June questions and answers

Newsletter issue - June 2020.

Q. I am the director of a limited company and due to the impact of the coronavirus, I will need to waive my entitlement to company dividends for the time-being. Are any formal waiver procedures necessary?

A. A ‘waiver of remuneration’ happens when a director or employee gives up rights to remuneration and gets nothing in return.

If an employee and employer agree to a reduction in the employee's remuneration before they are paid, for example to support company cashflow during the pandemic, then no income tax or National Insurance contributions (NICs) will be due on the amount given up. This is provided the agreement is not part of any wider arrangement to divert the amount to a particular recipient or a cause. For example, if it was waived on condition that the sum would be donated to a particular charity, this would still be liable to tax.

Directors or other shareholders, including employees, are able to waive their right to be paid a dividend. For this to be effective, a Deed of Waiver must be formally executed, dated and signed by shareholders and witnessed and returned to the company.

The waiver must be in place before the right to receive a dividend arises. For final dividends, this is before they are formally declared and approved by the shareholders. For interim dividends, the waiver must be in place before the dividends are paid.

Q. I have recently registered for VAT. Although my turnover is only just above the VAT registration threshold, I anticipate that it will now increase year-on-year. How does the flat rate scheme for VAT work and will it help me with business administration?

A. The VAT flat rate scheme (FRS) is used by many small businesses to help simplify their VAT reporting obligations, although some would argue that the scheme is not simple to use.

Broadly, the FRS is a simplified VAT accounting scheme for small businesses, which allows users to calculate VAT using a flat rate percentage by reference to their particular trade sector. When using the FRS, the business ignores VAT incurred on purchases when reporting VAT payable, with the exception of capital items which cost £2,000 or more.

In summary, with the flat rate scheme:

  • you pay a fixed rate of VAT to HMRC; and
  • you keep the difference between what you charge your customers and pay to HMRC; but
  • you can't reclaim the VAT on your purchases - except for certain capital assets over £2,000.

The percentages applicable to this scheme depend on the nature of the services provided. Full details of the scheme are included in the HMRC VAT Notice 733: Flat rate scheme for small businesses.

In your first year of VAT registration you get a 1% reduction in flat rate, which means that you can take 1% off the flat rate you apply to your turnover, until the day before your first anniversary of becoming VAT registered.

The scheme works well for some but not others. On the positive side, the scheme may save you some admin because you don't have to work out every item of input and output tax, but if your customers are VAT registered, you do have to calculate the VAT and issue VAT invoices in the normal way. Financially, the flat rates averages may work out cheaper for you than normal accounting or you may find this scheme more expensive.

Q. I have a part time job and I earn about £9,000 a year. As my earnings are less than the tax-free personal allowance, can I transfer the unused amount to my husband?

A. A spouse or civil partner who is not liable to income tax or not liable above the basic rate for a tax year may transfer part of their personal allowance to their spouse or civil partner, provided that the recipient of the transfer is not liable to income tax above the basic rate.

The transferor's personal allowance will be reduced by the same amount. For 2020/21 the amount that can be transferred is £1,250 (remaining unchanged from 2019/20). The spouse or civil partner receiving the transferred allowance will be entitled to a reduced income tax liability of up to £250 for 2020/21.

Backdated claims are possible and could be worth in excess of £800.

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