Money and taxes

Sunday, 16 June 2013

HMRC revised toolkits to help minimise common errors

HMRC has published the updated Business Profits and Capital v Revenue Toolkits to assist agents when completing their clients' 2012-13 returns. These can be useful to individuals who have an understanding of the tax rules and wish to prepare their own tax returns. Links are provided here and they should should be read in conjunction with the essential information reproduced below.

If in any doubt contact an accountant to assist you.

If you don't have one,why not try;

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Individuals, business and corporations

Trusts and Estates

Toolkits to help reduce errors - essential information
These toolkits are aimed at helping and supporting tax agents and advisers. They are part of HM Revenue & Customs' (HMRC's) wider approach to improving tax compliance, which is focused on help and support to ensure that returns are correct.

The toolkits have been developed with the benefit of input from agents and their representatives, including the Compliance Reform Forum. However, the content is based on HMRC's view of how tax law should be applied.

The application of these toolkits to specific cases will depend on the law at the relevant time and on the precise facts.

Overview

Each toolkit has three key elements:

A checklist - to help you to address the areas of possible error that HMRC identifies as key.

Explanatory notes - which identify the underlying types of error, how to mitigate those errors and a brief outline of the tax treatment. HMRC recommends that you review these notes, even if you are confident about answering the questions in the checklist.

Cross references - linking to the relevant guidance available online, so you can easily find more detailed guidance if required.

By being more open on the errors that HMRC sees in returns, and suggesting the steps that you can take to reduce those errors, the toolkits will help you to assure the completeness and accuracy of your clients’ returns.

Use of the toolkits is voluntary and you can use them in whatever way best suits you and your clients.

Examples of how the toolkits are used include:

as a straightforward checklist

to complement or check and refresh your existing processes

as a training aid for your staff

It should not be necessary for you to refer to all of the toolkits, only those that are relevant to your clients' circumstances and the return being completed.

Scope

Each toolkit is focused on errors which HMRC finds commonly occur. They are not comprehensive statements of all types of error that may arise in any particular return. For areas not dealt with in the toolkits you should refer to the full HMRC guidance.

Find HMRC reference material and publications

Each toolkit will be updated each year to reflect any changes arising from the relevant Finance Act, where applicable, and released for use with that year’s returns.

Where there are changes to legislation, the toolkits provide a brief summary of those changes. The types of error that may arise from new legislation will not be immediately apparent, but if HMRC encounters particular areas of common error, they will seek to address these errors by releasing an updated version.

HMRC's guidance is updated regularly. There will however be occasions when the draft guidance has not yet been published. Where that is the case, the toolkits provide a link to the latest publication available on the HMRC website.

The toolkits do not cover tax avoidance or deliberate attempts to evade tax, which are outside the scope of the toolkits and are subject to HMRC's normal compliance procedures.

Taking reasonable care

Under the penalty legislation, there will not be a penalty for an error in a return or other document where the person has taken reasonable care that the return or document is accurate. As part of their efforts to take reasonable care, a person may seek professional advice and may appoint an agent to help them.

Where a person appoints an agent, this does not relieve them of their responsibility for their tax affairs. They still have a duty to take reasonable care, within their ability and competence, and this includes the person taking reasonable care to avoid inaccuracy by their agent.

Further guidance on reasonable care

The aim of these toolkits is to highlight errors which HMRC finds commonly occur and to help you avoid inaccuracies in your clients' returns that may otherwise lead to penalties. Their use remains entirely voluntary. Whether reasonable care has been taken in any particular case will be a question of fact and will not depend on whether a toolkit has or has not been used.

Further guidance on penalties where an agent is acting

Find more information on understanding penalties

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Tuesday, 11 June 2013

How to start your own internet business

If you've ever had an idea for a product or service that you think could net you a fortune, you may well have considered setting up an internet business with the aim of sitting back and watching the money roll in.After all, in 2006, consumers spent £30.2bn on online goods and services, according to IMRG, the industry body for global e-retailing. Over the past 10 years, the growth of the internet has resulted in the high-profile successes of many internet-related businesses. Just a few weeks ago, for example, price comparison service Moneysupermarket.com became the second-biggest internet float in the world since the dot.com implosion, after that industry behemoth, Google.The internet has certainly revolutionized the way we live our lives, and offers a place where individuals can compete with global organisations. But just how easy is it to get started?

