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  • A Look Back at 2018 – Top 10 Tax Trends

    1. Digitalisation HMRC and Companies House through gov.uk are embracing this. Through the speed of setting up a company and filing forms, to checking your state pension online, we are now moving to filing VAT returns direct from a spreadsheet. At the same time, ‘Making Tax Digital’ is expected to increase taxes raised although we’re not sure that will prove true.
    2. Apps Allied to the above, there are many user-friendly apps to help record your receipts, business mileage, or review your profit or cash balance, integrating with your accounting records, making life a bit easier – assuming you’ve got smart devices!
    3. Self-employment crackdown The large growth in self-employment with lower national insurance has warranted several government responses, such as pushing one-person limited companies into being taxed as employees without any employment rights. But true self-employment in large numbers is probably here to stay.
    4. Simplification and complication! Large tax-free personal allowances, tax-free interest and dividends at low levels help focus HMRC’s attention on bigger figures and is often sold as a simplification. On the other hand, there has never been so much tax law, with many trip-ups for the unwary because politicians like to fiddle to meet their agendas. You can bet that as long as there’s an Office of Tax Simplification, tax will continue to get more complicated!
    5. Buy-To-Let properties are bad The adverse tax rules that have continued to be introduced over the last few years, with a further blow in the last Budget, shows that Governments see this as an area for some pickings. Buy-to-let owners will sell up, many by April 2020, adversely affecting the housing market, but perhaps that’s the plan?!
    6. Tax avoidance crackdown This is another thing that’s expected to improve public finances. This has continued for many years and has raised some money, but we must remember that evasion is illegal and needs more attention. Tax avoiders using the law to its extreme, but often losing in the courts, tend to be known to HMRC. What about all the unknowns, unregistered people who should pay tax?
    7. Accountants aren’t needed Simpler ‘micro’ accounts are allowed for small companies, cash accounting for sole traders and ‘Tax doesn’t have to be taxing’ campaigns all have their place, but the actual experience of the uninitiated is very different and HMRC will admit they couldn’t run the tax system without accountants.
    8. Reference to family income For child benefit, HMRC need to know both parents’ income (married or not) and you need to know each other’s income. For some, this is an unusual and not always easy conversation to have, and there have been many mistakes by HMRC in this area.
    9. Encouraging Research & Development – a bit! Seen as a good thing for the overall economy, there are good tax reliefs available to help reduce large and small companies’ tax bills and cashflow. The last Budget was a blow to small businesses where new restrictions were brought in, because a few people were making fake claims.
    10. Encouraging Entrepreneurship and Investment With income tax and capital gains tax incentives to invest in young businesses, a low 10% capital gains tax rate when business owners sell their businesses, and no Inheritance Tax on many businesses, these reliefs are very welcome and do encourage growth.

    I’m very interested to see how things pan out over the next 10 years, both from a UK and global perspective. There’s never a dull moment in accountancy!

  • Let The Taxman Contribute To Your Christmas Party

    You can spend a maximum of £150 per staff member plus another £150 for their other halves or guests. The only condition is that ALL members of staff at that location must be invited.

    The cost is fully tax deductible with no benefit in kind income tax or national insurance to worry about. Your staff will feel appreciated and you save 19% corporation tax, so everyone gets that holiday feeling!

    Ensure that the costs are called staff entertainment in your detailed Profit & Loss Account.

    Remember it doesn’t have to be AT Christmas; it could be a similar annual function such as a summer BBQ, as long as you spend less than £150 over the whole year.

    The £150 includes VAT and the cost of transport and/or overnight accommodation. Divide the total cost of each function by the total number of people, including non-employees, to arrive at the cost per head.

    The VAT is also fully recoverable when paying for your staff. If you make a small charge to your staff’s guests and pay over a small amount of VAT, the VAT on the total cost for the guests is also fully recoverable.

    I don’t have any staff. Can I benefit from this favourable tax treatment?

    As you are the only director/employee you might think you can’t have a Christmas party – wrong!

    You can avail yourself of the £150 per head exemption as a member of staff (the only one!) and also £150 for your better half even if he/she isn’t a director or employee.

    The cost is fully tax deductible so you save 19% corporation tax.

    Again, ensure that it is called staff entertainment in your detailed Profit & Loss Account.

