Good financial housekeeping
Income axe
The current climate of low growth, cuts to legal aid, rising costs such as professional indemnity insurance and austerity budgets means that many barristers are facing an unwelcome squeeze on many fronts: less income; more expenses; slower debtors; and potentially higher rates of tax.
To add insult to injury barristers, have to self-assess and, if late in filing their income tax returns, will face new fixed penalties of £100 plus £10 per day the return is late. This is regardless of whether the tax has been paid, although further interest and surcharges will apply if tax is paid late.
This article seeks to set out some simple steps to help barristers gain control of their tax and financial planning.
Cash back
There are three main tools to address income tax payments: mitigation, delay and planning. These should be discussed with your tax adviser as permutations bring different consequences.
Mitigation
- Review debtors. Can any specific provisions against be made to reduce taxable profits?
- Review WIP. Do amounts need to be recognised; are some payments received at risk of being repaid?
- Consider pension payments before 5 April to obtain higher rate income tax relief via your tax return. Maximum amount that can be paid with higher rate relief is £50,000; unused allowances from previous years can be used or carried forward.
- Payments made under gift aid also reduce higher rate tax bills.
Delay
- Cash basis. Barristers in their first seven years can use the cash basis rather than a “true and fair” earnings basis. This allows barristers to be taxed on what they receive not what they earn. After seven years the earnings basis must be used, although the catch-up charge can be spread over 10 years.
- Consider manipulating your catch-up charge to suit you, e.g. spreading over 10 years or making elections to advance the adjustment.
- Consider next year’s accounts now; can a claim to reduce payment on accounts be made?
- Consider changing your year end. This could delay the date that profits are assessed to tax or else release relief for overlaps profits in an earlier year.
Planning
- Consider setting aside funds regularly during the year to pay tax liabilities. Could your clerks arrange this for you?
- Consider timing of sales or investments to manage cashflow.
- Consider financing options – overdraft, mortgage, aged debt financing
VAT
VAT is a quarterly bane for most.
- Remember to submit returns. Penalties for missed returns and missed payment dates (if filed/paid online due one month and seven calendar days from the quarter end).
- Online filing is being brought in. It is mandatory for all those who registered for VAT since 1 April 2010 and will be mandatory for all by 1 April 2012.
- 3 different types of VAT method can apply to Chambers, depending on the model adopted by Chambers/the Head of Chambers. Check with your accountant that you are using the right one for you.
- Once registered for VAT, other income may also be liable to VAT including writing articles, devilling and lecturing.
Consider
- Registering / deregistering for VAT. Ensure you do not miss the registration date and suffer paying VAT out of your own pocket.
- Flat rate scheme (if turnover is below £150,000). A flat rate of 14.5% (13.5% in the first year of VAT registration) applies on turnover, generally no deductions otherwise allowed.
- Cash accounting scheme (if turnover is below £1.35m) – pay VAT on cash you receive and payments you make.
- Annual accounting schemes (if turnover is below £1.35m) – replaces normal quarterly returns with an annual return. Quarterly payments still apply however.
- Also ensure that you retain all purchase invoices and record all your allowable VAT input costs, for example the proportion of VAT on home costs attributable to business use.
Annual healthcheck
- Make use of your own and your spouse’s annual allowances, including: income tax rate bands and personal allowances; ISA allowances (including your children’s junior ISAs from November 2011); and pension allowances.
- Don’t forget annual capital gains tax exemptions. Also if you have a second home and can make a main residence election, this could mitigate future capital gains tax.
- Insurance planning – including family cover and income cover
- Investment planning – review your investment mandate with your investment manager. Consider tax efficient investments including VCT and EIS investments, insurance bonds and National Savings & Investments index linked certificates.
- School and university fees planning
- Inheritance tax planning – gifting out of income, use of nil rate bands
Summary
- System. Get in the habit of keeping receipts and other tax return information in a folder. Put the key dates in your diary or email system; missing dates can add to costs.
- Early birds. The earlier that information is collated and sent to your accountant the more warning you can get to consider reducing the liability. Ask for an estimate of tax liabilities in advance to help you plan.
- VAT rules. Ensure you know which set of rules suit you best, whether they have changed and how to apply them.
- Funding. Once a liability is known, plan how to fund it. Ideally use funds already set aside. If realising investments or taking out loans, consider the costs as this can be an expensive alternative.
- Planning. Make use of tax efficient allowances, pension contributions and consider other financial planning.