Under the Pensions Act 2008, every employer in the UK must put certain staff into a pension scheme and contribute towards it. This is called ‘automatic enrolment’. If you employ at least one person you are an employer and you have certain legal duties.
Are you currently employing staff?
If so, it’s important that you understand what to do and by when, so you can meet your automatic enrolment duties.
Use our ‘Duties Checker’ to find out your staging date and to work out what you need to do.
You have re-enrolment duties every three years, which is when you must put certain staff back into your pension scheme. Even if you have no staff to re-enrol you will need to complete a re-declaration of compliance.
It’s important for employers to understand their role in running a good quality pension scheme and there will be different duties and areas of focus depending on the type of scheme they’re involved in.
The following paper has been written by Rebecca Cave for accountancy software provider, Tax Calc to provide information on the introduction of Making Tax Digital. Although there has been some delays due to the political situation, it is important for small businesses to prepare for its introduction.
The making tax digital (MTD) project represents a fundamental shift in UK tax administration and the changes it will require for accountants, taxpayers and HMRC should not be underestimated. However, MTD is being developed in an agile manner, which means the law is being formulated as the project progresses, so we don’t yet have a full picture of how MTD will apply to all taxpayers or to all taxes.
This report addresses what we know so far about the impact of MTD for Business (MTDfB), which at this stage, only applies to unincorporated businesses (including most partnerships and trusts). HMRC expect MTD to be rolled out to the entire taxpayer population but the exact timing of that rollout is not set in stone (see Timetable). There are many hurdles to cross in order to achieve HMRC’s vision of a fully digital tax system (see Future Developments).
Note that references to ‘business’ include property letting.
The justification for MTD has shifted as agilely as its development. When it was first proposed by George Osborne in his March 2015 Budget, the digitisation of the tax system was heralded as a way to reduce the administrative burden for taxpayers. This goal may not to be achieved for some years, certainly not until MTD has bedded down. In fact, taxpayers may perceive the increased number of interactions per year with HMRC, as an escalation in their tax compliance burden, not as a reduction (see Reports and Submissions).
HMRC believe that MTD will reduce errors and mistakes in accounting data, which in turn will increase the tax collected. HMRC’s reasoning follows this path:
Taxpayers will record all their business transactions near the time they happen, so will make fewer omission errors. Receipts will not be lost and sales will not be forgotten.
Accounting software will prompt taxpayers to categorise their transactions accurately and catch scale errors, such as a taxi fare of £800 rather than £8.
The data will be submitted directly to HMRC by accounting software, eliminating transposition or omission errors when completing an online or paper tax form.
Taxpayers will understand what tax is due on their profits and when it must be paid, making the tax bill less of a shock and increasing the likelihood that it will be paid on time.
This rationale does not map convincingly on to larger incorporated businesses or on to larger partnerships.
Stages of MTD reporting
The stages of reporting under MTDfB are:
1) Record keeping: Taxpayer records their income and expenses in an electronic form on a timely basis, sorted into categories as prescribed by regulations.
2) Updates: Taxpayer (or their tax agent) reports the accounting data from stage 1 to HMRC using accounting software, on at least a quarterly basis.
3) Tax account: HMRC updates the year-to-date figures of profit or loss in the taxpayer’s digital tax account using the accounting data reported in stage 2. This is an automated function – HMRC does not examine the accounting data for accuracy or completeness at this stage.
4) Reflection: HMRC prompts the taxpayer to view their online digital tax account. This tells them how much tax they should expect to pay on the profit reported during the year so far. There is no requirement for the taxpayer to make a tax payment based on this information.
5) End of period statement: Taxpayer (or tax agent) makes any necessary adjustments to the totals reported in the quarterly updates and confirms that the figures for the full accounting period are complete and correct (TMA 1970, sch 1A, para 8).
6) Trade position: The adjustments from stage 5 are incorporated into the taxpayer’s digital tax account and HMRC prompts the taxpayer to view their tax account.
7) Final declaration: This performs the same function as the self-assessment tax return, which it replaces. The taxpayer must report all other income which is not already reflected in their personal digital tax account and confirm that the information filed, and accompanying self assessment, are both complete and correct (TMA 1970, s 8(2)).
The end of period statement (stage 5) and the final declaration (stage 7) are two separate processes, which have different deadlines (see Reports and Submissions).
Regulations (not yet published) will define what is meant by ‘electronic form’ for keeping and preserving records. HMRC has indicated that the likely categories for recording income and expenses will be those headings provided on the current self employment pages of the SA tax return, and for landlords, the categories on the land and property pages of the SA return.
The taxpayer will not have to keep every piece of accounting information in an electronic form. It will not be necessary to scan every receipt or send every invoice electronically – only the data from these sources will need to be entered as a digital record. However, there will still be a requirement to retain the source documents in some form.
Recording accounting information on a spreadsheet will be acceptable but that accounting data will have to be read into MTD-enabled software to allow it to be submitted to HMRC.
Taxpayers, or tax agents on their behalf, will only be able to make MTD submissions using software which has been designed to interact with HMRC’s application programme interface (API). The API acts like a door into the HMRC computer. The door can only be opened to allow data into HMRC, or out to the taxpayer/agent, if the software has been designed to unlock that door.
Currently many taxpayers submit tax information to HMRC by completing an online form. This is particularly the case for quarterly VAT returns and SA tax returns submitted without using commercial software. HMRC has ruled out this method of submitting data under MTD, as it wants the submission process to eliminate human error (see Why MTD?).
Free software HMRC has encouraged software producers to make free versions of their accounting software available for small businesses, to facilitate MTD submissions. HMRC has specified that the free software needs to cope with the following conditions:
Sole-trader business – not a partnership, company or trust
Turnover under VAT registration threshold
Not VAT registered
Accounting records kept under the cash basis
HMRC will not provide free MTD software. Tax agents will have to buy software in order to make MTD submissions on behalf of their clients and to view their clients’ tax data held by HMRC.
Using the cash basis will not be compulsory for MTD but it may make the reporting process easier for the smallest businesses.
The introduction of MTD has been designed to fit in with how HMRC holds its data, which is organised by tax (income tax, VAT, corporation tax) and not by type of taxpayer (individual, company, trust). It is important to understand that some businesses will commence reporting of different selections of data under MTD, at different dates, according to the taxes it is required to pay.
Taxpayers will commence reporting under MTD from the first accounting period that starts on or after these dates:
6 April 2018: Businesses with turnover exceeding the VAT registration threshold, to report income and expenses which are subject to income tax and Class 4 NIC.
6 April 2019: Businesses with turnover exceeding £10,000, to report income and expenses which are subject to income tax and Class 4 NIC.
April 2019: All VAT registered businesses, to report income and expenses which are subject to VAT – in essence, the information on the VAT return.
April 2020: Businesses which pay corporation tax, to report income and expenses subject to corporation tax – i.e. the information on the corporation tax return. Also all partnerships with turnover of £10 million or more.
HMRC has proposed that MTD will roll out for VAT and corporation tax information from April 2019 and April 2020 respectively, but it has not specified the date in April from which reporting should commence. This timetable may also be interrupted by the General Election on 8 June 2017, which will delay the passing of key parts of the MTD legislation.
When to commence
To determine when a taxpayer is required to commence MTD reporting, or if they qualify for full exemption on the basis of turnover, they should examine their total business turnover for the accounting period which has most recently ended. The taxpayer must consider the aggregated turnover from all their businesses, including rental income.
George is a self-employed builder who makes up his accounts to 31 March. His last accounts show a turnover of £80,000. He also lets a residential property, which generates income of £12,000 per tax year. As George’s total turnover from all his businesses is £92,000, which exceeds the VAT registration threshold of £85,000, he will be in the first wave to commence MTD reporting. Note, George is not VAT registered, as his annual trading turnover is below the VAT threshold, and his rental income is exempt from VAT.
George will be required to commence reporting under MTD as follows:
from 6 April 2018 for his rental income, which is always calculated on a tax year basis
from 1 April 2019 for his building trade.
As the commencement of MTD reporting is tied to the accounting period, a business that uses a year end early in the tax year can delay MTD reporting by switching to a 31 March year end.
Example 2 Joy’s hairdressing business has sales of £40,000 per year and she makes up her accounts to 30 May. If she continues with an accounting period ending on 30 May she will be required to commence reporting under MTD from 1 June 2019. However, if Joy changes her accounting period to run from 1 June 2018 to 31 March 2019, she will start MTD reporting from 1 April 2020.
Joy will need to abide by the law on changing an accounting date (ITTOIA 2005, ss 216-217), which requires notice to be given, and the first new accounting period not to be longer than 18 months (see BIM 81045). There are additional restrictions if she has changed her accounting period within the last five years. The draft law for MTD (TMA 1970, sch A1, para 18(3)) also gives HMRC a new power to disregard changes of accounting date, so caution will be needed if contemplating changing it.
The following taxpayers are exempt from MTD reporting:
taxpayers with total annual turnover, including rental income, of under £10,000
charities and community amateur sports clubs (CASC), but trading companies which are owned by charities are not exempt from MTD
taxpayers who meet the definition of being ‘digitally excluded’
partnerships which only receive income from OEICs or REITs
Lloyd’s underwriting partnerships.
Digital exclusion will be defined in TMA 1970, sch A1, para 14(4) as: a) the person or partner is a practising member of a religious society or order whose beliefs are incompatible with using electronic communications or keeping electronic records, or b) for any reason (including age, disability or location) it is not reasonably practicable for the person or partner to use electronic communications or to keep electronic records.
Reports and submissions A taxpayer will have to make six or more submissions per year to HMRC under MTD. These submissions do not all amount to a tax return or part of a tax return but each submission is an interaction between the taxpayer and HMRC, which clients may need help with.
The taxpayer (or tax agent on their behalf) must use electronic communications (i.e. approved software) to supply specified information about the business to HMRC. Regulations (not yet published) may set out exactly what financial information must be provided but HMRC has indicated that it will only require summary totals of income and expenses, not details of individual transactions.
For a partnership to be exempt from MTD reporting on the basis of digital exclusion, every partner in that partnership must be digitally excluded.
HMRC has said that a business with turnover under the VAT threshold will be permitted to submit just two figures: total income and total deductible expenses for the business, which is equivalent to the current three-line accounts concession. However, the requirements for keeping digital records mean the taxpayer has to keep a more detailed breakdown of expenses (see Digital Records).
