Mention VAT and most people either panic or switch off!!

But small businesses can use a special scheme called the Flat Rate scheme which takes a lot of the hard work out of VAT and gives small businesses a cash flow advantage.  Got your attention back?  Good!

Normally when you register for VAT you calculate the vat you charge on your sales, deduct the vat you have been charged on your purchases and pay over the difference to HMRC once a quarter.

Under the flat rate scheme, when you register you are given a percentage based on your industry sector (https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay).

This is then how the scheme works:

You invoice your client as normal say £1000, plus VAT of 20% making a total of £1200.

You then ignore any purchases that you have made in the period, and just calculate vat based on your gross sales at your percentage.  As an accountant, my percentage is 14.5% so 14.5% of £1200 = £174

I have therefore got in £200 in vat from my customer and only paid out £174.

The scheme is only advantageous if you have business where you don’t buy in a lot of items with VAT on – ie if your main cost is time!
To be eligible to join the scheme, your net turnover must be under £150,000.  If you have just registered for VAT then you get an initial year discount of 1% as well, adding to your cashflow advantage for 12 months.
Although under the scheme, you don’t reclaim the vat on purchases used in the business, if you invest in capital items (computers etc) and the vat-inclusive cost of a single purchase is over £2,000 – then you are allowed to claim back the VAT.
So although you do still need to complete quarterly returns, the flat rate scheme is a much simplified scheme and one most small businesses should definitely consider if thinking about / or having to register for VAT.
For more information please contact Rosie Forsyth at Wilkins & Co.

“I can’t run my business unless I have childcare – I must be able to claim it against my business?” is something I hear all the time – but at the moment if you are self-employed, childcare is not a tax deductible expense.

Agreed – totally unfair, as it can be so expensive, sometimes you wonder if its worth working!
If you are an employee, or have a limited company then childcare vouchers exist and you can use these to get some tax savings.

For the self-employed you will have to wait until 2017 when the new childcare tax relief will be rolled out.

Once launched, working parents will be able to get 20% towards their childcare costs (up to £2,000 a year for each child up to the age of 12).  In order to qualify both parents need to work, and neither can earn more than £100,000 a year.  There is a minimum you need to earn to qualify as well, but HMRC say there will be “start up period” for newly self employed parents whose income may be very low initially.

Parents will set up an online account for childcare, and for every £80 the parents put in HMRC will “top up” with £20, to the maximum of £10,000 per year.  You wont be able to claim tax-fee childcare on top of tax credits, universal credits or existing childcare vouchers.

So there is some help on the way – but in the meantime for many working Mums, we will need to continue to rely on extended family, friends, and CBBC!

Another frequently asked question is – do I need to file a personal tax return?

If you fell into one of the following categories at any time between 6 April 2015 and 5 April 2016, then YES you do need to complete a 2015/16 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. Your savings or investment income before tax was more than £10,000 (lucky you!!)
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. You had dividends from shares and you were a higher/additional rate taxpayer
11. Your income was over £100,000
12. 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 (oh yes it is!!!)

HMRC’s guidance on their website will tell you that all company directors need to complete a tax return – but that is not strictly true.  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!

So if in 15/16 like many directors, you had a small salary and dividends up the basic rate threshold, and no other income, it is more than likely that you have no personal tax liability, and therefore if you have not been asked by HMRC to complete a tax return, you do not need to send one in.

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 2016 that you have a tax liability for the year.  You then have until 31 January 2017 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 it touch for more information.

A couple of weeks ago I dealt with working from home expenses in my blog.  This week – we move on to your car!

Like working from home, there are 2 main methods of claiming motor expenses – one more complicated than the other!

1. The Mileage Method (simple method)

This is simple to work out and generally used if you are not doing lots of business mileage in your car.  If you use the family car occasionally for work, then this method would be the one for you to use.

You simply keep a record of the number of business miles you do and then calculate a flat rate of 45p per mile (for the first 10,000 miles) and then 25p per mile on anything over this.

You then do not charge the business for any other car related costs such as insurance, servicing, petrol etc.  These should all be paid for privately.  The actual cost of buying the car is not separately reflected in your accounts either under this method.

You can claim for extra journey costs such as parking, congestion charge and toll roads in addition to the 45p per mile so keep receipts for those.

Obviously you need good record keeping for this method – most people keep a note in their diary or in a notebook in the car of business miles done.

You can only use this method if your turnover is below the VAT registration threshold (currently £83,000) and once you have started using it, you can only change methods if you change your car – you can’t chop and change methods each year.

2. The Actual Cost Method

This is more complicated to work out, but generally beneficial is you use your car predominantly for work, with little private usage – or you have high repair bills!