    In this case we would advise that the VAT shouldn’t be reclaimed.

    Enjoy that Christmas Party a bit more knowing you’ve received a subsidy from ‘The Taxman’.

  • #Budget2018 – IR35 – What yesterday’s press release should have said

    If your clients are medium or large businesses, they’ll be deciding whether you’re self employed or an employee for tax deduction purposes only. Or put it another way, if they are a small company, the rules don’t apply and you may be able to continue as normal.

    If your client decides that you’re effectively an employee, then your client (or its agency) will need to deduct income tax, employee NIC and pay employer NIC without any associated employment rights.

    This means:

    1. Consultants, you are likely to suffer the employer’s NIC because your clients won’t be willing to pay it. If they’d needed and budgeted for a permanent employee you or someone else would presumably be on an employment contract, with all the benefits of that.
    2. This leads us on to the very uncomfortable outcome that a Consultant may pay full PAYE income tax and NIC, but without any employment rights at all.
    3. The mechanics of this are predictably complicated and involve a payslip being issued to your limited company, although your company’s accounts will show it has paid you dividends.
    4. Issuing invoices and being VAT registered makes no difference. Your clients work with the net of VAT invoiced amount and deduct tax from that, regardless of how you’ve taken the money out of your company.
    5. Regarding whether your client is a small business, if the usual Companies Act definition is used, your client should be under at least two of the following:
      • Turnover < £10.2m
      • Gross assets < £5.1m
      • Number of employees < 50
    6. How will you be able to check if a prospective client is small or not? You could look at filed accounts at Companies House, but these don’t have to be filed until 9 months after the year end.
    7. Will you have to trust your prospective client to get this right? Will procurement managers have this information? What if it changes mid-contract? Who will pass on this information to you, the procurement department or an agency? Does the definition of small also apply to the agency?

    What can you do about this?

    1. You may decide to work only for small companies! You’ll need to ask for written confirmation that your clients are small and are therefore not applying these rules. Try to have contract terms that your clients will pay any tax due if they make an incorrect assessment. Commercially, however, this may be unlikely!
    2. On the other hand, if your clients are medium or large, you’ll need reassurance they still regard you as self employed. HMRC has a ‘CEST’ tool (Check Employment Status for Tax) but it has its limitations.
    3. Your clients are expected to use the CEST tool to determine whether you are self employed or an employee. If they get a favourable result, ask for a copy and keep it on file in case of a future enquiry. If they get an unfavourable result, ask to look at it in case it’s been used incorrectly.
    4. HMRC recently admitted that the tool isn’t required if there’s no Mutuality of Obligation (‘MOO’) to offer and accept work. Tribunal cases have confirmed this point. If this stands, then being self employed might simply be determined by that point, if it’s clear.
    5. If your clients insist they need to apply these rules and they have assessed you as an employee, have contractual terms that mean they pay the employer’s NI if, commercially, this is available to you.
    6. Consider whether you can increase your fees to offset the increased tax burden. Again, commercially, this may not be available to you.
    7. If you do have one longstanding client, you may decide that now is the time to end your contract and apply for a different employment with them or another business. We’ve seen this to some extent with the public sector version. At least you won’t pay employer’s NI and you’ll get employment rights in return for paying PAYE.

    There is a consultation period and we expect many comments will be given resulting in clarifications or even improvements to the above! 

     

  • #Budget2018 – Good for small businesses BUT….

    Relatively favourable to growing businesses:

    1. Capital allowances of 100% (AIA) will be available on all expenditure up to £1m from 1 January 2019 to 31 December 2020 up from £200k. Even the £200k isn’t spent by most growing business but if you need to invest heavily in capital equipment this is very welcome.
    2. Research and Development cash repayments will only be available for amounts up to 3x the PAYE/NI bill from April 2020. It will be important to ensure businesses make the maximum claim they can before April 2020.
    3. A new Structures and Buildings Allowance (SBA) of 2% will be introduced for all new commercial buildings contracts entered into on or after today. This might also be a small boost to the construction sector.
    4. The £3k Employer Annual Allowance saving Employer’s NI of up to £3k will only be available for employers with an Employer’s NI bill under £100k. So this is still available for most growing businesses.
    5. The new 2% Digital Service Tax (DST) from April 2020 will apply only to certain revenues over £25m. With corporation tax at 17% from the same date, this may be bearable even if you are affected.
    6. The £85k VAT threshold remains for now (but you can’t help feel it will go eventually).
    7. The early increase in the tax free personal allowance to £12,500 and the higher rate threshold to £50,000 a year early will help business owners save dividend tax when taking dividends from their companies. Above that, remember that Child Benefit starts to get taken away so £50,000 may be the threshold to work with for a few years. 

