April 2017 sees the introduction of changes to the VAT flat rate scheme, which are likely to have a significant impact on certain small businesses. We consider the changes below.
Understanding the flat rate scheme
The VAT flat rate scheme was designed to reduce the administrative burden on small businesses operating VAT. Under the scheme, instead of having to identify and record the VAT on each and every sale and purchase made, a business can apply a flat rate percentage to its turnover as a one-off calculation.
Businesses can opt into the scheme, but only if they do not exceed the relevant limits. Businesses must leave the scheme once income in the last 12 months exceeds £230,000, unless this is as a result of a one-off transaction and income will fall below £191,500 in the upcoming year. Businesses are required to also leave the scheme if there are grounds to believe that total income is likely to exceed £230,000 in the next 30 days.
In the 2016 Autumn Statement, Chancellor Philip Hammond announced the introduction of a new 16.5% rate for ‘limited cost traders’. This type of trader is defined as one that spends less than 2% of its VAT-inclusive turnover on goods in the accounting period. Businesses whose VAT inclusive expenditure on goods is greater than 2% of their VAT inclusive turnover, but less than £1,000 per year (providing the prescribed accounting period is one year) may also be defined as a ‘limited cost trader’.
The new rate will be introduced from 1 April 2017 for those firms with limited costs, such as many labour-only businesses, including hairdressers and IT consultants, amongst other professions. Any business wishing to make use of the scheme will be required to determine whether or not it meets the definition of a ‘limited cost trader’.
The regulations outline that the goods must be used exclusively for the purpose of the business. Expenditure on the following items is excluded:
- capital expenditure
- food or drink for consumption by the flat rate business or its employees
- vehicles, vehicle parts and fuel (excluding businesses that provide transport services, such as taxi firms, and which use their own or a leased vehicle to carry out such services).
These are excluded as part of the test to prevent traders from attempting to inflate their costs above 2%.
The government hopes that the introduction of the new rate will help to ‘level the playing field’ and maintain the accounting simplification for the small businesses that make use of the scheme as it is intended to be used.
The government has issued anti-forestalling provisions which are designed to prevent a business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017. Businesses which provide a service on or after 1 April 2017 but either issue an invoice or receive a payment for that service before 1 April 2017 will be affected by the new provisions.
How will I know if my business is affected?
HMRC is set to introduce a new online tool to help businesses decide whether or not they should use the new 16.5% rate. It has also pledged to begin communicating with those businesses which will be affected, ahead of the 1 April 2017 implementation date.
If you believe that you will be affected by the new rules, or for more information on the flat rate scheme, please contact us today. We would be delighted to assist you.
Deadlines have been the staple of the tax man for quite a while now and the opportunity to raise a penalty rarely missed!
For many, the 31st January is the most prominent, being the date by which individuals need to file a tax return and pay their tax bill. This has been the case since Self Assessment first made it’s appearance back in 1996.
But, perhaps not quite fitting the Government pledge to reduce bureaucracy, those running an unincorporated business and landlords (with turnover greater than £10,000) are set to be given some extra deadlines to meet from next April.
This is when Making Tax Digital for Business makes it’s entrance. Under this regime, the aforementioned will be obliged to keep electronic accounting records and submit quarterly draft figures to HMRC in addition to a final set of accounts. The date you pay your tax will remain 31st January (and 31st July for those with payments on account to make) but will very kindly let you pay early if you wish.
Mark Smallman, senior partner of Rotherham based accountants Brearley & Co said “Despite the short timescale provided by HMRC, the affected tax payers and their agents need to ensure that they are ready for what is going to be for many a fundamental shift in their reporting practices. Key to this is having the right software whilst also making sure that there is a robust system in place to collate the information in the first place”.
As a result of recent consultation by HMRC to which a strong response was received, it has been indicated that there may be a postponement until 2019 for an as yet undefined group of tax payers (strongly tipped to be those below the VAT registration threshold) but Mark urges those affected not to rest on their laurels “It is better to be prepared and have things up and running in good time as it gives you an opportunity to become familiar with the new aspects, develop good habits and ditch a few bad ones so that everything is running smoothly at the start”.
Similar regimes are planned for VAT (2019) and Corporation Tax (2020).
If you need help in preparing for Making Tax Digital contact Brearley & Co on 01709 581667 (Swinton) or 01909 567767 (Dinnington).
The Queen has officially opened the UK’s new National Cyber Security Centre (NCSC), which is designed to protect businesses and individuals against destabilising cyber-attacks and breaches.
Initially soft-launched in October 2016, the NCSC, which is part of a £1.9 billion government cyber security initiative, will assist taxpayers in safeguarding themselves against cyber-attacks and hacks.
The official opening of the Centre comes alongside a warning that businesses are not fully prepared to combat cybercrime. 65% of firms reported a cyber-attack or breach in the last 12 months, according to government data.