Under this method, the business pays for all your motor costs.  You can include fuel, repairs, MOT, servicing, insurance, tax and breakdown cover.  You then work out the percentage of your costs that relates to private use and disallow the private element in your accounts.  So if you use your car 80% for business, and 20% privately, then the business can pay for 80% of the total cost.  In reality, what usually happens is you pay for all the costs from the business and then your accountant will make the adjustment in your accounts at the year end to reflect the private usage of the car.

You will need to keep records to be able to estimate the percentages – if queried, HMRC would really like to see records for about 3 months to give you an idea of the business usage.

The cost of the car can also recorded in the accounts under the actual cost method, and tax relief given via capital allowances but that’s for another blog!!

Under both methods, parking fines, speeding fines and driving awareness courses are never a business expense so don’t try to claim them!!

If you have any queries, then please contact Rosie Forsyth at Wilkins & Co.

How often do you treat your staff?

Being a lovely employer and giving your staff little treats before April 16 often ended up with accountants telling you that your gift has landed your staff an unwanted tax charge.

From April 16 there is a new exemption which everyone should be taking advantage of!

The exemption covers “trivial benefits”.

At its most simple, the new rules state that gifts to employees, their family or household members by their employer are not taxable so long as:

• The cost is under £50
• The benefit is not cash or a cash voucher
• The benefit is not contractual or habitual (ie done every month)
• The benefit is not linked to performance or in recognition of a particular service provided by the employee, so no bottles of champagne for reaching a target or clinching a deal

There is no limit to the number of gifts that can be given to staff members in a year – but if the cost of a gift is over £50, the whole lot is taxable not just the excess.

That sounds great – but before you get carried away – there is a limit imposed on close companies (that is a company controlled by less than 5 people – so in reality – most family companies.)   For these companies there is an annual cap of £300 per director, which is still generous.  Gifts to any family member, who is not themselves an employee would be included in the director’s limit.

There are lots of examples provided by HMRC as to what qualifies – but things such as birthday presents, flowers on special occasions, Xmas gifts for staff, theatre tickets, would all potentially qualify.  So up to the limit, for family companies, these should all be going through the company from now on!

You do need to note that the exemption is only on the tax the employee would have suffered – there is no change to the tax in the company.  For example if you pay for a birthday meal out – it may still count as entertaining which would not be allowable for corporation tax in the company.

So what are you waiting for – go ahead and treat your staff (and directors) every now and again!

Im off to enjoy the chilled bottle of wine the company has just very kindly treated me to – what a lovely employer I have!!

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?

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 £83,000) 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.

The new tax year is upon us so what’s new and what do you need to know about for the new tax year?

Personal Allowance
This has increased to £11,000 – this is the amount that you can earn this tax year without paying personal tax.  The next £32,000 of income will be taxed at 20%, and then 40% on earnings up to £150,000.

Personal Savings Allowance
A new savings allowance is introduced in 2016/17.  For basic rate taxpayers the allowance is £1,000 and for higher rate taxpayers £500. This means that no tax will be payable on savings income until the new savings allowance has been used up.

In a further change, banks and building societies will pay interest gross rather than deducting tax as they have done before.

Dividend Allowance
The way dividends are being taxed is changing – and most small limited company owners will be worse off.

The existing notional 10% tax credit on all dividends will be abolished and a £5,000 tax free dividend allowance is being introduced.

Dividends received above £5,000 will be taxed at 7.5% (basic rate), 32.5% (Higher rate) and 38.1% (additional rate), with no tax credit set against it as at present.

Limited company owners will therefore face tax bills on dividends taking from their limited companies – which could easily be avoided in the past.

Increase in the Employment Allowance

The allowance, which most limited company directors would have claimed at least in part in 15/16 is rising from £2,000 per annum to £3,000 per annum.  However it is no longer available to businesses where the director is also the sole employee, and therefore a lot of companies will no longer be able to claim it at all.

Abolition of 10% Wear and Tear Allowance for Landlords

The flat rate 10% allowance for landlords with furnished properties is being abolished, and being replaced with Replacement Furniture relief.

Tax relief will be given against rental income for the cost of replacing domestic items which includes moveable furniture, carpets, curtains, household appliances (fridges, freezers etc) kitchenware and TV’s.
So with lots to changes to be aware of as the new tax year starts, take the time to think about how they affect you and your business, and make sure you are being as tax-efficient as possible.

More and more business are starting to use cloud accounting software for their businesses.  But what is it and should you be using it too?

Cloud accounting is the same concept as accessing your bank account online.  You don’t need to install the software on your desktop, keep it up to date or back up your data. You can access your data from anywhere that has an internet connection and collaborate easily with your accountant who can access your real time data as well, if you let them!