    Some adverse changes:

    1. The qualifying period to be eligible for capital gains tax Entrepreneurs Relief of 10% will increase from 12 months to 24 months from 6 April 2019. In practice, this may have limited application but remember to get your spouse in as an owner-officer sooner rather than later.
    2. IR35 extension to the Private sector from April 2020 might encourage good freelancers/consultants to work for smaller businesses, however, there aren’t so many contracts in that sector. A lot of freelancers will face a very high tax bill. There may be some moves for their clients to take them on as employees, but this doesn’t easily fit in with the idea of a flexible, enterprising Britain. Expect a lot of debate between client and freelancer when a new contract is negotiated!
    3. The tax treatment of work related training costs will not change. This is a blow for the self employed sole trader who suffers an unfair rule where some training costs are seen to be capital and not tax deductible.
    4. Many clients also own a property they rent out and the Principal Private Residence changes mean their capital gains tax bill of 18% or 28% when they sell the property will increase. This may bring forward some property disposals to ensure they exchange before April 2020.

    With many changes effective from 2020 will the Chancellor prove to have had 2020 vision on the strength of the UK economy?

     

  • Growing SMEs – The Best Tax Incentive Ever?

    The best tax incentive revolves around the share capital in your company.

    Rather than give away or sell shares up front before the person has proved themselves, you grant an option for him/her to buy shares at a later date. If the person helps grows your company he benefits from that growth by buying the shares at the value they were when s/he joined you.

    S/he makes a profit for no initial cost, and your dividends haven’t been reduced.

    Importantly, there is no tax charge if s/he simply buys the shares and keeps them. More likely, s/he will wait until you sell your higher value company. If s/he has been with you for a year, the tax charge on that gain is only 10%.

    A much improved rate on say 40% income tax if you’d had to pay higher bonuses throughout that period.

    Your company hasn’t taken a risk, and its corporation tax bill is reduced by the gain, so you save 19% corporation tax as IF you had paid him those bonuses.

    How does it work?

    1. You write down a set of EMI share option rules such as what happens if your employee leaves your company.
    2. The company grants share options for no cost and no tax charge.
    3. Eg If your company is worth £90k and you company has issued 90 shares, each share might be worth £1,000. If you grant 10 share options, you’ve immediately given a perceived £10k value to your new person with no cost to you or tax charge to him/her.
    4. You and your new senior executive grow your business over the next, say, 5 years.
    5. You decide to sell your business for, say, £3m. The gain made by your senior executive is £300k less the initial £10k = £290k. After paying 10% capital gains tax of £29k, s/he has received a net £261k over 5 years equating to additional gross salary of over £130k per year. In addition, your company saves 19% corporation tax on the £290k, so its tax bill is reduced by £55k, without incurring any costs.

    Your company has benefitted from employing a senior employee who also benefits, if s/he stays with you and helps grow the company. Your corporation tax bill is reduced as if you’d paid him/her normal taxable bonuses, plus you’ve not paid 13.8% employer NI on top of those bonuses.

    Your senior executive knows that s/he benefits from any incremental value he adds to your company and pays only 10% tax instead of a potential 47% combined income tax and NI rate on bonuses.

  • Uber reaction – How should businesses react to recent employment law cases?

    Why does it matter?

    As a business owner, HMRC may decide that your longstanding sub-contractors are actually your workers or employees for tax purposes and should be subject to higher rates of national insurance. This is in addition to providing workers’ rights under employment law.

    How can you be self-employed, a worker or an employee?

    It used to be simpler to know whether you’re taking on an employee or a self-employed sub-contractor or supplier. The EU introduced a new definition of worker, a sort of hybrid between the two, which has caused some confusion. 

    What’s the point of being a worker?

