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Are your favourite clients actually your best clients?

How would you describe your favourite client?  Describing your worst may be easy – demanding, unappreciative, quibbling over fees, paying late– but who is your best client?

It’s easy to say the one who pays you the most – but would that be true?  I have several clients whose fees are by no means amongst the top few – but I love working with them.  We talk regularly, they value my advice (or so they say!!) and they frequently recommend me to their contacts.  I don’t make a fortune from them – but we have a great relationship and they help me generate new business.

It’s a good idea to every now and again go through you client list and rank them A, B and C – maybe initially on gut feel.

A’s are your best clients – you have a good relationship with them, fees are good, they pay on time, use several of your services and they recommend you.

B’s are your “OK” clients – you get the job done, they pay you, don’t complain but you probably don’t sell extra services to them – and they don’t rave about you to their friends.

C’s – we all have some of them!  They take up far more of your time than they should, expect you to do a lot of things for nothing – because “it’ll only take you a few minutes”, may grumble over fees and take a long time to pay.  They probably, strangely, are quite loyal to you – because you do pander to their needs!

Now – put the fees you generate from each client in a year next to them and total them up for each category.

Is the amount you are getting from your C’s really worth the hassle?  Should you lose a few of them and concentrate your time servicing your A clients, or turning your B’s into A’s?

If you put your fees up for all your “C” clients and started charging for all those extra’s you do for them– and you did lose 1 or 2 because of it – would it be the end of the world?  Or would you breath a sigh of relief that they are going to cause someone else all that grief!  If you lost 5 C’s and gained an A – would your life be a lot easier?

On the other hand, are your favourite clients actually generating you a decent level of fees?

Or are you actually spending too much time working on their account, because you like them – and again not charging them accordingly?  Are they friends – and you offered them “mates rates” when you were setting up your business – and they are still on them even though their business has grown and changed?

We’ve all heard of the 80/20 rule – where 80% of your sales come from only 20% of your clients so just ranking your clients into these simple groups can see if this applies to you – and then you can take action!!

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How is my Company Car taxed?

This week we are looking at company cars and explaining how they are taxed on both the company and the individual.

When a car is made available to an employee, or member of his household, by an employer, he will be charged tax on the value of the car as an employment benefit if he also has private use of the car.  It doesn’t matter how the company finances that car, it is still a benefit in kind to the employee.

The amount of tax the employee pays depends on:

  • The list price of the car plus accessories (not the price the company paid for it), and
  • Its CO2 emissions

Using this table, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/532303/TC2b.pdf

each level of Co2 emission is given a percentage and you then multiply that percentage by the list price to give you the taxable benefit.  This value is effectively “additional salary” on which you will pay income tax.   Diesel car owners have a 3% supplement over petrol owners – this was due to be scrapped but will now remain until 2021.  The percentages are set to increase by 2% each year, making company cars even more expensive in the future.

So, as an example, in 2016/17 my company provides me with a diesel car with a manufacturer’s list price of £30,000 and CO2 emissions of 165g/km.  The appropriate percentage is 33%.

The benefit in kind is 33% x 30,000 = £9900.  If I am a basic rate taxpayer, I will therefore pay £1,980 in income tax on this car in this tax year, and if I’m a higher rate taxpayer – £3,960.

If the company also pays for all my fuel (personal and business) there is a further tax charge.  This is worked out by multiplying the same percentage by a fixed amount agreed for each year.  For 16/17 the amount is £22,200 – so for my car above – the additional benefit is £7,326 and my tax bill £1,465 or £2,930.  You need to do a fair few miles in your car to make this worth having!

For the company , they will pay class IA NIC on the value of the benefit, so each year they will pay 13.8% x 30,000 = £4,140 for my company car, though this and the running costs are tax deductible in the accounts.

So a company car is often not a cheap option and you should work out whether it is the right option for you.

