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Making Tax Digital for Income Tax – what this means for your business and how you need to prepare

Making tax digital for income tax (MTD ITSA)  is coming in from April 2024 and is going to have a huge impact on most sole traders and landlords.

April 2024 may seem ages away – but your business needs to be prepared for the change, as you aren’t going to be MTD ready overnight!

This blog sets out the basics of the MTD ITSA regime, and how you need to prepare.

Who is affected?

MTD ITSA affects all sole traders and landlords with income over £10,000.  Note that this is income, and not profit, so unless your business is very small, you are likely to be caught.

What is MTD ITSA?

MTD ITSA is the digitalisation of tax data and submission. It requires you to keep digital records for your business – this means using MTD compliant accounting software such as Xero, Quickbooks, Freeagent etc

Currently you tell HMRC about your income once a year, via your self-assessment tax return.

This is being replaced by quarterly reporting – with everyone having the same quarter dates (5 July, 5 Oct, 5 Jan and 5 April).  The quarterly reports will be sent to HMRC digitally, from your accounting software.  They will have to be filed within one month of each quarter end.

There will then be a final report – called the End of Period Statement (EOPS) which needs to be filed by 31 Jan after the end of the tax year.  This will include any year end adjustments to your accounts, such as accruals, bad debt provisions, working from home claims etc.

On top of this – there will be a final declaration, replacing the current tax return.  This will bring together all your sources of income and finalise your tax liability for the year.

So one return is being replaced by five!

And if you are both a sole trader and a landlord, then you need to do the above for each source of income, so that’s 10 returns a year!

 

The Implications for your Business

MTD will impact your business.

At the most basic level:

  • You will need to start using accounting software and keep digital records, if you are not doing so already
  • This will need to be kept up to date, as information must be submitted quarterly
  • You will need a separate bank account for your business. If you mix business and personal transactions in one bank account, then you will have to analyse out all the personal transactions before submitting the info to HMRC
  • Cost  – MTD will have cost implications for your business:
    • HMRC have already said they will not be providing free software for you to use
    • Additional accountancy fees are inevitable if you want your accountant to help you with this
    • Training – if you want to do this yourself then you may need initial training in the software

 

What are the first steps to prepare?

Software is the key to MTD.  Good accounting software will automate a lot of the process and will generate the quarterly returns.  If these are accurate, then less work will be involved in creating the EOPS.

So the first step has to be digitalizing your accounting records.  Doing this sooner rather than later will help you get up to speed with using the software and ensure you are ready for April 24.  I would recommend using software from at least April 23, and possibly even from the start of this tax year,  April 22.

Secondly, if you don’t currently have a bank account that you just use for your business, then this should be done now.  It doesn’t have to be a business account, it can just be an account in your name, but it should be exclusively for business transactions.

How we can help 

MTD is massive and will fundamentally change the way many small businesses keep their accounting records.

The thought of 5 returns a year to HMRC rather than 1 is daunting to say the least.

We will be helping our clients to ensure the move to the new regime is as painless as possible, through webinars, training sessions, and regular updates as we move towards April 24.

For now we can help transition you onto accounting software.  Once you are up and running, you will wonder why you didn’t make the switch before, as you appreciate how simple it can be, and the time it can free up for you to concentrate on your business.

For more information please get in touch with Rosie Forsyth at Wilkins & Co.

 

 

 

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Tax year end – use or lose your allowances!

Just a couple of weeks to go before we say goodbye to the 20/21 tax year.  Many allowances will roll over on 6 April 2021 and if you have not used them in this tax year, the opportunity will be lost.  Noted below are some of the key areas for you to review to ensure you have been tax efficient in the year. Taking action now will allow you to take advantage of any exemptions, remaining reliefs and allowances before they are lost for the year.

Income tax

Ensure if possible you have sufficient income to use your personal allowance. The allowance is £12,500 for 2020/21. If a family member has unused allowance consider if there are ways for this to be utilised.

If you have a limited company, ensure the £2,000 tax free dividend allowance has been utilised – assuming you have sufficient distributable profits to be able to declare a dividend.  Also remember that dividends are paid “per share” so have to be paid to everyone holding that class of share in accordance with their shareholding.

For married couples/civil partners that are eligible for the Married Couples Allowance, ensure this has been claimed.  If one partner has not used all their personal allowance, and the other is a basic rate taxpayer, then up to £1,250 of the personal allowance can be transferred, saving £250 as a couple.  This can also be backdated to tax years since 5 April 2016 if not claimed previously. The claim is simple and can be done here .

Consider ways to reduce your taxable income if you are within the £100,000 to £125,000 group to prevent a 60% effective charge. Pension contributions and charitable donations are two ways you can reduce your taxable income.