    A worker enjoys many rights, just not quite as many as an employee. For example: 

    • Statutory maternity pay but NOT statutory maternity leave
    • Statutory paid holiday but NOT the right to time off for emergencies
    • Protection against unlawful discrimination but NOT protection against unfair dismissal

    So my self employed sub-contractors could win an employment law case, be classed as a worker, enjoy all the benefits but not necessarily pay any additional national insurance?

    Yes. In addition, you’d be required to include workers in pensions auto-enrolment paying up to 3% employer pensions contributions.

    HMRC might also require me to pay employer’s national insurance (13.8%) and deduct employee national insurance (12%) and income tax from the payments I make? 

    Yes.

    Does this additional national insurance buy the worker any more benefits?

    Not much. Assuming the worker already paid self employed Class 2 national insurance, the additional benefit is an enhanced job seeker’s allowance, if he needs it.

    That doesn’t make much sense.  I thought national insurance was a system you paid into to buy extra benefits.

    The state pension will usually be the most valuable benefit, but this is currently available anyway by paying £153.40 per year self employed Class 2 national insurance. 

    What should I do?

    1. Review all your contracts and practices with your self employed sub-contractors and suppliers to establish whether in the light of these recent tax cases they may be seen as workers or employees. 
    2. Use HMRC’s new Employment Status Tool to see whether HMRC agrees that your sub-contractors are self employed or not.
    3. If not, don’t necessarily rely on HMRC’s conclusion which ignores a vital Mutuality of Obligations (MOO) test. 
    4. Decide whether your contracts need to be amended to reflect your business arrangements more accurately or if you need to set up new employment contracts. 

    How does this apply to my limited company which provides services to my clients?

    If, through similar tests, you were found to be an employee of your client and caught within the ‘IR35’ rules, your company is obliged to pay PAYE and Class 1 employee and employer national insurance. As this wouldn’t have been factored into your pricing, this will make a big dent in your profits. 

    What should limited company contractors do?

    You can follow similar advice to above checking the details of your contracts and practices with your clients, as the points at issue are the essentially the same.

    This is a developing area of tax and employment law, so please check with your advisers before making any decisions. 

     

  • Budget 2017 – Brexit and Bricks

    The Brexit Effect – Changes effective from 2019 onwards

    VAT Registration Threshold

    This will be frozen at £85k for 2 years until 31 March 2020. In the meantime the threshold will be reviewed to establish how it might incentivise businesses further. It is true that many businesses selling to consumers deliberately stay under the threshold to avoid the administration and not to increase prices to their customers. With inflation, freezing the threshold itself might force many businesses to become VAT registered. If so, it’ll be a good time to review business models and how to grow successfully.  

    Travel and Subsistence

    From 6 April 2019, the overseas travel and subsistence allowances can be paid when on a business journey without needing to prove that some expenditure has been incurred by employees. This is a very welcome administration saving. A similar approach will be taken for UK subsistence rates. 

    Research and Development

    A pilot advanced clearance service will be available for SMEs to encourage them to make more claims. This is an excellent relief, but as usual there are some complicated parts which make many would-be claimants uninterested. Simplification is the real answer here.

    Entrepreneurs Relief

    Sometimes this valuable 10% capital gains tax rate isn’t available where new shares are issued at the same time as the founder is selling his/her final few shares. This issue will be looked at to see whether entrepreneurs can be encouraged ‘to remain involved in their businesses after receiving external investment’ presumably for the next phase of business growth. 

    Enterprise Investment Relief

    This change is effective a year earlier in April 2018 and will help businesses raise more much needed capital by doubling the tax efficient thresholds, but it comes with a price of more complication. HMRC is very quick to withdraw this relief for the smallest of reasons such as using the wrong form. As mentioned above, simplification at the same time would be very welcome for the busy growing business.

    Intangible Fixed Assets

    These have suffered many adverse tax changes recently and this will be reviewed to see whether UK companies can be better incentivised. 

    Disguised Employment

    AKA How can the government make sure it doesn’t lose out from the new flexible economy? The Matthew Taylor review will be consulted on to prevent the Chancellor from suddenly announcing an increase to Class 4 National Insurance, or similar, in the future. The delay to April 2019 in abolishing Class 2 National Insurance had already been announced.

    The possibility of extending the responsibility of deciding whether your supplier is really an employee from the public sector to the private sector will also be consulted on with the results due in 2018. This will be a worry to the many consultants who genuinely work on different projects for different clients and don’t require or want any employment related benefits.