Having a company van may be tax efficient than a company car as there is a fixed benefit of £3,170 – but there are strict rules about what is a van – and what is a car!

If the car is a genuine “pool car” then it can be provided tax free – but the qualifying conditions of being a pool car must be met.  These are:

The car

  • Is used for business purposes and any private use of the car is incidental.
  • Private use should account for no more than 5% of the car’s annual mileage on an irregular basis.
  • The same car not used exclusively by one or two employees in a tax year.
  • The car is not normally taken to an employee’s home at night.

HMRC will look at any pool car arrangement closely – and will expect mileage logs, written agreements, place for keys to be kept at work, employees personal cars etc so if you do think you have a pool car – make sure your records accurately detail its movements!

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How is the Taxing of Buy to Let changing?

Buy to let investors will see a big change to the way they calculate their profits, and therefore their tax bills from April 17.  Although this is still a year away, you need to understand the changes and how they may affect you if you considering a buy to let or already own one.

 

What are the changes?

Currently, landlords get tax relief for their finance costs against their rental business.

Put simply, you can offset the amount of interest you pay on your buy to let mortgage, (and related fees, commissions and legal expenses) against the rental income from the property.

This reduces the profit of the rental business – and hence your tax bill.  If you are a higher rate tax payer, then you are effectively getting 40 or 45% tax relief on your mortgage interest.

From April 17, new rules mean that all finance costs will no longer be an allowable cost of the business.  Instead, you will have to make a “tax return adjustment” that will give you a basic rate deduction of up to 20% of the finance cost.

 

So in practise – what on earth does that mean?

Let’s look at example to show what the effects are.

If you had rental income of £10,000 in 2016/17 and paid £2,000 in mortgage interest, under the current rules you would have rental profit of £8,000.  If you were a higher rate tax payer, you would pay tax on that at 40%, so £3,200.

The new rules are being phased in over 4 years from April 17 so by April 21 – with the same numbers above, you would have rental profit of £10,000 (as you now get no relief for the mortgage interest).  Tax on this at 40% is £4,000 – and then you get your “adjustment” of 20% of the finance cost (so 20% of £2000 = £400) deducted to give you a final bill of £3,600.  £400 more than it is now.

For basic rate taxpayers there is no change to the tax due BUT you cannot ignore it – as you may find that you actually become a higher rate taxpayer as a result of the changes.

 

Will I become a higher rate taxpayer?

Once the finance costs are disallowed in your rental accounts, obviously your rental profit is going to be higher –and depending on your personal circumstances, this could mean that your total income is pushed into the higher income bracket for tax. This potentially has knock on effects:

  • There could be an impact on tax credits, or child benefit
  • You could end up paying tax at 40%, or capital gains could be taxed at 28% instead of 18%

As I said above, the changes are being phased in over 4 years from April 17 as follows, so there are going to be some complicated tax computations ahead!

 

Year % of finance costs allowed as deduction % of costs available as a basic rate deduction
2017/18 75% 25%
2018/19 50% 50%
2019/20 25% 75%
2020/21 0 100%

 

What can I do about it?

If the loss of higher rate tax relief is going to be really costly to you – the popular alternative solution is to hold and manage your rental property through a limited company, as limited companies are not affected by these new rules.

This could be an option but needs careful consideration as it brings its own set of tax issues.

Transferring existing property into a limited company will give rise to both stamp duty and a capital gain based on market value.  The limited company will only pay corporation tax on its profit (currently 20% and falling to 18% from 2020,) so a lot less than 40% or 45% personal tax, but you still need to extract the money from the company to get it into your hands via either salary or dividends –and there are new tax rules for dividends from April 16 as well!  If the property is sold, the funds go into the company and the company pays the tax, and then you need to extract the money from the company.

If buying a new property through a limited company – you will probably find mortgages harder to find and at higher rates and higher stamp duty in some circumstances.

There are also the admin costs of running a limited company to consider.

 

As if that’s not enough bad news…..

