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.

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!

The government has announced major changes to the Making Tax Digital proposals- again!

Put on hold while we had the election, the changes now announced mean that MTD will affect far fewer people in the next couple of years than the initial plans.

MTD will initially now only apply for VAT.

Self-employed individuals who are VAT registered will have to file under MTD from 2019 – so they will need to file quarterly returns from MTD compatible software.

Other self-employed individuals and landlords will now not have to keep digital records, or update HMRC quarterly until at least 2020.

There is no news on the timetable for companies, but it will be at least 2020 before they need to comply.

This delay will give small business more time to make the transition to digital and is welcome news to many.

Having said that 2020 is not that far off, and clients who are switching to cloud accounting are benefiting from the real time information it brings them about their business – and the time savings made from being able to scan receipts on the go, and no longer living in dread of “accounts day!”

For more information please contact Rosie Forsyth.

Payments on account of 17/18 tax are due by 31 July, and you may have received a statement in the post telling you how much you need to pay.

What are they and how are they calculated?

If you pay your tax under self assessment – you will probably have to make “payments on account” of your tax bill at 2 stages during the year -31 Jan and 31 July.  They are just that – a “part payment” of your anticipated tax bill for the year.

How these are calculated is easiest explained with an example.

You started your business in May 2015, prepared your accounts and calculated your tax bill for 15/16 to be £3,000. This was due for payment at 31 Jan 2017.  But you also had to pay a payment on account of your next year’s (16/17) tax bill – and this was automatically calculated at 50% of the previous year – so £1,500.  So actually at 31 Jan 17 you had to pay £4500.  You may have just paid this at the time and not really grasped what it was for.

The second payment on account for 16/17 is due by the end of July and again is 50% of last year’s bill – so another £,1500.

So by now – you have paid £3,000 on account of your 16/17 tax bill – even though, if you have not yet filed your tax return, you don’t actually know how much your final bill will be.

If your profits in Year 2 have gone up – and when you do your accounts and file your tax return, your tax bill for 16/17 is worked out to be £5,000, then you have already paid £3,000 of it during the year – so you only owe a further £2,000 at 31 January 2018.  But, the process is repeated – so at 31 January 18 you will owe £2,000 for this year – and your first payment on account of 17/18, calculated as before at 50% of the current year bill (£2,500) – so £4,500 in total.  You then owe at 31 July 2018 your second payment on account of 17/18 – another £2,500.

If you are in the scenario where profits are lower than the year before, then you will have overpaid in the year with your 2 payments on account and you will be due a refund for that year.  In the example above, if your tax bill for 16/17 worked out to be £2,400, then because you have paid £3,000 during the year, then you have overpaid £600.  But, taking into account your first payment on account for 17/18 which will be 50% of £2400 = £1200, you still owe £1200 – £600 = £600 at 31 Jan 18!

Confused??  Who said tax wasn’t taxing!

If you know your profits are going to be lower in the next year, perhaps because you are doing less hours or lost a key client, then you can apply to reduce the payments on account that are going to make – to avoid overpaying in the first place.  Don’t overestimate the reduction though, as HMRC will charge you interest if you get it wrong and reduce the payments too much.

A word of warning – the changes to the dividend rules means that many more people will owe tax under self assessment. You are only excluded from making payments on account if the amount you owe in tax is less than £1,000, so many small business owners will be facing payments on account in the future.

For more information please contact Rosie Forsyth.

We are now well into the new tax year and if you have a new business, or your bookkeeping system leaves a little to be required – it’s time to get it into shape!  Leave it too long and the mountain of receipts just keeps growing!

If you have set up a new sole trader business this tax year – there are couple of things you must do straight away:

1. Register with HMRC – you can click here to do so.  This tells HMRC you are self-employed and means they will ask you to complete a tax return.  You need to do this within 3 months of starting your business.
2. Set up a separate bank account.  This can just be another current account but it’s really important to keep your business income and costs separate from your personal money.  You might want to set up another account as well where you can put money aside for your tax bill.
3. Buy a couple of folders (and keep the receipt!)