If your income will be over £50,000 also consider ways to reduce this if you have children and are claiming child benefit.  This is clawed back if the higher earning partner’s income is over £50,000, on a sliding scale, and all has to be paid back if your income is over £60,000 in a tax year.

Annual ISA subscriptions should be maximised. The limit for 2020/21 remains at £20,000. The investment return from ISAs is free from income tax and capital gains tax. Talk to an IFA to get advice on utilising your ISA allowance.

Pensions 

Most individuals can make contributions of up to 100% of their earnings, capped at £40,000 each tax year. Pension contributions are tax effective as tax relief is given at source for a personal contribution, but the contribution needs to be made before the end of the tax year for it to qualify.  Very high earners may be limited on the amount they can contribute and need to take individual advice.

If you do not use all your allowance in one year, you can carry it forward for up to three years. Any unused allowance for 2017/18 will be lost after 5 April 2021.

Even if you have no income, you can still make a net pension contribution of up to £2,880 and the government will add £720 basic rate tax relief, which can be a significant benefit.

Again take advice from an IFA as to your personal pension situation.

Inheritance Tax

Everyone has a £3,000 annual exemption to use each year. This is the amount individuals can give away without any inheritance tax implications.  Any unused exemption can be carried forward for one tax year only. This may be of use to the older generation wanting to help their families in these difficult times.

Small gifts of up to £250 made to an individual are also exempt each tax year.

If you would like any advice about your personal tax position then please do get in touch with Rosie Forsyth@wilkinsco.co.uk

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Extension to the Self-Employment Support Scheme

I’m sure we all saw in the news on Friday that this has been extended for 3 months, but here is just a quick summary of the main points:

  • the scheme will run for another 3 months, covering June, July and August
  • the second grant will be paid in one lump sum in August
  • this time the grant is worth 70% of average monthly trading profits, capped at £6,570
  • all the same criteria to qualify as for the first grant, so if you qualified and received that, you will qualify for this payment
  • applications for the grant will open in August so you cannot do anything until then to receive the money
  • you can still apply for the first grant until 13 July if you have not yet done so
  • you DON’T have to claimed for the first grant to apply for the second.  One of the criteria is that your business has been adversely affected by COVID-19, so it may be the case that it has only been affected in the later phase, in which case you would only apply for the second grant

This is all the information currently available: further guidance will be published on June 12 so we will bring you this when we have it.

As usual, if you have any questions, please do not hesitate to get in touch with Rosie Forsyth at Wilkins & Co.

rosie@wilkinsco.co.uk.

 

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Bounce Back Loans Now Available

These are now available for businesses to apply for.  There is little information available other than that already in the public domain and detailed here:

https://www.gov.uk/government/news/new-bounce-back-loans-to-launch-today

The main points are:

  • Loan may be between £2,000 and £50,000 or up to 25% of your turnover in the 2019 calendar year
  • Available to most businesses and available from most high street banks
  • Simple online process to apply – 7 questions to complete, including a self-declaration that the business has been impacted by CV19, and it was not in financial difficulty at 31 Dec 2019.  We believe this to mean (in broad terms) the balance sheet was positive at that date
  • access to funds in a matter of days
  • no interest payable for the first 12 months – and then the interest rate is 2.5%
  • repayment over a maximum period of 6 years
  • no personal guarantees
  • loan will be 100% government backed for the lender
  • the borrow remains 100% liable for the debt – this is a loan, not a grant!

The scheme will be of huge help to many businesses, and gives firms access to funds that they may need to help them through the next few months.

It has however received mixed reviews.  It is still a loan, and needs to be repaid in full by the business.  The terms are generous, but many small businesses will not want to burden themselves with additional debt at this time and feel that once again small limited companies are missing out on help being given to other sectors of the community.

 

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IR35 / OFF-PAYROLL WORKING – WHAT IS IT AND DOES IT APPLY TO ME?

Although IR35 is the hot topic – IR35 itself is not new – it has been around since 2000.  It is a piece of legislation that allows HMRC to collect additional payment from a contractor, where in reality the contractor is effectively an employee of their client – but is just choosing to operate through a limited company.

So why is everyone talking about it now?

New rules are coming in from April 2020, which are shifting the emphasis of deciding whether your working relationship is caught by IR35, from the worker to the end user in some circumstances.  If that end user determines that you are caught by the rules, they either need to take you onto the payroll or deduct PAYE and NI from your invoice.

This blog aims to demystify the new rules so you can determine if it will affect you.

Off-Payroll Working – What is it?