Each update will transmit year-to-date figures to HMRC, in a similar fashion to the submissions made under RTI for employees’ pay and deductions. This allows HMRC to reflect back to the taxpayer an indication of the tax liability which has accrued on their profits made so far (see stage 4 in Stages of MTD Reporting).
This update process should be an automatic data transfer from the taxpayer’s accounting software, to their accountant’s software or directly to HMRC. The taxpayer and their accountant won’t have to use the same brand of software. For example, a client could use Product X from which summary data is imported into a practice product for adjustment and submission. Thus, no matter what products their clients use, all updates and End of Period Statements can be handled in a consistent manner. It is in this way that spreadsheets will operate to deliver the required summary data.
There will be an option to make accounting adjustments at this stage but no obligation to do so. Accountants will need to decide how much checking to do on this data before it is submitted to HMRC.
The update does not constitute a ‘tax return’ as the taxpayer is not making a declaration that the information is complete or correct. However, the draft legislation (TMA 1970, sch A1, para 13(5)), says that regulations may provide:
“that information provided must meet standards of accuracy and completeness set by specific or general directions given by the Commissioners, and
that failure to meet those standards may be treated as a failure to provide the information, or as a failure to comply with the requirements of the regulations.” This indicates that it won’t be acceptable to provide estimate figures as a periodic update but until the regulations are published we do not know what standards of accuracy or completeness will be required.
HMRC have said there will be no penalties for submitting incorrect data as part of an update but there will be penalties for submitting an update late or not at all (see Penalties).
The update must be submitted within one month of the end of the period or interval for which the accounting data was collected. The taxpayer can provide updates on a more frequent basis, and at irregular intervals, but each update must be provided no more than three months after the last update was submitted. Normally the updates will be provided quarterly.
End of period statement
This is the process of finalising the accounts for the business. In practice, accountants will be able to prepare final accounts in their software, as they do today, and use this in the final figures for submission to HMRC.
Any accounting adjustments for accruals, prepayments and tax adjustments, such as disallowing entertaining costs, are made as part of the end of period statement. To make such adjustments, the accountant will have to see the detail of business transactions, not just the summary data submitted as updates. It may take more effort to correct data submitted as part of the periodic updates at this stage than it would to do that work at the time the periodic update is made. The timing of any checking process will be a decision for the accountant.
The taxpayer must confirm that this statement is complete and a correct report of their business results. It is equivalent to the self-employed pages of the SA tax return. It may be possible to submit the end of period statement alongside the last update for the accounting period but in view of the additional checking required extra time is permitted for submission.
The taxpayer must submit periodic updates for each trade or business they operate, so separate updates will be required for a lettings business and a trade.
The draft law has set the deadline for making the end of period statement as the earlier of: ten months after the accounting year end; or 31 January after the year end (see Example 3). This would leave a business with a 31 December year end with only one month to submit its end of period statement, which does not appear to be what HMRC intended.
The law that requires a person to make a personal tax return when sent a notice to file by HMRC (TMA 1970 s 8), is being rewritten to require the person to submit a ‘final declaration’ alongside the self assessment of tax due. Thus, the final declaration is the new name for the current SA tax return.
However, in practice the final declaration will be a different process to completing an SA return, as data already held by HMRC (e.g. business profits, employment income and bank interest) will be downloaded from HMRC. The taxpayer will not be able to change this downloaded data, as HMRC will require any changes to be made at source by the provider of that data (e.g. the employer to data provided through RTI). HMRC will need to consult on a dispute process to reconcile claims by taxpayers that the source data is incorrect.
The deadlines for submitting the final declaration are the same as exist for the current SA tax return: the later of 31 January following end of the tax year or three months after HMRC sends a notice to the taxpayer.
MTD will apply to partnerships where one or more of the partners is subject to income tax, so it will apply to mixed partnerships which have corporate members and to LLPs.
Partnerships are responsible for keeping the accounting records for business and the nominated partner is responsible for making the periodic updates on behalf of the partnership business. These updates don’t have to include a partnership share statement that divides the income between the partners. This is sensible as most partnerships don’t determine the distribution of income between the partners until the accounting period has been finalised.
I was asked by a client last week as to what tax reliefs were available where their home (Principle Private Residence) was let under a tenancy agreement, rather than sold when they moved. This was something that we had done a number of years ago, but I needed to brush up on the current rules.
Generally, there is no Capital Gains Tax (CGT) to pay on the sale of your home. But if you own more than one property, the second one is liable to tax.
You can choose which property you wish to be your main residence, provided this is done within two years of buying the second property. You can then switch your nominated “main residence” between the different properties as often as you like as long as you notify HMRC each time.
To qualify for Principal Private Residence Relief, you must have lived in the property and at one point it was your main residence.
Example of PPR Relief
You purchased a property in January 2000 and sold it in December 2016, owning it for 17 years. You lived in the property for 9 years, rented it out for 8 years. It produced a gain of £150,000.
As you lived in the property for 9 years, you would be able to claim PPR relief for this period and the relief would be £79,412 (9/17 x £150,000)
In addition to the above, you are also entitled to a further 18 months of relief, and this is regardless of whether the property was let to a tenant or remained empty. Therefore, the PPR is increased to £92,647 (10½/17 x £150,000)
There are further reliefs for those who are disabled or live in care homes and the 18 months is extended to 3 years, which was the old PPR relief until 2014.
If only part of a gain on the sale of a property is covered by PPR relief, then the additional period in which the property was rented out, letting relief can be applied to reduce the remaining chargeable gain.
The maximum amount of Letting Relief due is the lower of:
The amount of Private Residence Relief due
The amount of gain you’ve made on the rented period.
Example of Letting Relief
Using the example above: You will be entitled to PPR relief of 10½ years (9 years in residence and final 18months) out of the 17 years; this part of the gain is £92,647 (refer above).
Therefore, how much Letting Relief will be allowable?
Amount of PPR – £92,647
Gain in relation to renting of the property £70,588 (8/17 x £150,000)
The lower of these is £40,000. This brings the chargeable gain down to £17,353 (£150,000-£92,647-£40,000).
An individual’s personal Capital Gain Tax allowance for 2017/18 is £11,300. So, for a husband and wife joint ownership, with no other capital gains, as the chargeable gain is covered by the allowance.
One final point to note, that if the property is empty during the letting period, then the third criteria (gain relating to renting the property) is reduced to only the rented period!
I was recently involved in carrying out due diligence on grant applications being awarded by a regional LEP. For confidentiality reasons I will not go into great detail, but the experience has been interesting and I feel that I am in a position to provide guidance to organisations looking for grant funding.
There are 30 Local Enterprise Partners in the UK, and they provide grants normally through the local authorities. The grants can be for specific capital expenditure or to assist a business with its growth plans. The grants are normally subject to matched funding by the business and the objective of the grant is to generate employment. The range of grants can be wide and often confusing, and many chambers of commerce have appointed ‘business navigators’ to help their members to understand what is available.
I will leave the complexity of finding grants for the reader to investigate, and the purpose of this blog is to provide guidance on how to complete the application. So based on my experience in reviewing grant applications I suggest the following:
Understand what the purpose of the grant is. Read the application form! This sounds obvious, but if the grant is for capital expenditure, then it must be capital expenditure! At least 20% of the applications I reviewed for capital expenditure were at least in part for the funding of overheads. For example, annual salaries, marketing costs and even the cost of a contract hire car.
The grant will normally be supporting a project or single business activity. Identify and define clearly what this project is? In the case of a start-up business this may be difficult, as the project is the start-up. But for an established business you are investing in X capital expenditure, then it is important to understand the incremental benefits of the project / activity.
The jobs created from the grant funding need to clearly relate to the project / activity. If you are building new facilities, then it is the jobs created in that facility. Not staff that would be recruited as part of your normal business activities.
Matched funding is normally required with these applications. Demonstrate that the funding is available. Provide evidence of any loans that have been agreed for the project. If it is from reserves, prove that cash is available in the business.
Keep your application simple and understandable. Many applicants seem to believe that the more information you provide the better chance of getting the grant. If the application form asks for a business proposal and states in a maximum of 1,000 words, then 2,000 words is not helping.
In some cases I found applicants ‘cut and pasting’ from an old business plan and other data into the application form. This resulted in a long confusing and incongruent statement, not helping me as the reviewer and therefore not helping the business to get the grant! It is better to have a shorter but clear and concise statement of the business proposal. Sometimes it is more difficult to be concise.
Be honest in the application. If your company has a short-hold tenancy which is owned by the Directors’ pension fund then state it on the application form. When an organisation is looking to spend £100K on a building that is on a short lease it is illogical. But less so if the Directors own the building through their pension fund.
Financial records. If you are applying for grants and other funding ensure that your financial records are up to date. Do not wait for the statutory due dates. The more up to date the better! If you have good management accounts, then include them in your application.
Financial projections. This was the most difficult area for most applicants. The quality of the financial projections was often insufficient for the purpose of the application. Often VAT was wrongly accounted for in the P&L and cash flow forecasts. If a balance sheet is submitted make sure the cash balance agrees to the cash flow projection? This is the area where getting help can be most beneficial. Use your Accountant or contact us at the Helpful Bean Counter Contact us
If the cash flow generates a significantly high cash balance, this must be support by high profits! Cash is Profit in the long to medium term. So very high cash balances often implies that costs are not fully understood or recognised!
The worst characteristic is overly complicated analysis which has not been summarised. The business model can be complicated, especially if it is a financial or commission based product. I had one application that modelled the business over 36 months, but produced no annual summaries.
Provide percentages for Gross Profit and Overheads. Make sure these are consistent with the developments in the business plan. For example, if the intention is to outsource production.
Try to identify the incremental benefit of the project. If it is generating employment, ensure that this is reflected in your forecasts.
I am an Accountant and I would be naturally critical of the financial projections. But if you are applying for a grant of say £25K, surely it is important to get the logic in your financial projections to reflect the assumptions in your business plan.
The first stage in assessing the grant application was for the business advisers who carried out the due diligence to present their views to a small committee. During the review that I was involved in we had less than 3 hours to assess 70 applications and we reduced the number of application for the final review to only 22.
So if you want to be successful it is important that you follow the above guidelines and ensure that your application is easily understood and can be explained. Before your application is submitted it is important that it is fully challenged. If you don’t have a business adviser, then get as many people (staff, managers and others) to review the application and answer the following questions:
Describe the Project?
How does in fit into the business plan?
