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That's it for today!
Thank you to everyone for sending in their questions & many thanks to Jon Dawson for providing his expert advice.

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12:00 - Penny has another question:
“If I am claiming expenses from a client, I’m sending them the receipts and keeping a copy – is this OK or should I send them a copy and keep the full receipts?”

Jon Dawson replies:
I don't think that it is likely to get you into trouble but best practice would be to keep the original documents for your records and send a copy to your customer.

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11:39 - Penny from Loughborough has sent in this question:
"I have a limited company but seem to use my own money (and credit cards as the business one is not through yet & also has a low limit). What’s the best thing to do – can I claim this back? Or is it best to count this as investment into the company that I can withdraw later?

It’s getting rather complicated on my spreadsheet of what I’ve paid to where – some is my money and some is the company’s money – aargh – any tips and hints gratefully received!

Also I have a husband who is doing a lot of copy-editing. He owns 20% of my company but I’m the only fee earner. What’s the best way to pay him – he has a PhD and is very well qualified, so I suspect that we wouldn’t have problems of overpaying him?"

Jon Dawson replies:
Your situation is a very common one. In an ideal world, I would recommend that it is best to keep personal funds and company funds separate. But, of course, the real life world of small business is not like that.

1. If you pay expenses on behalf of the business  either in "cash" or on your credit card then you can recover this at any time since the company is simply returning your money to you.
   
   
2. I am not sure how you keep your records but,  either on Excel or in Sage, I would recommend that you keep a record of your loan account.
   
   An example of the bookkeeping is attached [MS Excel].
   
   I would suggest that you set out  your spreadsheets as the example attached.
   
   
3. If the company owes you significant sums  for a significant time, there is no reason why it should not pay you interest. This would be taxable income (but not subject to NIC) for you and a tax allowable expense for the company.
   
   
4. You have no problems whilst the company owes money to you. You will create tax problems for yourself and the company though if you get into a position where you owe money to the company.
   
   
5. Your husband
   If your husband is doing work for the company then there is no reason why you should not pay him for this work. The rate you pay him should be broadly commercial i.e.: what you would pay someone else to do the same work. This payment might be as a salary subject to PAYE or you might pay your husband in a self employed capacity.
   
   In the latter case, your husband would have to declare the income to HMIT and you would have to be careful to ensure that he satisfies the criteria which the Revenue use to decide whether someone is employed or self employed. There is a booklet "Employed or Self Employed" which is available from Revenue web site.
   
   There is no reason why the company cannot pay dividends to you and your husband would then receive 20% of any dividend paid. Dividends are usually a more tax effective means of paying the directors than salary but a company can only legally declare a dividend when it has profits available.
   
   The whole issue of dividend payments in companies owned by wife and husband is the subject  of  a tax case knows as "Arctic Systems". The final verdict on this case is awaited from the House of Lords.
   
   My view is that paying a legally declared dividend to a shareholder such as your husband is legitimate tax planning.
   The Inland revenue do not agree and we will have to see what Their Lordships say.
   

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11:08 - Carolyn from Nottingham asks:
"Would you be able to advise on the best way to present my accounts in Excel? I started in business last August and am very organised from an administration perspective.  
 
I save all my receipts and invoices (VAT and otherwise) relevant to business expenditure. I am not eligible to claim VAT - I am a sole trader and under the claim threshold.
 
I would like to establish best practice for my accounts.  What could you recommend in terms of layout and information I would need to record? Thank you in advance ...... "

Jon Dawson replies:
You  state that you are not VAT registered. You can register for VAT even if your turnover is less than £60k. In some circumstances, it can be beneficial to register even if you do not need to . This might apply if your customers were other VAT registered business .You would then be able to reclaim VAT on your purchases (which might or might not be significant) but you would have the administrative task of completing a VAT return each quarter.

Turning now to the bookkeeping issue:

The most important advice I give to people is to try to do their bookkeeping on a regular basis. The longer you leave such a task the more daunting it becomes and the less inclined you are to tackle it .

Looking after your accounting records is very important for three reasons:

1. To enable you to see how the business is performing
2. In case of any questions from the Inland Revenue
3. To help you to control your accountancy costs.

Maintaining your records on Excel is fine but, if and when the business becomes larger, you may feel the need to use a package such as Sage or Quick Bucks.

Broadly speaking I would suggest:

1. A spreadsheet showing income and analysing the total income between the types This would cross reference to your sales invoices (if you are in a trade where you issue invoices). 
   
   
2. A spreadsheet for expenditure. This would record the total expenditure and break it down between the main types of expenditure. This should ideally be cross referenced to your purchase invoice and to the cheque etc. number by which payment was made.

