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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 – so that includes their “plus ones”)

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 to a Xmas do.

If you are a sole trader, then Im 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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Taxes Made Easy 2017/18 – Free to Download

Hot of the press is my new tax planning brochure for 2017/18.

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

Covering personal tax and matters affecting both your business and your family, my guide suggests 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 you should avoid.

Chose your donut to download with my compliments!

 

If I can help you with any issues covered in my guide, then please get in touch.

Do let me know if it’s been of help!

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Sole Trader v Limited Company – which is right for you?

Making the right decision as to the structure of your business can be crucial, whether it be in terms of tax savings, simplicity, perception to the outside world or future plans.

The choice is generally between setting up as a sole trader or a limited company, though other options may be partnerships or LLP’s.

This blog sets out some of the key differences between the 2 structures.  We have not covered all the differences here and have assumed for simplicity that there is no other income in the year to consider (PAYE income, rental property etc)

TAX

A sole trader will pay tax on all the profits of the business over and above their personal allowance (£11,500 in this tax year.)  Profit is then taxed at 20% up to the basic rate threshold of £45,000 and then at 40% on the next £105,000.

The sole trader also pays class 2 and class 4 NIC.  Class 2 NIC is a flat rate of £2.85 per week and class 4 NIC is calculated on the profit of the business, with 9% NIC being paid on profit between £8,164 and £45,000 and 2% on profit over £45,000.  Both types of NIC are collected via self-assessment and the tax return.

A limited company on the other hand pays corporation tax on its profit.  Corporation is currently paid at 19%.  One of the key difference though between being a sole trader and a limited company is that you have to remember that the limited company’s money is NOT your money, as it is for a sole trader – it belongs to the limited company and you have to take it out of the business for it to be “yours”.

To take the money out of the business, you either pay yourself a salary or a dividend.  This is where tax savings can be made and is one of the advantages of being a limited company.  Taking a salary out of the business is an allowable expense of the business, and therefore it reduces the profit of the company, and saves corporation tax.  Usually a limited company director will take a salary equal to their personal allowance from the company, and therefore pays no personal tax on it.

Further withdrawals from the company are then usually taken as dividends.  The dividend rules changed about a year ago, so the tax savings are not as great as they used to be, but as there is no national insurance payable on the dividend, this method of paying yourself is still more tax efficient than paying further salary.

There is no requirement for the owner to withdraw all the profit from the business and as you are only taxed personally on the amounts you withdraw, this gives you more flexibility than the sole trader if you don’t need to take all the money out of the company each year, and can lead to tax efficiencies.

To request a comparison between the tax you would pay under each structure for a given profit level, please ask!

ADMIN

The sole trader has the advantage of simplicity.  To set up as a sole trader, you need to register with HMRC and then file your tax return once a year (at the moment!)

Trading as a limited company is more complicated.  You need to register your company name with Companies House, set up a business bank account and appoint directors and shareholders.  The directors have legal duties to comply with in terms of keeping proper accounting records, filing accounts and ensuring the company complies with the relevant tax and employment law.

The company must file accounts with Companies House and these must be in a set format, and also file a corporation tax return with HMRC.  The directors will also usually need to file a personal tax return if they have received dividends from the company.  If you are paying yourself a salary, then you need to set up and operate a PAYE scheme.

You won’t therefore be surprised that accountancy costs for a limited company are going to be considerably more than for a sole trader!

LIMITED LIABILITY AND PERCEPTION

This is often a reason why start-ups go for the limited company option.  As a limited company your liability is limited to the amount of the assets owned in the company name.

For a sole trader, there is no such distinction between personal and business assets and therefore your home could be at risk.  If you operate in a high risk or litigious sector this would be an important consideration, though insurance policies can be taken out.  Limited company directors may also be asked for personal guarantees for bank loans etc.

Some people prefer to operate as limited companies as there is perception of the status being more “grown up” or being taken more seriously, and in some sectors that may be true.  Clients in some situations (especially for contractors) will only deal with limited companies so you will have no choice!

 

There are many other differences not covered above, but these 3 are the main considerations to take into account.  You should always take advice from an accountant when deciding which structure is best for you.  If I can help you further then please contact me.

 

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Is it time to say GOODBYE to the Flat Rate VAT Scheme?

The changes announced last Autumn to certain businesses using the flat rate VAT scheme come into effect this month.

What were the changes and how may they affect you?

Businesses using the flat rate vat scheme pay over a lower rate of vat calculated only on their gross sales figures – the rate they pay varies according to the industry but was generally between 13.5% and 14.5%.

From 1 April 2017 these businesses must also determine whether they meet the definition of a “LIMITED COST TRADER” – and if they do the rate at which they pay over VAT is being amended to 16.5%.

A Limited Cost Trader is 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 spend money on services, and these services have VAT charged on them, you will probably be better off changing to the normal VAT rules, and reclaiming the input tax on services.  You need to weigh up against this the fact that submitting your VAT return may be more complicated each quarter and you need to make sure your accounting records are up the job!

My clients are deregistering if possible, but where their turnover is over the threshold, most are moving to the normal vat rules to enable them to reclaim any input tax that they have incurred.    If you do change methods, you do need to write to HMRC and let them know.

Which way have you decided to go?

 

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Tax Returns – need some help? A few timely tips and reminders to help you on your way

A few personal tax reminders this week to point you in the right direction.  Need any more help – you know where I am!

  1. It’s your responsibility to complete a tax return and advise HMRC if you need to submit one – don’t wait to be asked!
  2. You need to submit your return by 31 January 2017, or the penalty is automatically £100.  The penalty is not reduced or cancelled if there is no tax due.
  3. Getting yourself set up to file your return takes time.  HMRC send out passwords in the post, and their postal system is worse than their phone system – so don’t leave it too late!
  4. If you want any tax owed to be collected via an adjustment to your tax code then you need to submit by 31 December 2016.
  5. If either you or your partner has adjusted income over £50,000, and you have been claiming Child Benefit in the year, then you need to pay this back at least in part.  You do this on your tax return, so you need to provide the details
  6. If you are self employed, class 2 NIC is now claimed via self assessment so this will be appearing on your statement as an amount due.  If your earnings are low, then the Small Earnings exemption is now automatically applied.
  7. Married couples and civil partners may be eligible for the Marriage Allowance which enables transfer of an element of the personal allowance between spouses (see previous blog.) This is widely underclaimed so check if it applies!
  8. Dividends and most bank interest are currently received net of tax, so this is grossed up when it is declared on your tax return.  The rules have all changed this year, so make sure you now how this affects you.
  9. If you jointly own rental property, then this income is automatically split 50/50, unless you have declared otherwise to HMRC.  It’s not a matter of choice as to which of you declare it!
  10. Tax isn’t meant to be taxing – but it is!  Just let someone else do and get your life back!  Contact Rosie Forsyth at Wilkins & Co
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