Does the application comply with the requirements of the grant?
Are the financial projections consistent with the business plan?
Have all questions been answered?
Remember quality of answers rather quantity of data submitted
These are my personal observations from carrying out a review of LEP grant applications. I am more than happy to help anyone applying for a grant.
Making Tax Digital – The views of the Helpful Bean Counter
The reasons for the change according to HMRC’s website are the following:
Making Tax Digital (MTD) is a key part of the government’s initiative to transform HM Revenue and Customs (HMRC) into a world-leading, digital tax authority, reducing the burden for individuals and businesses to keep on top of their tax affairs, with digital tax accounts meaning the end of the annual tax return for millions.
The majority of businesses want to get their tax right, but the recent tax gap figures show too many find this hard. The amount of tax not collected due to taxpayer error and carelessness has risen to over £8bn a year.
HMRC needs to do more to help businesses get their tax right up front rather than tackling them once things have gone wrong. That will reduce the likelihood of errors, lowering the chance of unwelcome compliance checks and giving businesses greater certainty.
The introduction of digital record keeping and quarterly updates for the majority of businesses will take out around 10% of error, and lay the foundations to go further with digital nudges and prompts to help improve voluntary compliance. It will also give businesses a clearer view of their tax position in-year.
MTD also brings the tax system into line with what businesses and individuals expect from other online service providers: a modern digital experience.
Last year more than one million small businesses accessed digital help and support from HMRC.
The government believes that, for the majority of businesses, the transition to the new system will be straightforward because they already use digital tools on a regular basis, for instance, online banking, and and/or keeping their records digitally and sending HMRC data quarterly, for example, Value Added Tax (VAT) returns.
Overview from the Helpful Bean Counter
The above are the views expressed by HMRC. Do you agree? Or do you feel this is another step towards more State control and bureaucracy? I will try to keep our comments as clear as possible, but this is a major change and the legislation is complex.
MTD will be introduced over the next 4 years. Unlike most tax and legislative changes, it is normally the larger organisations that implement the change first. With MTD the Government has highlighted the tax gap or shortfall being due to small businesses, and they are the organisations that will be affected by the change first. This includes unincorporated businesses (sole traders / partnerships) and landlords. Please refer to our comments on the implementation dates.
The most significant impact will be on those businesses that keep basic accounting records. For example, a trader that maintains a simple spreadsheet and a file of invoices, or where we receive a bag of receipts and if we are lucky a few bank statements. This will no longer satisfy the requirements of HMRC!
All businesses, except those defined as small (Sales less than £10,000 per annum), must keep records that record individual customer transactions. An exception is made for retailers, who are only required to keep daily cash takings! All records must be connected to a digital record, such as your bank account.
Based on these records you will need to provide HMRC with quarterly financial information via their online website. At this point in time we have not been able to determine the information that will be required, but it is reasonable to assume it will be include basic categories of income and expenditure, and some balance sheet information, such bank balances.
So I hope you agree this is a significant change and will require even very small businesses, such as landlords, internet traders, small market traders, building trades and many hobby based businesses to keep up to date accounting records. All records must be connected to a digital record, such as your bank account.
HMRC would like to see all businesses with their own accounting systems. In anticipation of MTD most of the accounting software companies have products that are aimed at the small company market. Many of these are cloud accounting packages, which can be linked to the business bank accounts. They can also prepare customer invoices and record digitally costs and other expenses. HMRC have also agreed that spreadsheets, such as MS Excel can be used, so long as they are able to record digital bank transactions and comply with their standards (to be announced!)
We feel it is important that you contact your Accountant before MTD is introduced to discuss the best options for your business to record their accounting transactions. We can provide advice on most of the cloud and non-cloud accounting packages.
The implementation of MTD(following changes in the 2017 Budget)
I will ignore involvement in the pilot, although if we have clients who want to get involved we are willing to help.
The first key period is April 2018. This will be for those unincorporated businesses (not companies) whose sales are above the VAT threshold, which in the tax year 2017/18 is £85,000. These businesses and landlords will have to provide a quarterly return to HMRC of the information required under MTD commencing from the start of their accounting period, which is called the staging date. For example, if their accounts are prepared to the 31 August, then the first MTD return will be for the quarter to 30 November 2018.
The next key start date is April 2019. Firstly, all unincorporated businesses and landlords with sales over £10,000 will need to comply with MTD. Secondly, all businesses (including companies) will need to comply with MTD if they are VAT registered.
For accounting period commencing after April 2020 all companies will have to comply with MTD.
As already stated MTD will require all business categories to provide quarterly digital financial information to HMRC. In addition to MTD the following tax information will also be required digitally:
April 2018 starters – Will also provide information for Income Tax purposes, such as self assessment.
April 2019 starters– Companies registered for VAT will only provide VAT information. Unincorporated businesses will provide Income Tax and VAT.
All Companies from April 2020 will also provide Corporation Tax digitally.
It is assumed that quarterly MTD returns will need to be prepared by the same deadline as for the VAT returns. Within 5 weeks of the quarter end. The business will also prepare an annual return, as well as complying with other reporting requirements, such as Companies House submissions. The final annual position must be submitted to HMRC no later than 10 months after the end of the accounting period.
We will keep our clients aware of the actual reporting deadline once they are announced.
Key implication for our clients to consider
Responsibility for compliance with MTD is with the business owner, rather than your Accountant. We are happy to discuss with you how MTD will impact on your business.
How to maintain your records.
You must keep a record of all your business transactions. In many cases the primary record will be your business bank account, and should be directly linked to your accounting records. Based upon current information from HMRC there is no requirement to hold scanned images of invoices, sales or purchases. For many businesses it is suggested that they use an accounting package to hold your transactions. We can help you evaluate what is the best solution for your business, from a regularly updated excel spreadsheet to a cloud accounting package, such a Xero, Sage or Quickbooks (and many others).
Do I need to consider changing my accounting year end date?
There may be some advantage in changing your accounting period before your staging date (the date you start to prepare quarterly MTD information), as it could delay the start of the MTD reporting. The basis or accounting period will however be apportioned over the tax period, so it is unlikely to create any tax saving.
It was mentioned during the HMRC webinar that they are considering removing the basis period for unincorporated businesses, so that your accounting period would be the same of the tax year.
Relationship with local adviser / accountant
The fundamental change is that all businesses need to keep the accounting records up to date. Not a data gathering exercise at the year end! By keeping the records up to date and reporting financial statement on a quarterly basis, many businesses will require a closer relationship with their Accountant. It is hoped that the closer relationship will be of benefit to both parties
Increase in Accountants fees
There will be more involvement with the client and the additional reporting requirements may involve increasing our fee. We hope to counter to this by improving your book-keeping processes so that the records are up to date and this should simplify the year end reporting
For many smaller clients, the relationship with their Accountant is only once a year. This obviously will change, unless the client is able to deal with the quarterly reporting. We believe it would be reasonable to move our clients onto quarterly billing.
To sum up, this is a significant change in the reporting requirements of small businesses. Although, MTD does apply to larger companies from April 2020, they already have more comprehensive reporting requirement and will either employ that own tax advisers or use the services of the large firms of Accountants. As stated by the HMRC objectives their aim is to find the missing £8bn not collected caused by ‘tax payer’ errors, and their target is small business and landlord sectors.
It will also be a cultural change for small business owners, in that they must keep their records up to date. Real time to use the jargon. Many small businesses keep a basic record, perhaps they list their receipts and payments on a simple spreadsheet. Not all small businesses have a dedicated bank account, and the transactions are processed through a mixture of personal bank accounts and credit cards. This will need to change if the information is to be reported upon quarterly to HMRC. It is the view of the Helpful Bean Counter that all businesses need to look at their processes for recording transactions. Certainly, it will be helpful to have a dedicated bank account and it may be worth considering using an accountancy package to record all the transactions. We can provide advice on improving your procedures.
On a recent HMRC webinar on MTD a question was asked why HMRC wants quarterly financial information, as at least in the short term as it is not being used for tax collection purposes. Their view was a little confused, but their main reason was to ensure that businesses owners maintain upto date accounting records.
The 2017 budget has already delayed the start of MTD for businesses whose income is below the VAT registration threshold. We would not be surprised if there are not further delays. Once the processes are established there will be severe penalties for non-compliance, but the early message from HMRC is that they will be relaxed during the early stages of MTD. But we at the Helpful Bean Counter believe it is important that our clients carefully consider the implications to their business now to ensure that they have the right processes to comply with the requirements.
Key points effecting Small Businesses in the Spring Budget 2017 and the revised introduction of making tax digital
Due to the snap election, some of the measures mentioned in the Budget have been put on hold. These include the annual tax free dividend allowance being reduced from £5,000 to £2,000 in 2018/19. The Money Purchase annual allowance being cut from £10,000 to £4,000 from April 2017. And finally, the reform of non-doms has been removed from the Finance Bill.
There is also little mention in the Bill of the digital tax changes for small businesses, which may be delayed further. However, it is likely that these measures will be introduced if the Conservatives are successful, so our blog still contains the changes announced in the Spring Budget.
Changes announced in the Spring Budget
Personal allowance rises to £11.5k
The personal allowance will rise by £500 to £11,500 and the higher rate threshold will increase by £2,000 to £45,000. (Lower if you are in Scotland!)
Vehicle Excise Duties (VED) rates
Have increased in line with the RPI.
Approximately 98% of individuals owning a car first registered after March 2001 but before 1 April 2017 will not have to pay no more than £5 extra VED and owners of vans and pre-2001 cars will pay £5 extra.
But note the rate of VED has significantly increased on new vehicles registered after the 31 March 2017 – Introduced in the previous year’s budget.
VAT registration threshold
From 1 April 2017 the VAT registration threshold will increase to £85,000 from £83,000 and the deregistration threshold will rise from £81,000 to £83,000.
The Chancellor has announced a cut in the dividend allowance from the current £5,000 to £2,000 from April 2018. Note: £5,000 was only introduced in the tax year 2016/17!
The move will hit shareholder directors in business who frequently use dividends as part of their pay packages.
The rates of tax paid on dividends is linked to the personal allowance, starting at 7.5% for basic rate, 32.5% for higher rate, and 38.1% for additional rate taxpayers.
Corporation tax rate
From the tax year 2017/18, the corporation tax rate will be cut to 19%, which reflects a massive fall from the high of 28% before the 2008 crash. The new rate will come into force from 1 April.