Your business plan
The starting point for any new venture is to create a business plan, says Tony Cohen, the head of entrepreneurial business at Deloitte.

"You need to know your target market, know your competition, attract funding, secure good resources, build consumer loyalty – especially blogger coverage – and forge alliances with strategic partners," he says. "Preparation and research are key."

Jeffrey Macklin from FDUK, a company that provides part-time finance directors to start-up businesses, says the objective of the business plan is to tell a simple yet compelling story that leaves the reader wanting to meet the management team and find out more about the proposition. "It should be as succinct and accessible as possible, and around 20 pages at most," he says.

Finding a market

One of the most important elements of setting up an online business is finding out if there is a market for your idea.

"It's all about finding a niche," says William Berry, a self-made internet millionaire. "Hampers, for example, are a niche of food retailing, but there are already market leaders in this area, so you either need to aim for a niche which doesn't already have a market leader, or attempt to become even more niche – by offering Christmas hampers, say. "

Financing

There are many different financing options available to aspiring entrepreneurs. For many businesses, raising funds may involve several sources.

Bank finance in the form of a loan or overdraft is usually cheaper than selling shares or equity in your business, says Macklin. But he adds that equity investment is ideal for those businesses that do not want to increase their level of borrowing, or are unable to provide the necessary security.

If you're considering equity investment, two options are so-called " business angels" and venture capitalists. Business angels are wealthy individuals who look to invest in growing companies wanting to raise between £10,000 and £250,00. They will also offer contacts and advice. Venture capitalists will only invest – usually a minimum of £2m – if they can see a significant return in three years, say.

For internet start-ups with a sound business proposition but without the necessary security to obtain conventional lending, the Small Firms Loan Guarantee is another option, according to Steve Jennings, director of business banking at Alliance & Leicester Commercial Bank. He says cash-flow analysis is vital.

"A common error businesses make is to ask for too little financial support in the hope of getting at least some of the funding they need," he says. "But this is potentially a recipe for disaster."

Your website

Websites will set you back varying amounts. "The cost is relative," says Berry. "While a basic one could cost as little as £500, a really good one that dominates the market could cost up to £20,000."

If building your own website is not an option, try searching for web designers online, or ask friends and colleagues for recommendations, says Nick James, a small-business consultant and the founder of Nick-James.com, an online club for entrepreneurs. Keep the site clean and simple: people will buy from you if they trust the site and can find what they want.

"Make sure you update your website's content constantly, as innovation, imagination and invention are essential if you are going to succeed in the longer term," he says. "Also make it easy for people to get in touch: your business needs to present a human face."

Marketing

One area where internet businesses often fail is marketing, according to Lisa Richards, a partner at accountants Smith Cooper.

"Too many people fall into the trap of developing their product or service and then expecting orders to come racing in," Richards says. "But with no 'shop window' through which to promote yourself, how are potential customers going to find you?"

Sites such as Google AdWords can be a cost-effective way of advertising, she says. These operate on a "pay per click" basis, so you only pay when someone clicks through to your website.

James also recommends emailing your friends and family with details of your site. "Look out for chatrooms and discussion forums, and let people know you're there," he adds. "Network with others and get referrals."

You may want to get a company to do search engine optimization (SEO) for you to ensure that you catch any potential customers searching for your type of product on the likes of Yahoo! and Google. "But try to get them to work on the results," says Berry. "SEO isn't that important if you have spent money effectively on online ads. A lot of people try to get to the top of search engines – and there can only be one."

Customer transactions

Make it fast and easy for customers to order, as a site with a difficult sales process is likely to lose customers, says James. "Fulfil every order as fast as you possibly can," he adds.

Websites should be easy to navigate so users don't get frustrated and leave without making a purchase. Security should also be a priority, and potential customers should be assured their details will be kept safe.

"How you treat customers matters," says James. "Talk to them as often as possible and help them to get to know you and build confidence in you and the services you provide. Ask them what they want from you and react to what they tell you."

Start small and have patience

Don't give up your day job too soon, as it will take time for your internet venture to grow – and in the meantime there may not be much incoming revenue. As a budding online entrepreneur, you'll need lots of energy, enthusiasm, determination and passion; but you also need to be realistic. "Success on the web is rare," warns Cohen. "While many businesses are launched, few make a profit, and most will never see a return on investment. That said, while starting up an internet business can be one of the toughest things you ever do, it can also be the most rewarding."