Stamp duty is also changing from 1 April 2016 for second homes or buy to lets so you will pay an additional 3% over the current rates for your main home.  This applies to transactions completed after 1 April 2016 where contracts were exchanged after 25 November 2015 – hence the current rush for completion on deals before 1 April!

The rules are complicated but will affect a lot of buy to let investors.  You need to work through how it is going to affect you personally over the next few years so you can plan accordingly.

 

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

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Sole Trader or Limited Company?

Sole Trader or Limited Company?

Feb 14, 2016

Should I set up as a sole trader or a limited company?

Each have their own advantages and disadvantages, and there is no “one size fits all answer” so it’s vital you understand what each offers you so you can make the right decision for you and your business.

Here we look at some of the differences between the 2 structures.

 

Ownership

If you operate as a sole trader, then you are the business and you are personally liable for the debts of the business.  A limited company, on the other hand, is a separate legal entity and you will own shares in the company.  Unless you have given personal guarantees you will not be personally liable for the debts of the company.

This is an important distinction – if you operate a limited company it is vital to keep the company’s money and your personal finances completely separate.  You must have a separate business bank account and remember that this is not “your money!”

 

Set up and filing requirements

A sole trader is simple to set up – you register with HMRC and off you go.  You need to file a personal tax return each year which will include the profits of the business on the “self-employment” page.  Your actual accounts aren’t automatically filed with HMRC and there is no set layout.

A limited company has to be incorporated at Companies House and you are appointed as a director.  The company needs to file annual accounts that are in a set format complying with Company Law and also file a corporation tax return with HMRC.  An annual return must also be filed online each year.

You will also then file a personal tax return each year with details of the income you have taken out of the company.

 

Tax

A sole trader pays:

  • Income tax on the profit of the business, over your personal allowance (£11,000 for 2016/17)
  • class 2 National Insurance at a flat rate of £2.80 per week – and class 4 National Insurance based on the profit of the business at a rate of 9% on profit over £8,060 (for 2016/17)

Any amounts you withdraw from the business as “wages” do not affect your tax bill – you pay tax on the profit of the business, irrespective of how much you have actually taken out for yourself.

A limited company pays corporation tax at 20% on its profit.  Directors will then pay tax on the money that they have taken out of the business for personal use and this is where there is more scope to save tax within a limited company.

Directors can withdraw money from the company as either “salary” or “dividends” and basic tax planning can usually structure the total amount withdrawn so that less tax is payable overall when compared to a sole trader.

The new dividend tax rules which come into effect from April 16 mean the savings are not as great as they were.

 

Summary

A sole trader is the simpler option in terms of set up and filing requirements.  A limited company will give you limited liability but is a more formal structure.  There are more deadlines to meet and as a director you have a responsibility to act in the best interest of the company.

A limited company can be more tax efficient, especially where reasonable profits are generated.

There is no right or wrong answer – just one that suits your personal requirements best.  To discuss your options further, please contact Rosie Forsyth at Wilkins & Co.

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What travel and subsistence costs can I claim from my business?

What travel and subsistence costs can I claim from my business?

Feb 8, 2016

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.

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Bookkeeping for the Self employed – what you need to know!

Bookkeeping for the Self employed – what you need to know!

Jan 29, 2016

So WELL DONE – you have taken the plunge and set up on your own!

If the accounts side of being self employed is all a bit of a mystery to you, here’s a basic guide to get you started!

 

Things to 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!  For a lot of start-ups and freelancers– a simple excel spreadsheet will suffice in the early days so that’s what I am going to concentrate on here.

 

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.

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 – 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 accounting system.  Try to keep this up to date – there is nothing worse than sitting down to catch up the last 6 months!

Many accountants will have a template they use for their clients – contact me by email if you would like mine.

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So How Was it For You??

 

Tax return season is nearly over for another year (phew!) and accountants everywhere will be collapsing in heaps, wondering why they thought “dry January” was a good idea and making mental notes that next year will be better!