Off-payroll working is a term used by HMRC to describe the situation where:

A worker/freelancer provides a service (eg themselves) to an end client, and invoices that client via their own limited company and CRUCIALLY – if that worker was providing that service directly to the end client (eg NOT via ABC Limited) then that worker would meet the employment test status (see below) to make them an actual employee of the client.

If off-payroll working applies:

  • The end client is required to deduct PAYE and NI from your invoice, BUT
  • You do not acquire any employment rights under the rules – so you have no right to SSP, SMP, holiday pay,pension etc

so not a great position to be in!

The Changes from April 2020

From April 2020 if your end user is a large or medium sized company, then it becomes their responsibility to assess whether you have the employment status of a “worker”.  If they determine that you do, then the off-payroll working rules kick in.

Prior to April 2020 it was your responsibility to determine your status, and to deal with the IR35 legislation yourself.

(A medium company is one that meets 2 out of 3 of these criteria:

  • turnover over £10.2m,
  • over 50 employees
  • balance sheet total of over £5.1m)

It is important to note that if your end user is a small company, the changes do not apply to them at all.

If it is a medium/large company then the following will happen:

  • The end client must tell you that they are a large or medium size company
  • The end client must assess your employment status and tell you what they have decided
  • The end client will then deduct PAYE and NI from your invoice if they have concluded the off-payroll working rules apply

How will they assess my employment status?

The end client should start by using HMRC’s Check Employment Status Tool “CEST” which will give an assessment at the end of the questions.

It asks a number of questions about your working arrangements, such as “could you send a substitute to perform the task” and “does the end client have the right to determine your working hours”

If the questions are answered accurately and honestly, HMRC will accept the results of this test.

Once they have determined your status, they need to inform you of their decision by providing you with a Status Determination Statement.  If you disagree, you can challenge the result, and they will need to come back to you within 45 days.

What is likely to happen?

These rules came into force for the public sector last year, and the outcome was for many organisations, they just decided to take everyone onto the payroll and to no longer engage freelancers, as the risk of getting it wrong was just too high.  We are seeing the same already from some of the banks in advance of these changes.

Obviously, having PAYE and NI deducted from your invoice is going to affect your take-home pay, and if you are affected then there should be some negotiation about your future invoices!

It is important to note that the changes do not affect everyone, but there is, as is to be expected, currently widespread panic in the freelance world!

If your end client is a small company, there is no change.

However you are still responsible for determining your employment status, and I would highly recommend running through the CEST questionnaire to see how HMRC would assess your status, and if you should be applying the IR35 rules yourself.

If you have any questions, then as usual – get in touch!

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Property Landlord? – Big Changes ahead to Capital Gains Tax

There are 2 big changes coming in from April 2020 that will affect anyone selling a property that is now rented out but that has once been your main home.

Rental properties that have never been the landlord’s main home do not get these reliefs anyway, and are therefore not affected.

  1. REDUCTION IN THE FINAL PERIOD EXEMPTION

When you sell a property, you pay capital gains tax (CGT) on the profit you make.  CGT is paid at the rate of 18% or 28% on residential property transactions depending on your tax bracket.

At the moment you don’t have to pay any CGT for the years you lived in the property, plus an additional exemption for the final 18 months that you owned it, even if you weren’t living there at the time.

For example, if you have owned the property for 10 years, lived in it for 6 years and then rented it out for the last 4 years, you would not pay CGT on 7.5 years of ownership – or 75% of the gain.

But from April 2020 this final period exemption will be cut to 9 months.  This means in the above example, after April you will not pay CGT on 6.75 years or 67.5% of the gain.

(There will be no change to the 36 months available to disabled people or those in, or moving into, a care home.)

  1. ABOLITION OF LETTINGS RELIEF FOR MOST LANDLORDS

The other change is arguably a bigger deal and involves lettings relief, which currently provides up to £40,000 of relief (£80,000 for a couple) to people who let out a property that is, or has been in the past, their main home.

From April 2020, lettings relief will only apply where the owner actually SHARES OCCUPANCY of the home with a tenant – effectively spelling the end of this tax relief for most people!

The relief will not be available at all for properties sold after 6 April 2020 – there are no transitional rules allowing you to claim it for the years up to April 2020 – it is simply going!

If you are therefore currently selling or thinking of selling a rental property, that has previously been your main home, then this needs to be sold before 5 April 2020 if you want to keep your lettings relief, and the current 18 month final period exemption.

For more information, please contact Rosie Forsyth of Wilkins & Co.

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How has the tax on buy-to-lets changed?

The new tax rules for landlords have been in since April 17 but it’s only now that you will be completing your first tax return under these rules, so here is a little reminder of how the new rules work (and a little work out for your brain in this hot weather!)

