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Last Minute tax return – don’t forget to claim for working from home

One of the most common questions I get from sole traders is about allocating a cost to the business for working from home. If you are in a panic trying to get your tax return done before the end of the month, you might forget to include a cost for this in your accounts, but this would result in you paying more tax than necessary – so take 5 minutes and think about what you might be able to claim.

If you are self-employed and work at least partly from home then you are entitled to include part of the running costs of your home in your accounts.  But how much is a reasonable amount?

You have 2 options as to how to work out how much you can claim.

1  Flat Rate Method

If your sales are under the VAT threshold (currently £85,000) and you are self-employed then you can use this method. You simply work out how many hours a month you spend on average running your business from home and then include a fixed amount in your accounts, as follows:

25-50 hours: £10 per month

51-100 hours: £18 per month

101 hours or more: £26 per month

The flat rate covers the running costs of your home; you can also claim a proportion of the fixed costs and your phone/broadband as per option 2.

2  Actual Costs

 This method requires a little more effort, but it may give you a higher figure and therefore save you more tax.  Under this method, you need to apportion the running costs of your home on a “fair and reasonable” basis between those that are personal and those that relate to the business.

This is usually done by reference to the number of rooms you have in your house and the amount of time you use them for business.  There is no laid out formula though and therefore how you allocate costs will vary from business to business.  Keep any workings you have done so you can back up your figures to HMRC if necessary.

The costs you can actually claim can be spilt into fixed costs, running costs and phone/broadband.

Fixed Costs

  • Mortgage interest (not capital) or rent
  • Council tax
  • Insurance
  • Water rates

Running costs

  • Electricity
  • Gas
  • Repairs and maintenance
  • Cleaning

For example, assume you work from your sitting room 8 hours per day 4 days per week.  Your total fixed costs are £6,600 per year and your running costs £1,500.  You have 6 rooms in your house. A reasonable allocation of the fixed costs would be £6600 x 1/6 x 4/7 x 8/24 = £210.

An allocation of the running costs could be £1500 x 1/6 x 4/7 x 8/12 (as gas etc not used during the night) = £96

The phone and broadband is claimed on a usage basis only, so if you use your internet 50% business, 50% private you can claim 50% of the cost, including line rental.

If a property repair works solely to the area that you use for business, you can include the full cost in your accounts – for example, your office roof needs repairing.  If the repair is to the whole house – then claim in proportion as above.

So claiming costs of working from home is not as simple as it sounds.  The flat rate method will give you a quick answer, but the actual costs option may give you a higher figure.  If you need any further help then please contact Rosie Forsyth at Wilkins & Co.

Note – these rules only apply to the self-employed and not to owners of limited companies.

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If I hide – do I still need to file a tax return?

Do you need to file a tax return this year?

The tax year runs from 6 April to 5 April, and tax returns for last year (that’s 6 April 2017 to 5 April 2018) are due to be filed by 31 January 2019.

If you meet any of the following criteria – then YES you do need to file a tax return.

  • You were self-employed at any point between 6 April 2017 and 5 April 2018 and your income from this was more than £1,000
  • you received more than £2,500 from renting out property
  • you received more than £2,500 in other untaxed income, for example from tips or commission
  • your income from savings or investments was £10,000 or more before tax
  • your income from dividends from shares was over £2,000
  • you made profits from selling assets eg shares or a second home
  • you were a company director and received income that needs to be declared
  • your income (or your partner’s) was over £50,000 and one of you claimed child benefit
  • your taxable income was over £100,000

You also need to send a tax return if you:

  • need to prove you’re self-employed, for example to claim Tax-Free Childcare or claim Maternity Allowance
  • want to make voluntary Class 2 National Insurance payments to help you qualify for state benefits

To file a tax return, you need to have first registered with HMRC.  You should have done this by 5 October 2018, but if you haven’t, then you need to get on with this ASAP, by following the link here if you are self-employed:

https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed

HMRC will then send you your UTR (unique taxpayer reference) number.  Without this, your tax return cannot be filed, either by yourself or by an accountant.  The reference can take a few weeks to come through, so do not leave this until January!!

