Finance and Business Blog

Following the reduction of the VAT rate from 17.5% to 15%, HM Revenue and Customs has issued the following guidance relating to the changes to the flat rate VAT scheme:

8.4 Flat rate scheme

Will the rate change affect my flat rate percentage?
Yes. The table of flat rates has been changed to reflect the new rate of VAT. The new table is set out in Annex E. You should make sure you use the new rate for your sector from 1 December 2008.

My flat rate has not been reduced. Why not?
The flat rate percentages are calculated by reference to the VAT actually paid in each sector and, following the change to the standard rate of VAT, most sectors will find that their flat rates are reduced. However, there are a small number of sectors that, with VAT at 17.5 per cent, would have needed an increase in order to reflect the correct underlying rate for that sector. Following the rate change to 15 per cent, those sectors have been left unchanged rather than increased.

I want to leave the scheme because of these changes. What should I do?
Usually, we would expect you to leave the scheme at the end of an accounting period. You can leave the scheme at any time, but this might mean you having to perform different calculations to determine your VAT liability. If you do wish to leave the scheme, you must write and tell us. We will confirm the date you left the scheme in writing.

I use the cash based turnover method. I have received payment for a supply made prior to the change of flat rates. Which flat rate should I use?
Remember that the cash based turnover method allows you to account for your VAT liability when you receive payment. It does not affect the tax point. Supplies made before the rate change remain taxable at 17.5 per cent, even where payment is received after the change.

To determine your VAT liability for a particular transaction, you will first need to identify and separate all payments made and received so that you can identify the appropriate rate of VAT. You must then apply the flat rate percentage that was in place at the time of supply and not the rate that is in place when payment is received. You will probably need to refer back to the original invoices.

16 Annex E - Flat Rate Scheme - New Percentage Rates
Category of business (Appropriate percentage)
Accountancy or book-keeping (11.5)
Advertising (8.5)
Agricultural services (7)
Any other activity not listed elsewhere (9)
Architect, civil and structural engineer or surveyor (11)
Boarding or care of animals (9.5)
Business services that are not listed elsewhere (9.5)
Catering services including restaurants and takeaways (10.5)
Computer and IT consultancy or data processing (11.5)
Computer repair services (10)
Dealing in waste or scrap (8.5)
Entertainment or journalism (9.5)
Estate agency or property management services (9.5)
Farming or agriculture that is not listed elsewhere (5.5)
Film, radio, television or video production (9.5)
Financial services (10.5)
Forestry or fishing (8)
General building or construction services* (7.5)
Hairdressing or other beauty treatment services (10.5)
Hiring or renting goods (7.5)
Hotel or accommodation (8.5)
Investigation or security (9)
Labour-only building or construction services* (11.5)
Laundry or dry-cleaning services (9.5)
Lawyer or legal services (12)
Library, archive, museum or other cultural activity (7.5)
Management consultancy (11)
Manufacturing that is not listed elsewhere (7.5)
Manufacturing fabricated metal products (8.5)
Manufacturing food (7)
Manufacturing yarn, textiles or clothing (7.5)
Membership organisation (5.5)
Mining or quarrying (8)
Packaging (7.5)
Photography (8.5)
Post offices (2)
Printing (6.5)
Publishing (8.5)
Pubs (5.5)
Real estate activity not listed elsewhere (11)
Repairing personal or household goods (7.5)
Repairing vehicles (6.5)
Retailing food, confectionary, tobacco, newspapers or children’s clothing (2)
Retailing pharmaceuticals, medical goods, cosmetics or toiletries (6)
Retailing that is not listed elsewhere (5.5)
Retailing vehicles or fuel (5.5)
Secretarial services (9.5)
Social work (8)
Sport or recreation (6)
Transport or storage, including couriers, freight, removals and taxis (8)
Travel agency (8)
Veterinary medicine (8)
Wholesaling agricultural products (5.5)
Wholesaling food (5)
Wholesaling that is not listed elsewhere (6)

‘Labour-only building or construction services’ means building or construction services where the value of materials supplied is less than 10 per cent of relevant turnover from such services; any other building or construction services are ‘general building or construction services’.

Version  5.1 of Earnings Tracker has just been released to address the issue of VAT being chargeable at 15%, with effect from 1st December. In previous versions of Earnings Tracker, the VAT rate was hardcoded as 17.5% - basically because we never thought it would change !

We would recommend that if you are using an earlier version of Earnings Tracker, you upgrade to Version 5.1 so that you can set the correct VAT rate.

Alternatively, if you’ve downloaded a previous version and you want to stick with that version, you should edit the classes.php file and change the two occurrrences of .175 to .15 for invoices raised after 1st December 2008.

Please go to the Earnings Tracker web pages for more information.

The Chancellor, Alistair Darling, today announced he would cut VAT from 17.5% to 15%, effective from 1st December. Unless the VAT Flat Rate Scheme percentage is also reduced, the benefit from working through the scheme will have been wiped out.

