such as licenses or permits. A sole proprietorship typically does not have any rules or operating regulations under which it must function. The business decisions are solely the result of the owner’s abilities.

Partnership

In a partnership, two or more individuals join together to run the business enterprise. Each of the individual partners has ownership of partnership assets and responsibility for liabilities, as well as authority in running the business. The authority of the partners, and the way in which profits or losses are to be shared, can be modified by the partnership agreement. The responsibility for liabilities can also be modified by agreement among the partners, but partnership creditors typically have recourse to the personal assets of each of the partners for settlement of partnership debts.

The rights, responsibilities and obligations of partners are typically detailed in a partnership agreement. It is a good idea to have such an agreement for any partnership.

A partnership is a legal entity recognised under the law and, as such, it has rights and responsibilities in and of itself. A partnership can sign contracts, obtain trade credit and borrow money. When a partnership is small, most creditors require a personal guarantee of the general partners for credit.

A partnership is also required to file an income tax return. A partnership typically does not pay income tax; the information from the partnership tax return is combined with the personal income of the partners to determine their overall tax liability.

Limited Liability Partnership

The Limited Liability Partnership (“LLP”) offers limited liability to its members but, like a traditional partnership, is tax transparent and offers flexibility in terms of its internal organisation.

An LLP is a separate legal entity from its members. Therefore, it may enter into contracts and deeds, sue and be sued and grant floating charges over its assets in its own name. This avoids the problems that exist in relation to partnerships, where technically it is often necessary for every partner to be party to certain documents or litigation, and the creation of floating charges is not possible.

The members of the LLP are those persons registered at Companies House as members.

The main “price” paid in return for limited liability is public availability of financial statements. An LLP must file accounts (prepared on a “true and fair view” basis) annually at Companies House, which must include the name and profit share of the highest paid member.

In addition the LLP must also file details of the name and address of every member at Companies House. At least two members must be “designated members” responsible for making proper filings at Companies House (and subject to penalties in the event of default).

Provided an LLP carries on a trade or a profession and is not simply an investment vehicle, it is tax transparent – that is, the LLP itself is not taxed on its income or capital gains at all. Instead the members are taxed on their shares of the LLPs’ profits and gains, just as partners in a partnership are currently taxed.

Up until 6 April 2014, all members of a LLP were taxed as self employed individuals. However, from 6 April 2014, certain members (mainly those receiving a fixed profit share) are now required to be taxed as employees with PAYE and Class 1 National Insurance Contributions (‘EEs and ‘ERs) being payable on their remuneration from the LLP.

LLPs were primarily intended for use by the professions. However, any type of business operating for profit may use LLPs. An LLP may be suitable for use as a joint venture vehicle or as an alternative to a limited company, particularly for small businesses.

Limited Company

A limited company is a separate legal entity that exists under the authority granted by statute. A limited company has substantially all of the legal rights of an individual and is responsible for its own debts. It must also file tax returns and pay taxes on income it derives from its operations. Typically, the owners or shareholders of a limited company are protected from the liabilities of the business. However, when a limited company is small, creditors often require personal guarantees of the principal owners before extending credit. The legal protection afforded to the owners of a limited company can be useful.

A limited company must obtain approval from Companies House to use its proposed name. A limited company must also adopt and file a Memorandum and Articles of Association, which govern its rights and obligations to its shareholders, directors and officers.

A limited company must file annual tax returns (“corporation” tax returns) with HM Revenue & Customs.

Incorporating a business allows a number of other advantages such as the ease of bringing in additional capital through the issue of share capital, or allowing an individual to sell or transfer their interest in the business. It also provides for business continuity when the original owners choose to retire or sell their shares. From a tax perspective, the act of incorporation can create advantages via:

  • Selling the business to the company at market value and paying Capital Gains Tax (CGT) on the gain at 10% instead of the normal rate of tax when funds are withdrawn from a limited company
  • Obtaining corporation tax relief in the company on amortising the goodwill where the business started after 31 March 2002
  • Saving National Insurance contributions (NICs) by drawing profits as dividends rather than as salary

Should you decide to incorporate your business venture, you should seek advice from an accountant.

Business Structure – The Pros and Cons

Company Sole Trader/Partnership
A company must be formally incorporated with a written constitution in the form of a Memorandum and Articles of Incorporation. There is, therefore, an initial setup cost. There are no formation costs, but a written partnership agreement is advised.
Companies are governed by the Companies Acts. A company must:– Keep accounting records- Produce audited accounts (if turnover > £6.5m)- File accounts and an Annual Return with the Registrar of Companies. This information is available to the public.

