‘Tax’ and ‘Inspector’ – separately, two rather mundane words, but when combined, they can strike fear into the hearts of company directors everywhere, conjuring visions of surly HMRC officials ransacking your office and leaving a trail of fines and retrospective tax charges in their wake.
Maybe we’re being overly dramatic – but people do tend to worry about tax inspections, and often needlessly.
To put your mind at ease, we’ve been taking a look at past inspections and the reasons behind them, and we’ve come up with simple rules to keep you in the taxman’s good books!
Record your expenses and mileage as they happen
Yes, it may appear a simple suggestion, but it’s a vital task that people often neglect. You don’t want to find yourself wondering what the £70 train ticket last January was for. It’s not just best-practice, either; HMRC demand you keep expense receipts going back six years in case they come knocking.
An online backup is infinitely better than a faded paper receipt, which is why we recommend our mobile apps Snap and Mile Cruncher for all your expense-claiming needs. All the details, plus a photo of the original, will be stored in your Crunch account in case you need them!
You can find out what expenses you can claim in our “What business expenses can I claim as a limited company?” article.
Review your contracts for IR35 liabilities
It can be a real headache to determine whether you fall foul of IR35 legislation, especially when HMRC themselves can’t tell you with any real certainty. That said, an IR35 issue remains one of the main reasons tax inspections are launched, so you need to make sure you’re on top of it.
Simply put, IR35 rules are used to determine if you’re “employed” by your client when you provide services through your limited company. As with any employment legislation, the rules are complex. If you’re unsure about your employment position with your client, it might be time for an IR35 review.
The proper use and recording of dividends
Give HMRC half an inch to reclassify your dividend as a director’s loan and they’ll certainly try. This means that if you owe your company in excess of £10,000 at any time in your accounting year, it qualifies as a benefit in kind, and begins attracting additional tax and National Insurance liabilities. You must report the loan on your personal Self Assessment tax return. You may have to pay tax on the loan at the official rate of interest.
You can clear the loan by taking a dividend from your company or simply repay the amount into your company accounts. However, you can only take a dividend if you have the profits available to do so. HMRC are vigilant towards the use of company funds for personal use, so make sure to keep everything simple and above board.
Proper record-keeping is again vital here – luckily, Crunch generates and stores all the necessaries, so you’re good to go.
Don’t pay personal expenses through your company
When you set up your limited company, you created it as a legal entity, separate from your personal finances; you need to remember that your business isn’t a personal bank account.
There’s some discretion with regards to personal expenditure that’s collectively under £10,000 in your Director’s Loan Account, but it’s best to avoid bad habits where possible.
You can check out our article on “How to claim business expenses you paid for personally” for further reading on the subject.
Be on time and up to date!
Late or missing tax payments will attract tax inspectors like bees to honey. Make sure to plan properly, know when your statutory returns to HMRC and Companies House are due, give yourself enough time to complete them and pay any liabilities due.
Chase up all your debts and keep your records as accurate as possible. This means raising invoices, recording expenses and regular bank reconciliations. Stay on top of these and hopefully the will taxman never be tempted to knock on your door.