Peer to Peer lending

I have to confess, when I first heard about peer to peer lending, I thought it

Loans

Loans (Photo credit: zingbot)

was a bit of a gimmick, not a real world solution which could be useful for our clients.

What changed my mind was listening to the BBC money box programme on ‘Broken Banking’ It is available to listen to on BBC iplayer for a year ahead. After that, if anyone wants to listen, I’ve kept a copy.

The programme explains that peer to peer sites take a smaller ‘margin’ than the banks, and so the lender receives a higher interest rate whilst the borrower pays a lower interest rate than they would have paid to the banks.

The Government has supplied peer-to-peer lenders with £100 million (as reported in the FT) which will aid their growth.

So, which peer to peer sites deal with businesses?

Funding Circle

Funding Circle places your cash with small businesses with at least two years’ trading history. You can choose to spread your cash across lots of different businesses in different risk classes if you wish.

Information for borrowers

  • Fees: one-off 2% of sum borrowed
  • Loan period: 1 to 3 years
  • Minimum/maximum borrowed: £5,000 / £75,000
  • Average rate: around 9%

Information for lenders

  • Fees: 1%
  • Minimum/maximum lent: £20 / no maximum (although maximum £20,000 per loan)
  • Average rate: 8.3%
  • Range of rates: Varies. Minimum 6%-8% depending on risk.
  • Default rates: Estimated 0.6%-2.3%

ThinCats

Thin Cats offers secured loans to businesses. Lenders can lend to a range of businesses to spread their risk.Information for borrowers

  • Fees: £450 listing fee, plus £500 fee for preparation of legal documentation
  • Loan period: a few months to 5 years
  • Minimum/maximum borrowed: £50,000 / £1,000,000
  • Average rate: Lender rate plus 1.5%. Currently 8.5%-16.5
  • Early repayment allowed?: Yes, without penalty

Information for lenders

  • Fees: None
  • Minimum/maximum lent: No maximum. Minimum £1,000 per deal
  • Average rate: No data
  • Range of rates: 7%-15% depending on risk.
  • Default rates: No data

MarketInvoice

MarketInvoice is a slightly different concept, with a ‘flexible factoring’ approach rather than a loan.

MarketInvoice allows businesses to sell long-dated invoices to investors, who bid against each other to offer the best terms. An auction type market means that invoices are sold quickly and at competitive rates.

MarketInvoice provides access to the cash tied up in invoices, whenever you need it. It avoids the high annual administration fees associated with traditional factoring.

The process is flexible and transparent.

To date, over £28 million has been advanced to businesses of various sizes and in various sectors. Some  customers use it every month, and others use it as and when required.

Equitable Life compensation

If you are due, or have already received, compensation in respect of the Government’s maladministration of Equitable Life pensions and policies you may be interested in the tax position of these payments.

  1. There is no need to declare receipts to HMRC as they are not subject to Income Tax, Capital Gains Tax or Corporation Tax.
  2. Payments under the scheme will not affect recipients’ eligibility for working or child tax credits.
  3. For social security and social care purposes the payments will be classed as income (if linked to retirement annuities), or capital if linked to any other policies.
  4. Payments to the estates of deceased policy holders will not be subject to Inheritance Tax.

Any interest received in addition to the compensation or rebated premiums will be taxable regardless of whether it has been taxed at source or not.

For a full run-down on the compensation scheme you can view FAQs at http://equitablelifepaymentscheme.independent.gov.uk/index.htm

Furnished Holiday Lettings

Does your holiday home qualify as a Furnished Holiday Let (FHL) property? And if it does, what are the tax advantages?

Does your property qualify?

From April 2012 the following conditions apply:

  1. The property must be situated in the UK or EEA.
  2. The property must be available for commercial letting as holiday accommodation for at least 210 days per annum.
  3. The property must be let on a commercial basis for at least 105 days per annum.
  4. The property must not be let for periods of longer term letting. Accordingly, for 7 months of the year the property must not be in the same occupation for more than 31 consecutive days and must not exceed more than 155 days in a tax year.
  5. Periods of longer term letting do not count towards 3 above.

The periods to which you need to apply these tests are:

  • For a continuing let, the tax year.
  • For a new let, assuming that property did not qualify as a FHL in the previous year, apply tests to first twelve months of letting.
  • When letting ceases apply tests to last twelve months of letting.