– Keep Statutory Books showing details of shareholders and directors

Sole traders and partnerships are not required by law to have annual accounts nor to file accounts for inspection. However, annual accounts are necessary for the HM Revenue and Customs tax returns.
Companies may have greater borrowing potential. They can use current assets as security by creating a floating charge. Sole traders and partners are unrestricted in the amount and purpose of borrowings but cannot create floating charges.
Shares in a company are generally transferable –therefore ownership may change but the business continues.
Incorporation does not guarantee reliability or respectability but gives the impression of a soundly based organisation. Personally, there may be prestige attached to directorship. The unincorporated business does not carry the same prestige.
Tax is payable on directors’ remuneration paid via PAYE on the 19th of the following month. If applicable, higher rate tax is paid by shareholders on dividends under the self-assessment rules.Corporation tax is payable 9 months after the year-end.  For a sole trader or partnership, tax is generally paid by instalments on the 31 January in the tax year and the 31 July following the tax year. For an ongoing business tax for 2013/14 is payable: first payment on account on 31 January 2014, second payment on account on 31 July 2014, with any final balance due on 31 January 2015. For a start-up business, this is slightly different and covered in more detail later in this publication.
First year losses in a company can only be carried forward to set against future profits. Losses generated by a sole trader or a partner can be set against other income of the year or carried back to prior years, potentially resulting in a tax refund.
For profits up to £300,000 tax is charged at 20% (2014/15) Profits are taxed at 40% on taxable income in excess of £31,865 and at 45% over £150,000 (2014/15)
There is both employers’ and employees’ national insurance payable on directors salaries and bonuses. The NI charge is greater than that paid by a sole trader/partner, but there is no NI charge on dividends. A partner/sole trader will pay Class 2 NI of £2.75 p.w. (2014/15) and Class 4 NI dependent on the level of profits.

For further information on starting a new business please feel free to download a copy of my 2014/15 New Business Kit and you can forward it to anyone you know that is starting a business or has a new business.

New Business Kit 2014/15

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How to Calculate Holiday Entitlement for Full and Part Time Employees

Many employers are confused about annual holiday entitlement for employees particularly when they are part-time or work irregular hours.

It is important to provide the legal holiday entitlement to avoid breaking the law and the penalties that may result.

In my previous blog I discussed calculating holiday pay for workers on irregular hours, This post looks at employees on a fixed salary who are full or part time.

Full-time employees (working 5 or more days per week) are entitled to 28 days paid holiday a year. The 28 days includes bank holidays. This scenario is quite straight forward, however, if they start or leave during the holiday year, the 28 days is time apportioned.

For example, if someone leaves are joins 6 months into the holiday year, they are entitled to 14 days holiday including bank holidays that are taken in the period employed.

Part-time employees on regular hours

It gets more complicated when an employee is part-time working regular hours over 1 to 4 days a week. These employees are paid 28 days pro-rata.

Example of holiday entitlement calculation:

Working 4 days a week: 28 days x 4/5 = 22.4 days a year

Working 3 days a week: 28 days x 3/5 = 16.8 days a year

Working 2 days a week: 28 days x 2/5 = 11.2 days a year

Working 1 day a week: 28 days x 1/5 = 5.6 days a year

Note that 28 days is the maximum statutory holiday. Employees working 6 days a week are still only entitled to 28 days’ paid holiday and not 33.6 days (28 days x 6/5).

Bank or public holidays do not have to be given as paid leave although employees can take any bank holidays that fall on their normal working days out of their annual holiday entitlement.

A part time employee that works Tuesday to Friday does not work on any of the Monday bank holidays but still gets 22.4 days holiday entitlement.

I know of one employer that had an employee that worked four days a week from Tuesday to Friday and the employee was told correctly that there holiday entitlement was 22.4 days a year but then told incorrectly that it was 22.4 days less 8 bank holidays leaving 14.4 days holiday a year plus a maximum of 4 bank holidays that did not fall on a Monday. The employee lost out on a minimum of 4 days holiday a year and in some years it was 6 days when just boxing day and Good Friday fell outside of a Monday.

I would like to repeat that it is important to provide the legal holiday entitlement to employees and avoid breaking the law and the penalties that may result.

Consult your accountant, book-keeper or payroll bureau for further help.

