The Budget in December 2009 has resulted in the high rate of VAT currently at 21.5% being brought back to 21%. The 21.5% vat rate has been in place for 13 months where before that it was 21%.

The change on the 1^st December 2008 brought with it many headaches for bookkeepers. Not only did it require that the those businesses where the 21% VAT rate was there main vat rate mean that the default vat rate for every product and customer be changed, along with any outstanding sales orders and purchase orders, it was the middle of the Vat period of Nov/Dec’08 which made administrating it more difficult.

Accounting software in some cases also had to be upgraded as it could not handle the change in the VAT rate. This alone cost businesses a lot of money.

BUDGET 2010 – What we learnt from Budget 2009

What we learnt from our previous experience of changing the VAT rate is that it can be done. It is inconvenient, but the tools are out there now.

Some of the mistakes people made were as follows;

You owe them, they owe you, but neither of you have any money how do you get paid and how do you record the payments?

One of your customers also supplies goods to you so therefore he is both a customer and a supplier to you. You owe him money and he owes you money, but you don’t have very much cash and would like to minimise the amount you wish to pay him. So how do you do this?

Example:

You owe your supplier ABC Products €1,000

ABC Products also buys goods from you and so is a customer. They owe you €900.

Normally what would happen is that you send them a cheque for €1,000 and they send you a cheque for €900. Sometimes the term “Swapping Cheques” is used, you both get your money at the same time. The problem with swapping cheques is that there may not be enough money in your bank account to honour your cheque to your supplier. When you lodge the cheque from them for €900 in your bank account, the cheque may not yet actually be cleared and the money on that cheque may not yet be available for you to spend. So when the cheque you wrote to ABC Products for €1,000 hits your bank account, the bank will dishonour the cheque (bounce it) as the cheque for €900 has not yet been cleared and is not in the funds available to meet any cheques you have written.

This may also be the same situation for your supplier ABC Products. They may have their own cashflow problems and are relying on your cheque to ensure that their cheque is honoured by the bank.

So how do we overcome this? The answer is by using “Contra’s”.

In this article I will use the term Director and Business owner. Usually a business owner is a director of the business. Sole traders and partnerships are different to Limited Liability companies in that they own everything themselves while in a Limited Liability Company the Director or Business owner owns shares in the business but has no right to any of the business assets for his own private use. He or she is treated in the business as an employee and has no right to take anything from the company and must follow company law in regards to any transactions with the business e.g. borrowing money from the business.

Directors Salary

A Director gets a salary. It is better to agree a salary at the beginning of the year and if the company performs well over the year, increase it (or decrease it, if necessary). Avoid leaving it to the end of the year to work out what your gross salary should have been. Keep reviewing the amount being paid to the directors and what the cost in taxes will be so that you don't accumulate a big tax bill at the end of the year. By defining what the directors salary id for the year, you will then know the net pay he should be taking home and any money taken above the amount may then be treated as a directors loan.

Directors Expenses

Directors buy stuff for the business using their own money. This could be because the credit limit on his business card was lower than the amount needed to pay for an item, so the director used his own personal credit card to pay for the item. He should then give the invoice to the company and be refunded by the business for the value of the invoice.

On a monthly basis he can list all the items he bought on a claim form and be paid back the money he spent. If the business is not in a position to pay him back immediately, he will be come a creditor i.e. someone who is owed money by the company.

Set up a supplier account in your accounts system under the directors name and record all his purchases on behalf of the business here. In this way you will know exactly how much he has to be paid back.

Directors Loans to the company