There are complex rules that allow you to average the occupancy figures where you have more than one property in your FHL business. All of your UK FHL properties form a single trade for tax purposes. Any EEA properties form a separate trade. So you cannot average UK and EEA numbers. This averaging process can be useful where you have one or more properties that do not qualify and others that more than qualify for FHL status.

If you pass the test in 3 above for one year but fail it for the next 1 or 2 years, then you may be able to elect for those years to be treated as qualifying.

What are the tax advantages?

As your FHL business is considered to be a trade you will be able to avail yourself of the following reliefs that would not be available to non-FHL property letting businesses.

  • You can claim capital allowances on the purchase of furniture, white goods and other qualifying expenditure.
  • You may qualify for certain Capital Gains Tax reliefs including Entrepreneurs’ Relief, Business Asset Rollover Relief and relief for gifts and similar transactions.
  • FHL profits count as earnings for UK pension relief.

Beware of losses though, as these can only be carried forward against future FHL profits.

If you would like to see if your property holding(s) qualify for these important tax advantages, please contact us and we will help you work through the necessary calculations.

VAT flat rate scheme

The VAT Flat Rate scheme provides smaller businesses with a number of options that can often create real cash savings. Benefits include:

  • Simplified administration, quicker to produce returns.
  • Depending on the market sector your business operates within, you may be able to reduce your overall VAT payments.

To qualify, your annual turnover must not exceed £150,000, excluding VAT. Once you are in the scheme you are not required to leave until your annual turnover exceeds £230,000.

If you register for this scheme you still add VAT to your sales in the usual way. Instead of calculating the amount you need to pay to HMRC as the difference between your output VAT (the VAT you add to your sales) and your input VAT (the VAT added to the goods or services you buy), you simply calculate the total of your sales including VAT and multiply this figure by the flat rate percentage. Income for these purposes, your flat rate turnover, includes:

  • VAT inclusive sales at standard rate, zero rate and reduced rate supplies.
  • Sales of exempt supplies such as rent or lottery commission.
  • Sales of capital expenditure goods – unless you have previously reclaimed VAT when the goods were purchased, in which case you have to pay VAT at the standard rate and not the flat rate.
  • Sales to other EU countries.
  • Sales of second hand goods. If you have a lot of turnover in this category you may be better off using a margin scheme.

Obviously, the higher the flat rate percentage, the less beneficial the scheme will be in reducing your overall VAT payments.

Flat rate percentages vary between 4% and 14.5%.

For example a business repairing personal or household goods would save £2,000 per year in the following scenario:

  1. Flat rate that applies 10%.
  2. Turnover £100,000.
  3. Turnover including VAT £120,000.
  4. Purchases of parts and services £30,000, VAT input tax added £6,000.
  5. Annual VAT bill without applying Flat Rate Scheme, £14,000 (£20,000 – £6,000).
  6. Annual VAT bill applying Flat Rate Scheme, £12,000 (£120,000 x 10%).

Additionally you can reclaim the input tax charged on capital assets bought where the total single invoice value (including VAT) is £2,000 or more.

As a bonus, in the year following the registration of your business for VAT, you can deduct 1% from the flat rate percentage. So in our example, if a full year’s discount was available, the savings in year one would actually be £3,200. (£14,000 less £120,000 x 9%).

(Please note: This 1% reduction in the flat rate would not apply to businesses who had been VAT registered for more than a year when they join the Flat Rate Scheme.)

The scheme does not suit businesses that have a high proportion of zero rated sales or that have high levels of input tax reclaimable on purchases of goods and services. And it may not be possible to produce real cash savings if your business falls into one of the higher flat rate percentages.

You have to make a formal application to join the scheme and it is well worth crunching the numbers to see if you would benefit. As always we would be happy to do this for you.

Taking too much out of the company

Any payment made to a director as part of their remuneration package is generally subject to tax that is usually collected via the PAYE system. The payments made by the employer are allowable expenditure and reduce the employer’s taxable profits.

However, many smaller limited companies pay personal expenses on behalf of directors. These personal expenses do not form part of the director’s remuneration package and should not be included as an expense in the company’s accounts – a company may not deduct expenditure unless it is incurred wholly and exclusively for the purposes of its trade.

Which begs the question, how are these personal expenses of the director treated in the company’s accounts? Unless reimbursed by the director, such personal expenses are debited to the director’s loan account.