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How to Calculate Holiday Entitlement for Workers on Irregular Hours

Calculating holiday entitlement can be easy for employees who are full-time and on an annual salary. But what if they are casual workers or work irregular hours?

The hospitality industry such as pubs, restaurants, café’s and hotels often employ workers on irregular hours and on an hourly wage. In these circumstances, calculating holiday entitlement can be a nightmare.

Fortunately, help is at hand through a Government web site where there is a tool to calculate holiday entitlement in days or hours for a full holiday year or work out holiday someone is entitled to when they start or leave a job part way through a holiday year.

For my hospitality industry clients I maintain a spreadsheet listing in the first two columns the employees and the hours they have each worked in the holiday year to date.

Here is a PDF of my Holiday Accumulation Spreadsheet . You can look at my example whilst you follow the blog.

I then use the Government holiday calculator tool to work out the holiday hours due to date and note it in column 3.

When employees want to take holiday, they can get holiday pay up to their entitlement and the holiday hours taken are recorded in column 4 and the monetary amount is recorded in column 5.

Column 6 is the holiday hours remaining taking the cumulative holiday hours entitlement in column 3 less holiday hours taken in 4.

Finally, column 7 is the monetary value of holiday pay remaining and the total of this column is the total future holiday pay owed to staff in the future at that point in time. Under new reporting standards for limited companies, future liabilities have to be shown in the accounts (applicable for accounting periods commencing after 1 January, 2015).

The link to the Government tool for calculating holiday entitlement is below. Once you go on it, click the button ‘Start Now’ and choose ‘casual or irregular hours’ button then click ‘Next step’. Then you can enter the hours worked in the holiday year to date and click ‘Next step’ where on the next page it gives you the holiday entitlement to date in hours and minutes.

Click here to access the Government  Holiday Entitlement Calculator

Consult your accountant, book-keeper or payroll bureau for further help.

Next time, I will explain holiday entitlement for full and part-time employees on a fixed salary.

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Pension Auto Enrolment Part 3

This is the final part of our brief guide to Pension Auto Enrolment. If you have not read previous parts then click Part 1 Part 2

What do you need to contribute?

The minimum contributions rate must be at least 8% of the employees’ ‘qualifying earnings’ by 2018, with employers picking up at least 3% of that amount. You can phase in the cost of your employer duties up until 2018, which is designed to help you manage the impact on your cash flow.

‘Qualifying earnings’ are a band of earnings from £5,772 to £41,865 (figures for 2014/15 tax year). These earnings include:

  • salary
  • wage
  • overtime
  • bonuses
  • commission
  • statutory sick pay
  • statutory maternity pay
  • ordinary or additional statutory paternity pay
  • statutory adoption pay

As an alternative to using the qualifying earnings definition, you can choose to use ‘certification’. A certificate can cover all workers or groups of workers.

Getting it right – the process you should follow

As stated previously, we recommend you start your scheme set up process at least 12 months before your staging date. This is based on feedback from many large employers who have already  been through Auto Enrolment and stated that in reality they needed 12 months to go through the different stages effectively.

Of course, we along with our financial adviser associates, can do a lot of this legwork for you and provide you with expert guidance throughout the process.

Small businesses will only in reality need 6-8 months, but the longer the time, the more choices you have.

The process starting 12 months before start date:

Step 1 – Identify your staging date

When is you firm being auto enrolled? Do you need to bring the date forward to fit in with your business calendar?

Ask your accountant or payroll bureau for the date and we highly recommend you start the process 12 months before this date.

Step 2 – Pension scheme

What’s right for one employer may not be right for another. Do you just want to meet the minimum requirements or do you want a pension scheme that is the right fit for your business? If you already have a company pension scheme, does it meet the requirements?

Are you going to seek advice from your accountant in conjunction with experts in the financial adviser field to make sure you get it right?

Bear in mind that a pension is part of your benefits package so could be used to attract the right calibre of employees.

The process starting 8 months before start date:

Step 3 – Assess your workforce

Not all employees are eligible for Auto Enrolment – make sure you know who is and also which group of people are eligible to opt-in if they wish (see part 2 section entitled ‘Which employees are eligible’).

You may need to ‘clean’ your data to make sure you can manage the different groups and communicate with them effectively.

The process starting 6 months before start date:

Stage 4 – Communications strategy

Make sure you give your employees the right information at the right time, taking into account the different groups they fall into.

You should communicate with them throughout the process and make sure they know their rights and what your pension scheme will look like.