The rate will be cut to 17% in 2020.
Note: The new rates of income and corporation tax are only applied once the legislation is passed.
Making Tax Digital
The Chancellor Philip Hammond has delayed the introduction of Making Tax Digital for sole traders, landlords and the self employed operating under the new £85,000 VAT threshold
The Chancellor’s announcement means that sole traders, the self employed and buy-to-let landlords with income of less than the current £83,000 VAT threshold will not have to start quarterly reporting until 2019, a one-year deferral from the planned April 2018 introduction date originally set out in the recent consultation feedback documents issued by HMRC at the end of January.
There is still no confirmation of whether the £10,000 threshold for Making Tax Digital will be raised although this will be confirmed on 20 March when the draft Finance Bill legislation is issued.
Businesses over the £85,000 VAT threshold will have to report under quarterly reporting from April 2018.
Significant changes are being made to the VAT Flat Rate Scheme from the 1st April 2017.
For many contractors who incur limited direct costs, the scheme has provided a great cash benefit. For example, if the contractor invoiced a client £15,000 in a VAT quarter, the contractor would have have charged the client a further £3,000 in VAT. If we use the example of an IT contractor with a FRS rate of 14.5%, then the contract would pay over to HMRC (18,000 x 14.5%) £2,610. Therefore the contractor would keep £390.
If the contractor incurred very little VAT chargeable costs, then the FRS can provide a significant cash benefit!
The rules stated below for the Flat Rate Scheme still apply, but only if the business satisfies a new test as to whether it is a Limited cost business definition (LCBD). If it falls within the definition in each VAT period, then the FRS is restricted to 16.5%. In the IT contractor example, this would restrict the ‘cash benefit’ to only £30!
The new criteria will apply if the contractor’s VAT inclusive expenditure on goods is :
below 2% of their VAT inclusive turnover; or
more than 2% of their VAT inclusive turnover but less than £250 per quarter (£1000 per annum)
But what VAT expenditure is allowable for the 2% test?
It is only expenditure that is directly related to the goods and services provided. It does not include capital expenditure, or expenditure on services, such as advertising or promotion, or even the cost of your accountant!
I have attached some links below to HMRC websites fyi. The Helpful Bean Counter is also willing to help you if you require more information.
If you are not restricted by the new test, then the FRS rules stated below can be applied:
The flat rate VAT scheme is an incentive provided by the government to help simplify taxes and means you charge VAT on your invoices (current rate 20%)
….but only pay back to HM Revenue and Customs at a lower rate!
for example IT Contractors (rates differ depending on your profession/trade – see table below) the rate in your first year is just 13.5% of the gross amount and 14.5% in subsequent years (you receive a 1% discount in your first year).
This provides the following additional income (based on a 45 week working year):
£200 per day contract – £1,710 extra per year
£350 per day contract – £2,992.50 extra per year
£600 per day contract – £5,130 extra per year
The FRS is therefore the chosen scheme for most Contractors, Freelancers, Consultants and Interim Managers. It is also the scheme that is recommended for businesses that have very few VAT chargeable purchases and expenses i.e. don’t buy much stock.
Important notes about the FRS:
If you estimate that your annual turnover excluding VAT will exceed £150,000 in your first year, you shouldn’t join the scheme.
If your annual turnover exceeds £230,000 of VAT inclusive revenue in subsequent years you must come off the scheme.
Companies on the flat rate scheme are unable to claim back any VAT on purchased goods and expenses for their business.
You can however reclaim VAT on capital asset purchases over £2,000, for example a PC. Providing all the capital purchases are on the same receipt such as a PC, printer and scanner you can claim the VAT back on these items. You cannot however buy a PC one month for £1,500 then a printer the next month for £300 and a scanner the month after for £200 and add them together, they must all be on the same receipt.
Like standard VAT, the flat rate scheme still requires you to complete a quarterly VAT return form (online only). You will need to charge the standard VAT rate, currently 20%, to your invoices, however…rather than accounting for the VAT on every payment, when you do your quarterly report you will only pay a single flat rate percentage on your turnover of each quarter.
The VAT percentage you pay is considerably lower than that of the standard VAT rate,(see below table for a full list of the standard rates depending on your profession) you then keep the difference as your profit. See example below based on a Limited Company specialising in IT:
Net amount you invoice your client
VAT charged on top to your client (20%)
Flat rate VAT 13.5% (this includes a first year discount of 1%)
VAT to be paid to HMRC – 13.5% of £6,000
VAT received from client
Profit for you i.e. what you get to keep
Advantages of using the Flat Rate Scheme
The ability to earn money from VAT, you can earn thousands of pounds extra each year simply out of VAT (the government does this as the FRS is simple for them to manage and you are in affect acting as a tax collector).
A reduced amount of paperwork to handle as you are not submitting any of your input costs to HMRC all you need to do is keep the receipts from your purchases.
If you are a new business, using the flat rate scheme in your first year, you receive a further 1% decrease on the overall percentage tax you pay each quarter.
Disadvantages of using the Flat Rate Scheme
If you are buying lots of stock or have high VAT chargeable expenses you will miss out on reclaiming the VAT.
If you are incurring high travel and hotel costs whilst carrying out a contract. In some situations it may be more beneficial to not be on FRS.
If you decide to stop your FRS election it is not possible to go back to the scheme for 12 months. So only change your election if there has been a significant change to your circumstances.
Hopefully we’ve now covered some of the basics of the Flat Rate VAT Scheme, however should you have any further questions please do not hesitate contact us on 02393 110395 or email: firstname.lastname@example.org
Flat Rate Scheme percentage rates from 2nd January 2014:
Category of business
Accountancy or book-keeping
Any other activity not listed elsewhere
Architect, civil and structural engineer or surveyor
Boarding or care of animals
Business services that are not listed elsewhere
Catering services including restaurants and takeaways
Computer and IT consultancy or data processing
Computer repair services
Dealing in waste or scrap
Entertainment or journalism
Estate agency or property management services
Farming or agriculture that is not listed elsewhere
Film, radio, television or video production
Forestry or fishing
General building or construction services
Hairdressing or other beauty treatment services
Hiring or renting goods
Hotel or accommodation
Investigation or security
Labour-only building or construction services
Laundry or dry-cleaning services
Lawyer or legal services
Library, archive, museum or other cultural activity
Manufacturing fabricated metal products
Manufacturing that is not listed elsewhere
Manufacturing yarn, textiles or clothing
Mining or quarrying
Real estate activity not listed elsewhere
Repairing personal or household goods
Retailing food, confectionary, tobacco, newspapers or children’s clothing
Retailing pharmaceuticals, medical goods, cosmetics or toiletries
Retailing that is not listed elsewhere
Retailing vehicles or fuel
Sport or recreation
Transport or storage, including couriers, freight, removals and taxis
Many freelancers and contractors are attracted to the idea of an Umbrella Company to maximise their earnings.But the Personal Service Company can achieve the same tax advantage, plus you can benefit from lower monthly administration costs and other benefits described below.
For example, as a freelance journalist you will receive an income probably from a small number of clients, and possibly only one. The umbrella company will pay you a salary up the national insurance threshold, reimburse you with any direct expenses and they will pay any remaining balance from the remaining income as a dividend.
The personal service company ( Jargon Busting ) can operate in the same manner in that you can achieve the same salary, up to the national insurance threshold and you can take dividend. The main difference is that the dividend that you can take is based on your estimated profit for your financial year, rather than just the period you have worked.
In the personal service company the director will have a loan account, which following HMRC rules must not be overdrawn (debtor in the company’s accounts) at the end of your financial accounting period and technically at the end of the fiscal tax year 5thApril. Therefore if your income varies during the year, due to holidays or other seasonal factors, then as long as there is cash in the business, you can temporarily overdraw your account.
A personal service company can register for VAT. So as long as your clients can recover VAT there should be no impact on your business and the additional charge will improve your cash flow. Under a standard registration you will be able to recover VAT on your purchases and expenses. Not just the direct expenses, but small capital purchases such as a new computer! In addition you can register to be assessed on the fixed rate scheme. Please refer our blog on the Flat Rate Scheme. Although an umbrella company can register for VAT, it can not operate under the Flat Rate Scheme, as its registration would be for all its clients and its own costs.
If most of your direct expenses are reimbursed by your client then you are unlikely to have a high level of recoverable VAT. The flat rate scheme provides a simple calculation for VAT payable, but this also allows for a standard amount of recovery based upon your trade. In simple terms, if you invoice your client 20% VAT, you may only pay over to HMRC 14%, depending on the rate set by HMRC for your trade. The remaining 6% would stay in your business. You also have the cash flow benefit of the VAT received, as there is a delay in paying the VAT to HMRC. As the VAT period is normally 3 months, plus a further 5 weeks for payment, the average cash flow benefit is 2 months.
I will leave the technical details for now, but The Helpful Bean Counter will provide a full VAT service for your personal services company as part of our monthly charge.
Another benefit of the personal service company is that you can treat your spouse as a shareholding Director and therefore take a Dividend or even a Salary if they are contributing to the activities of the Company. You may also incur more general costs, such as running a small office from home, or travel and expenses not directly involved in a specific contract assignment. For example going to networking and other events to promote your services. A good Accountant can advise on this.
The umbrella company is definitely an efficient way to maximise your earnings. But it is very process driven and the writer believes that the longer-term holistic approach of the personal services company is more efficient and flexible. The umbrella company process is really just a payroll service that pays a regular dividend. Whereas once the personal service company has been set-up it can be used to develop other business activities. For example, my company Wordsfinance Limited was used as my own personal service company and this is now used for our accountancy practice, The Helpful Bean Counter. In fact, the wider the business activities are, is a good defence against IR35. New focus on IR35
The Government and HMRC are closely monitoring the use of both umbrella companies and personal services companies. Again please read my comments in New focus on IR35
I have only briefly tackled many of the issues in this short blog, but there are still significant benefits in running a personal service company. Changes in the structure of employment over the next decade will result in more workers becoming freelancers, contractor or whatever word the sector uses to describe this form of flexible working. The avoidance of taxation is not illegal, but it is increasingly becoming less morally tolerated. The objective in the writer’s view is to keep within the boundaries of what is morally right and I believe that a well-run personal services company is better in the long term than an umbrella company arrangement.