In the good old days pre April 17, unincorporated landlords would only pay tax on their rental profit.  The interest that you pay on your “interest-only buy to let mortgage” was a cost that you could claim in full in working out your profit for the year.  In tax terms, you would be saving tax at your highest marginal tax rate on this mortgage interest, so at 40% for a higher rate taxpayer.

From April 2020, you will no longer be able to deduct your mortgage cost from your rental income in working out the profit.  Instead, you will receive a 20% tax credit for your mortgage interest.

This new system will potentially increase the tax you pay in 2 ways:

  1. If you are a higher rate taxpayer, the tax credit is only 20%, whereas before you had 40% relief
  2. Less obviously, you could be forced into a higher tax bracket, depending on your other income, as the rental income that you now need to declare is higher than it was before. This could have knock on effects for child benefit or tax credits, or even capital gains tax if you are selling your rental property.

The change is being phased in over 3 years – which leads to some complicated calculations over the next few years.

In 17/18, you can still claim 75% of your mortgage interest relief, and you’ll get the 20% tax credit on the other 25%

In 18/19, you can claim 50% of your mortgage interest relief, and you’ll get the 20% tax credit on the other 50%

In 19/20, you can only claim 25% of your mortgage interest relief, and you’ll get the 20% tax credit on the other 75%

So if you are doing your 17/18 tax return, you need to provide HMRC with this information.

There are new boxes on the 2017/18 tax return to complete – the 75% you can claim this year goes into Box 26 on the Property pages, and the 25% you can’t claim needs to be entered into Box 44.  You’d then be wise to check the tax due as a result, to make sure it has been calculated correctly.

Good luck!

As ever, if you need some help with this, or your tax return this year, then please drop me an email at rosieforsyth@wilkinsco.co.uk

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Are you Missing Something?

This blog looks at items that are often overlooked or missed by individuals and employees when completing their tax returns.  All are allowances that you may be perfectly entitled to, so if you are not claiming them, you are missing out and paying more tax than is necessary.

Marriage Allowance

Many people entitled to this are still not claiming it – and it is worth £252 this tax year.  The allowance is available if you are married, one partner does not pay tax (as their income is under the personal allowance threshold of £12,570) and the other pays basic rate tax.  The non-taxpayer can transfer £1260 of their personal allowance to their partner, resulting in a £252 saving.  You can backdate a claim to April 17 for any year you were eligible, giving overall savings of over £900.

Claiming for Using your own car for work

Most self employed are aware that you can claim 45p per mile for business travel, but often overlooked is the situation for the employed.  If your employer reimburses you for business travel at a rate less than 45p then you can claim tax relief on the difference via your tax return or online.  Although business travel has probably been minimal this year, you should still claim the tax relief on mileage if you can.
https://www.gov.uk/tax-relief-for-employees

Subscriptions

Professional subscriptions related to your business are deductible. This applies not only to sole traders, but also to directors and other employees who pay their own subscriptions personally, and a claim can made via your tax return, or online as above.

Tax Relief on Pension Contributions

Contributions to personal pension schemes are paid net of basic rate tax.  Higher and additional rate taxpayers can claim further tax relief on their contributions, again this should be done via your personal tax return.

Gift Aid Payments

Donations to charity through Gift Aid are also paid net of basic rate tax, and the charity reclaims the tax that you have already paid.

Again, if you pay tax at higher or additional rates, you are entitled to further tax relief on your donations and this can be claimed via your tax return.  It is useful just to keep a list during the year of donations you have made that are under Gift Aid, so you have the information when you do your tax return, or to pass to your accountant.

Missing Receipts/Items paid personally

Failing to keep a list of items you have paid for personally for your business, or not having receipts means you are not claiming for all your costs of running your business, and will end up paying more tax.  The odd missing receipt is not going to be the end of the world, but not having any back up for your costs is going to cause a problem.

New Trading and Property Income allowances

Individuals with trading or property income below £1,000 no long need to declare or pay tax on that income.  This is meant to cover ebay sellers, hobby businesses etc.

Those with income above the allowance either calculate profits in the normal way, or simply deduct the relevant allowance from the income (not from the profit – you can’t have both!)

And don’t forget to declare SEISS income….

Not an allowance – but just worth the reminder that SEISS income is taxable – and needs to be declared on your tax return separately from your normal trading income.  If it’s not put in the right place on your tax return, and HMRC know you have received it, they will add it onto your income for the year, so you will end up paying more tax than you should.

These are just some of the commonly missed items.  Getting prepared and keeping information as you get it will help make sure you don’t miss out.  An accountant should pick up on these areas if they are completing your return for you, and you should always seek professional advice if you are in any doubt as to what you can claim.  For more information 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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