Unfortunately it is very easy to be self employed without realising it.

You might not consider yourself to be running a business, but if you are undertaking work or selling goods with the intention of earning money there is a good chance that HMRC will consider you to be self employed.

HMRC look at the key indicators – called “Badges of Trade” to determine whether you are in fact running a business.

They are:

• Profit motive – an activity must be carried on with a view to be making a profit before it can be considered a trade. You might make losses initially but if your aim is to make money, then you could well be deemed to be running a business.
• Frequency and number of transactions – generally the more often a similar transaction is carried out, the more likely you are to be running a business. For example, making candles twice a year for your own school fete is very different to having a stall most weeks at local events.
• Modification of the asset – the more you alter something between buying and selling it, the more likely it is to be considered trading
• Nature of the asset – the type and quantity of something bought and sold is relevant. For example, I will buy a car and later sell it, but I am not a motor dealer.  However, if I bought 1000 pens and sold them on at a higher price, I am probably doing it for commercial reasons (though I do get through a lot of pens!!)
• Existence of Similar trade – transactions similar to an existing trade are more likely to be considered trading. Consider a motor mechanic buying and selling a car – he is more likely to be deemed to be in the car trade than I am.
• Sources of finance – if you have borrowed money for your “venture” – and the intention is to repay it from the money generated – then you are probably trading
• Length of ownership – the shorter time you have something before you sell it, the more likely is it that you are trading, and not just selling something on that you purchased for personal enjoyment.

HMRC would usually look at all these factors as a whole, but a single badge may indicate a business if it is significant enough.

So you do need to be careful that your “hobby” isn’t actually generating self employed income. 

If it is then you need to register with HMRC, ideally within 3 months of starting to trade.    You are then responsible for paying the right amount of tax and NI on your business which you will do via self-assessment and by completing a tax return each year.  You will have costs that you can set off against the money you earn, and if you do end up in a loss-making position, may be able to offset those losses against other income that you have, to generate a tax repayment.

For more information please contact Rosie Forsyth.

Another exciting time in the world of tax!

With the snap election and the dissolution of Parliament, outstanding bills had to be passed or scrapped before Parliament shut up shop and went on the election trail – and this process is called a Wash Up!

The Finance Bill is too important to be scrapped, so to get it passed in a hurry, lots of contentious clauses had to be dropped.

So what didn’t make the grade?

The headline area is Making Tax Digital.  I don’t expect in the long run this will mean we have seen the last of this, and it will almost certainly reappear under the new government, but for now it’s out!   It may not even mean that the timescale for introducing it gets delayed but we will have to wait a bit longer to find out.

Also out are the 2 new allowance I wrote about last week!  The £1,000 allowances for property and rental income that came in in April 17 are out again and have been scrapped!

Better news is the reduction in the dividend allowance from 18/19 from £5,000 to £2,000 has also gone.  This will please a lot of small business owners, but again it could well be reintroduced post election (depending on who gets in of course!)

Other provisions have been scrapped but the above are the most relevant to my clients.

There is a budget already planned for the Autumn and often a mini-budget post an election, so this tax hokey-cokey looks set to continue. Not great when you are trying to plan for your business or your clients!

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?

Bookkeeping might not be your favourite job – but it’s so important to the smooth running of your business.

Here’s my list of the most common mistakes that I see small business owners make time and time again.  Forewarned is forearmed so take a look at your current system, and see if you need to make any changes!

Not making a distinction between business and personal items

It’s tempting and very common just to use your personal bank account and credit card for your business transactions.  Its may seem less hassle when you start, but it makes your bookkeeping so much harder to keep track of over time.

You need to be able to claim for your business expenses, but not for your personal expenditure.  Keep things clean and simple from the start – have a separate bank account that you just use for business income and expenses – and you will avoid muddle and potential trouble with the tax man later on.

Not keeping all your receipts

You will probably keep receipts for large items of expenditure, or for items where you have a supplier invoice, but all those small items often get forgotten.  If you need to justify your expenses to HMRC, they will want to see the evidence with the receipt.  If you don’t keep the receipt, you’ll probably forget to record sundry items like parking, stationery and stamps, and then you will end up paying the tax man more than you actually need to!

Not having an organised system

Whatever works for you, but not keeping on top of it will mean it becomes a mammoth task to catch up, and you will put it off more and more!  A simple system is fine, but you need to keep basic records and file things away sensibly. Cloud systems and receipt scanning Apps save you time and stress, and make it more likely that you record all you receipts when you get them.