If you are going to file your tax return yourself, you will need your government gateway ID and password.  If you are using an accountant, they can generally file your return using their own software and government gateway log-ins, but will also need time to set themselves up as your agent.

It is your responsibility to let HMRC know if you have to file a return – so if you have a new source of income in the year, or a one-off capital gain (eg if you have sold a rental property) then don’t wait for HMRC to ask for the information!

Penalties for late filing are an automatic £100.  Even if there is not any tax actually due, if you are required for file a return, and this is not with HMRC by midnight on 31 Jan- you will get a fine!

The tax is also due to be paid by 31 January.  When you file your return, you will get a calculation of the tax due as part of the submission process, or your accountant will tell you when they send you your return for approval and signing, so the sooner you do this – the sooner you will know the amount you have to pay.

For any more information, or help with your personal tax return, please contact Rosie Forsyth at Wilkins & Co

 

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Making Tax Digital – less than 6 months to go – are you ready?

MTD goes live in less than 6 months, but research shows that 40% of small businesses that will be affected by MTD, are not yet aware of it, and have certainly not begun to prepare for its impact.

So are you affected and what do you need to do?

HMRC are about to launch their publicity campaign to increase awareness, but here are some frequently asked questions from small businesses:

Does MTD apply to me?

If you run a VAT-registered business (limited company OR sole trader) with a taxable turnover above the VAT registration threshold (currently £85,000) then YES it applies to you from April 19.

I have registered for VAT voluntarily, so I am VAT registered – but my turnover is less than £85K. Does MTD apply?

No it will not apply from April 19.  MTD is planned for all businesses over time, but you not caught in this first batch of people!

What does MTD mean anyway?

MTD means that you will have to keep digital VAT records and send VAT returns using “MTD-compatible” software from April 19.  The deadlines or frequency of returns are not changing, it is just how the information gets to HMRC.

If you are already using commercial accounting software, it is likely that the provider is working hard to make it MTD compatible, and you should be OK, though you will need to upgrade to the latest version that is compliant.

HMRC have provided a list of suppliers it is working with to provide MTD compliant software so you can check:

https://www.gov.uk/government/publications/software-suppliers-supporting-making-tax-digital-for-vat/software-suppliers-supporting-making-tax-digital-for-vat

I keep my accounts on a spreadsheet – is that still OK?

Technically yes, but I would be thinking about switching to a digital package!

If you use a spreadsheet, then that spreadsheet must be able to submit the required data to HMRC digitally and to do this you will need to add “bridging software”.  This is a piece of software that will extract the data from your spreadsheet and send it to HMRC in the correct format.

What you will no longer be able to do is physically retype in figures from one piece of software to another.

We have no examples yet of what this “bridging software” might look like – all we do know, is HMRC aren’t providing a free version for you to use!

My accountant does my VAT return from the info I send them so won’t they just deal with it?

Sadly no!

The portal that accountants use to submit vat returns will be closing, as this requires someone to type the information into it – and this will no longer be allowed.  Nor can your accountant take your spreadsheets, correct a few errors, and then retype the information into a vat return and submit it, as the information flow has not been digital.  HMRC have said that “cutting and pasting” information will be acceptable for the first year only, to give people time to update systems.

So what do I need to do if I am affected?

You need to look at how you keep your accounts, and if you have not yet moved onto a digital package, now really is the time to do it!  The start of your new financial year is the perfect time, so if that falls between now (or even a couple of months ago) and 31 March, then I would switch your accounts over now, so you are up and running smoothly when the changes come in.

Digital accounting packages are not expensive – prices can be as low as £9 per month, with add ons that allow you to submit receipts electronically.  Switching to digital will save your business time, and give you more accurate data about your business in real time, so be brave – bite the bullet and go digital!!

