We’re already doing some tax returns – it’s good to get them out of the way earlier rather than later – and I’ll mention a couple of points that may help you with your tax – tax-free interest, and how PAYE codes work. There’s also something about the taxman’s plans to bring in “digital tax accounts”. Finally, we’ve been quite busy doing audits; perhaps it’s of interest to explain what they’re about. But first…


We’re just coming up to the end of the ninth year of Chamberlains, and the last year has been pretty good. At the start we took over responsibility for Tony Rowlands’ former clients – he was retiring – and we were joined by Jo Jones who formerly helped him and who has been vital in continuing to look after them. She specailises in management accounts and payroll – when she’s not out indulging another interest, looking after people’s horses!

The extra work from Tony’s clients and the growth of our own work made it possible to take on Keith Olding in a new full-time position. He’s had wide-ranging experience with firms of accountants and out in industry, and many clients have benefitted from his commitment. As one said, (unsolicited), “Hi Keith, Thank you so much for your help and support during this audit, it has been very much appreciated”. And when he’s not in the office you may find him nearby down at his allotment – or perhaps on stage with the local amateur dramatics!

We’re still looking to grow, so please recommend any good new clients, but we’ve been quite careful not to take on so much too quickly – we want to continue to offer a good service to existing ones. As I hope you’ll have seen, we try our best not to skimp on our work. If there’s anything we could do better, please let me know.


I mentioned this last month, but because it affects so many people it’s perhaps worth a reminder. As from 6 April 2016 banks and building societies aren’t deducting tax from the princely sums of interest that they give you. They may have written to you to explain this, but it’s normally in bank-speak – probably saying how wonderful they are, trying to take credit for this change (am I over cynical?) and not explaining it very well.

Briefly, interest income is now tax-free up to £1,000 if you’re a basic rate taxpayer, £500 if you pay tax at higher rates, or not at all if you have income over £150,000. So most people’s interest will be tax-free – even if you’re lucky enough to get interest at 1% you’d need to have £100,000 on deposit to get £1,000 interest. If you get more than this, you may need to consider doing a tax return because theoretically there’ll be extra tax to pay unless it’s covered by your personal allowance. In fact HMRC will probably know about your interest (banks automatically tell them) and will tweak your PAYE code (see below) to cater for this – but it’s too early to know yet how this will play out.


The basic idea is that you “pay as you earn” (hence “PAYE”) – so that you pay sufficient tax during the year via your salary or pension. We all get a personal allowance each year – an amount of tax-free income. The PAYE code spreads this over the year to level out your net income and ease the pain of the tax.

For example, the normal tax code this year is 1100L – which reflects the personal allowance of £11,000 (for some reason the code always shows the figure divided by 10). If you have an annual salary (or pension) of £24,000 you’d be due to get £2,000 each month. The payroll processor allocates one-twelfth of the £11,000 so the first £917 is tax-free and the remaining £1,083 is taxed at the basic rate of 20% – £216.60. And you’d receive £1,783.40 net of tax – except that there’s also a bit of National Insurance to deduct. (National Insurance is a story for another day. It would be much simpler if they abolished NI and increased tax but that’s politically unacceptable…)

So far, so good. And the system works for people who pay higher rates of tax because the basic rate band is spread over the twelve months (like the PAYE code) and amounts above it are taxed at 40% – or 45% if your income is over £150,000.

However, HMRC often sends out a different PAYE code to reflect your specific circumstances. If you receive taxable benefits from your employer – private medical insurance is quite common for example – this will feed through to a reduction in the allowance. On the other hand, if you’re a higher rate taxpayer and your tax return shows that you’re due an extra allowance because of gifts to charity or payments into a pension scheme,. HMRC will normally assume that you’ll do the same the next year and they’ll increase your tax code to show this extra allowance.

Another adjustment to the PAYE code could be for investment income – and this may become more frequent with the coming of tax-free interest, as I suggested above. Any PAYE code is only an estimate – HMRC can’t definitely know what you’ll be doing in the year, and the actual figures on the next year’s tax return will correct the position. For example, if you make less pension payments you’ll have had too little tax deducted and there’ll be a balance to pay.

HMRC can also use the PAYE code to collect underpaid tax, but there are a few conditions before they can do this:
1. The tax return needs to be submitted by 31 October by paper or by 30 December online
2. The underpaid tax can only be up to £3,000
3. You must have a suitable income source for the coding to apply to, and the tax can’t take away more than 50% of the income.
There’s a box to tick on your tax return to say that you want this to happen, but sometimes HMRC will assume that it’s what you want anyway.

As you’d expect with tax, that’s not all. PAYE codes are normally on a cumulative basis. Using the example above, in month two tax is calculated on the basis of £4,000 income to date and tax allowances of two lots of £917, ie. £1,834. This will give tax due of 20% on £2,166, which comes out to £433.20 tax. You paid £216.60 in month one, so there’s now another £216.60 to pay. And so it continues through the year – which helps to cater for changing levels of income and changed PAYE codes.

However, we sometimes see “M1” added to the end of a PAYE code. This is generally a provisional code because HMRC isn’t sure what’s going on – perhaps you’ve changed jobs. It means that each is treated in isolation as if it were month 1 – so that the tax paid in previous months is left undisturbed by cumulative calculations. It can be a protection against deduction of excessive tax, for example.

