The devil’s always in the detail.

Mr Hammond said yesterday that he was going to shut down “inappropriate use” of the Flat Rate VAT scheme – but that’s not quite what he meant.  The planned changes will affect most service industries using the scheme.

Currently businesses determine which rate to use based on their industry sector. This is generally between 13.5% and 14.5%.

From 1 April 2017 they must also determine whether they meet the definition of a “LIMITED COST TRADER” – and if they do they are being forced to use a new rate of 16.5%.

A Limited Cost Trader will be defined as one whose VAT inclusive expenditure on GOODS is either:

• Less than 2% of their VAT inclusive turnover in a prescribed period ( which we think will be a vat quarter)
• Greater than 2% but less than £1000 per annum

GOODS, for this test, must be exclusively used for the business, but EXCLUDE:

• Capital expenditure
• Food and drink for consumption by the business or its employees
• Vehicles, vehicle parts and fuel

So the majority of contractors, and most business providing a service, will be caught by these rules, as the amounts of goods that you actually buy are very small.  Computer software is a service as are phone bills etc.

The Maths

If you are currently on a flat rate of 14.5%:

Sales invoice to client £10000 plus vat means you receive £12000 from your client.

VAT paid over to HMRC is 14.5% x £12000 = £1740.  Your net cashflow benefit is £260 (£208 after corporation tax)

Under the new rules, 16.5% will be paid over = £1,980 – a benefit of £20 (£16 after corporation tax)

So if your turnover is below the VAT registration threshold, you really need to ask whether it’s worth it any more, and consider deregistering.

If you have a high outlay on services which have VAT charged on them, you may be better off changing to the normal VAT rules, and reclaiming the input tax on services.

Which ever way you go – it’s one more thing to think about and one more attack on the small business!

For further information and help, please contact me.

Question 1:  My what?

Your Personal tax account contains key info that HMRC has about you.  Almost everyone can access it, but only 3m of use have done so far.  I joined this merry club over the weekend and accessed mine – and I have to say – it was almost interesting! (Note to self – get out more!)

For now, it contains limited information, but under Making Tax Digital, it will become the platform for declaring all your info to HMRC.

Question 2:  Why do I need to?

Apart from being able to update admin info here with HMRC rather than hanging on the phone for hours – like a change of address – your personal account has details of your NI contributions record, and also shows you your state pension forecast (bit depressing!)

The stats on incorrect NI records are frightening – so it is well worth just looking over yours and seeing if it looks right as it could affect your state pension.  Mine was wrong as I had no record of contributions for a couple of years so I am going to have to look into it further.

I’ve also got to keep going until Im 67 to claim any sort of state pension!

If you are employed you can check your tax code here as well, which again can often be incorrect and mean you pay the wrong amount of tax each month.

Question 3:  How do I get into it?

Here is the link to start you off:

https://www.gov.uk/personal-tax-account

You will need your passport handy and your NI number.  You then receive a Government Gateway number that you need to keep.  A few days later you will receive a password in the post and once you have these, you are in!

There are a lot of negatives about Making Tax Digital, but personal tax accounts are a good idea and give you access to information that HMRC have, so you can check whether its right!

I would encourage you to set yours up and just take a look and see what’s there.  If you don’t like what you see, get in touch for help sorting it out.

With Making Tax Digital being introduced in April 18, all small businesses will have to keep their records digitally – “in the cloud.”  But what is that exactly and should you be getting ahead of the game and moving over now?

Cloud accounting is the same concept as accessing your bank account online.  A few years ago, you wrote cheques and sent them in post; you would never have thought of accessing your bank account and doing your banking online.  With an online accounts package, you can access your data from anywhere and upload expenses and receipts to it as you get them in the shop.  You don’t need to install software on your desktop, keep it up to date, or back up your data.

If your computer dies, all is not lost as your data is still there in the cloud.

The real benefit of cloud accounting is that it is done in real time, so your accounts are always up to date and you can make business decisions based on actual information.

Giving your accounts to your accountant 8 months after your year end and getting them back a couple of weeks later may tell you what tax you have to pay, but it’s a bit late for your accountant to then point out that your advertising spend was out of control, or you have several invoices that haven’t yet been paid.

Cloud accounting gives you, and your accountant relevant information on which you can make informed decisions.

So how does it work? 

In most packages you raise your invoices in the software – and email it straight out.  It can automatically send out reminders to your customers that the invoice is due for payment, or overdue.  You can get your bank statement “fed” directly into your package, and simply set up rules, so that every time the software sees a payment to say “Shell” – it puts it in the “Motor expenses” category.  No need to produce a spreadsheet for your accountant to go through.

The popular “add-on” is an app called Receiptbank – which you have on your phone and you simply take a photo of your receipt and press a button.  It makes a lovely “whooshing” sound and that’s all you need to do.  You can bin the receipt, knowing that it is safely recorded in your accounts.

No more throwing all your receipts in a pile to deal with later, or losing them and not being able to claim for items because you can’t find the damn paperwork.

Cloud accounting is generally subscription based – so you will pay anywhere between £5 and £30 per month depending on which package and product you go for.  Most VAT registered small businesses will pay between £10 and £20 per month.  Popular options are Kashflow (my favourite), Quickbooks,  Xero and Sage – and most will offer a 14 day trial so you can try before you buy.  Receiptbank is usually about £10 a month on top of this.
There is a more basic version of Receiptbank called 1Tap – ideal for non-vat registered sole traders – at only £6 per month.

So it may sound expensive – but £25-£30 a month could completely transform the pain that is doing your accounts.  How many hours does it take you a month?  How many hours on top of that putting it off?  What’s that worth to you if you got that time back and could use it to either do more billable work – or spend more time with the family?  With these package you will definitely save time – and stress!

So is it for you? 

For all but the very small businesses, I would say yes.  Making Tax Digital is going to force it on you anyway, and I’m advising all my clients to make the switch from April 17 so are fully up and running when MTD comes in. Just image a world without the dread of accounts………..!

For more information please contact Rosie Forsyth.