HMRC are still wanting to bring in MTD for everyone, so although the timetable has been pushed back to at least 2020, even if you don’t have to make the switch before April 2019, it is worth assessing how you keep your accounts and if it could be more efficient!

For more information please contact Rosie Forsyth at Wilkins Co.

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When do I register for VAT?

You can google the VAT registration threshold – its currently £85k  – but so many people look at their wrong sales figure to compare to this number – and registering for VAT late can be very expensive!

You have to register for VAT when your “VAT taxable turnover” in a 12 month period is over £85k.  If we take ” VAT taxable turnover” to be your sales (which simplifies it somewhat,) then you need to look at your sales figure for the last 12 months.

This is NOT THE SAME AS YOUR SALES SINCE THE START OF YOUR FINANCIAL YEAR.
There is no starting again when you get to your year end – you need to look at your sales figure for the last 12 months – ON A ROLLING BASIS.

So you need to look at Sept 17 – Aug 18, and then Oct 17 – Sept 18, then Nov 17 – Oct 18 etc etc.

If your turnover is around the £75-80k, you need to keep a close eye on it each month to see if you have gone over the registration threshold.  If you have exceeded £85k, then you have one month in which to register for VAT and then you need to start charging VAT in the following month.

For example if your sales for the year Sept 17 to 31 Aug 18 were over £85k for the first time, then you need to register by 30 Sept 18 and you will be registered from 1 October.

If you are late in registering, then you are deemed to be register from 1 October anyway, and you are liable for the vat that you should have been charging, plus potentially a penalty, so this can be very expensive for your business!

If your turnover has gone over the threshold temporarily, say you have sent out an unusually large invoice – you can apply for an exception to registration, but you need to write to HMRC with evidence that you sales for the next 12 months will be under the VAT deregistration threshold of £83k.

So do keep an eye on your turnover if you are close to the threshold.  I see late registration time and time again, as business owners only look at current year sales, not sales for the last 12 months.

For more information then please contact Rosie Forsyth at Wilkins & Co.

 

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Taxes Made Easy for 2018/19

Hot of the press is my new tax planning brochure for this tax year.

This easy to read guide provides you with simple tax planning points for the current year.

Covering personal tax, and matters affecting both you and your family, my guide suggest many ways in which you can save money on your tax bill by taking full advantage of the current tax system, as well as highlighting some of the pitfalls that you should avoid.

Please download a copy with my compliments – and let me know if I can help you with any issues raised.

Download Your Free Copy Now

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Update on the new tax free childcare scheme

The new Tax -free childcare scheme began in 2017 and is now available to the employed and self-employed where both parents are in paid work for more than 16 hours per week and neither parent earns more than £100,000.

The scheme is run via an online account and the government tops up 20p for every 80p you pay into the scheme up to a maximum of £2,000 per child up to the age of 12 (and therefore an £8,000 contribution by parents).  Grandparents or employers could contribute instead of parents.

The scheme replaces the employer childcare vouchers.  These schemes were due to close to new entrants at 5 April 18 but will now remain open for an extra six months until October 2018. Parents already registered at that time can continue to receive vouchers for as long as their employer offers them, or switch to tax-free childcare instead.

If you already receive childcare vouchers from your employer, then you have to decide whether you want to continue with this scheme, or move to the new scheme.  The website https://www.childcarechoices.gov.uk can help you decide which is better for you.

In general, the new scheme is better for the self employed and those with more than one child and high childcare costs, as the vouchers are per child.  The old scheme, if offered, favours couples where one parent does not work and high earners – but it worth doing the sums in your particular case.

If you want to leave your employer’s voucher scheme you must provide them with a Childcare Account Notice (CAN). This can be sent by email and states that you wish to leave the voucher scheme and use tax-free childcare instead.