Example

At 17.5% VAT:

£10000 x 17.5% = £1750

£10000 + £1750 = £11750

£11750 x 13% = £1527.5 (this is the amount of VAT payable)

£1750 - £1527.5 = £222.5 (this is the VAT surplus)

Now, at 15% VAT:

 £10000 x 15% = £1500

£10000 + £1500 = £11500

£11500 x 13% = £1495 (this is the amount of VAT payable)

£1500 - £1495 = £5 (this is the VAT surplus)

So, unless the Chancellor also reduces the VAT Flat Rate percentage, there will be no point in working through the VAT Flat Rate Scheme.

In business and finance, a share (also referred to as equity share) of stock means a share of ownership in a corporation (company). In the plural, stocks is often used as a synonym for shares especially in the United States, but it is less commonly used that way outside of North America.

In the United Kingdom, South Africa, and Australia, stock can also refer to completely different financial instruments such as government bonds or, less commonly, to all kinds of marketable securities.

Types of stock
Stock typically takes the form of shares of either common stock or preferred stock. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders. Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Shares of such stock are called “convertible preferred shares” (or “convertible preference shares” in the UK).

Although there is a great deal of commonality between the stocks of different companies, each new equity issue can have legal clauses attached to it that make it dynamically different from the more general cases. Some shares of common stock may be issued without the typical voting rights being included, for instance, or some shares may have special rights unique to them and issued only to certain parties. Note that not all equity shares are the same.

Stock derivatives
A stock derivative is any financial instrument which has a value that is dependent on the price of the underlying stock. Futures and options are the main types of derivatives on stocks. The underlying security may be a stock index or an individual firm’s stock, for example, single-stock futures.

Stock futures are contracts where the buyer is long, i.e., takes on the obligation to buy on the contract maturity date, and the seller is short, i.e., takes on the obligation to sell. Stock index futures are generally not delivered in the usual manner, but by cash settlement.

A stock option is a class of option. Specifically, a call option is the right (not obligation) to buy stock in the future at a fixed price and a put option is the right (not obligation) to sell stock in the future at a fixed price. Thus, the value of a stock option changes in reaction to the underlying stock of which it is a derivative. The most popular method of valuing stock options is the Black Scholes model.

Source: http://en.wikipedia.org/wiki/Stock

According to economic theory, in a prolonged period of deflation, consumers hold off buying goods, assuming they will become cheaper later on.

This can lead to further falls in demand and output. As businesses sell less, they normally respond by cutting jobs or cutting salaries.

Overall, consumers then have less money to spend - and demand falls yet again.

This causes a downward spiral where demand falls, prices fall, demand falls further, and so on.

In financial markets, a share is a unit of account for various financial instruments including stocks, mutual funds, limited partnerships, and REIT’s. In British English, use of the word shares in the plural to refer to stock is so common that it almost replaces the word stock itself. In American English, the plural stocks is widely used instead of shares, in other words to refer to the stock (or perhaps originally stock certificates) of even a single company. Traditionalist demands that the plural stocks be used only when referring to stock of more than one company are rarely heard nowadays.

The income received from shares is called a dividend, and a person owning shares is called a shareholder.

A share of stock is one of a finite number of equal portions in the capital of a company, entitling the owner to a proportion of distributed, non-reinvested profits known as dividends, and to a portion of the value of the company in case of liquidation. Shares can be voting or non-voting, meaning they either do or do not carry the right to vote on the board of directors and corporate policy. Whether this right exists often affects the value of the share. Voting and non-voting shares are also known as Class A and B shares respectively.

Source: http://en.wikipedia.org/wiki/Share_(finance)

Accounts receivable (A/R) is one of a series of accounting transactions dealing with the billing of customers who owe money to a person, company or organization for goods and services that have been provided to the customer. In most business entities this is typically done by generating an invoice and mailing or electronically delivering it to the customer, who in turn must pay it within an established timeframe called credit or payment terms.

An example of a common payment term is Net 30, meaning payment is due in the amount of the invoice 30 days from the date of invoice. Other common payment terms include Net 45 and Net 60 but could in reality be for any time period agreed upon by the vendor and client.

While booking a receivable is accomplished by a simple accounting transaction, the process of maintaining and collecting payments on the accounts receivable subsidiary account balances can be a full time proposition. Depending on the industry in practice, accounts receivable payments can be received up to 10 - 15 days after the due date has been reached. These types of payment practices are sometimes developed by industry standards, corporate policy, or because of the financial condition of the client.

On a company’s balance sheet, accounts receivable is the amount that customers owe to that company. Sometimes called trade receivables, they are classified as current assets. To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account. When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry. The ending balance on the trial balance sheet for accounts receivable is always debit.

Business organizations which have become too large to perform such tasks by hand (or small ones that could but prefer not to do them by hand) will generally use accounting software on a computer to perform this task.