From baby steps to big success - A matter of development

Julie White, 38, of Milton Keynes, set up her own internet business, Truly Madly Baby, in 2005 after she had given birth to her son, Samuel.

The business has been a great success, and Julie can now boast a six-figure turnover.

It was after starting out working for Ann Summers as a party planner for home events that Julie identified a gap in the market for a "buy in your own home" service for baby products and accessories.

"I looked at what else was out there, and the types of products I might be able to sell, and then I got started designing my own online model," Julie says.

A few weeks after she started the company, she appeared on Dragons' Den, the popular BBC reality TV programme for budding entrepreneurs.

After making a strong pitch, she received two offers from the dragons. But in the end, she decided to turn both of them down.

Instead, Julie opted to go with a different backer, who offered her a £75,000 investment. After that, the business took off.

"I had experience of accounting and customer service from my previous career," she says. "But it was a very steep learning curve – and I made some mistakes along the way, but nothing too detrimental to the business. Overall, it's been a very positive experience."

Julie now has four employees on the payrole and some 260 consultants who co-ordinate the parties.

"There are now plans to extend into Europe," she says. "My advice to anyone thinking of setting up their own business is that if you believe it's good enough then you have to go for it."

Graham Hobson is the founder of the online digital printing website PhotoBox, which now has 2 million members.

He started it in 2000 after he noticed the lack of online storing and printing websites in the UK, compared to the vast number of similar sites in the US.

"I'd always worked in technology but I'm an accidental entrepreneur," he says. "I wrote a business plan, got financial backing and a partner to join me in the business."

Graham gave up his day job in 1999. The first three years, he admits, were "painfully slow."

"We expected it all to happen quickly, but in reality, it was about steady growth," he says. "We were naive about marketing in the beginning and had to learn a lot of lessons."

Viral marketing has helped PhotoBox, and last year it merged with Photoways, a French firm.

"If you want to set up an internet business, you have to convince all the people around you it's a good idea," Graham says. "Put in your own time and energy, but other people's money – and take as much advice from other people as you can."

Saturday, 1 June 2013

Consumer spending in the U.S. unexpectedly declined in April

Shobhana Chandra - May 31, 2013

Consumer spending in the U.S. unexpectedly declined in April for the first time in almost a year as incomes stagnated, indicating that the largest part of the economy will struggle to pick up without bigger job gains?
Purchases fell 0.2 percent after a 0.1 percent gain in March that was smaller than previously estimated, a Commerce Department report showed today in Washington. Incomes were unchanged and prices dropped by the most in more than four years. Other reports showed consumer confidence and business activity jumped in May.The figures point to a cooling in growth this quarter as higher U.S. payroll taxes and budget cuts restrain the world’s largest economy, giving Federal Reserve policy makers reason to keep pumping money into financial markets. At the same time, record-low inflation combined with rebounds in home and stock prices are shoring up confidence, which will help prevent an extended pullback in demand?“Spending growth is going to be soft,” said Gus Faucher, a senior economist at PNC Financial Services Group Inc. in Pittsburgh, who correctly projected the drop in spending. “Inflation is too low from the Fed’s perspective, so they are going to be cautious about tapering” bond purchases intended to boost the economy, he said. “We will see better growth toward the end of the year.”Stocks fell, paring the seventh monthly gain for the Standard & Poor’s 500 Index, as investors weighed today’s economic data. The S&P 500 dropped 1.4 percent to 1,630.74 at the close in New York.

Growth Forecast

Growth will ease this quarter to a 1.6 percent annualized rate, according to the median forecast of economists in a separate Bloomberg survey conducted earlier this month. The second half will show improvement, with GDP projected to climb at an average pace of 2.4 percent.The U.S. is still faring better than the euro area, where a report today showed unemployment increased to a record in April after the currency bloc’s recession deepened in the first quarter. The jobless rate rose to 12.2 percent from 12.1 percent in March, the European Union’s statistics office in Luxembourg said.

American companies are weathering the slowdown in overseas demand, according to another report today.

The MNI Chicago Report’s business barometer rose to 58.7, exceeding all forecasts in a Bloomberg survey and the highest since March 2012, from 49 in April. A reading greater than 50 signals expansion. Manufacturing makes up about 12 percent of the economy and may be helped as consumer purchases of automobiles and gains in housing keep factories running.

