Since my last blog introducing “making tax digital “ things have moved on, so this week’s blog is an update on what we know so far, and how it may affect you – as it will!

In August 2016 HMRC issued policy papers together with six consultations on MTD. In a press release it says that it’s a digital revolution for the tax system to cut red tape for British business!

It will apply to a wide range of taxpayers from 2018, including most businesses, self-employed people, landlords as well as individual taxpayers.  Currently only businesses and landlords with a turnover (not profit) of under £10,000 are exempt.

Once implemented, in theory you will be able to see, via your personal digital account, a complete picture of your tax affairs, and you’ll be able to manage all of your liabilities at the same time and in the same place.

HMRC will collect and process information in real time and you’ll no longer have to wait until the end of the tax year to see how much you owe.  Sounds lovely, but how are HMRC going to get the information?

Businesses will have to report figures quarterly to HMRC, making adjustments at the year end for accounting and tax adjustments.  Records will have to be kept digitally with the expectation that invoices, receipt etc will be kept digitally through software, using apps and cameras to upload pdf’s etc.  Some free software may be available online, but HMRC will not be providing its own free software to help you!!  That means, no more waiting to the year end and handing over a shoebox of receipts to your accountant – HMRC need up to date information quarterly!

But don’t worry – they haven’t decided on the fines yet for late filing………but they will!

Although HMRC claims that the annual tax return will go, businesses will still need to prepare year end accounts in order to reconcile their quarterly payments and claim various reliefs and make accounting adjustments.

They will be required to file a year end declaration, instead of a personal or corporation tax return.  The key difference between the year end declaration and a tax return, other than in name, appears to be that HMRC will pre-populate some of the return figures, e.g. bank interest, income from employment.

For the self employed, it is assumed that HMRC might attempt to pre-populate the year-end declaration with data submitted in the quarterly return figures, however, as currently it the case with VAT, a VAT registered businesses will still need to reconcile their quarterly returns to their year-end accounts and so all must reconcile to the end of year declaration.

Oh – and all taxpayers will need to check that pre-populated data is correct!

So… the upshot of all these changes are that, as a business owner, you are going to have to sooner or later, go digital with your accounts. All the “cloud” package providers will be making sure their software provides HMRC with the information they will need, so you just need to find the one you like and get going!!

For more information, or advice on how to choose the right digital accounts package for you contact Rosie Forsyth.

One of the most frequently asked questions from a sole trader is in relation to travel expenses and what can be claimed against the business.

The general rule is that the cost of business travel is an allowable cost.  The question then is what is business travel?

This will depend on how you work and where your base of operation is.

Commuting is not business travel and therefore cannot be claimed. So, if you go the same place every day to work, such as an office or clinic, then that is commuting.  If you do work from home, but also have another regular and predictable place of business, then travel to that place is deemed commuting. eg a hairdresser may see some clients at home but also work in the same salon twice a week.  If you store equipment in a depot and go there to pick it up before working elsewhere, travel to the depot is also deemed commuting.

It is important therefore to determine where you base of operation is as mistakes can be costly.   Everyone’s situation will be different but where you keep your files and accounting records, where you do your admin, keep your tools, where you source new work would all be contributing factors.

What about my daily dose of caffeine in the local coffee shop while I work?

HMRC’s view is that refreshments purchased away from the normal place of business are not an allowable cost of running the business – as they have a dual purpose (you must eat to live!)

Note this is different to the treatment of employees subsistence and for limited companies.

The only time when you will be able to claim these is when occasional business journeys are made outside the normal pattern of work (eg you live and work in London but you go to Birmingham for the day to an exhibition) or where your work is of an “itinerant nature” – so you are constantly on the road.

If your trip requires you to stay away from home overnight, then hotel and reasonable subsistence costs are allowable.

So if you are meeting clients in coffee shops, rather than home, then all those coffees and cakes are not going to be an allowable cost to the business.  You maybe surprised by this – as a couple of coffee’s is cheaper than renting a meeting room – but those are the rules!

For more information please contact Rosie Forsyth at Wilkins & Co.

The Marriage Allowance was introduced in April 2015 and could save you £220 this year in tax (and £212 last year) but the take up has been very low, as couples just don’t know about it.  Its free money, so worth checking if you are eligible.

To qualify all of the following must apply:

• You are married or in a civil partnership ( just living together doesn’t count)
• Your income is under £11,000 in total in this tax year (£10,600 for 15/16)
• Your partner’s income is between £11,000 and £43,000

If so, the Marriage Allowances lets you transfer £1,100 of your personal allowance to your husband, wife or civil partner, if they are the higher earner.  That means effectively they can earn £1,100 more before they start paying tax, which will save you as a couple £220 a year.

Simple!

If you were eligible in 15/16, you can backdate your claim to 6 April 2015 and you can claim online by clicking here.  It’s the non-tax payer who needs to apply.  The allowance stays in force until one of you cancels it.