 

But how was it for you?

If you did it yourself, could you find what you needed?  Or had a few receipts gone through the wash in your jeans (shame it wasn’t a lottery ticket eh!)

It doesn’t have to be this way. Follow some simple steps below and next year will be a breeze!  All it takes is a bit of organisation.

  • Buy yourself a nice folder or document wallet (nice stationery always helps, and it’s tax deductible!)
  • Make a note on the front of your UTR, NI number and government gateway details
  • File documents in there as they arrive through the post or via email.  P60’s and P11D’s are often emailed to employees now – print them out and put them in the folder when you get them so you aren’t trawling through emails next New Year or hassling your payroll department for copies!
  • If you receive any dividends in the year – you will get a dividend voucher when the dividend is paid – file it when you get it.
  • The same goes for bank interest – if you are lucky enough still to get bank interest – then you will get a “certificate of tax deduction” from your bank – or you can download one.  Print it out and pop it in the folder.
  • File any other tax related items as you receive them – if in doubt – file it!  Far easier to realise you didn’t need it when you come to do your return, than be turning drawers out trying to find it.
  • If you have bought or sold shares in the year, you will need those details so keep the contract notes in the file.
  • Have a buy-to-let?  A separate section of the file will be needed to keep the receipts from B & Q, for the plumber who popped over, and for the mortgage interest statement your provider will send you.

Then when you pluck up courage next year to get your return done (pre Summer hols – NOT in January 2017!) everything you need will be to hand and you will wonder what all the fuss was about.

If you are self employed then you will need to have all those documents as well – but that’s for another blog!

For most people, the nightmare of doing your tax return is trying to find the information you need – but with a little bit of organisation, you can make next year a relatively pain free experience.

If you do need some help with your tax returns, all nice folders will always be welcome with me at Wilkins & Co

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Claiming Expenses for the Self Employed

Claiming Expenses for the Self Employed

Jan 17, 2016

This is a guest blog written by Helen Watson (@hellohelenw), social media manager in training with Digital Mums. 

I’ve spoken to Rosie to get an overview of what you need to know about claiming expenses. (This blog refers to sole traders, there are some differences for limited companies.)

Why do I need to record my expenses?

To keep accurate records about your business, to see if you are making any money and to ensure that you are paying the correct amount of tax. It is important to know where you costs are, so you can budget and price correctly! Anything that is “wholly and exclusively” used for your business should be claimed as an expense. This will reduce your profit figure and therefore your tax bill.

What can I claim for?

Any expenses that you genuinely incur in running your business.  Common examples: stationery, advertising, accountancy fees, staffing costs, raw materials, membership fees (of professional bodies, not gym memberships!)

Some items will be dual purpose, for business and personal usage. One example of this is a mobile phone which is used for business and personal calls.  In this case you would work out the percentage of business and personal calls and apportion the costs accordingly.

Other dual purpose items can be claimed according to a set formula. One example of this is a car. You can choose to claim 45p per mile for business mileage (25p after 10,000 miles) rather than adding up the costs of running your car (insurance, petrol, repairs, etc) and apportioning that. Most small business owners claim mileage as this is more straightforward, although it is crucial to keep a log of your business mileage.

What is business mileage?

Travelling for business, but not commuting. If a self-employed hairdresser travels to the same salon every day, this is not business mileage. A mobile hairdresser who travels between client’s homes is doing business mileage. Parking and speeding fines can not be claimed as expenses! 

What if I work from home?

You can claim for the expense of using your home to run your business from. There is a flat rate that can be used providing you are working from home for more than 25 hours per month.  The alternative is to work out the running costs of your home, calculate how much of your home you use for your business and factor in the time you spend running the business, then claim the appropriate percentage of the costs as expenses.

What about my work clothing?