July 1983

The 9.7-point jump in the Chicago index was the biggest since July 1983. Economists watch the gauge and other regional manufacturing reports for an early reading on the national outlook. The group says its membership includes both manufacturers and service providers, making the gauge a measure of overall growth. Its members have operations across the U.S. and abroad.

The report showed orders, factory employment and production all accelerated during the month.

Companies predicting some pickup in manufacturing include Weyerhaeuser Co., which has benefited from a housing rebound.

“We’ve got a lot of leverage to the housing industry through our timberlands, our wood products manufacturing and our homebuilding business,” chief executive officer Daniel S. Fulton said in a May 21 presentation. “We’re finally at a stage where I can say with a lot of confidence, housing recovery is underway.”

Consumer Sentiment

Strength in residential real estate is propelling consumer confidence as well. Sentiment climbed in May to the highest level in almost six years, according to figures from Thomson Reuters/University of Michigan. The group’s final sentiment index increased to 84.5 in May, the strongest since July 2007, from 76.4 a month earlier.

More optimism may help underpin household purchases after the weak start to the second quarter. The drop in consumer spending last month was the first since May 2012. The March reading was previously reported as an increase of 0.2 percent.

The saving rate was unchanged at 2.5 percent even as spending dropped, reflecting the lack of income growth. Wages and salaries were also unchanged in April, showing why gains in sentiment require a pickup in the labor market to translate into more spending.

Labor Market

Employers hired a net 165,000 workers in May, the same as in April, economists projected ahead of the Labor Department’s payrolls report next week. The jobless rate probably held at a four-year low of 7.5 percent, they said.

The Commerce Department’s price index tied to purchases, the gauge tracked by Fed policy makers, fell 0.3 percent in April, the biggest drop since December 2008, as fuel costs retreated. The so-called core price measure, which excludes food and fuel, was unchanged from the prior month and was up 1.1 percent from April 2012, matching a record low.

Adjusting consumer spending for inflation, which renders the figures used to calculate gross domestic product, real purchases rose 0.1 percent, the smallest advance since October, after a 0.2 percent increase in the previous month, today’s report showed.

First Quarter

Strength in consumer spending and business investment helped the economy weather government cutbacks, revised first-quarter data showed yesterday. Gross domestic product rose at a 2.4 percent annualized rate, and household spending expanded 3.4 percent, the most since the last three months of 2010.

Consumers also probably had smaller utility bills last month as temperatures warmed following the coolest March since 2002, helping curb total spending. Spending on services, which includes utilities, declined 0.1 percent after adjusting for inflation.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz atcwellisz@bloomberg.net

Proposed changes to the taxation of partnerships

HMRC Consultation document on the tax rules for partnerships

On 20th May, HM Revenue & Customs issued it's long awaited consultation paper on the tax rules for partnerships. This consultation was announced in the March 2013 budget.

The taxation of partnerships has been under scrutiny for some time, with the suggestion that they are not always purely for commercial purposes but are increasingly being used to achieve tax advantage.
The areas of particular concern relate to national insurance contributions (nic), income tax and capital gains tax.

The consultation is looking at two particular, but unrelated areas where HMRC believes income tax and nic are being avoided. They are disguised employment and Profit and Loss allocation schemes.

Disguised employment

Employment status has been in the spotlight for several years and HMRC has already introduced specialist officers to consider the status of self employed people to cut down on the perceived loss of tax revenue through the artificial take up of the advantageous tax and nic regime for the self employed.

There is a statutory presumption that partners in a partnership are self employed and they have always been taxed on a self employed basis. The Limited Liability Partnership Act 2000 introduced the Limited Liability Partnership from April 2001. The partners within an LLP are taxed like any other partners on a self employed basis.

Currently partners can be remunerated by means of a fixed, predetermined profit share equivalent to a salary and they are still taxed on a self employed. In some cases this has been taken further by changing employees, who have no part in the risk or operation of the business, to partners in the LLP in order to take advantage of the beneficial tax and nic position.

The aim is to prevent a member of an LLP benefiting from the default partner status if the terms of his or her engagement with the LLP are tantamount to an employment. This will be achieved by providing that an individual member who meets either of two conditions be classed as a “salaried member” and, in that capacity, will be liable to income tax and primary (Class 1) NICs as an employee.

The first condition states that a “salaried member” of an LLP is an individual member of the LLP who, on the assumption that the LLP is carried on as a partnership by two or more members of the LLP, would be regarded as employed by that partnership.