Much of this system is applied automatically via payroll software and most of the time it works quite well. However, sometimes HMRC gets it wrong and makes assumptions that are incorrect. The position will be corrected at the end of the tax year via a review or a tax return, so it may not be worthwhile making minor changes – the codings are always only provisional in nature. However, if we’re dealing with your personal tax affairs, we can contact them to change the code to something more sensible if it seems appropriate. For this reason it’s a good idea to keep an eye on your tax codes.


George Osborne announced the introduction of digital tax accounts in his 2015 Budget. “Digital” seems to mean more online communications to and from HMRC, for example by employers, pension funds, banks and other institutions. (In fact much of it already is, but HMRC plans to use it better.) This information will then be used to calculate individuals’ tax liabilities which may be viewed by them online. All this sounds great in theory, but many accountants expressed concerns about the reliability of this data.

It’s now suggested that by next month, June 2016, every individual and 5 million small businesses will get access to their digital tax account. Over the next four years HMRC expects a full range of “services” to be available to taxpayers through their digital tax accounts. (“Services” implies that HMRC are doing something for you – but it normally just means showing how much you owe them and giving you ways of letting them know about extra income for them to tax it!)

The next big step, according to the government’s plans, will be introduction of quarterly reporting of income and expenditure by businesses and landlords from 2018. This sounds even worse than quarterly VAT returns…

Again, we accountants have serious concerns about the timescale and lack of consultation. HMRC say “you will not need an accountant to fill out the information on the new system”. They are expecting businesses to use new Apps on their Smart phones and Tablets to transmit their data to HMRC. Maybe, but most people would probably prefer to spend their time running their business rather than working out how to fill in more forms. Accountants are not expecting less work – the quarterly reporting may turn out to be just an expansion of the quarterly management accounts and VAT returns that we already do for many clients.


One of the main things people want from their accountant is reliability – confidence in the figures. Using a chartered accountant gives the assurance that comes with someone who’s well qualified and who is committed to upholding professional and ethical standards. However, unless something looks odd, the accountant won’t necessarily probe far into the figures given to them by their client, and the report that they sign will normally say that they haven’t carried out an audit.

If you want more assurance, you may ask for the accounts to be audited. This can be obligatory if the business is above a certain size – but this is now at a high enough level to exclude most companies. To need an audit, a stand-alone business would need to have a tick against at least two of the following:
• More than 50 employees
• Turnover more than £10.2m
• Gross assets more than £5.1m (ie. total fixed plus current assets.)
There’s also a complicated “two-year rule” which may need to be checked, and if it’s part of a group, the turnover and asset limits are slightly higher. Minority shareholders can also insist on an audit so long as they ask at least one month before the company year end, and there are a few specific types of company (eg. FCA-regulated) that always need audits.

Some of us think that audits should be obligatory at lower levels to give greater confidence in accounts, for example to suppliers and other potential users of the accounts. This seems extra relevant at times of greater fraud and economic uncertainty, but the trend for the limits has been upwards for the last few years, supposedly to remove red-tape for businesses.

However, we do a number of audits for smaller companies because they are UK subsidiaries of a larger foreign group. This is a good way for the foreign owners to gain confidence in the way the UK business is being conducted and in the reliability of what they’re being told by the local directors. In other cases the trade body of the business may insist in them having an audit, or the owners may simply wish to have the extra confidence in their accounts that an audit implies. This might be if they’re not closely involved in the day-to-day running of the finances or if they’re planning to sell the business and want to show potential buyers a clean audit report.

A “clean” audit report? Oh, that’s one that isn’t “qualified”! So what do we mean by that? Well, a clean audit report is one that says that the accounts “show a true and fair view” of the finances – which is what everyone wants. Normally, if the auditor receives accounts that wouldn’t fit this label, he’ll persuade the directors to make the necessary changes so that it can. But sometimes it won’t be possible to reach an agreement or sometimes the relevant information won’t be available for the auditor to be sure – in which case he’ll have to qualify his report. Fortunately this is rare – I’ve only ever needed to sign one such report.

So what happens in an audit? The first stage is to work out what’s important in the accounts and to identify areas where things are most likely to go wrong. Part of this is to decide how big numbers need to be before they’re significant or “material”. It’s obvious that no-one will be worried about whether you’re likely to have to pay £100.00 for your gas bill or £100.02 – the accounts can still give a true and fair view regardless. If the total due was £9,000 would anyone bother if it was actually £8,500? Probably not. In other words, the auditor can ignore small differences and concentrate on what’s important. The examination of the records is never 100% – it doesn’t need to be and it wouldn’t be cost-effective.

So the auditor doesn’t look at everything – just at what’s necessary to be able to give his true and fair opinion. Another misconception is that the audit will detect fraud. It may do, and it should probably do if it’s significant to the accounts (if it’s “material”), but the audit is not designed for this purpose.

So far, I’ve just talked about companies, but audits can also be needed for charities – they need them at a smaller size than companies – and there are also specialist sorts of audits for businesses that hold clients’ funds, such as solicitors or licensed conveyancers. You’ll be glad to know that we’re qualified to look after all of these, and we’d welcome more such clients.