The main disadvantage of a personal service company is that it requires good administration and accounting. Busy freelancers do not have the time or probably the inclination to do this. But this is the reason why our proposition at the Helpful Bean Counter is appropriate for you. If you want more information, please contact Martin Samuel at email@example.com or 07989 011240 / 02393110395
There are several tax areas which rely on being able to determine whether a particular vehicle is classified as a car or a van:
Benefits in kind, where car and fuel benefits are linked to a scale of CO2 emissions, whereas vans are on flat rates.
Capital allowances, where vans qualify for annual investment allowance, whereas cars enter the main or special pools and qualify for writing down allowance only. Cars with qualifying emissions not more than 75g/km are entitled to 100% first year allowance.
VAT where input tax can be claimed on vans but not on cars (except in some very specific circumstances).
Car benefit definitions
Every mechanically propelled vehicle is a car, unless it is:
a goods vehicle
a motor cycle (essentially a vehicle with less than four wheels)
an invalid carriage (normally obvious)
a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used (not many of these about)
A goods vehicle is defined as a vehicle of a construction primarily suited for the conveyance of goods or burden of any description (excludes people). The test is of construction, not use. It is only if the primary purpose for which the vehicle is constructed is the carriage of goods that it will escape from being a car.
For benefit tax/NIC and VAT purposes, one must look at the construction at the particular time in question (time of transaction or in relevant tax year). VED is based on type approval at the time the vehicle is first registered.
A vehicle whose design weight exceeds 3,500kg is not a van, but a heavy goods vehicle.
Double cab pick-ups
These vehicles were very popular a few years ago when the van benefit in kind was much lower than the car benefit. The substantial increase in van benefit from April 2007 made this less of an issue, but there are still potential savings to be made.
On the surface many double cab pick-ups appear to be equally suited to convey passengers or goods. However, when all factors relating to their construction are taken into account, a number of vehicles within this category do have a predominant purpose of carrying goods or burden. Each case will depend on the facts and exact specification.
As a general rule, HMRC accepts that a double cab pick-up with a payload of 1 tonne (1,000kg) or over is a van for benefit purposes. The 1 tonne rule applies only to double cab pick-ups, not to any other vehicle.
Capital allowances definition
This is almost identical to the benefits definition. Hire cars, taxis and driving school instructor cars are specifically included in the definition of cars.
VAT input tax recovery
VAT rules say that a car is any motor vehicle of a kind normally used on public roads. It must have three or more wheels and meet one of the following conditions:
It must be constructed – or adapted – mainly for carrying passengers.
It must have roofed accommodation behind the driver’s seat. This must either be fitted with side windows already or be constructed – or adapted – so that side windows can be fitted.
In addition, the following are not cars for VAT purposes:
vehicles capable of accommodating only one person or suitable for carrying twelve or more people including the driver
caravans, ambulances and prison vans
vehicles of three tonnes or more un-laden weight
special purpose vehicles, such as ice cream vans, mobile shops, hearses, bullion vans, and breakdown and recovery vehicles
vehicles with a payload of one tonne or more
Problem car-derived vans
These vehicles, from the outside, still maintain the appearance of a car. However, from the interior the vehicles have the appearance and functionality of a van – the rear seats and seatbelts have been removed along with their mountings, the rear area of the shell is fitted with a new floor panel to create a payload area and the vehicle’s ‘side windows’ to the rear of the driver’s seat are made opaque. Such vehicles will be classified as vans, but all the criteria are very strictly applied.
Vans with rear seats
Some vehicles look like vans and don’t have windows in the sides behind the driver. But they do have additional seats for carrying passengers behind the front row of seats (or they’re designed so they can be fitted with them). They’re sometimes known as combination vans or combi vans.
HMRC considers that this type of vehicle is a commercial vehicle for VAT purposes if it meets either of the following conditions:
It has a payload of more than one tonne after the extra seats have been added.
The dedicated load area (the load area that’s completely unaffected by the extra seats) is larger than the passenger area. This means that the main use of the vehicle is for carrying goods rather than passengers.
If it meets either of these conditions then the vehicle is a commercial vehicle for VAT purposes and you can reclaim the input VAT if you follow the normal rules for reclaiming VAT.
HMRC has produced a list of car derived vans and vans with rear seats showing whether they’re classed as a van (commercial vehicle) or a car for VAT purposes:
A surge in rejections of company accounts prepared under the new UK GAAP rules, identified by ICAEW, has been refuted by Companies House, which reports that only 2.5% of accounts have been returned, despite hitting the peak reporting period
However, a spike in calls to ICAEW helplines have been related to rejection of accounts filed under the new FRS 102 Financial Reporting Standard, although this may be a sign of first-year adoption teething issues.
According to Companies House, the most recently available figures for August show that 206,923 sets of accounts were filed and out of these 5,237 sets were rejected (2.5%).
However, this is the peak filing period so it is too early to say whether this number will increase over the September/October reporting period.
The rejection process is largely a manual process; the electronic system flags potential errors to document examiners at Companies House, who then make a decision on whether the accounts are acceptable or not. If the accounts are rejected they are sent back to the company along with a letter giving full details of the reason that they were rejected and what they need to do to correct this.
Despite criticism of the complexity of the new accounting rules and transition arrangements, as highlighted in a recent ICAEW FAQ on filing tips, Companies House said it has ‘not actually detected an increased “failure rate” due to recent changes to accounting legislation and standards’.
In August the main reasons for rejecting accounts were:
Number of rejections
Made up date duplicate
Accounting reference date/made up date absent/incorrect
Balance sheet signature missing
Invalid company name
Company name/number mismatch
Company name mismatch
Source: Companies House
A number of significant changes to old UK GAAP with the introduction of FRS 102 has resulted in an overhaul of current accoumting practice. In addition, the number of companies eligible to file abridged accounts is far higher than the estimated 11,000, set out by government in the original impact statement. Roughly 1.9m companies filed accounts of this type in 2015/16.
Abbreviated accounts abolished
The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 abolished abbreviated accounts. This means that abbreviated accounts cannot be filed for accounting periods beginning on or after 1 January 2016.
Introducing abridged accounts
The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 also introduced the concept of abridged accounts. Abridged accounts contain a balance sheet that contains a sub-set of the information that is included in a full balance sheet. Likewise, the profit and loss account may also contain a sub-set of the information that is included in a full profit and loss account. Only small companies and LLPs may prepare abridged accounts.
Abridged accounts will be identified by a statement containing wording to the effect of the “members have consented to the abridgement”.
‘We have no way of knowing how many companies will opt to take advantage of abridgement but the number of companies that are eligible is roughly comparable with the number of companies that can claim audit exemption as a small company,’ stated Companies House.
Small companies can choose to not file the profit and loss account and/or the directors’ report. This watered down version is known as ‘filleted accounts’. Under this set-up, if a small company chooses not to file the P&L account or the directors’ report, the balance sheet submitted to Companies House must reflect this.
Companies House guidance to be updated
Although Companies House has not reported a significant change in reporting rejection numbers, it is currently working to improve the electronic filing options for accounts, which assist the user and provide built-in validation. This helps ensure that accounts are accepted first time.
It will also issue new guidance for company preparers to help customers meet their filing requirements. In response to questions about the new system of accounts, it also published a blog on 6 October to provide further advice to small companies.
The Helpful Bean Counter is pleased to offer a free to download 5 year financial forecast model.
Please follow the attached link: http://www.helpfulbeancounter.co.uk/financial-model-template/
We are also keen to help you modify the financial forecast model to suit your business. Our fees are very competitive! We offer a free consultation to get to know your business, and for most SME businesses we can provide a full financial forecast for less than £2000, plus VAT.
For EIS and SEIS purposes a company needs to meet a number of requirements at the time of accepting investment and, unless specified otherwise must continue to meet these requirements for a period of at least three years. What requirements must the company meet?
The trading requirement
A company must exist wholly for the purposes of carrying on a ‘qualifying trade’, ignoring any insignificant or incidental activities.
A qualifying trade is one which is conducted on a commercial basis with a view to profit and doesn’t consist to a substantial extent of ‘excluded activities’. There are a number of ‘excluded activities’ including: dealing in land and financial instruments, dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution, certain financial activities, receiving royalties or licence fees other than where the company has created the whole or greater part (in terms of value) of a relevant intangible asset, legal or accountancy services, property development, farming, forestry, operation of hotels or nursing homes, subsidised generation of electricity and the provision of services to another business carrying on excluded activities where a person holds a controlling interest in both the company and the business to which services are being provided.
If the company has any subsidiaries, they must all be ‘qualifying subsidiaries’. A qualifying subsidiary is one in which more than 50% of the ordinary share capital is owned (directly or indirectly) by the company issuing the shares.
Control and independence
The company cannot be controlled by another company.
UK permanent establishment
The company must have a permanent establishment in the UK. Permanent establishment is defined for the purposes of EIS and SEIS and is different to the wider meaning for Corporation Tax.
Use of money raised
For EIS – the company must employ the money raised for a qualifying purpose within two years.
For SEIS – the company must spend the money raised for a qualifying purpose within three years; the term ‘spend’ is technically different to ‘employ’ used in the EIS rules.
The company’s gross assets (or if it has qualifying subsidiaries the assets of the group) must not exceed:
For EIS – £15,000,000 immediately before the issue of EIS shares and £16,000,000 immediately thereafter.
For SEIS – £200,000 immediately before the issue of SEIS shares.
Numbers of employees
The company (or if it has qualifying subsidiaries the group) must have less than:
For EIS – 250 employees at the date of issue of the shares.
For SEIS – 25 employees at the date of issue of the shares.
Some specific additional conditions for a company seeking SEIS status include:
The company must be carrying on, or intending to carry on, a new qualifying trade. That is a trade which is the first trade of the company and that begins no earlier than two years before the share issue.
A company can’t have raised money via the EIS or from a Venture Capital Trust before.
SEIS and EIS Tax Relief Key Points
The government has created two schemes of generous tax reliefs for business investors. The EIS was introduced in 1994 and followed its predecessor the Business Expansion Scheme. The scheme is designed to help small and medium sized businesses raise equity investment by offering investors a range of tax reliefs.
The SEIS was introduced in 2012 to focus additional tax incentives on early stage micro businesses.
EIS and SEIS Key Points for Consideration:
The schemes apply to investment in companies, and not to sole traders, partnerships or limited liability partnerships.
The amount that a company can raise under the EIS is up to £5,000,000 in any 12 month period. For SEIS the overall limit is effectively £150,000.
Both schemes offer a range of tax reliefs to investors.
