HMRC help themselves
I switched from self-employment to limited company this financial year (see this previous post).
In so doing, I changed banks for business banking, switching from the world’s local money launderers to the home of the Libor liars (I’ve got a Co-op Bank application form, honest, I just need the time to switch). However, what I did not do was close my self-employed account with the money launderers. Just in case, basically (e.g. I knew that funds transfers from France worked; there could have been unforeseen hiccups with the new account).
But I did keep the same VAT number.
After the VAT returns in Q1 and Q2, HMRC owed me a few quid. I searched both times for the place on their website to add a direct debit instruction for my Ltd Co. account with the Libor liars, to no avail. So HMRC sent me cheques to C Bavington Ltd, and I paid them in.
For Q3, however, I owed HMRC £270. Looked around the website again for DD instructions, no joy, so I kicked off an electronic payment from the Ltd Co bank account, a week before the payment deadline. Job done, I thought.
But no.
A few days later, HMRC dipped into my old self-employed account and helped themselves to 270 quid. This put the world’s local money launderers into a minor tizz, since I was now overdrawn on an account I hadn’t used for months. Interest was charged.
Anyway, by shuffling money around like, er, some kind of money launderer, everything is now back in order (and the old self-employed account now closed).
I should be fair. It took me 2 minutes on the phone to HMRC to explain and for them to offer to send a cheque, which they then did. HSBC waived their standard £25 overdraft charge (but not the interest) and indeed texted me to get me to call them, hence drawing my attention to the problem.
I do understand how it happened (I think). I suspect it is because I did not cancel the direct debit instruction from my self-employed bank account, and there is a legacy connection between that account and the Ltd Co’s VAT number.
But I don’t really understand why:
a) HMRC don’t check the VAT account balance (which would have showed I owed them nothing) before triggering the direct debit;
b) HMRC can take money from one entity (me, as a self-employed person) owed by another (the Ltd Co.) given the difference in the account names just because the VAT number is the same. I should clarify this is not a VAT number that is “shared” in some way. It has been transferred from one entity to another;
c) HSBC decided to allow an unused account with no overdraft facility to go overdrawn.
I would have thought at least one of those factors would have stopped this happening.
All of which is a long-winded way of saying that, if you do decide to switch from self-employment to limited company and you’re VAT registered, make sure everything is done neatly and don’t rely on either your bank’s or HMRC’s systems to block obvious mistakes. And especially cancel those direct debits!
b) is particularly intriguing to me. My newly-fledged little Ltd. (heaven help it!) has yet to have any dealings with the monstrous entity that is HMRC. Thankfully, VAT is one thing I don’t need to worry about.
On another finance-related subject, I was recently told by my accountant that under RTI rules (whatever those are – gulp!), I now have to draw my salary once a month as a distinct payment. Are you aware of any such requirement? Due to an unexpectedly delayed payment from one client, and since I’m still in the process of weaning my regulars off my old bank account (old habits seem to die verrry hard), there’s a danger I might not have enough in the kitty at the end of this month to pay myself a wage! *bites knuckles nervously, eyes bulging*
I assume that you anticipate that, by year-end, the full-year earnings will be enough to cover the full-year salary? And you fully intend to draw it eventually, to use up your personal tax allowance, and pay some NI to retain pension entitlements, all that?
And let me add that my own accountant has not, as yet, insisted that I do actually pay myself the 700-odd quid a month every month.
That said, I understand 2013-14 is the first full year the system has been running, I know accountants have been moaning about it (and potentially not all sharing the same understanding of how it works), and I haven’t seen mine since the FY started.
BUT the payroll bureau do send a payslip every month and AFAIK, they are reporting it to HMRC as per the new rules.
Which is the point, I think. It gets reported monthly. You could (should?) even account for it monthly – I have an account called “Salaries Unpaid” and I can use that so the books look right (the expense of my salary is then properly deducted each month so it doesn’t look as though profits are larger than they should be, which could mean you accidentally pay more dividends than you should). To the best of my knowledge, if cash flow situations and overdraft facilities and common sense mean you’d rather not actually physically pay it, I don’t believe you have to. Then once everything is jogging along, you can actually pay yourself the actual money (I drew my first salary in November 2012, although I had paid a dividend before that).
You could also just use the director’s loan account, although I like the idea of having the salary separate (DL is where my “use of home” deduction ended up, for example).
And as a point of general principle, inspections notwithstanding, while I can see how HMRC could (attempt to) enforce a requirement to report figures, I cannot for the life of me see how they could enforce the physical carrying out of the transactions reported (well, I can: they could take the money from the company like they do for VAT and pay it to individuals like they do for tax credits, but let’s hope they don’t!).
You might also find extra information on the UK business forums here. Or from your accountant, natch 🙂
Many thanks for your reply, Charlie.
Rest assured, it’s highly likely that my full-year earnings will stretch to a salary – and hopefully a whole lot more besides! I’m just slightly worried that a couple of my clients won’t bother to start making payments to my new bank account. I don’t know whether you’ve ever had this problem, but the last time I started using a new bank account, which was a few years ago, it took many nagging reminders, many of them in bold text and larger-than-usual font sizes, before the penny finally dropped with some of my clients. One appears to have completely ignored my email about it last month. Never have I been unhappier to see a big fat payment showing up in my personal bank account! But as long as they can get it right this month at the second time of asking, I should be fine…
What my accountant has suggested is that I pay myself an annual salary of £8,100 in twelve monthly instalments of £670 or so, and I did that for the first time at the end of May (which was my first full month as a Ltd.) and plan to continue. Whether that will be enough to afford me any pension entitlements, I don’t know (“live for today” has always been my motto). Let’s hope so! Otherwise I could be scrubbing floors or flipping burgers well into my dotage…
My accountant also told me that HMRC has indicated it won’t impose penalties straight away on people who don’t immediately start drawing their salaries once a month as a separate payment, i.e. separately from any other drawings. I have yet to experience the joys of accounting using Sage, as I was advised to get back in touch with my accountant after I’ve been up and running for three months or so. So I have a couple more months of bliss to go before I need to worry about all that.
I wonder how many UK-based freelance translators have gone limited? Perhaps I should start a blog of my own to share the fruits of my experience…
I have indeed had the wrong bank account experience. An ex employer, and by no means a small outfit, pays me into my personal current account they used to pay my salary into (the last salary being January 2003), regardless of what the invoice says.
What I do is simply transfer it into my limited company account and proceed from there, as if the client had paid it directly into that account. In other words, I typically transfer it back into my personal account as salary or dividends a few days, weeks or months later! I find it much easier to keep track of where I am that way, to be truthful. And it means all the bank accounts reconcile (all the GBP invoice payments end up in the bank account intended to receive them, etc.) and.. well, it just looks better, to my eyes. Although it might seem a bit tiresome, it sounds like it could be one possible solution to your issue (assuming the transfers in question are free of charge).
Ah, clever – didn’t know you could do that. I may well do that then, as I had a misdirected payment last month, though I’ll run it by my accountant first. There shouldn’t be a charge as I have free business banking for a year with good old Santander. Thanks! Hope the switchover to Ltd. has been going well for you thus far.