Stage 5 – IT systems

How are you going to manage the scheme, taking into account joiners and leavers?

How does the software integrate with payroll systems?

The process starting 4-5 months before start date:

Stage 6 – Test processes

Analyse cost implications and changes to your processes. Make any necessary changes to your existing scheme and test everything to make sure you are fully ready and are meeting the detailed requirements set by the Pensions Regulator.

The process from going live from start date:

Stage 7 – Scheme set up

Carry out all your duties and start auto enrolling your employees.

Register with the Pensions Regulator within 5 months after your staging (start) date.

Stage 8 – On-going management of your scheme

Carry out all your on-going duties, including management of the ‘eligible’, ‘non-eligible’ and ‘entitled’ workers (remember they could move from one group to another), as well as employee leavers and joiners.

regularly review your pension – is it fit for purpose?

Re-register with the Pensions Regulator every 3 years.

 

What happens if you don’t meet your Auto Enrolment requirements?

The Pensions Regulator has the power to investigate firms who it believes are not meeting the requirements and issue penalties for non-compliance (see Part 2).

Large employers have already gone through the Auto Enrolment process and the Pensions Regulator indicated that it is investigating over 500 of them about their compliance with the legislation and may take enforcement action regarding non-compliance.

The financial penalties for non-compliance are significant but it also serves to highlight the complexity of complying with the legislation.

Remember, even if you have a limited company and you are the only employee, Auto Enrolment still affects you and you business.

 

Help is out there

At the Dales Accountancy Service, our payroll software is ready for Auto enrolment and can link with pension providers and the Pensions Regulator on behalf of our payroll clients.

We are also linking up with Whiteleaf Financial Plc who provided the content for this 3 part guide to Auto Enrolment to ensure clients meet their obligations without penalty.

A good financial services provider with an expert knowledge of Auto Enrolment can take the pain out of meeting your Auto Enrolment duties.

Key benefits to look for in a financial services provider for your Auto enrolment obligations:

  • Fit for purpose pension scheme that meets the requirements of Auto Enrolment. This includes reviewing your existing pemsion scheme (if applicable).
  • Expert guidance and assistance through the different stages of pension scheme set up (including communication/presentations to your employees).
  • Access to HR systems – to be used by you and employees
  • On-going support and management of your scheme
  • Detailed annual report of the scheme

 

What next?

I hope you found this 3 part series of interest and further information will be provided through this blog in future. If you  require further information please contact your accountant and financial services provider.

A PDF of Whiteleaf Financial’s brochure on which this 3 part series was based is available for download here Automatic Enrolment Brochure

Back to Part 2 Part 1

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Pension Auto Enrolment Part 2

Go back to Part 1

Why do you need help with pension Auto Enrolment?

Complying with Auto Enrolment is not a straight forward process to implement and it can take 12 months to work through the detailed pension scheme requirements. It’s not surprising when you consider that, in addition to a review of pension arrangements, it involves reviews and analysis of payroll systems, employee categories, IT systems, Terms and Conditions of employment, and various HR policies.

It’s not just time though. An announcement from the Pensions Regulator indicated that it is investigating over 500 of employers which have already been through the process about their compliance with the legislation and has indicated that it may take enforcement action regarding non-compliance. The financial penalties for non-compliance are significant but it also serves to highlight the complexity of complying with the legislation.

As referred to above, the Pensions Regulator can issue penalty notices to punish persistent and deliberate non-compliance.

A fixed penalty notice will be issued if the employer does not comply with statutory notices, or if there’s sufficient evidence of a breach of the law. This is fixed at £400 and payable within a specific period.

The Pensions Regulator can also issue an escalating penalty notice for failure to comply with a statutory notice. This penalty has a prescribed daily rate of £50 to £10,000 depending on the number of staff the employer has.

They can issue a civil penalty for cases where employers fail to pay contributions due. This is a financial penalty of up to £5,000 for individuals and up to £50,000 for organisations.

Where employers fail to comply with a compliance notice or there is evidence of a breach, the Pensions Regulator can issue a prohibited recruitment conduct penalty notice. This penalty has a prescribed rate of £1,000 to £5,000 depending on the number of staff the employer has. They aim to fully recover all the penalties that they issue.

