As an accountant, often I'm flabbergasted by some of the myths that exist about accounts and taxation. I'm not sure where they come from, but most of them are very wide of the mark. So, what's the reality? Time to dispel five common myths about accounting and tax
1. There are ways to avoid paying tax if you set up a limited company?
My polite response is, if this were the case, everyone would do it. Personally, I think confusion arises from the fact there's no income tax to be paid on dividends up to the dividend allowance. Dividend income over the dividend allowance threshold is taxed at the rate applicable to your income tax band (8.75% basic rate, 33.75% higher rate or 39.35% for additional rate tax payers). There is no national insurance paid on any dividend income. It is worth remembering that dividends would have been paid to the shareholders after corporation tax had been deducted, so tax has been paid, albeit by the company.
2. You have to be good at maths to do accounts?
Well, you must be able to add up and subtract some numbers, but with some user-friendly software packages this really isn't too difficult. However, I would recommend that you agree your accounting system with your accountant in advance. You would be surprised how much of an influence this could have on your fees.
3. Your accounts have to be prepared by a qualified accountant?
Not only is this incorrect, but your accounts can be prepared by anyone. In fact, anyone can call themselves an 'accountant'. Accountants who are members of the recognised accounting bodies (eg ICAEW, AAT, ACCA, ACA to name a few) are regulated. Fact is there are no overall regulations in place that govern whether someone can call themselves an accountant. So how do you ensure your accountant knows what they're doing? Well, like anything, I would suggest going on recommendations.
4. HMRC get everything right?
I once received a call from a client who had received a tax bill for £67,000. It was clearly wrong and the matter was sorted out in minutes. Don't just assume that all correspondence from HM Revenue & Customs is correct. Like anyone, they make mistakes, so it's always worthwhile checking - especially if the bill is higher than you expect. Your accountant should always verify the tax calculation and advise on any amounts due. So don't be afraid to query tax bills - HMRC aren't always right.
5. All companies need an audit
Not true at all. In fact, most companies would be classified as 'small' and would not require an audit. So, what is small? Generally, if your company has a turnover of no more than £10.2m and a balance sheet total of no more than £5.1m, no audit is required. There are some exceptions, so it's worth checking, but an audit should be one less thing to worry about.
Written by Elaine Clark, founder and managing director of Cheap Accounting.