Once claimed, your partner will either have their tax code changed (and therefore pay less tax each month on their salary), or claim the allowance on their tax return, if they are self-employed.

The allowance is most likely to be used by part time workers or the newly self-employed with high initial costs.  For the self-employed, it’s the profit figure that you need to be looking at to determine if you qualify, not your sales figure – so you should check each year if profits vary year on year.

For more information contact Rosie Forsyth of Wilkins & Co.

Petrol receipts are notorious for getting lost on the floor of the car, at the bottom of your bag or anywhere other than in your filing system!  But do you actually need to keep them if you use your car for business?

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

The Mileage Method (simple!)

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, and therefore you don’t need to keep the petrol receipts.  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.

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.

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, and therefore you do need receipts to back up your expenditure.  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 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 – 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, 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.

If you are limited company owner, once a year you will get a letter from Companies House – headed “URGENT –ANNUAL RETURN DUE”.  This will throw you into complete panic as you think it means your accounts and you’ll be on the phone to your accountant in a hot sweat as your accounts are still in the pile of things to do.  Your accountant will (hopefully!) calm you down, tell you it’s just a simple online form that needs doing, and you won’t end up in jail if it’s late, as suggested by the letter!

From 30 June 2016 the Confirmation Statement replaces the Annual Return and hopefully the name change may reduce the moment of panic when it lands on your doorstep!  The purpose of the Confirmation Statement is to provide up to date information about your company for inclusion on the public register – so anyone who looks up your company gets accurate information.

To complete the Statement, you need to check and confirm the information already held at Companies House – about who the directors of the company are, where the Registered Office is, and who holds the shares.  A new addition to the Register is the “People with Significant Control” (PSC) register.  For most small companies, this is a bit of duplication – as it will be the shareholders; but for larger companies you could have minority shareholders who actually have a lot of say in the company, and this register is meant to draw that fact to your attention.  It only needs completing once, and then confirming each year.

The form can be completed online and there is a filing fee of £13 to pay.  Don’t be drawn into one of the websites offering to do it for you for an “often not insignificant fee” – you really can do it yourself very easily.  Alternatively your accountant will do it for you for a nominal sum (or at least – I do for my clients!!)  You will need to be registered with Companies House to be able to file – which means more passwords being sent to you in the post!

For further information about the Confirmation Statement, here is the link:

https://companieshouse.blog.gov.uk/2016/05/27/changes-that-affect-you-confirmation-statement

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.

Statements are arriving in the post and payments on account of 16/17 tax are due at 31 July.  What are they?

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.

How these are calculated is easiest explained with an example.

You started your business in May 2014, prepared your accounts and calculated your tax bill for 14/15 to be £3,000. This was due for payment at 31 Jan 2016.  However, at 31 Jan 16 you also had to pay a payment on account of your next year’s (15/16) tax bill – and this was automatically calculated at 50% of the previous year – so £1500.  So actually at 31 Jan 16 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 15/16 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 £3000 on account of your 15/16 tax bill – and you probably haven’t even filed your tax return yet ( shame on you – but let’s not go there now!!)

If your profits in second year have gone up – and when you do your accounts and file your tax return, your tax bill for 15/16 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.  Bad news – the process is repeated – so at 31 Jan 17 you will owe £2,000 for this year – and your first payment on account of 16/17, calculated as before at 50% of the current year bill (£2,500) – so £4500 in total.  You then owe at 31 July 2017 your second payment on account of 16/17 – 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 15/16 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 16/17 which will be 50% of £2400 = £1200, you still owe £1200 – £600 = £600 at 31 Jan 17!

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 facing tax bills on dividends for the first time next year – will also be hit with payments on account!

For more information please contact Rosie Forsyth.

Are your children tax-efficient? Get them working for you and save tax at the same time.

Children are entitled to the same income tax personal allowance as their parents, in the current tax year £11,000. Parents who are higher rate tax payers, will need to earn £8,333 if they want to enrich a son or daughter by £5,000. Your child would need to earn £5,000 as no tax would be payable (on the assumption that their total income including the £5,000 is under £11,000). Indirectly, this would save your business £3,333.

The key to employing your kids in the business is to make sure that any involvement is commercially justifiable. For example, paying your ten-year-old £6,000 a year for bookkeeping support will not pass muster with HMRC. You should always aim to pay realistic rates for the job undertaken and ensure that the tasks are manageable.

There are rules about the number of hours children can work per week – this won’t affect a few hours helping you out, but if you want to pay them any more than that then you need to check out the rules.  If you go over the NI threshold you will also need to operate a proper payroll but for amounts under approx. £150 per week there will be no tax or NI payable.

You also have to actually hand over the cash!  Pay it into their bank account from your business account.  What happens to it then is up to them (or you – depending on your relationship with your kids!!)