Investment must be in shares of the company and not by way of any form of debt (under current law).
Companies who wish to use the schemes can apply to HMRC for advance assurance of EIS and/or SEIS status prior to accepting inward investment.
There are a range of conditions that an investee company must satisfy.
There are a range of conditions that an individual investor must satisfy.
The tax incentives offered under the EIS and Seed EIS are very attractive. The use of the schemes is restricted by various limits and qualifying criteria. The rules are complex and many of the rules require compliance for at least 3 years post investment.
If you would like more information on both these scheme, then contact Martin Samuel firstname.lastname@example.org
A quick update on the Chancellor’s Autumn Statement from the Helpful Bean Counter
£1bn broadband investment
Small businesses struggling with poor internet connections could soon be able to access a better connection after the chancellor announced an investment of more than £1bn into building out the UK’s digital infrastructure.
Wanting to make sure the UK is a “world leader” in 5G internet, Hammond said the government would be pursuing improvements in speed, security and reliability. Additionally, 100 per cent business rate relief will be provided for the next five years when it comes to new fibre infrastructure.
National Living Wage increase
Employers with staff on the lowest legal wage will now have to pay more after Hammond revealed in the Autumn Statement 2016 that the National Living Wage, the replacement to the National Minimum Wage, will go up from £7.20 to £7.50 in April 2017.
Back at the turn of the millennium the National Minimum Wage was £3.60. However, the Labour and Conservative governments have taken steps to increase it – with Labour planning for it to be £10 if the party comes back into power.
The tax-free personal allowance has also been increased, and will sit at £12,500 by the end of the current parliament. £11,500 from April 2017!
Increase to Export Finance funds
Small businesses looking to engage with export activities will soon have access to better financial assistance. UK Export Finance, an organisation with a mission to “ensure that no viable UK export fails for lack of finance or insurance”, is set to double in capacity.
This involves a double of “total risk appetite” to £5bn, increasing capacity for support in individual markets by up to 100 per cent and making sure more currencies are pre-approved for UK Export Finance assistance.
VAT – flat rate scheme
The government is shutting down what it called “inappropriate use” of the VAT flat rate scheme put in place to help small companies. The VAT flat rate scheme is an alternative way for small businesses to work out how much VAT to pay to HMRC each quarter.
Recently The Guardian revealed temp recruitment agencies were generating millions of pounds for participants by exploiting VAT rules that were originally designed to benefit very small businesses.
Instead, the government used the Autumn Statement 2016 to introduce a new 16.5 per cent rate from 1 April 2017 for businesses with limited costs, such as many labour-only businesses. This will, it added, help “level the playing field” and maintain the accounting simplification for the small businesses that use the scheme as intended.
Any budding entrepreneurs looking to carve out a business in the buy-to-let space could soon see fees previously levied on tenants transferred to them.
The government will be banning letting fees for private tenants “as soon as possible” after they have been seen to “spiral” despite regulation attempts.
The chancellor announced in his Autumn Statement 2016 speech that the doubling of rural business rate relief – completely removing the burden of business rates – would bring a “well-needed” tax break to small businesses that are the “lifeblood of their communities”. Increasing rural business rate relief to 100 per cent is expected to save qualifying businesses up to £2,900 every year in business rate payments.
If you wish to register for self-employment, then you must comply with the official HMRC procedures to ensure that you are paying the correct national insurance (NI) and income tax.
How does the government define self-employment?
HMRC will consider you self-employed if you are frequently trading goods or services, and take responsibility over the success or failure of your business. The government outlines two main types of self-employment models: a sole trader, and a business partnership.
Register as a sole trader
A sole trader is one person running a business as an individual. It is acknowledged as a relatively hassle-free way to test the water for people just starting out in business.
As a sole trader, after you register for self-employment, you are required to complete a self-assessment return each year. It requires you to keep records of each business transaction, as well as all expenses for your activity.
If your business has a turnover of over £83,000, then you are required by law to register for VAT.
The government allows sole traders that do not qualify for VAT the opportunity to register voluntarily. For example, if goods are sold to another VAT-registered company, then the sole trader can reclaim VAT.
For first-time sole traders that have not submitted a tax return before, the registration process begins on HMRC’s online registration portal.
To register for self-employment, sole traders are not required to submit their business name at Companies House – however, they are still subject to the same legal requirements. For example, suggesting a connection to government or local authorities, or using offensive or sensitive language without permission.
HMRC offers sole traders working in the construction industry the opportunity to register for the Construction Industry Scheme (CIS). CIS requires contractors to deduct payment from a sub-contractor, which then add to the worker’s NI and income tax contributions. If you are self-employed and working for a contractor, then choosing to register for CIS will see you receive a smaller deduction.
Register as a business partnership
An “ordinary” business partnership is a model of self-employment recognised by HMRC as shared responsibility between two or more people – or “partners” – of a business. Profits can be shared among partners, and each partner is required to pay their share of tax on business profits.
HMRC requires a nominated partner to submit a collective self-assessment tax return for the business, while each partner is responsible for a personal self-assessment tax return.
As with sole trading, an ordinary business partnership is required to register for VAT if it expects turnover of over £83,000 each year.
Self-assessment and VAT registration duties can be completed online at the HMRC website. Once a business partnership has registered for VAT, then HMRC must be notified each time a partner leaves the business.
Legal obligations are shared among partners, with each partner responsible for their share of business losses and any company expenses, for example, stock and equipment.
Similarly to setting up as a sole trader, ordinary business partnerships do not have to register under a name at Companies House, but the rules regarding government association remain.
HMRC has recently unveiled severe penalties under proposed new legislation seeking to target those intermediaries that provide tax avoidance schemes, and this may have implications for contractors and freelancers, and the use of Umbrella Companies ( Personal services company versus the Umbrella Company )
In the UK tax evasion is illegal, but tax avoidance is not! But HMRC and the Government continue to tighten measures against intermediaries or enablers that promote tax avoidance schemes.
Enablers of tax avoidance could face fines of up to 100 per cent of the tax the scheme’s user underpaid, HMRC has warned following new legislation unveiled in the Budget 2016 speech.
As it stands today, tax avoiders face “significant financial costs” when HMRC proves in court that an offence has taken place. However, the new changes target those aiding the tax avoidance, who have previously faced little risk.
The new tax avoidance laws are being consulted on by the government, but Jane Ellison, financial secretary to the Treasury, had a stark warning for those committing tax avoidance crimes. “People who peddle tax avoidance schemes deny the country of vital tax revenue and this government is determined to make sure they pay.
“These tough new sanctions will make would-be enablers think twice and in turn reduce the number of schemes on the market.”
The government is now calling for views from members of the public, representative bodies, advisers and promoters, as well as businesses and individuals who may have received marketing material, taken advice about, or used arrangements which seek to avoid tax.
HMRC and the government’s new target are the enablers of tax avoidance, believing that financial sanctions provide a “tangible response” by minimising the financial rewards those enablers would otherwise enjoy.
Enablers are described as those who design, promote and market avoidance. This could include independent financial advisors (IFAs) and accountants, but also could be company formation agents, banks, trustees or lawyers.
HMRC intends to start cracking down on those acting as a “middleman”, individuals arranging access and providing instructions to others who may provide evasion services, as well as those providing planning and bespoke advice on the jurisdictions, investments and structures that enable the taxpayer to hide their money and any income, profit or gains.
If an enabler helps ten people implement arrangements which are then defeated by HMRC in court, and each of those has underpaid by £1,000, then an enabler would receive a penalty equivalent to ten times £1,000 – £10,000.
HMRC’s plans do make it clear that the purpose of penalty provisions is to “influence behaviour’ by supporting those who try to meet obligations and penalise those who do not.
Our view at Freelance Us is to ensure that the schemes we operate are not only within the HMRC rules and regulations, but are also ethically correct today and in the future. The perception of the public is changing and Government is keen to ensure tax avoidance schemes are more transparent and pay higher levels of tax. Our objective is to maximise your earnings, but within the rules laid down for personal services companies.
Please contact Martin Samuel if you require any further information
The annual confirmation statement is a new filing requirement that was introduced on 30th June 2016. It has replaced the annual return (Companies House form AR01) but serves exactly the same purpose in a simplified format.
All private limited companies and limited liability partnerships (LLPs) registered in the United Kingdom must deliver at a confirmation statement to Companies House at least once every 12 months, even if the business is dormant.
What is the purpose of the confirmation statement
The purpose of the confirmation statement (Companies House form CS01) is to verify that important company data registered at Companies House and displayed on the public register is accurate and up to date. If any information held on record is inaccurate or out of date when the confirmation statement is due, the company should update the information on the relevant separate form beforehand, or at the same time as delivering the confirmation statement.
The confirmation statement is more straightforward than the annual return because there is no need to enter previously filed information if there have been no changes in the past 12 months. If your company details are all exactly the same and you don’t have any changes to report, all you need to do is ‘check and confirm’ the information held on public record and submit the statement.
Register of People with Significant Control
Companies registered before June 30th 2016 will have to include information about People with Significant Control (PSCs) in their first confirmation statement. The need for all companies to keep a PSC register at their registered office or alternative inspection location was introduced on 6th April 2016. Companies registered on or after June 30th will provide PSC information on their incorporation application form. This information should then be updated or confirmed annual when filing a confirmation statement.
What to include in a confirmation statement
To complete a confirmation statement, companies simply require checking the information registered at Companies House and confirming that it is accurate and up to date at that time. The data you will have to check and confirm includes:
Company name and registration number
Registered office address
Single alternative inspection location (SAIL address)
Location of the company’s statutory registers (i.e. registered office or SAIL address)
Information about each director – Full name – Former names used for business purposes within the past 20 years – Usual residential address – Service address – Date of birth – Nationality – Occupation
Information about each company secretary (if applicable) – Name – Former names – Service address
Principal business activities (Standard Industrial Classification (SIC) codes)
Name of each shareholder
Shares held by each shareholder – class, quantity, and details of any transfers
Statement of capital – total number of shares of the company – aggregate nominal value of those shares – aggregate amount (if any) unpaid on those shares (whether on account of their nominal value or by way of premium)
For each class of shares, you’ll also need to provide the: – prescribed particulars of the rights attached to the shares – total number of shares of that class – aggregate nominal value of shares of that class
Trading status of shares
Information about people with significant control (PSCs) – Name – Month and year of birth – Nationality – Country, state or part of the UK where the PSC usually lives – Service address – Usual residential address (this must not be disclosed when making your register available for inspection or providing copies of the PSC register) – Date he or she became a PSC in relation to the company (for existing companies the 6 April 2016 should be used) – Which conditions for being a PSC are met
Can I report changes using the confirmation statement?