There were lots of teething problems when the online accounts were set up, so much so that ‘Childcare Service compensation‘ is now available from HMRC  – www.gov.uk/government/publications/childcare-service-compensation

It offers parents compensation if they have been subjected to various technical difficulties in relation to its online Tax-free Childcare account. Problems with the service include technical issues, mistakes and unreasonable delays.

Parents affected by technical issues may be able to ask the government for a top-up as a one-off payment for Tax-Free Childcare or apply for reimbursement of any reasonable costs directly caused by the service not working properly.

You may be eligible if you have:

  • been unable to complete your application for Tax-Free Childcare
  • been unable to access your childcare accounts
  • not received a decision about if you’re eligible, without explanation, for more than 20 days

If you require any further information then please get in touch.

 

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What tax planning should you be doing before 5 April?

With the tax year ending soon have you been as tax efficient as you could have been this tax year?

What can you do before the year end to maximise your tax efficiency?

Here are a few of my tips for tax efficiency:

If you have a limited company – make sure you have paid £5,000 in dividends if profits allows.  The tax free allowance for dividends is reducing to £2,000 after 6 April 2018

Transfer income-producing assets to a spouse if you pay tax at different rates.  If you have a limited company, should your spouse also have shares to get their tax free dividend allowance and potentially pay tax a lower rate on additional dividends?

Check your total income for the year if you receive child benefit payments.  If you have the ability to determine your income for the year, by varying the level of dividend paid, keeping your income below £50,000 will ensure you retain your child benefit.

Trivial Benefits – limited company directors can get £300 a year tax free using these.  If you have not used your full allowance yet, get down to John Lewis and stock up on vouchers.  Conditions do apply so check my early blog for full details

If you are considering buying capital equipment for your business, doing if before the end of the tax year will give you the tax deduction this year rather than next

Pension contributions – very tax efficient for the company to contribute to your personal pension.  Review any payments made in the year and take advice from an IFA.

If you have taxable income over £100,000, you will lose your personal allowance on a sliding scale, so your marginal tax rate may be as high as 60% on part of your income.  Consider making additional pension contributions or gift aid donations which may restore your personal tax allowance.

Use your allowance for tax free ISA saving; that’s up to £20,000 in this tax year. Under 18s can save £4,128 in a Junior ISA.  Also consider LISA’s to help your children get on the housing ladder.

Inheritance tax – often forgotten, but if you have spare cash available, consider making gifts to take the funds outside of your estate.  If you don’t have the cash, bring this up with grandparents over Sunday lunch!  Up to £3,000 per tax year can be gifted as one off capital sums and will be exempt from inheritance tax. Any unused part of this allowance can be carried forward 1 year.

Often simple steps can be taken to minimise your tax bill, so hopefully the above list has added one or two items to your “to do “list.

Please contact me for any further information.

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Tax efficient Xmas Gifts and Parties

‘Tis the season to be jolly and you might be wanting to thank some of your clients for their business during the year.  Whilst tax may not be top of your agenda right now – can you do this tax efficiently?

Your gifts will only get tax relief, and you can only reclaim the VAT if they are:

  • NOT food, drink, tobacco or a voucher AND
  • Carry a conspicuous advert for your business AND
  • The cost of that gift, and any other to that person in the year is under £50

(That’s why your gift may be an embossed diary/mug!)

If you want to give your staff a Christmas gift, it may well be covered by the “trivial benefit” rules I have covered in a previous blog.  Here if it is classed as “staff entertaining” you may well be able to reclaim the vat.

What about the Xmas party?

Most people are aware about the rules for the staff Xmas party.  For a limited company, the cost for the annual party is allowable for tax as long as it is under £150 per head (all staff have to be invited but the cost is per head – “plus ones” can also be invited)

But a lot of us work for ourselves and don’t have staff – we employ subcontractors.  What are the rules if we want to take them out at Xmas as a thank you.