I would recommend that you check your spreadsheets off against the bank statements each month or so. This should identify any errors you might have made ( e.g: entered a payment of £100 as £10) and should enable you to identify any items such as bank charges and bank interest which you can then enter into your spreadsheet.

I would recommend that you keep your invoices in 2 files for both sales and purchases.When you raise a sales invoice or receive a purchase invoice, you would put it into the unpaid file. When you pay the invoice or receive payment from your customer, you would transfer it to the paid invoice and give it a sequential number.

Hope that this helps.

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10:56 - Our next question is:
“Please explain how private equity firms arrange their affairs to optimise personal income & company corporation tax status. How could these schemes beneficially be applied to universities and their spin out companies?”

Jon Dawson replies:
Private equity firms have been much in the news recently, not least because their owners famously earn huge pay packets and appear to pay very little tax.

One of the reasons for this is that the majority of the owners are not UK domiciled. The question of domicile is a complex one but, for someone who is not UK domiciled, they are not liable to tax on income arising in the UK.

In essence, private equity firms operate like this:

• Private investors subscribe into a fund.
• The fund then borrows large sums of money, so that the owners can claim tax relief on the interest on their borrowings.
• They use the money to buy shares. Usually, these will be shares in a private company or in a public company which is then taken "primate" i.e.: it ceases to be quoted .
• During the period of ownership any income arising is offset by interest on the borrowings.
• On exit, the owners will typically be paying capital gains tax at an effective rate of tax of 10% due to the availability of business asset tape relief.

There is no reason in principle why a private equity fund could not be set up to invest in university spin off business.

The practical difficulties are:

1. The established private equity houses make money by minimising risk. SO typically the companies they buy are established companies which are experiencing a dip in fortunes rather than more risky start up ventures.
   
   
2. If you are borrowing to buy an established trading company, there are lots of valuable assets to provide security to lenders of finance. Typically, this would not be  available in a start up situation.

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10:45 - Tim from Leicester asks:
“I would like an up-to-date statement on university spin out companies and R&D tax credits (current qualifications for, benefits accruing, proposed 2008 changes etc.).  
A simple authoritative summary - with cross references to key documents containing more detail would be greatly appreciated (NB: one of the problems with the web is that you do not know if you are downloading the most up-to-date information).”

Jon Dawson replies:
A good question & attached is my response in full [MS Word].

All I will say here is this: the research and development tax credit system was introduced as one of Gordon Brown's Big Ideas to encourage invention and innovation .

My experience is that the Inland revenue have  interpreted "innovation" quite narrowly and it is often difficult to satisfy their criteria.

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10:34 - Our next question is:
“Can you provide a simple explanation of taxation taper relief and how it works?”

Jon Dawson replies:
A sentence containing the words "simple" AND "business taper relief" is probably a contradiction in terms, rather like "Military Intelligence"

But anyway, the basic concept was to provide a more generous tax framework for people who were investing in relatively risky ventures such as private business.
 
To obtain full business asset taper relief the tax payer must have owned the asset for 2 complete years. Once he or she has achieved this period then 75% of any gain arising is exempted from capital gains tax . This means that for a 40% tax payer, a gain might only be taxed at a rate of 10% . An example is enclosed [MS Excel].

Qualifying assets for business asset tape relief are as follows:

1. Company shares. Must be shares in a an unquoted company (AIM listed shares are eligible) and the company must be a trading company i.e.: not an investment  company or a property company.
   
   
2. Property which is owned by an individual and let to a trading business. So the property must be commercial and not residential
   
   
3. Property let as a qualifying holiday let.

This relief is extremely valuable and for any planned disposal it is very important to ensure that nothing takes place to prejudice the availability of this relief .

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10:20 - Tim from Leicester has sent in today's first question:
“What exactly is EIS? How can a company qualify and who can benefit? How can this beneficially apply to university spin out companies?”

Jon Dawson replies:
EIS is Enterprise Investment Scheme. It was introduced some time ago to encourage private investment in relatively high risk ventures.
A university spin out company would be perfect. The EIS scheme provides tax sweeteners to improve the attractiveness of investing in companies such as a spin out company.

The advantages of applying to an EIS are as follows:

1. The investor receives a tax  credit of 20% on his investment. So, if MR X invests £100,000 in a qualifying company, he will have £20k deducted from his tax liability for that year.
   
   
2. EIS shares are exempt from any capital gains tax arising on a  disposal providing that they have been held for 3 years. So, if MR X buys shares for £100,000 and sells them 4 years later for £200,000, he will have no tax to pay on the gain.
   
   
3. If the company fails and the shares become of no value the investor can utilise the loss on his investment against his taxable income and not just against other capital gains transactions.

To qualify for relief the company must be:

• Unquoted when the shares are issued
• Must carry on a qualifying trade i.e.: not an investment or property company

The investor must buy the shares direct from the company and must not serve as a director in the company.

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