Recording Money spent on petrol/car insurance/repairs – and claiming a mileage allowance

It’s a nice try – but you can’t have both.  Keep a mileage record of business mileage travelled (excluding regular commuting) and then pay for your petrol personally – or record the total running costs of your car in the year, and allocate a percentage to the business based on business usage.  I have had clients who pay their car insurance and repairs from the business – and then want to claim the mileage allowance of 45p per mile.

Not Leaving Money in the Business for tax

Hopefully you have made a profit – and that may well mean you owe the tax man.  Not taking into this account, and spending all your hard earned cash will lead to tears later down the line when you have to pay the tax bill in January.  Again cloud accounting systems will estimate for you what your tax bill might be – which at least flags up to you the fact that there will be tax to pay.  Saving the money to pay it though is still down to you!

For more information or help with your accounts please contact Rosie Forsyth

I find it amazing………… but not everyone’s idea of fun is keeping their accounts up to date.

If you are one of these strange creatures, then what do you need to do each month to keep on top of your bookkeeping?

Using Apps and cloud based packages is the way forward (and may soon become compulsory under Making Tax Digital) but even if you currently use a spreadsheet; each month you should do a few simple tasks:

1. Raise sales invoices for work done in the month and send them out
2. Make sure you have been paid for previous sales invoices.  Mark them off as paid on your spreadsheet, or chase any slow payers
3. Collate all your expenses for the month – these may have been paid from your business account, cash or on a credit card, but if they relate to the business make sure they are recorded.  List them on a spreadsheet and file the paper receipts in a file by month.  (A cross- referenced numbering system too would make your accountant very happy at the end of the year!)
4. Ideally you should “reconcile” the bank.  If you have a bank account that you just use for business, go down it and make sure you have recorded all the transactions on there on your spreadsheets.  You will need to add to your spreadsheet things like direct debits and bank charges as you won’t have paper receipts for those.  Your spreadsheet will then include everything that is on the bank statement for the month, plus expenses you have paid for in cash or on a credit card.
5. Update your mileage log.  If you use your car for work you need to keep a record of the miles you have done.  Leave this task til the end of the year and you’ll have no idea where you have been!
6. If you are putting money aside for your tax bill, transfer this over to a different account (and forget about it!)

And that’s it!

Doing this once a month will help you keep you on top of your accounts.  Using an App such as “Receiptbank” or “1tap” means you can scan your receipt when you get it and then throw it away.  The App will record the data for you and store the photo of the receipt – giving you your Sunday afternoons back to do something more exciting!

For more information or help with setting up a bookkeeping system, please contact Rosie Forsyth.

HMRC has published its response to the MTD consultations and gives us an update on the current position as to how MTD will be implemented next year.

So what do you need to know?

• The way you report to HMRC will change from April 18
• You will need to give HMRC info quarterly with a 5^th report due at the year end
• You can still use spreadsheets as long as they meet the requirements of MTD ( this is likely to mean linking it with software somehow)
• The requirement to keep digital records does not mean that you will have to produce and store your invoices and receipts digitally
• Free software will be available to businesses with the most straight forward affairs (no info yet about what this will look like)
• Cash accounting rules can be used for businesses with a turnover up to £150,000.
• Businesses eligible for 3 line accounts on their tax return will only have to give the same info quarterly (income, expenses, profit)
• No penalties for the first 12 months for getting it wrong!

So for a small sole trader business, from April 18 you will have to do the following returns:

1. First report from April – June 18 due in June/July 18
2. Second report from July – Sept 18 due in Sept/Oct 18
3. Third report from Oct – Dec 18 due in Dec 18/Jan 19
4. Fourth report from Jan – March 19 due in March/April 19
5. Fifth and final report for the year, confirming annual figures due Jan 20
   AND:
6. Normal tax return for 17/18 due 31 Jan 19

HMRC has been lobbied to change the level at which business need to comply with MTD (currently sales of £10,000 for small businesses and landlords) but they have not announced any changes yet.  Instead it is “considering if further” along with the start date for the smallest of businesses!!

It is also playing down the costs of MTD to the small business.  Its own assessment is a one off transitional cost of around £280 – much lower than the figure estimated by everyone else of around £1250.  (I know which figure I believe!)

So What Should I do Now?

With the new financial year starting in April – now is the ideal time to think about your bookkeeping systems and how you are going to need to change them for MTD.  MTD is a year off, but with the first return due just 3 months into the year, that’s not long to get your head around a new system.

It is likely that any new free software offered will be similar to the current HMRC online tax return filing system (eg can’t be accessed by your accountant), so if you are going to need/want your accountant’s help with MTD, then you will probably need to look at commercial online software.

New programmes will undoubtedly become available during the year as we learn more about MTD, but for those who leave their accounts til the year end and then spend a day frantically getting a spreadsheet up to date, or organising receipts, you are going to have to change your ways.