Only clothing that is “protective” or a uniform can be claimed as an expense. You cannot claim for general clothes, even if you have bought them just for work. If you are working on a building site, wearing a jacket that you would only wear to work as it gets dirty, you cannot claim this as an expense.  However, if the jacket had your business logo on, then this would be advertising your business and would be allowable.

What records do I need to keep?

It is crucial to keep good records. If HMRC investigate your tax affairs, you need to be able to evidence your expenditure. Having separate business and personal bank accounts will make things much easier. Keep all your receipts, especially if you have paid for things in cash.

Do I need accounting software?

If you have a limited amount of transactions a month a simple spreadsheet will suffice. Any more than that and accounting software can be really useful. Rosie recommends KashFlow, you will have to pay (from £10 per month) but it will streamline your record keeping, and save you time, so definitely worth considering.

Need more information?

I’ve briefly covered some of the most common expenses for small business here. If you would like some more information, please contact Rosie Forsyth.

 

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How do the New Dividend Rules affect the owner of a small company?

How do the New Dividend Rules affect the owner of a small company?

Jan 10, 2016

You will, no doubt, have heard much moaning about the new dividend rules that come in from 6 April 2016 but do you know how they affect you?

 

Many of my clients are owners of micro businesses, operating as a limited company; often on their own, or with their partner as fellow director and shareholder.  They have taken their money out of the company in the most tax efficient way – minimum salary and then a dividend payment up to the basic rate threshold – because that’s what their accountant told them to do!

 

How do the new dividend rules affect them?

 

From 6 April 2016, the notional tax credit attached to dividends is abolished ( dont worry if you never really knew what it was – it kept us accountants crunching numbers and usually meant that you didnt pay any additional personal tax on dividends you took out of your company)

Instead, a £5,000 dividend tax allowance is being introduced.

Any dividend you receive on top of this will be taxed – at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.

So for a typical client of mine this will be the effect:

They will have a salary of £11,000 in 2016/17 (up to the personal allowance) and then dividends of £32,000 (the basic rate threshold)

Instead of paying no personal tax, as they would have done this year, their salary will be covered by their personal allowance; they will receive a £5,000 dividend allowance against their dividends and the remaining £27,000 will be taxed at 7.5%, which is £2,025.

If husband and wife have been drawing salary and dividends in the past, then they will be £4,050 worse off under the rules.

Not surprisingly this is hugely unpopular and over 100,000 have signed the petition against it.  The changes have been introduced to close the gap between the tax regime for those operating through a limited company compared to being self employed – and certainly the tax benefit of incorporating has been reduced.

 

What should you do?

Ensure you pay the maximum dividend you can before 5 April 2016 up the basic rate threshold.

Consider company pension contributions and other tax efficient ways of extracting money from the company.

I will be talking to my clients in the next couple of months to ensure we do all we can to make sure they are as tax efficient as possible in this tax year.

If you would benefit from some further help , then please contact Rosie Forsyth

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Changes to National Insurance for the self-employed

Changes to National Insurance for the self-employed

Sep 15, 2015

Being self employed you are liable for both class 2 and class 4 National Insurance.

 

Class 2 is traditionally paid at a flat rate per week (£2.80) and has been collected monthly or 6 monthly by direct debit, and Class 4 is payable at 9% on the profit of you business over £8,060. Class 4 is collected along with your income tax at 31 January.

 

If you had small earnings (under £5,965) then you could apply for an exemption from playing Class 2 NIC.

 

From 6 April 2015 the rules have changed.  Class 2 NIC is now payable like Class 4 NIC in one go at the 31 January after you have filed your tax return.  For small earnings, Class 2 is only payable if your profit is above the threshold; there is no need to apply for an exception anymore.

 

For those currently paying class 2 by DD, the payments are collected 4 months in arrears, so the last payment should have been July 15 – make sure HMRC are not continuing to collect it!

 

Class 2 payments do count towards the state pension and other benefits, so if you do have small profits, voluntary contributions of Class 2 NIC may be worth considering.

 

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

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