Associated accounting issues include recognizing accounts receivable, valuing accounts receivable, and disposing of accounts receivable.

Accounts receivable departments use the sales ledger.

Other types of accounting transactions include accounts payable, payroll, and trial balance.

Since not all customer debts will be collected, businesses typically record an allowance for bad debts which is subtracted from total accounts receivable. When accounts receivable are not paid, some companies turn them over to third party collection agencies or collection attorneys who will attempt to recover the debt via negotiating payment plans, settlement offers or legal action. Outstanding advances are part of accounts receivables if a company gets an order from its customers with payment terms agreed in advance. Since no billing is being done to claim the advances several times this area of collectible is not reflected in accounts receivables. Ideally, since advance payment is mutually agreed term, it is the responsibility of the accounts department to take out periodically the statement showing advance collectible and should be provided to sales & marketing for collection of advances. The payment of accounts receivable can be protected either by a letter of credit or by Trade Credit Insurance.

Companies can use their accounts receivable as collateral when obtaining a loan (asset-based lending) or sell them through factoring (finance). Pools or portfolios of accounts receivable can be sold in the capital markets through a securitization.

Bookkeeping for Accounts Receivable

Companies have two methods available to them for measuring the net value of account receivables, which is computed by subtracting the balance of an allowance account from the accounts receivable account.

The first method is the allowance method, which establishes a liability account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable. The amount of the bad debt provision can be computed in two ways - either by reviewing each individual debt and deciding whether it is doubtful (a specific provision) or by providing for a fixed percentage, say 2%, of total debtors (a general provision). The change in the bad debt provision from year to year is posted to the bad debt expense account in the income statement.

The second method, known as the direct write-off method, is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value. The entry would consist of debiting a bad debt expense account and crediting the respective account receivable in the sales ledger.

The two methods are not mutually exclusive, and some businesses will have a provision for doubtful debts and will also write off specific debts that they know to be bad (for example, if the debtor has gone into liquidation.)

For tax reporting purposes, a general provision for bad debts is not an allowable deduction from profit - a business can only get relief for specific debtors that have gone bad. However, for financial reporting purposes, companies may choose to have a general provision against bad debts in line with their past experience of customer payments in order to avoid over stating debtors in the balance sheet.

Source: http://en.wikipedia.org/wiki/Accounts_receivable

In accountancy, a purchase ledger records all the purchases made by your business. It records information such as invoices received, credit notes received and payments sent.

The purchase ledger was formerly maintained in book form, hence the term ‘ledger’, but nowadays it is much more likely to be held on computer using accountancy software.

Since its inception in 2005, Earnings Tracker has continued to evolve, with new functionality being added for each software release. Version 5.0 (beta), which has just been released, continues this trend and is possibly the most significant upgrade the product has seen in its three year history. (The beta version will run until December 08.)

Here at JDT we want Earnings Tracker to be as useful as possible, enabling UK contractors to keep track of their company’s monthly revenue and outgoings. By offering the product as either a free download or as a free online software tool, we are ensuring that the software is available to anyone who wants it.

Summary of Version 5 Features

Multiple Invoice Recording
It is now possible to enter up to eight separate invoice amounts per month, which hopefully will be sufficient for the vast majority of contractors. The client and invoice number can also be entered for each invoice.

Static Data
The amount of static data that can be entered has been increased. Static data refers to items that do not generally change on a month-by-month basis, for example, salaries and accountancy fees.

Corporation tax, rent, and a default year can now all be entered as static data. The default year is used when, for example, you add a new month to the spreadsheet.

Reports
It is now possible to generate annual reports for a range of items, for example, expenses, invoice amounts, bank charges, bank  interest, and dividend payments.

Details Fields
A number of details fields have been added to the Add New Month and Edit Month screens. These will make it easier to keep track of monthly transactions. Details fields have been added for expenses, other revenue received (non-invoiced), and other outgoings.

Bug Fixes and Cosmetic Changes

Like any other software product, Earnings Tracker has (or at least had) one or two bugs. The following issues have been addressed in this release.

Delete Confirmation
A confirmation dialog box has been added when you select to delete a month or a dividend. In previous release, when you click the delete button, the deletion took place meaning that there was a chance that items could be accidentally deleted.

General Comments When Adding or Editing a Month
The main comments field when adding or editing a month has been extended significantly so there is now no limit on how much taxt can be entered. Previously, comments were limited to 100 characters.

Rounding Values
Some values are now rounded to two decimal places when they are displayed, improving the readability of the values.

Summary

We feel that version 5 offers a big improvement over previous versions of Earnings Tracker, and will prove to be a useful accounting / bookkeeping software tool for UK contractors and freelancers.

The beta version is available at the following address:

http://www.dixondevelopment.co.uk/earnings-tracker_v5/index.htm

Earnings Tracker v5.0 beta will be available Monday 10th November.

Full details of how to access the beta, and what the new features are, will be posted on Monday or Tuesday.

John