You can report certain changes to your company data using the confirmation statement, just like you could with the annual return. The information you can update includes:
People with significant Control
All other information, such as amendments to officer’s details and the registered office, must be reported separately using the relevant Companies House form. You can file these forms and update the required information prior to, or at the same time as, filing your confirmation statement.
Confirmation statement filing deadline
You must file a confirmation statement at least once every 12 months. The due date is called the ‘confirmation date’, which falls on the anniversary of company formation or the ‘made up’ date of your last annual return. This is date on which you confirm that all information held on pubic record is correct.
Each year thereafter, your confirmation date will fall on the anniversary of your previous confirmation date. You have 14 days after this date to deliver the statement to Companies House
Do I have to file a final annual return?
If the made up date of your annual return was on or before 29th June 2016, you will be required to deliver a final annual return. You have 28 days after the made up date to file it at Companies House. Each year thereafter, you will deliver a confirmation statement.
If the made up date of your annual return was on or after 30th June 2016, you do not have to file a final annual return. You will deliver a confirmation statement instead. You have 14 days after the confirmation date to deliver it to Companies House.
Who is responsible for filing a confirmation statement?
Company directors, company secretaries and designated LLP members are legally responsible for ensuring a confirmation statement is delivered to Companies House, either online or by post, each year. It must reach Companies House no later than 14 days after the confirmation date.
Failure to file a confirmation statement is a criminal offence and can have serious consequences. The registrar may take steps to strike the company or LLP from the register. Company officers may also face personal prosecution for failing to maintain their legal duties.
What if I don’t have any changes to report?
If your company details are exactly the same as they were when you filed your last annual return or confirmation statement, you must still file a confirmation statement to ‘check and confirm’ that the company details on public record are correct.
How do I file a confirmation statement?
Confirmation statements can be delivered to Companies House in one of three ways:
By post using paper form CS01 (or LLCS01 for LLPs)
Online via WebFiling
Online via software filing via a company formation agent
It is cheaper and easier to file online via WebFiling or Software filing. The postal form comes in two parts, one of which consists of 28 pages, and it costs £40 to file. The online form only costs £13 to file and you will benefit from in-built checks and pre-populated data, which will make the entire process much simpler for you.
How much does it cost?
It costs £13 to file a confirmation statement online, or £40 to file one by post. Unlike the annual return, however, you will only be charged this fee once per year, irrespective of how many confirmation statements you file within a 12-month period. This means you can update your company details as often as required for no additional charge.
Difference between annual confirmation statement and annual accounts
Both of these filing requirements are due once per year. That’s where the similarity ends.
Annual confirmation statements are used to confirm key details about the internal structure of a limited company or LLP on a certain date. They must be filed at Companies House at least once every 12 months.
Annual accounts show the financial performance and activity of a company over the course of the previous year. A copy must be given to members, Companies House and HMRC.
Confirmation statements for dormant companies
All private limited companies, whether dormant or active, must deliver an annual confirmation statement to Companies House every 12 months. Whilst a company may not be trading, certain details about the internal structure of the business may change. Therefore, you must confirm that the correct information is held at Companies House and displayed on the central public register.
What happens if I forget to file a confirmation statement?
If you forget to file a confirmation statement by the deadline, don’t worry too much. You won’t be fined for sending it late, but it is a criminal offence if you simply don’t file it at all. Send it as soon as you remember to avoid facing any negative consequences.
If you do fail to deliver one at all, your company could be struck off the register because Companies House will assume it is no longer trading. If this happens, your company will cease to exist and its assets will pass to the Crown. Company officers/LLP members may also face prosecution.
Sign up for email reminders
Companies House will send a reminder to your registered office in advance of your filing deadline. This will explain everything you need to know.
If you haven’t already done so, we recommend signing up for email reminders in case you forget about your filing deadline and miss it – click here to find out more.
If you have any question please contact Jane Samuel at email@example.com
HMRC are again starting to focus their attention on IR35, so watch out Contractors! Over the last 20 years there has been a significant increase in the number of freelance contractors. Depending on the sector different terminology is used. The writer himself spent a significant period of his career working as an ‘interim’ Accountant. In other sectors a more common term is a ‘freelancer’, or even just a mere ‘contractor’. There are some business sectors where this type of service has become the norm, such as the IT sector and in many areas of the media. In fact it has also become popular in the public sector and quasi-government organisations, such as the BBC. I will say no more, but you can have your own views!
Regardless of the description these are people that generally provide a service through an intermediary to the final client. The intermediary is normally an employment agency and the provider of the service invoices for their services through a limited company, or otherwise known as a personal service company. The benefit for the service provider is that they can optimise their personal tax situation by reducing the amount of income that is taxed and charged to national insurance (NIC) through the PAYE system. It also allows greater offsetting of business expenses than allowed for normal employees and perhaps the greater benefit is being able to take profits from the limited company as dividends.
Back in 1998 Chancellor Gordon Brown attempted to plug the hole in the tax system. Thus, the first solution set out in the 1999 Budget press release number IR35, was to make the client (final customer of the contractor), shoulder the burden of the new tax regime. If the worker who provided services through an intermediary, operated under the control of the client (like an employee), the client would have to apply PAYE and NIC to amounts invoiced by the intermediary.
By September 1999 the proposals had changed significantly, such that the intermediary would be responsible for the compliance with what become known as IR35. Also the control test was replaced with an employed or self-employed test.
HMRC have now issued a consultation paper which takes a similar position to the original IR35 press release. Please refer the consultation paper in issued on 26 May 2016 The current consultation paper suggests the client, or third party agency if there is one, will have to test whether the worker falls within IR35.
A new online IR35 interactive tool will allow the client or agency to perform this test by answering just a few questions. The result from this online tool will be provided in real-time and give the definitive HMRC view on the position.
When the contract falls within IR35, the client, or agency in the chain who is closest to the personal service company, must apply PAYE and NIC to the net amount invoiced (less VAT and 5% expenses). This PAYE will be reported through RTI, using the worker’s NI number.
As stated above there has been a significant growth in personal service contracts in the public sector and these changes will only apply to contracts performed for public sector bodies from April 2017 onwards. The definition of a public sector body is lifted from the Freedom of Information Act 2000.
With regards to the private sector the basic IR35 rules remain unchanged. If a service provder has been caught by IR35 than the service company must distribute 85% of the firm’s income through the PAYE system. But HMRC is still not applying the IR35 rules strictly and many sectors still seem to avoid it. Again I will not comment any further!
To conclude this is still an area of great inconsistency and many personal service companies still avoid the IR35 requirements, even though they often only work for a single customer and have been in the same arrangement for many years. The current focus is on the public sector and the writer knows from his own experience that this is an area often picked up in freedom of information requests, especially in the NHS.
Jane and Martin (our Helpful Bean Counters) were asked to speak on a local radio station in Southampton to discuss their view on setting up their business, working together as a married couple and the challenges faced by small family businesses.
Community Hr Mon-Fri 3-4pm Friday 24 June
24 Jun 2016 by “Kelly”
In the Community hour Lilly Arora & David Vane hosts Ideas4bussiness with their guests Jane and Martin Samuel Wordsfinance Limited they are both business advisors and we hope to explore if there is a difference in the way that men and women work in a business.
For most SMEs there is no distinction between management and ownership and as such they would argue that corporate governance is an expensive and unnecessary luxury. Why introduce systems which impose limits on how they conduct business? They could impact profitability, creativity and speed of response.
For many companies happy with what they are, then the questions are probably right. But for any SME looking to grow putting in place an appropriate corporate governance regime or culture from the outset will have significant benefits.
A proper governance system will improve the company’s ability to obtain external funding, be it from banks, angel investors or VCs. Investors are prepared to pay a premium for shares for companies that are properly managed. Banks are more likely to fund businesses with good systems in place.
Creating a positive Culture
Corporate governance in an SME situation requires a set of rules and guidelines that allow all stakeholders to understand how the organisation will be managed. A clear understanding by all staff of the operating processes and who is responsible for what should create a positive culture and a reduction in internal conflict, allowing more attention to be paid to achieving the company’s growth strategy and ongoing profitability.
Planning for the Future
One of the biggest challenges for SMEs is planning for the future and providing strategic direction. Many young companies fail to take advantage of using external board members. Non Executive Directors. NED’s can help to balance the views of the executives and introducing additional skills, resulting in better strategic management decisions. Employing NED’s on a part time basis is also very cost effective!
With the help of all employees, the board can add value to the business by encouraging and supporting the pursuit of new opportunities for the company within a framework by way of R&D, cost reductions, potential JVs or collaboration. None of these can be achieved by the board alone.
Whether your company is large or small, reputation matters and in this area corporate governance is just as important for SMEs as for companies in the FTSE 100.
Systems and processes in a SME have to be appropriate to the size of organisation. But there is no doubt that taking the time to think about what systems are needed and putting these in place increases the long term value of the company and its potential for properly funded growth.
Any company looking to sell, introduce investor finance or to list on a market needs to start prepare reliable, consistent and trust worthy management information. Appropriate Corporate Governance helps the SME to gain credibility over these reporting and information processes and as such add value to the business.
George Osborne revealed a shake-up in the way dividend income is taxed in the Summer Budget 2015. It was announced that the taxation of dividends would be changed from 6 April 2016 through the fanfare of removing many from paying tax on dividends. The reality for business owners of limited companies is anything but and it now appears that they are paying the price for the Government’s commitment to reducing the main rate of corporation tax.
It has only been a few weeks since the Chancellor’s announcements at Summer Budget 2015. As the dust settles, it’s clear to both advisors and business owners that the taxation of small businesses is back to the top of the agenda. Certainly, despite the welcomed announcement of corporation tax rate reductions, the proposed changes in dividend taxation certainly mean less of those pounds earned being kept in the typical owner/ manager pocket.