    Making Tax Digital 

    Nothing new here except to confirm the delayed timetable to April 2019 for VAT registered businesses with a turnover of over £85k and to at least April 2020 for other businesses and individuals.  

    Property and Other Assets 

    Stamp Duty Land Tax  

    The house building, estate agent and related industries presumably will benefit from the abolition of stamp duty land tax for purchases of residential property up to £300k. Stamp duty is driven by completion dates so even if you’ve already exchanged, you will benefit now from this change on completion. 

    Companies Capital Gains Tax Indexation 

    This often valuable additional tax deduction for companies on the sale of an asset will be frozen at December 2017 inflation rates. This seems to be a further attack on residential properties where many buy-to-let landlords are incorporating in response to earlier adverse property tax changes. 

    Residential Property Capital Gains Tax Payment Date 

    The much reduced payment window to only 30 days will be deferred until April 2020, a welcome delay and perhaps not a government priority for now. 

    Conclusion 

    Many other initiatives were announced to make the UK Brexit-ready and to encourage house building. These were the main themes, but we can always expect anti-avoidance measures to be in Budgets for the foreseeable future. There were several of these, such as taxing Royalties from UK sales in the UK, which don’t affect most SME businesses. 

     

  • Top Five Most Common Tax Queries – 2016/17

    1. Dividend Tax – How much tax will I have to pay?

    Unfortunately, most companies are affected by this. Broadly dividends you pay over £5k within the basic rate tax band have now suffered a 7.5% tax charge. If this is over £1k, which is likely, you’ll also find yourself in the payments on account system meaning that you have to pay 50% of next year’s tax bill before the end of the tax year in January. Plus a further 50% in July. The first year this applies is this tax year just ended and therefore your cashflow requirements will be even higher next January 2018, and July 2018.

    2. Salary – What salary should I take from my limited company?

    If you’re a sole director, you can’t claim the Employer Annual Allowance of £3k, so the most tax efficient monthly salary was set at the national insurance threshold of £671. For next tax year, this increases to £680. If there’s more than one director who was paid at least £485pcm or you employed staff, even briefly during the tax year, you could claim the Employer Annual Allowance using part of the £3k. This means if you paid yourself the full tax free personal allowance of £11k or £916pcm, when all the taxes are taken into account, this saved £472 per couple of directors. This year the savings are very similar, despite the increased tax free personal allowance to £11,500 as the reduced rate of corporation tax to 19% reduces the saving from paying a higher salary. Before paying a second director, you should always review their other income such as property rental.

    3. VAT – Should I deregister from the VAT Flat Rate scheme?

    HMRC recently introduced the concept of a limited cost trader, meaning mostly consultants, who they deemed to be abusing the tax system by profiting from the Flat Rate scheme. As the scheme was introduced by the government and taxpayers were encouraged to use it, this was a strange statement to hear. The upshot is that consultants have moved to standard VAT accounting meaning they make neither a gain or a loss but HMRC may now need to spend more time reviewing their tax returns because they will be more complicated. Unfortunately, the new rules, as is often the case, has caught other people. For example, if you run a ballet school but sell a few ballet clothes to students, selling goods isn’t your main business activity, so you can no longer operate the Flat Rate scheme. 

    4. Pensions – How much tax relief do I receive and should my company pay the contributions?

    If you’re a company director-shareholder taking a small salary (see above) and larger dividends (see above) you are limited when looking at personal pension contributions. This is because pensions can’t be paid against dividends even though we now pay tax on dividends. Therefore, it’s usually a good idea for your company to pay company pension contributions. They are an expense in your profit and loss account and therefore saved 20% corporation tax (or 19% during this new tax year).

    For people who don’t run their own business who are in their employer’s pension scheme please triple check that you understand whether you’re receiving full or partial tax relief in your payslips. We see many people only receivng 20% who aren’t aware they need to make a further 20% claim in their tax return.

    5. Sporting events or memberships – Can I claim tax relief?

    Despite being a place where business is discussed with customers and suppliers, HMRC view this as not being tax deductible. The main reason to go to a sporting event with customers and suppliers is to entertain and entertaining is not tax deductible. On the other hand, if there’s a conference with a business agenda for staff to attend away from their office, this is likely to be tax deductible. If the cost is less than £50 incl VAT per person, you may be able to use the new trivial benefits rules and treat staff to a sporting event, as many times as you like. So, it’s not all bad. 

