A new client recently came to me after using an online accounting service advertised from just £38 plus VAT a month. On the face of it, that sounds like a bargain. But once I look a closer look, I could see where the cheap monthly fee had become very expensive.
They had signed up for a fixed monthly package, with everything dealt with remotely. Admittedly, an appealing arrangement when you are busy and want someone else to handle the tax.
Unfortunately, the service had left some fairly basic questions unanswered for years.
Two directors and more than ten years without payroll
The company had two directors, yet neither had been put on the payroll for over ten years. In their circumstances, that meant missing out on a more tax-efficient way of taking money from the business.
There was a longer-term concern too. The client had gaps in their National Insurance record, with several years failing to count towards their State Pension. And dividends do not build up that record. Setting an appropriate salary can help secure qualifying years, depending on the earnings rules and any other contributions or credits.
Thankfully, I have now corrected the payroll arrangements. The estimated tax saving is around £2,600 a year, based on their current circumstances.
An expensive misunderstanding about company cars
The client had also received advice about electric vehicles and bought a plug-in hybrid, expecting tax benefits that the particular car simply did not deliver.
The estimated additional personal tax cost was around £2,000 a year compared with the fully electric option. A plug-in hybrid has its own company car tax treatment, influenced by its emissions and electric range.
The hybrid also did not qualify for the same immediate capital allowances available on a qualifying new, unused fully electric car. Relief on the hybrid would instead be spread over time.
The cost of an earlier purchase cannot be undone. But at least the client now properly understands the position before they make another vehicle purchase.
A VAT scheme that suited the process
The previous provider had steered the client towards the VAT Flat Rate Scheme. The scheme can make the paperwork easier, but the figures still have to work for the client.
Under that scheme, businesses generally cannot reclaim VAT on purchases, apart from certain qualifying capital assets. For this client, around £3,000 a year of input VAT was going unreclaimed!
I have moved them onto normal VAT accounting so they can reclaim eligible input VAT. The overall saving depends on comparing the complete VAT bills under both methods, including the different amounts payable to HMRC. That comparison matters much more than simply how easy a return is to prepare.
What the monthly fee failed to show
Putting the directors on payroll is expected to save around £2,600 a year in tax. Moving to normal VAT accounting also allows the company to reclaim eligible VAT on its costs, something it had been missing out on.
When you look at what had been overlooked, that low monthly accounting fee starts to look rather less attractive.
This is why I am extremely wary of the contractor accounting factory approach. Contractors deserve someone who checks whether the arrangements actually suit them. I want to understand the person behind the accounts and have the conversations that make a difference to what they keep.
Sound familiar?
If you are paying a monthly accounting fee but wondering whether anyone is properly reviewing your tax position, it may be time for a second opinion.
Get in touch with me on 07866 465 223 to see how I can help.