What Records do I need to keep?

You need to keep records of your sales and costs.  You won’t need to send these to HMRC but you need to keep them so you can work out your profit or loss for your tax return, and show them to HMRC if asked.

There are many ways you can keep your records, ranging from pen and paper to accounting software and the key is to choose one that suits you.  If you don’t get it – you aren’t going to keep it up to date!  The way we report our figures to HMRC will be changing – Making Tax Digital is on hold for now, but it is expected to be back on the agenda when the Government has sorted itself out, so before long we will need to be keeping digital records.

There are some great Apps out there now for scanning receipts and recording your data for you, so if you are just starting up your business, I would go straight for the digital option.  Take a photo of your receipt when you get it, upload it, put it into the relevant category, and then bin it – job done! You will save far more than the monthly subscription fee in regained time.

Even if you just go for an App to record your expenses (Receiptbank is the one I use) then the rest of your record keeping is pretty straightforward.

For your Sales:

Keep a copy of every invoice that you send out (paper or electronic).

Keep a record on a spreadsheet of all invoices raised – noting the date it was issued, the number (keep these sequential), who it was to and the amount.  Have a final column where you note the date the invoice is paid – perhaps in a different colour so it stands out!  You can then easily see who owes you money and how long the invoice has been outstanding – so you can get chasing!

Expenses:

It’s really important to keep track of what you are spending.  Try to pay for everything related to your business directly from your business bank account – this will make recording expenses so much easier.  Some things you will have to pay in cash (parking etc) but wherever possible use your business account debit card.  Even in Tesco if you are buying bits of stationery, pay for this separately to your weekly shop, or you will probably forget you bought it and you won’t claim it against the business.

If you haven’t gone for the App then keep a spreadsheet of your expenses.  It’s a good idea to have one spreadsheet or tab for all costs that you have paid for from the business account and another one for cash payments.  Your spreadsheet should note the date, the supplier name and the total.  It should then break down the amount into categories so you can keep track of what you are spending – the categories can be whatever you like and what will be useful for you – but might include post, stationery, travel, parking, website, networking, subscriptions etc. Don’t forget to include a category for money that you have taken out of the business for yourself, as you will need to “pay” yourself at some point!

Keep the actual receipts for your expenditure in a folder if you haven’t zapped them on your phone – filing them by month is a good idea and for the super organised, number them and cross reference them to your expenses summary spreadsheet, so when your accountant queries something you can find the receipt quickly!

Other Costs

If you use your car for business then the simplest way to charge the business for this is to recharge the mileage.  The business can pay you 45p per business mile – so you need to keep a record of the business mileage that you do.  You might chose to keep a notebook/diary in the car to keep a log, or to keep a spreadsheet but somewhere you need to keep a record of the business miles you have done.  Every month, or quarter, total this up and repay the amount due to you from the business account – not forgetting to note it on your expenses summary!

Keep a record of your mobile phone bill and internet costs as you can also reclaim a percentage of these from your business.

Bank Accounts

Print out your statement when you get it and file it in your folder.  Check the items on your bank statement to the income and costs on your summary and make sure you have everything recorded.

When you are paid by a client, it’s a good idea to put a percentage of this aside into your “tax” bank account to save for you tax bill – the amount you need to put aside will vary depending on your personal circumstance, but between 20 and 30% as a guide.

If you follow these basic steps then you are well on the way to having a good bookkeeping system.  Try to keep this up to date – there is nothing worse than sitting down to catch up the last 6 months!

Using your phone to zap your receipts is strangely satisfying (and the kids love it!) so I would really recommend going down the digital route to keep your records – contact me for prices.

If you are happier sticking to spreadsheets for now then do contact me by email for a template that can be used.

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.

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.

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.