The government will legislate to reform the basis of dividend taxation in Finance Bill 2016, so it is expected that following consultation we will only get a clear confirmation of the position at Autumn statement 2015 later this year. Making the reasonable assumption that the announcements made at the Summer Budget will apply from 6 April 2016, the changes will be as follows:
the dividend tax credit will be repealed
a new dividend allowance of £5,000 per year will be introduced (this does not reduce total income, but essentially taxes the first £5,000 at a 0% rate, so reduces the basic and higher rate bands), and
the rates of tax on dividend income will increase to 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. Conveniently this appears to fall out side the protection of the new ‘tax lock’ for headline income tax rates
Profit extraction cost
The observant amongst you will know that the answer to the perpetual ‘salary versus dividend’ question asked by clients has generally always been that dividends are best from a tax perspective. Notably this is because no national insurance liability accrues on dividends, though of course sufficient distributable profits must be available in order to ensure that a legal dividend can be declared and paid.
The Chancellor is closing the tax gap between extraction of profits by way of salary or dividends. The following analysis is based on current announcements including that the NIC upper earnings/ profits limit increases to £43,000 (for Class 1 and 4 NIC) and that the owner / manager extracts a salary of £8,112 (the employers NIC threshold), with the remainder taken as dividends.
There is still a small tax benefit in operating as a limited company as opposed to a sole trader though this disappears around profits of £140,000. On average, up to £200,000 of profits, the marginal effective tax rate benefit on extracting profits from a company as compared to operating as a sole trade will now only be around 1.4%. This compares with a benefit of around 5.1% in 2015/16. For companies with profits up to £100,000 the benefit is now 3.5% on average, but nevertheless operating, as a limited company will certainly not be as attractive as it is now.
Dividends as the ‘top slice’ of income
For those receiving dividend income, it is always important to consider the tax impact of dividends being the ‘top slice of income’. If we just look at the marginal rates on paying a dividend, the cost has increased by 7.5%:
For owner/managers extracting profit using low salary and dividends utilising their basic rate band, there is an immediate cost once dividends paid exceed the £5,000 allowance.
Consideration will also need to be given where taxpayers are close to the higher or additional rate thresholds as the dividend allowance, whilst tax free, will push income into higher marginal rates. The following table shows the additional tax cost where £5,000 of dividend income is pushed into the next marginal rate of tax:
Dividend income taxed at:
Higher rate (£5,000 x (32.5% — 7.5%)
Additional rate (£5,000 x (38.1% — 32.5%)
Therefore it may be worthwhile deferring payments or ensuring all options have been explored to extract profits in a tax efficient manner.
What next ansd what can you do?
It is clear that this will be of keen interest to owner/managers, but we await draft legislation to confirm the implications. It should certainly be high on the agenda at year-end planning meetings in early 2016, and taxpayers may wish to explore:
bringing forward the payment of dividends into 2015/16. This will require careful consideration of company law procedures to ensure the date of payment arises in 2015/16 and evaluating the benefit of a lower liability versus earlier tax payment
postponing dividends to ensure that sufficient reserves are maintained in anticipation of any possible future transactions, for instance a share buyback
utilising the proposed £5,000 annual dividend allowance each year
extracting profits by way of director’s loan account (25% corporation tax charge and a beneficial loan (3% interest rate since April 2015))
maximising tax efficient profit extraction, eg pension contributions and other tax free benefits
There will, of course, be many permutations and it will depend on each individual taxpayer’s needs.
In terms of the Government’s strategic plan of preventing tax motivated incorporations, it remains to be seen whether the proposed changes will have the desired effect. However, it is clear that there are many commercial reasons that result in businesses choosing the corporate veil of a limited company rather than an unincorporated structure, and the marginal benefits may still be worthwhile in these situations. It also remains to be seen what will be the future impact of HMRC’s ongoing efforts to improve the effectiveness of IR35 and the Office of Tax Simplification’s continuing review of closer alignment of income tax and NIC. What is probably certain is that until the UK’s deficit is under control, the tax burden for virtually everyone is likely to go up.
Micro-entity accounts are a new type of accounts that can be submitted to Companies House from 1 December 2013. They will provide the smallest companies with the opportunity to prepare and publish simplified financial statements (profit & loss account; and balance sheet) if they wish.
These accounts can be filed with Companies House on paper, WebFiling or Software Filing, and apply to financial years ending on, or after, 30 September 2013.
A micro-entity must meet at least two of the following conditions:
turnover must be not more than £632,000
the balance sheet total must be not more than £316,000
the average number of employees must be not more than 10
Why have these regulations been introduced?
In February 2012 the European Council formally adopted into EU law a set of exemptions for micro-entities from the accounting requirements of the 4th and 7th Directives. The objective was to reduce the administrative burden for these companies. In order to introduce these exemptions in the UK.
It excludes additional types of entity, most notably charities and LLPs. Other entities excluded are investment undertakings, financial holding and insurance undertakings, credit institutions, qualifying partnerships, and overseas companies.
It is worth keeping in mind that the regulations are optional for eligible companies. The directors of a micro-entity may therefore simply continue preparing accounts under the existing financial reporting regime
What are the main features of the micro-entity regulations?
A simpler balance sheet and profit and loss account. There are two formats for the balance sheet and one format for the profit and loss account. These are set out in the regulations
A micro-entity is still required to prepare a directors’ report, applying the requirements for a small company’s directors’ report and the associated small company exemptions.
No notes to the accounts are required. But the company must provide details of any advances, credit and guarantees with directors and details of any other charges, contingent liabilities, capital commitments, other additional guarantees and/or certain other financial commitments should be disclosed at the foot of the balance sheet.
The information required in micro-entity accounts is referred to in the regulations as the ‘minimum accounting items’. On a technical issue, a micro-entity is permitted to ignore any provision of an accounting standard which would require additional information to these minimum accounting items, including any additional information on the minimum accounting items themselves. The micro-entity can choose to disclose information.
The will greatly simplify the reporting for smaller companies falling into the micro entity requirements. There are approximately 1.56 million micro entities in the UK compared to a total number of companies registered of 2.8 million
The Helpful Bean Counter would like to provide you with a quick update on the Budget announcements. The chancellor’s 2016 Budget had much in it of interest to small companies. Here are the measures you need to know.
Small business rate relief will be permanently doubled from 50% to 100%. Businesses with a property with a rateable value of £12,000 and below will receive 100% relief. Businesses with a property with a rateable value between £12,000 and £15,000 will receive tapered relief. As a result, 600,000 small businesses will pay no business rates.
From April 2020, business rates will be based on the consumer price index (CPI), the main measure of inflation, instead of the retail price index (RPI), a move called for by business groups.
The government is also planning to modernise the administration of business rates.
Corporation and Capital Gains Tax
The government will cut corporation tax to 17% by 2020. From April 2016, capital gains tax at the higher rate will fall from 28% to 20%, with the basic rate dropping from 18% to 10%.
Adults aged under the age of 40 will be able to save using a new lifetime ISA from April 2017. They will be able to contribute up to £4,000 per year, and receive a 25% bonus from the government.
ISA and Personal Allowances
The ISA limit will increase to £20,000, and the personal tax-free limit will be raised to £11,500 from April 2017
From April 2018, Class 2 National Insurance Contributions for the self-employed will be abolished meaning self-employers workers will only need to pay one type of national insurance if your profit exceeds £5,965.
Fuel duty will be frozen for the sixth year in row.
Help to Grow
The government’s pilot Help to Grow initiative for growth businesses has been expanded up to £200m.
Enterprise Finance Guarantee scheme
The Enterprise Finance Guarantee, will be extended to at least March 2018 to support over £250m of lending per year. The programme helps small businesses that might not get the loan they need because of a lack of sufficient collateral or a track record.
The government intends to raise £8bn in tax from larger businesses through changes including rules to prevent multi-national companies avoiding paying tax in the countries they operate in and taxing outbound royalty payments meaning multi-nationals pay more tax in the UK. Osborne said the revenue raised will be used to help the small companies “who pay their fair share of tax”.
Personal service companies
Public sector companies need to ensure employees pay the correct tax rather than allowing an advantage to those paid through personal service companies, a method used by many independent freelancers and contractors.
I attended the ACCA conference on Alternative Finance (AF), hosted by Barclays Bank at Canary Wharf on the 8th July. Speakers included Emma Jones (Enterprise Nation), Marte Borhaug (CBI), Jonathan Moules (FT), Rebecca McNeil (Barclays) and Irene Graham (BBA).
AF is becoming a real alternative to conventional bank funding, especial for SME’s looking to grow. The link above is to the ACCA’s Technical Factsheet on AF. It is worth looking at as it covers the sector in detail and gives information on some of the providers.
There where some clear messages going out from the speakers, which I have noted below:
AF is here to stay and provided over £4bn of funding in 2014
The main High Street Banks now have to refer businesses to a panel (platform) of alternative finance providers if the decline funding, or feel that it is more appropriate for their client’s needs. So not only a lender of last resort!
AF can provide both borrowing and equity financing. It ranges from P2P Cloud (or online) funding providers to business angels and VC’s.
AF covers many types of financing. A more unusual example was given of Hotel Chocolat, who issued a bond which provided lenders with their product rather than interest.
It was stressed by some of the contributors that with P2P finance you don’t just get funding, but you have many enthusiastic investors who will talk about your product to friends and family and even buy the product. What better PR!
It is also important that businesses are aware of their credit ratings and the credit rating process. It is worth looking at the following link on the BBA site BBA Credit Rating . It was even suggested that accounts and other returns to HMRC and Company House are provided earlier than required, to improve the business’s credit rating!
The timing of the process in getting finance is important. Many SME’s will need quick funding to take advantage of an opportunity, or to deal with an adverse event. In many cases funding will not be immediate and will require the preparation of business plans and forecasts. Funding Circle (P2P) on average take 15 days to process a loan application. Equity funding could take many months to arrange!
Sometimes finance is required for short term working capital requirements. Overdrafts and invoice discounting are the traditional methods, but iwoka (www.iwoca.co.uk) can provide an AF solution.
Small businesses should be encouraged to use advisers, or business mentors when applying for finance. It is a complex landscape, especially if you are busy running a business.
The current AF providers are looking for better regulation and governance, and this is evolving in the new market. It also needs to be better understood by investors as it does not have the same protection as bank deposits. There are 2 Trade Associations covering the AF market. www.ukcfa.org.uk and www.p2pfa.info
There have been marketing benefits in using P2P funding and stated above with Hotel Chocolat. But you should only use funding, traditional and AF when it is required.
At GetinBiz we are excited by the opportunities that AF provides the start-up and established SME market. It is important to get the right form of finance and it is important that advice is sought. In many cases the more traditional finance options may be more suitable, such as asset finance or invoice discounting.