This would be determined by referring to the status tests already in use.It is understood that an LLP agreement will not have the terminology or characteristics expected in a contract for services and so there is a second condition;

A “salaried member” of an LLP includes an individual member of the LLP who does not meet the first condition but who:
(a) has no economic risk (loss of capital or repayment of drawings) in the event that the LLP makes a loss or is wound up;
(b) is not entitled to a share of the profits; and
(c) is not entitled to a share of any surplus assets on a winding-up.

Profit and Loss allocation schemes

It potentially links directly with the above in how different classes of partners are rewarded for their contribution, funding of the partnership and probably artificial arrangements involving companies with non-commercial arrangements on say transfer pricing and profit sharing or extraction.

There are a number of particularly aggressive arrangements that exist in the market. For example some structures are designed so that all revenue profits are earned in a company whilst all capital gains are earned in a partnership for the same business.

The proposed treatment is to reallocate profits for tax and nic purposes on a just and reasonable basis and to deny loss relief claims where these losses are considered to be articificial.

Additionally buying and selling of partnership profits will be looked at to ensure that the transaction is not purely an attempt to switch income otherwise subject to income tax to a gain subject to tax at a lower rate.

The changes will take effect from 6 April 2014, with the government seeking views on these proposals for changing the partnerships rules by 9 August 2013.

Managing the economy - Time for a new solution

The recession that was caused in no small part by the financial crisis shows no sign of nearing an end. If there is a glimmer of light in the UK coming from the end of the tunnel, it might prove to be a very long tunnel.

The latest news from around the world does not create much optimism that we will come out of the recession any time soon.

Unemployment across the single currency Eurozone has reached record highs

Chinese growth appears to be slowing

Managing individual economies has become increasingly complex over the last few decades as international trade and international banking have caused the economic problems of individual nations to reverberate around the world. Historically the international impact would usually be no more than ripples. Foreign exchange rates would then fluctuate and help to provide a local solution by making exports cheaper.

In the world of today the international nature of markets and banks has made the problems more widespread and in turn more severe. With the current fragile state of national economies and international banks the ripples have become waves that threaten to have a knock on impact like a house of cards.

The economists of today have a standard set of tricks up their sleeves. In simple terms, they look at statistical indicators such as employment levels and inflation rates or price indices to gauge how the economy is doing. Based on a belief that the availability of money acts like a tap to stimulate or dampen economic activity, the strategy usually employed is to play with interest rates to encourage or discourage borrowing. With interest rates already having hit rock bottom then money supply must be influenced directly by the Central Bank to stimulate the economy hence quantitative easing.

The coalition came into power with a supposedly unavoidable austerity package. The opposition suggested that they would have handled the situation but it is hard to be certain what they would have done if in power when faced with the reality of the impact of their decisions. If as some believe policy is made by the Civil Service and then wrapped to match the colour of the politicians would their strategy have been that different.

It is important to realise the important since of confidence in the behaviour of markets, particularly financial markets. With every more complex markets, the players in the market place look for ways to make decisions using information provided by specialist information gatherers. Credit ratings re given to all major business to provide an indication of the risk associated with lending money. These credit ratings are also applied to countries. Most countries look to increase their borrowing through the international market place. If the credit rating is poorer then the risk is considered to be higher and so the interest rate, the cost of borrowing money, is higher.

Before the monetarist approach to managing the economy, there was a strong belief that the government should spend money to create jobs that in turn would increase overall disposable income and stimulate the economy. There are at least a couple of weaknesses in this strategy. Firstly, the jobs need to be sustainable employment to have a long term impact. This is much harder to achieve than digging holes and filing them in again. Secondly the increase in spending would create a need to borrow more money. After several years of a flourishing economy, the country should have low borrowing and be in the position to raise funds for growth. However this is not the case.

An alternative way to raise funds is to increase the money flowing into the Teasury through taxation and similar sources. Historically the UK has been a good place to trade though not cheap in tax terms.
This has encouraged tax avoidance which is legal planning within the law to reduce exposure to taxation. This should not be confused with tax evasion which is illegal.

Is it not now time to move away from the Civil Servants and look to find a new understanding of the international play of markets in the 21st Century and the implementation of new approaches to stimulate the economy? This needs to be a worldwide approach with a combined commitment to work.