The HMRC have relaxed the application of penalties for late filing of monthly RTI returns for SME's. They indicate on their website that only persistent defaulters will be considered for penalties after first receiving a late filing notice.
Although we should all be thankful for small mercies, employers should remember the RTI concession is in stark contrast to the attitude the HMRC adopt for applying penalties to registered construction firms who fail to make their monthly CIS returns on time. Every month a CIS return is filed late will cost a CIS construction firm a £100. For the HMRC to honor the terms of its Charter in treating all tax-payers with an even hand, they are going to have to unify their approach to applying penalties on CIS and RTI-payroll returns sooner or later.
Most of us agree the RTI reporting system has reduced the level of work we have to carry out each month and removed the nightmare of year end reporting./p>
Many accountants, like MAAP, will remember a time when managing their smaller clients' payroll function was a relatively small part of the overall cost of providing a complete accounting and tax advisory service. That is not the case now, as managing a client's payroll has become a time-consuming process that requires highly skilled and trained operatives to correctly complete the work each month. As the HMRC move towards implementing their plans for monthly or quarterly real time reporting of financial information, the way we as accountants will interface with our clients will take the next logical steps towards a much more sensible and mutually beneficial relationship.
When you process financial transactional information in real-time, it becomes possible to produce all sorts of invaluable performance indicators to help business owners better manage their business.
The new approach will allow businesses to identify if their target net margins are slipping and take immediate action to investigate why this is happening and correct the underlying cause.
At a more sophisticated level, real-time cash flow planning becomes a viable proposition for even the smallest of businesses. Knowing what liabilities you face over the next 12 months and how the income stream is going to materialise to settle the debts as they become due is an essential part of managing any business. It will also help managers decide if the business can afford to undertake high-profit projects which often involve significant outlays in materials and staff resources before any revenue streams become established. Running out of cash in a highly profitable business is a very common cause of company failure through insolvency.
One problem with real-time reporting is not so immediately obvious, but it will affect those directors who continue to use their company's bank account to pay for personal expenditure. Drawing down more money from their company each month than the RTI-reported salary, expenses and available declared dividends provide for, is a recipe for a costly disaster when the time comes to prepare and submit the next annual Corporation Tax return to the HMRC.
Using your business bank account to fund excessive private expenditure will often create an unplanned director's loan account at the year end. Unless the loan is fully repaid within 9 months of the company's year end reporting date, the amount outstanding is subject to a 25% tax surcharge.
The tax surcharge will be repaid once the underlying loan account has been paid off, but the repayment is delayed until after the end of the tax accounting year in which the debt is settled.
Many small company directors end up an ever-worsening tax trap, where the extra tax surcharge levied on their loan account each year, makes it even harder for the business to generate enough funding to pay a dividend or salary to discharge the debt. It is cycle of events that can quickly spiral out of control over a few years and cause the failure of the business through insolvency.
The moral of the story is the only funds a director should take out of their business each month for their own use, is based on the legitimate expenses they can reclaim, their net salary and the dividends declared.
Real-time reporting will provide directors with accurate information about the available distributable profits to help them decide if it is legally possible to declare a dividend. Many a director has come to grief by running-up a large loan balance during the year, with the expectation a dividend will be voted through to clear it at year end, only to discover the company cannot afford to declare the dividend required.
A useful rule of thumb is you can only afford to vote through and pay a dividend if the balance remaining in the company's bank account will cover all the business and trade creditor and tax debts (including 20% of the dividends already, or about to be declared that year).
Generally speaking, we consider the HMRC's intentions to introduce real-time financial reporting a step in the right direction. Lobby groups will no doubt campaign, complain and over-exaggerate the extra administration work involved, but once we all get over the shock of the new way of working … we suspect the benefits will soon become apparent and people will wonder how they managed.
If you would like to discuss your payroll or business accounting arrangements, please take advantage of our free first consultation.
We are particularly keen to meet business owners who recognise the advantages they can derive from real-time reporting to better manage the growth of their business.
We are happy to discuss how MAAP can help you over the telephone, or we can arrange a no-obligation and free appointment. We are not embarrassed to claim we want to sell you on why MAAP will be good for your business, but we do not engage in persistent sales practices. Call us on 01202 482121 to find out why we don't have to.
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