So get your kids helping you out (after all – they will be much quicker updating your website or researching etc than you anyway) and pay their pocket money from the business!

Tax reporting is changing soon – are you ready for it?

Starting from 2018 all businesses self employed and landlords will have to update their tax affairs digitally at least quarterly.  The intention is that this will be via apps or third party software, so keeping records on a spreadsheet (or in a shoebox!) is no longer going to be an option.

If you look at the HMRC Youtube video (click here for link), it all looks very lovely and simple, but the reality may be very different and there is very little information on how it will actually work.

This really seems to have been rushed in and HMRC is being lobbied by all accounting bodies to delay implementation, but they seem to be going ahead….

What do we know?

Everyone will have their own digital tax account and it will be pre-populated with info HMRC already have about you.  Eg if you are in employment, it will put your P60 details in there for you.  At least quarterly you will need to update this info with your self employment income, dividends etc- using an app or third party software.  HMRC have confirmed that tax agents ( eg your accountant) will not have access your digital account online, and will only have access through third party software.

So ignoring your accounts til mid January each year is definitely out – that’s probably a good thing!

You will have to keep records either on the free app HMRC will provide, or on a cloud based system – and keep it up to date.

What we don’t know!

When do you send this info through? Will it be on a cash basis or invoice basis? What if you make an error?

Will the quarters tie up with your VAT quarter if you are registered?

What about year end adjustments or do you have to update “use of home charges” etc quarterly?

Will there be penalties for sending the information late?

The intention is to start paying your tax on a pay as you go basis too rather than once a year – OMG!

What should you do?

You probably already have a Personal Tax Account (“PTA”) and possibly even a Business Tax Account (“BTA”) and you should get access to this now. (click here to see how to access)

If you are using spreadsheets for your accounts, you need to start thinking about changing over to a digital system as 2018 really isn’t that far away.  I will be keeping my clients up to date with changes to the system as they are introduced.  HMRC consultations are due – but have been delayed until after the referendum!!

Does the thought of attending a networking event fill you with excitement or dread?  Do you look forward to events as a chance to meet new people and promote your business, or put it in your diary and then find an excuse not to go?

Not everyone loves networking but for a small business I see it as an invaluable way to raise your profile and get yourself known locally.

Here are the main benefits I have gained from networking locally:

1. New Business and Referrals– probably the most obvious benefit in financial terms but it takes time.  Don’t expect to turn up a couple of times and the work to flow in.  I firmly believe that people buy from people, and it takes time to get to know someone, find out what they are about and how they run their business.  You’ll gravitate to people on the same wavelength as you, and hopefully they start referring you and vice-versa.
2. Connections – following on from above, its so true that “Its not what you know, but who you know!”  You may think you have nothing in common with someone, but they will know a whole group of other people who may be your ideal customer.  I met a manager of a Care home at an event – part of a National establishment who was never going to need my services.  We got on well though over a period of months, so when several of their self employed health care assistants needed help, she asked me to go in, as someone local and approachable, to talk to them.  As a result, I now do 6 monthly bookkeeping workshops for their care workers, and do personal tax returns for several of them.
3. Confidence – ask me to have stood up and talk to a group of people 2 years ago, I wouldn’t have slept for a week beforehand!  Im still no public speaker, but I can manage a minute or 2 without turning into a jibbering wreck (outwardly anyway!)  Different networking groups have different levels of “formal” interaction – so if you don’t want to stand up and be in the spotlight, pick one that is very informal.
4. Raising my Profile – if you are a local business, networking is a great way to get yourself known in your community. Regular attendance and talking to a mix of people will build your reputation as a local expert in your field.  Help people out when you can – I ofen get “ can I just pick your brain about xxx” at networking events, and while you have to be careful about giving specific advice, helping someone understand something a bit better will probably mean they come back to you when they need some real advice that they are willing to pay for.  There’s also a real sense of satisfaction from helping other people, and I come away from most events having been able to answer a question, or connected 2 people together etc.
5. Friendship – a personal benefit as well as a business one.  Ive made some great friends through networking who I know will always support both me and my business.

So with so many local events to chose from – how do you decide which one to go to?

I could network constantly within a 10 mile radius so first pick your time of day.  Breakfast meetings don’t work for me with 2 kids to get to school, so morning or lunch time events suit me.  Then look to see what’s involved – is it a very informal set up where you grab a coffee and mingle, or a sit down structure with a formal presentation from someone in the group?
I now help run High Wycombe Business Biscotti which is an informal group meeting on the first Thursday of every month at Wycombe Heights Golf Club, and I am a member of Marlow Athena and Maidenhead Business Girls.  Each group is different but all help me build my profile in the community – and all are fun! So give one a go, and starting building your connections.
www.businessbiscotti.co.uk

Athena networking

Maidenhead Business Girls