     

  • Budget 2017 – So will the Chancellor be sacked?

    The thing about national insurance

    It’s complicated.

    The Chancellor referred to the lack of payment for public services but the national insurance of £6,170 due on a salary of £32,000 includes £3,297 paid by the employer, not the individual. Plus the employer receives corporation tax relief reducing the net amount paid to the Treasury by £659 to £2,638 from the employer.

    If you look at what the individual pays, the correct comparison is £2,873 from the employee versus £2,300 from the self-employed, a reduced differential of £573. On a salary or profit of £32,000, this gap will drop to about £240 from April 2019. 

    This £240 is effectively the price of no holiday pay, sick pay, maternity pay, having to pay all your own pension contributions etc. 

    Hopefully, the announced review of benefits available to all will improve these comparisons. 

    15 MARCH 2017 UPDATE – THIS CLASS 4 NATIONAL INSURANCE INCREASE HAS BEEN SCRAPPED. 

    Making tax digital

    On top of this a 1 year delay to ‘making tax digital’ quarterly reporting where your turnover is less than £83k won’t reduce this new self-employed burden by much and the self-employed may start to feel a bit hard done by today.

    Dividend tax 

    The 0% tax rate on £5,000 of dividends will from April 2018 be available on only £2,000 of dividends. This will adversely affect small owner-managed businesses but it’s still likely to be beneficial to run many businesses through a limited company, if only to be able to control the timing of your personal taxable income.

    Perhaps when HMRC was told that its example of the interaction of the £5,000 and the tax free personal allowance was wrong, the Treasury had to re-run its numbers and discovered that £5,000 would cost more than they realised!

    Research & Development 

    As part of the Chancellor’s determination to tackle our poor productivity, he seems willing to be more lenient about the details required when making an R&D claim. This needs to be an instruction to HMRC, as the most lengthy information requests are made by inspectors after submission, sometimes for relatively small claims. 

    Conclusion

    The Chancellor’s error in the national insurance comparison and HMRC’s error in calculating the effect of the £5,000 tax free dividend, show how complicated the tax system has become. Even those legislating and running it don’t always understand the interactions across different parts of the system. There has to be more inroads into simplifying the tax system so taxpayers have more certainty over the tax they’ll have to pay.

    On the basis the Chancellor is waiting for the Autumn to deliver a more comprehensive budget, and will check with practitioners before making comparisons, perhaps he won’t be sacked this time. And perhaps we’d like to hear a few more jokes yet. 

  • New Years Resolution – Exercise Your Figures

    Look on them as more than simply keeping Companies House and HMRC happy. Put them through a workout for your benefit! 

    Gross Profit Margins

    Why should you bother with gross profit margins? They are the first stage to profitability. If these are small or even negative, you’ve no hope of making a profit. 

    What are they? Very simply, the difference between the price paid and the price sold. If you pay 10p for an apple and sell it for 50p, you’ve made a 40p gross margin. 

    So what? If you check these regularly, you’ll notice if they’re falling or increasing, better or worse than the year or month before. 

    And? If they’re falling it might indicate that your suppliers’ cost increases aren’t being passed on to your customers and you’re at risk of making an overall loss. 

    You might find yourself being busier, but less profitable which isn’t good for your health or bank balance.

    If they’re rising, perhaps you’re selling more higher margin product lines and you want to understand why and capitalise on it even further. 

    Actions

    You may need to:

    1. Increase prices on some products, not necessarily all of them.
    2. Reduce prices on other products.
    3. Negotiate with suppliers for better volume or early payment discounts.
    4. Carry out more market research on comparable pricing and markets leading you to change your product mix. 
    5. Amend sales force incentives to change behaviour to suit a new environment.
    6. Reduce stock levels for slower moving items. 

    Summary

    Only by knowing your figures do you really know your business.

    Start with healthy core information and then give it a workout getting relevant reports produced from which you can take the best action for your business. 

    We’ve only looked at one aspect of your figures. The same principles apply for many other areas such as cashflow, net profit, debtors, creditors and, of course, tax. 

    Happy New Year!