Online bookkeeping systems do save you time and hassle, as well as giving you real time information about your business, and are well worth the £20-£30 a month cost.  My advice would be to look at these for your business from April this year so you are all ready to go when MTD goes live.

For more information please contact Rosie Forsyth

With this year’s tax returns all done (smug smile) this question is the most commonly asked by my self employed clients.

What costs can we allocate to the business when we work from home?

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 £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.

Its tax return season and I am currently up to my eyes in “last minute.com” self –assessment returns.

Most self-employed know that (and have budgeted for) tax is due at 20% (or 40%) on their profits, but National Insurance is often forgotten about, leading to confusion over the amounts due at 31 January. The first thing to get to grips with is the fact that if you are employed, your National Insurance position is very different from that of a sole trader.

As an employee you have Class 1 NIC’s deducted from your pay.  But if you are self-employed you currently pay two classes of NICs: Class 2 and Class 4.

Class 2 NIC

Class 2 NIC’s are flat rate contributions (£2.80 per week in 2015/16).  Class 2 NI is liable to be paid for every week of self-employment in a tax year, if the profits for that tax year are greater than the Small Profits Threshold (£5,965 in 2015/16).

Class 2 NI used to be paid monthly by direct debit but is now calculated and paid via your tax return.

These contributions provide you with the opportunity to build up entitlement to the state pension and other benefit. A full state pension is paid only to those who have an adequate record of NI contributions – currently 30 years of contributions.
If your profit is under the Small Profits Threshold then you will be exempt from paying Class 2 NIC – this exemption is now automatically given when you submit your tax return.  In previous year’s you had to separately claim the exemption.

Class 4 NIC

Class 4 NIC’s are paid on the net profits that are subject to income tax and are payable at the same time as your income tax.   Class 4 contributions are payable at a rate of 9% on profits over £8,060 up to £42,385, and 2% on profits above this level.

This means that you could be paying Class 4 NIC’s but not income tax if your profit for the year is between £8,060 and £10,600.  It’s also a big number to forget about when budgeting for the amounts due at 31 January!

Class 2 is going be abolished from April 2018 to simplify things for the self employed but you should still remember to take NI into account when budgeting for your tax bill to avoid any nasty surprises!

For more information please contact Rosie at Wilkins & Co.

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.

This week I’m on a rant about Making Tax Digital – because it is a humongeous change to accounts and tax as we know it- and most of those people it’s going to affect – haven’t cottoned on!

The MTD change is starting with the little guys – that’s you and me, which seems unfair to us, but from HMRC’s stand point is logical, as they need to get it right with people with relatively simple tax affairs, before moving onto the Amazon’s and Starbucks of this world!

At the moment, it’s all change from April 2018 for the self-employed and landlords with turnover of over £10,000 – that’s really not that much.  There is an outcry about this and everyone is lobbying HMRC to increase the threshold to slightly larger businesses with turnover equal to the vat threshold – as at least they are used to doing some kind of digital return already.  But at the moment we are stuck with the £10k cut off.

So if you have turnover or rental income of £10k very soon you are into reporting your results quarterly – and digitally – to HMRC.  Sending your receipts in a carrier bag to your accountant once a year (probably 7-8 months after your year-end) is just no longer an option.  Even sending then nicely analysed on a spreadsheet looks like it won’t do anymore.

So how are we going to do cope with MTD? The truth is – we just don’t know – as information from HMRC is so limited.

As an accountant I’m really busy dealing with my clients at the moment and I have plenty of “carrier bag” clients – whom I love dearly.  They don’t get accounts – why would they?  I don’t get plumbing! (no offence plumbers – but I really cant read a receipt when its been through the wash)

Do I have time to do their accounts 4 times a year rather than 1, and within a one month deadline?  Probably not.

Can I do it for the same fee?  Definitely not!

I am in the process of educating my clients and moving them onto cloud accounting packages and most of them making the switch do like them.  Most get that once they know what they are doing, it will save lots of time and give them up to date figures which they can use to make real time business decisions.

After all, what real use is a set of accounts 9 months after the end of your year, apart from telling you how much tax you owe?  With real time information, accountants can really add value to a business.

But most decent accounting packages come with a monthly subscription.  For some clients, the annual fee of that alone is about what they pay now for their annual accounts, so their costs are really going to increase.  Research shows the annual cost of MTD to a small business will be £1,250.

So whilst I get the logic, and it all sounds lovely in theory, HMRC need to step into the real world and consider the thousands of small businesses this is really going to affect.  We need the turnover limit increased and the start date delayed to give clients time to adapt to digital systems.

You can give HMRC your views before Nov 7 here  https://www.gov.uk/government/collections/making-tax-digital-consultations

Rant over.