Scratching HeadBusiness owners have enough to deal with just running their business, without also having to learn what is or isn't a requirement when preparing their paperwork for their accountant. You could argue, this is what the accountant is for, to advise them or their requirements, however you can only do so much, and sometimes, people often have their own ideas on what is right or wrong.

During my time in the profession, i see a number of misconceptions business owners have when dealing with all aspects of tax and so ive complied a list of what i feel are the top 5.

1. Cash Accounting

I see this quite often with clients who are VAT Registered. Not understanding the difference between Invoice raised, and Invoice paid.

This is the first misconception some have. "If i haven't been paid, i don't need to declare it". This is just not true. For example, unless you have a Cash Accounting scheme in place, any invoice raised within the vat quarter is to be declared, regardless of whether a payment has been received.

There is also the issue when it comes to preparing accounts. Say for example your accounting period ends 5th April, you raise an invoice dated 4th April, but this invoice isn't paid until 4th May. When preparing your accounts, your turnover would reflect when the invoice was raised (4th April) but your balance sheet would show as being owed until paid (4th May).

You pay tax, or VAT when you date an invoice, not when it is paid, unless you are under a cash accounting scheme.

2. Paying Staff on dates different to what is shown on payslips.

A payment date is exactly what it says on the tin, the day in which you pay your staff. Depending on the frequency of pay, all staff must be paid on the date shown on their payslips, for work carried out, during a specified period. However on a few occasions i have seen times when some business owners believe they can pick or choose, when they wish to pay their staff, and for what period, throughout the year. It simply can not work this way, forgetting the law for a moment, tax is calculated based on when a payment is due, and which week/month it is due on.

3. Register for VAT to reclaim VAT.

A few clients in the past have asked whether they should volunteer registration for VAT, so they can reclaim the VAT on their purchases. Simple answer is yes and no. Yes you can register for VAT even if your turnover does not exceed the threshold for registration, but you can not simply just register so you are repaid VAT, on fuel for example.

Once registered for VAT you must also apply the VAT rate to your invoices. You pay HMRC the difference between VAT on Invoices and VAT on purchases. You don't save yourself anything. In fact what you may do in this process, is cut your profit margins and give yourself another expense.

Some businesses can not just simply add 20% to their fees, when they hit the registration threshold, a lot of them, suffer a loss by reducing their profit by 20% in order to charge VAT.

Therefore if you were charging a fee of £100 before, £20 of this is now VAT due to HMRC. its unlikely you would have anywhere near that much VAT on allowable expenses to offset against it, and as such, there is no saving, there is in fact a further outlay.

4. Registering for VAT saves on Income Tax.

This one is somewhat connected to the last, some business owners are under the impression if they register for VAT they save on Income Tax. This again is not true, VAT, Income Tax and Corporation Tax are all currently at 20%, so where you save in one place, you pay out on the other.

When you're registered for VAT your accounts, will be Net of VAT, for obvious reasons. and so all this will do, is reduce the appearance of profit on your accounts. The income tax you once saved before, has been paid in VAT instead.

As a sole trader, you also have a personal allowance which in short, is an amount you can earn tax-free. There is no personal allowance for VAT, and so in some situations, you could end up paying more.

5. Paying more Tax keeps the Inspector happy.

Not only have I heard this from clients, but I have even seen this from other professionals. That if the accounts raise more tax than what would actually be due, they somehow avoid a tax inspection because they believe HMRC will be happy.

This simply isnt the case, firstly unless something is very very wrong, checks on self assessment are random. Regardless of how much you pay in tax, it could still happen to you. Its more likely during an inspection, the inspector would pick up on any unpaid tax, rather than notify you of any tax overpaid, and so all you are doing is paying more than you should. The only person being effected by this, is you and your bank balance.

 

With all the changes coming in the next few years, its never been more important to make sure you are preparing your accounts correctly. With the looming Making Tax Digital ahead of us, reporting the wrong figures can mean you end up paying more than you should be.

If you feel you can relate to any of the top 5 common misconceptions, it could be a good idea to seek someone like Moonlite Accounts, who can keep you up to date with your requirements, as well as take the burden away from having to deal with tax matters, and leave you to deal with the day to day running of your business.

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