These guys are not your employees so they are not covered by the above rule.  Any money spent on entertaining them is deemed customer entertaining and therefore won’t be allowable for tax in your accounts, (but – you should probably still take them out!!)

So what about you, the business owner?

If you are a director, then you are classed as an employee and you can treat yourself ( and your plus one) to a Xmas do.

If you are a sole trader, then I’m sorry, it’s the final of Strictly and a bottle of cheap plonk for you!

 

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Dividends – new rules mean higher personal tax bills at Jan 18

How dividends are taxed changed dramatically at 6 April 16 and its impact is just being felt by shareholders completing their 16/17 tax returns.  The tax on those dividends is due for payment at 31 Jan 18 and is coming as a shock for those unprepared!

In the good old days before 5 April 16, the 10% dividend credit meant that basic rate taxpayers paid no further tax on dividend income as the 10% tax on dividends was covered by the 10% tax credit.  Higher rate tax payers had additional tax due of 25% on any dividends taken.

Since April 16, all that changed.  The notional tax credit was scrapped, and instead everyone was given a £5,000 dividend allowance.  That means that you don’t pay tax on your first £5,000 of dividend received in a tax year.  But after that, basic rate taxpayers will pay 7.5% on any dividend received, and higher rate payers 32.5%.

So for example, a higher rate taxpayer receiving £30,000 of dividends this year, will face a tax bill of £8,125 (as opposed to £7,500 before)

The further sting is that under self-assessment, if you chose to pay your tax in one go at 31 January rather than have it collected via your tax code, then you need to make a payment on account of your 17/18 tax at the same time.  This is calculated at 50% of this year’s tax – so actually at 31 Jan 18 you will need to fork out £12,187 based on the example above.

Basic rate taxpayers with a dividend of £30,000 will face a tax bill of £1,875 (or £2,812 with the payment on account) at 31 January.  Prior to April 16 there would have been no additional personal tax on this dividend at all.

With the dividend allowance reducing from £5,000 to £2,000 from April 18, personal tax bills for limited company shareholders are only going in one direction!

For further information please contact Rosie Forsyth at Wilkins & Co.

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Who has to file a personal tax return?

This is a commonly asked question – and people often do not realise that they have to register for self-assessment and file a personal tax return .

If you fell into any one of the categories below between 6 April 2016 and 5 April 2017, then yes you do need to file a personal tax return:

  1. You were self employed
  2. You were a company director – SEE BELOW
  3. HMRC have sent you notification to complete a return
  4. You had more than £2500 in untaxed income, eg from renting out a property
  5. You received dividends, savings or investment income before tax of more than £10,000
  6. You have a Capital Gain – ie you made profit from selling shares, a second home, a business or other chargeable assets
  7. You or your partner’s income was over £50,000 and one of you claimed Child Benefit in the year
  8. You had income from abroad that you need to pay tax on
  9. You lived abroad and had a UK income
  10. Your income was over £100,000
  11. You had a form P800 send from HMRC saying you didn’t pay enough tax last year and you haven’t either sent them a cheque or arranged to pay it via your tax code

The company director question is an interesting one and one that has been subject of an HMRC tribunal in the year.

HMRC’s guidance on their website will tell you that all company directors need to complete a tax return – but that is to put it kindly, misleading (as the tribunal concluded!)

If you are going to have a tax liability based on your income, then yes, you need to notify HMRC and complete a return – but if you have no further tax liability, then there is no requirement to register for self-assessment, director or not!

Unfortunately due to the change in dividends rules in 16/17, many directors will be having to file a tax return this year for the first time, as personal tax payments become due on dividends over £5,000.

If you do fall into one of the categories above, and have not filed self-assessment returns before, you have to notify HMRC by 5 October 2017 that you have a tax liability for the year.  You then have until 31 January 2018 to file your return online.

We act for many small businesses completing tax returns for the first time – and we get that its daunting!  We can help you through the process and make it as stress free as possible– do get in touch for more information.

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