Questions you need to ask yourself :

  • Have you chosen a pension scheme yet?
  • What software are you going to use to manage your scheme, ensuring leavers and joiners are catered for?
  • How will it work with your payroll processes and software?
  • Which of your workforce will need to be automatically enrolled?
  • Which of your workforce can request to join your pension scheme?
  • How will you communicate with your staff?
  • What help can be provided by your accountant and other professionals to help you meet all the requirements of Auto Enrolment and ensure you’re compliant?

Which employees are eligible?

There are three different categories of workers, defined by their age and how much they earn.

1. Eligible employees are people who:

  •  work or ordinarily work in the UK;
  • are aged between 22 to State pension age inclusive;
  • earn £10,000 p.a. or over (based on 2014/15 tax year).

These people are eligible to join the scheme but do have the freedom to opt out.

2. Non-eligible employees are people who:

  • work or ordinarily work in the UK;
  • are aged 16-74 (inclusive);
  • earn between £5,772 to £10,000 p.a. inclusive (based on 2014/15 tax year).

or

  •  earn above £10,000 and are under 22 or are over the State pension age.

These people can opt-in to the schemeif they choose to do so.

3. Entitled workers are people who:

  • work or ordinarily work in the UK;
  • are aged between 16 and 74 (inclusive);
  • earn £5,772 or less (based on 2014/15 tax year).

These people can join the scheme but the employer does not have to make contributions.

What is NEST?

NEST (National Employment Savings Trust) is a pension scheme that you can use tomeet your employer duties. It’s a simple, low cost option that’s primarily aimed at low to medium earners that don’t have access to a company pension scheme.

We highly recommend you get expert financial advice and take a look at other options before proceeding with NEST.

Your Requirements

Your employer duties will depend on the types of worker as identified above.

Summary of employer duties for an ‘eligible worker’ (1. above):

  • Enrol them into an Auto Enrolment scheme
  • Make contributions
  • Set up and manage process for employees to opt-out
  • Keep robust records

Summary of employer duties for a ‘non-eligible worker’ (2. above):

  • Provide effective communication on your scheme and their rights to opt-in
  • If requested, arrange scheme membership and make contributions
  • Set up and manage process for employees to opt-out
  • Continually assess individuals in this group – they may become eligible e.g. age and earnings
  • Keep robust records

Summary of employer duties for an ‘entitled worker’ (3. above):

  • Provide effective communication on your scheme and their rights to opt-in
  • If requested, arrange scheme membership and make contributions (only applicable if you choose to make employer contributions)
  • Deduct contributions from their salary and pay into the scheme
  • Continually assess individuals in the group – they may move into the eligible or non-eligible groups at a later date
  • Keep robust records

Go back to Part 1

Go forward to Part 3

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Pension Auto Enrolment Part 1

Pension Auto Enrolment is a hot topic at the moment and many thousands of employers have received a letter from the Pensions Regulator detailing their Auto Enrolment requirements. This is part 1 of a 3 part guide on the subject.

The Pension Auto Enrolment requirements can be a real headache for employers, however, the good news is that The Dales Accountancy Service can offer their clients a solution that enables employers to meet their Pension Auto Enrolment obligations without fear.

Pension Auto Enrolment:

  • What does it mean?
  • What do you have to do?
  • How do you do it?
  • How much will it cost?
  • Where do you start?

To start with, it is important you know exactly what you want to achieve; whether it’s just compliance and meeting your duties or you want to add value by providing more than the minimum requirements. The answer to this question might be different for separate groups of employees.

You can’t avoid the legislation. The reality is that just like PAYE, VAT and National Insurance, Auto Enrolment is another compliance requirement you will need to deal with and, like the other compliance requirements, there are punitive fines if you don’t.

Chances are you will need help:

  • Help to understand what the legislation requires you to do;
  • Help to understand the options you have;
  • Help to assess the costs of Auto enrolment and how to minimise those costs;
  • Help to assess your current arrangements and resources to see how they can be utilised to meet your obligations;
  • Help to put together your solution;
  • Help to deliver your solution to make you compliant both at your staging (start) date and on an on-going basis.

We, together with our financial adviser associates, can provide a solution that will help you pro-actively deal with your forthcoming obligations, establish a straightforward project plan and turn what could be problematic into a manageable, efficient and undisruptive process.

Most of all, we and our financial adviser associates can reduce the distraction of Auto Enrolment to your business, reduce cost and resources that would need to be applied if you were doing it yourself, and give you the assurance you will be compliant.

In part 2 we answer the questions “Why do we need help with Auto Enrolment?” and “Which employees are eligible?”

 

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