Of course the director may have introduced funds into the company at some time in the past in which case the debiting of personal expenses will simply reduce the amount owing to the director. Problems only arise when the director’s loan is overdrawn, in which case the director owes money to the company. Two tax complications arise:

1. Company liable to additional Corporation Tax charge.

If the director is also a shareholder in a “close” company, any overdrawn balance on a director’s loan account at the end of the company’s accounting year will create a potential Corporation Tax charge based on 25% of the amount overdrawn at the year end. For example, if John, a director and shareholder of A Ltd, has an overdrawn loan account with the company at their year end, 31 March 2012, amounting to £10,000 then a potential liability to Corporation Tax will arise of £2,500. This liability will be reduced or cancelled if the loan is reduced or repaid in full before 31 December 2012 (9 months after the accounting year end). Even if the loan is repaid after the nine month deadline, the company can apply to have the additional tax repaid although there may be a significant delay. Quite often the overdrawn balances are cleared by paying dividends which are credited to the loan account within the nine month period.

2. Director may face a personal tax charge.

If A Ltd in the example quoted above, had made no interest charge to John for the loan of the £10,000 then HMRC would seek to tax John as if he’d received a benefit (the interest forgone). If John had owed more than £5,000 at any time during the year to 5 April 2012 he would be assessed to a benefit in kind charge. HMRC currently use a 4% rate to calculate the benefit which means John would pay tax on a benefit in kind charge of £400. Additionally, A Ltd would be liable to a Class 1A National Insurance charge on the same amount, i.e. on £400 assuming £10,000 was owed for a full year.

To avoid the personal tax and Class 1A charge, A Ltd could charge John for the statutory interest by crediting interest received in its accounts and debiting John’s loan account with the same amount of £400. John would then need to repay £10,400 before 31 December 2012 in order to ensure HMRC would withdraw the additional Corporation Tax charge.

Accounting for directors loan transactions can be complicated especially if the company makes an interest charge to the director.

Capital Gain on second home

You don’t need to live in a residence for long, but you do have to live there!

A recent case involved a couple who inherited a second home from a deceased parent.

Anyone owning two residences can make an election as to which one is to be treated as their main residence for CGT purposes. Once an election has been made within the required time limit, it can be varied at any time. This means that a ‘second home’ can be classed as the main residence for a short period shortly before it is sold. The benefit is that the last three years of ownership are then classed as qualifying for exemption from CGT.

The couple complied with the usual filing deadlines and sent an election to have the second property considered as their principal private residence for the week before it was sold on 19 October 2007. If successful, the election would have had significant Capital Gains Tax consequences. For example if a property is at any time considered to be a principal private residence, the last three years of ownership will be ignored for CGT purposes.

HMRC rejected their claim.

The election was refused, not because they only claimed to be in residence for a week, but because they could not demonstrate that they had occupied the second property with any degree of permanence or continuity.

For example:

  • The owners kept no records of their periods of residence in the inherited house.
  • None of the householder bills were in their personal names.
  • No personal possessions were moved to the second property.
  • The inherited house was similar to, and only 6 miles from, the main residence.
  • Steps were taken to sell the property shortly after it was inherited.

This case is a salutory lesson for those considering this type of arrangement: it is not only essential to make a proper election to HMRC within the required time limits, it is also critical to accumulate evidence of appropriate occupation of the elected property.

VAT flat rate and cash schemes

Two of the VAT special schemes can provide particular advantages for smaller businesses.

  • The Flat Rate Scheme (reviewed in our June 2012 newsletter) can reduce overall VAT payable, especially for traders that are subject to the lower Flat Rate percentages.
  • Cash Accounting allows you to defer payment of VAT added to your sales until the invoices are paid. This can have significant cash flow benefits for businesses with amounts owed from customers that are higher than amounts due to suppliers.

In order to register for either of these schemes, your projected business turnover for the year following registration needs to be below certain limits.

  • Under the Flat Rate Scheme rules you can register as long as your projected turnover for the next twelve months does not exceed £150,000 excluding VAT.
  • The equivalent turnover limit to join the Cash Accounting Scheme is £1.35m.

Once you are in the scheme you can continue to enjoy the benefits until your turnover exceeds the exit turnover limits. For both of these schemes these turnover limits are higher than the amounts required for registration.

  • You will need to leave the Flat Rate Scheme when your annual turnover exceeds £230,000 excluding VAT.
  • The equivalent amount to leave the Cash Accounting scheme is £1.6m.

Planning note

From a planning point of view it is therefore wise to consider registration for these schemes when a smaller business commences trading or shortly thereafter, when turnover limits will be at their lowest levels in most cases.

The Flat Rate rules allow you to stay in the scheme and exceed the turnover registration limits by £80,000 before you need to exit.