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, Freeagent, Xero and Sage – and most will offer a 14 day trial so you can try before you buy.

The main advantage is that all your information is in one place.  You can add logo’s etc so you can raise your invoice directly from the software, it will then show you who owes you what – and how old the debt is.  With “automated bank feeds” you can link your bank account to the software so you can download your bank statement directly into the package.  It will then match up receipts with outstanding invoices and payments with suppliers for you.  Other amounts paid from the bank can be allocated to a category such as “stationery” or “materials purchased” quickly and easily.

You can even get “add-ons” now such as “Receiptbank” (payable extra) where you literally take a photo of your receipt and an app whizzes it off to your accounts package for you.  No more losing receipts or sitting down once a month to put them all into a spreadsheet.

Another advantage is you can see how your business is doing during the year.  I have some clients who hand their books over once a year and have no idea what their sales figure has been for the year, or if they have made a profit or loss.  Cloud accounting produces real time key data for you – in reports or graphs for you “creatives” out there!

So is it for you?  If you have sufficient transactions to make your bookkeeping a chore, or if you hand your accountant a shoebox at the end of the year full of receipts that have probably been through the wash once or twice – then definitely!   The monthly cost is minimal given the time savings involved.

For very small businesses, then you may find your spreadsheet is adequate for now but with HMRC pushing for everyone to have “digital tax records” by 2020 or sooner, it may be that cloud accounting will soon be the way forward for everyone.

Tax codes are dropping through letter boxes at the moment for 2016/17 and causing complete confusion for many due to the new dividend tax rules.

Your tax code is important as it tells your employer/pension provide how much pay you can receive before they need to deduct tax.

Your tax code is made up of numbers and usually one letter.  The numbers show how much tax free income you get in a tax year – you usually multiply the number by 10 to get the total amount of income you can earn before tax.   The letter refers to your personal tax situation and how it affects your personal allowance (a detailed list can be found here)

For example the standard tax code next year is 1100L – this means you can earn £11000 (the amount of the personal allowance) before you start to pay tax.

For directors with dividend income, as you will be aware the rules for taxing those dividends are changing from 6 April 2016.

HMRC are being sneaky and including in your tax code an adjustment for the dividend tax they think you will pay in 16/17.  By including it in your code, the amount of pay you receive tax free will go down each month.  The tax would normally be collected via self-assessment (payable 31 Jan 18) so this is just HMRC’s way of getting the tax from you early!

You are perfectly entitled to change your code to take out this amount – and pay the tax via self-assessment.  You just need to call HMRC and ask them to remove the dividend tax amount from your tax code.

If you have any queries about your tax code and don’t understand why it is what it is, then please get in touch.

When you’re running your own business, the end of the tax year can be a great time for a spring clean and a time to create order out of chaos!  The tax year ends on 5 April 2016, so most sole traders will be preparing their accounts to this date.  For owners of limited companies, even if the company year end is different, you will be including the amount of salary and dividend paid to you in the tax year (6 April 15 – 5 April 16) on your self-assessment tax return.

So what should you be doing before the end of the tax year?

1. Get you Bookkeeping in Order

I know –not very exciting – but so important. Make sure you have copies of all your invoices and receipts, bank statements, and your spreadsheets are up to date.  A good filing system will not only make your life easier but also put a smile on your accountant’s face!

Make sure you have a record of any business mileage you have done, and have details of any other items relating to the business that you may have paid in cash or from your personal account (eg mobile phone, parking)

2. Asset purchase

If you are considering buying capital items for your business (computers, furniture etc) then if you purchase them before the end of the tax year and your accounting year end, then you will get the full tax relief for them in the year.

3. Personal tax

Don’t forget tax efficiency in your personal life.  Have you used your ISA allowance (or even part of it), considered pension contributions or made any Gift Aid donations – keep a note of all these as they could save you tax.

Make a plan to be organised for the new tax year – speak to a financial advisor about your own personal situation and resolve to get those things done you may have been putting off.  Have you made a will, got insurance for if you can’t work or worse?  Resolve to sort these out in the new tax year if you haven’t already.

4. Use your Allowances

Have you made use of you own and your family’s personal allowances?  Check to see if you can structure your assets and income in a way so that you are able to fully utilise your allowances.

5. Dividends

If you have a limited company consider bringing forward paying dividends.  Dividends that fall into the higher rate tax bracket are taxed at 25% before 5 April 16 and 32.5%.  Everyone will have a £5,000 dividend tax allowance from 6 April 16 so plan if possible to ensure it is fully utilised across the family.

A few simple steps can help you get your house in order before the year end and good tax planning can save you tax.  If you would like any more advice then please contact Rosie Forsyth at Wilkins & Co.