Additionally, the government also suggested that nine out of ten businesses do not have an incident management plan in place in the event that a cyber-attack should occur.
Commenting on the issue, Chancellor Philip Hammond said: ‘The cyber-attacks we are seeing are increasing in their frequency, their severity and their sophistication. In the first three months of its existence, the NCSC has already mobilised to respond to attacks on 188 occasions.
‘The NCSC will play a unique and crucial role bringing together the public and the business community on the one hand, and our intelligence and security agencies on the other.’
As accountants and tax advisers we regularly hear HMRC bemoaning tax lost through avoidance and evasion, and their determination to ‘crack down’. A series of lurid media headlines over the past few years, ‘naming and shaming’ various public figures over their alleged tax avoidance activities, is evidence of a very public campaign to ensure that everyone pays their “fair share”.
Far less frequently, however, is it acknowledged that there are just as many, if not more, situations where the ‘boot is on the other foot’, i.e. tax is paid unnecessarily when quite legitimate claims may be made for tax relief. One extremely valuable tax relief, which is claimed by only a small minority of eligible claimants, is R&D tax credits. These credits can allow a claim of 225% of eligible expenditure, so a spend of, say £10,000 would give tax relief of £22,500.
The most common reason for claims being missed is the misconception that R&D means only scientific projects in laboratories, and “people in white coats”, but that is far from the case. R&D is so much more than the next wonder drug or iPhone app. Indeed, we have even encountered cases in the past where certain website developments may give rise to a perfectly valid claim.
Many companies simply do not realise, initially, that a project might fall within the wide definition of R&D, and do not think to claim. Other perceived problems are difficulties in identifying and separating R&D costs from “normal” business expenditure, or a belief that the entire process is complicated, and costly to go through. In fact, these are rarely significantly problematic issues where advice is sought from an R&D specialist.
Perhaps most importantly, R&D experts will usually work on a ‘percentage of tax saved’ basis to give piece of mind, for those considering a claim, that there is no risk of running up a costly bill for professional advice, only to subsequently find that no claim is possible, or ever was. Good R&D consultants, furthermore, will only claim their fee once the valuable tax relief has been agreed and processed by HMRC, never leaving the client out of pocket for even a short time.
In summary, the message is that it costs nothing to ask!
Andrew Cowe, Senior Tax Manager at Brearley & Co
Anyone receiving a penalty from HMRC for late filing of a self assessment form for tax year 2015/16 must complete an SA370 appeal form within 30 days if they dispute the fine, although only the basic £100 fine appeal process is available online
Form SA370 has to be used to appeal against a penalty for sending a tax return late and/or paying tax late for all fines over £100 and completed forms must be returned by post to HMRC within 30 days of receipt of a penalty notice.
If a self assessment form is one day late, a late filing penalty fine of £100 is automatically applied, which can be appealed online for the tax year 2015 to 2016 at www.gov.uk/tax-appeals/penalty Online appellants will receive confirmation of receipt of the appeal request.
Taxpayers must give a ‘reasonable excuse’ which falls within the parameters of HMRC’s definition.
HMRC will only accept an appeal ‘if something sudden or out of your control, meant that you couldn’t meet the deadline’.
The HMRC guidance gives a few examples of what it accepts as a ‘reasonable excuse’.
- a close relative or domestic partner passed away shortly before the deadline;
- taxpayer did not receive online HMRC self assessment activation code in time to send tax return by the deadline – as long as it sent it as soon as the code is received; and
- taxpayer lost tax records through theft, fire or flood, and could not replace them in time to meet the deadline.
Despite HMRC’s race to adoption of Making Tax Digital and full digitisation of the tax system, the appeal process is still paper-based.
Completed forms for fines over £100 have to be sent in a paper format to: Self Assessment, HM Revenue and Customs, BX9 1AS.
Ahead of the 2017 Spring Budget on 8 March, business groups have set out their wishes and priorities for both business and the UK economy.
In a letter to Chancellor Philip Hammond, the Confederation of British Industry (CBI) called for the government to ‘back businesses’ growth ambitions’ to help build prosperity across the UK, and to work alongside firms to ‘prioritise stability’ during periods of economic uncertainty.
The CBI has also urged the government to tackle the UK’s ‘outdated’ business rates regime and limit its ‘growing burden’ on businesses.
Echoing the call made by the CBI, the British Chambers of Commerce (BCC) also advised the government to take action on ‘delivering real reform’ to the business rates system.
The business group called for the government to abandon the ‘fiscal neutrality principle’ in business rates reform, labelling this as an ‘unacceptable barrier’ to the revision of the system.
The BCC also recommended that the government bring forward the switch from the Retail Price Index (RPI) to the Consumer Price Index (CPI) to April 2017, instead of during 2020, as is currently planned.
Meanwhile, the Federation of Small Businesses (FSB) has advocated for a ‘pro-business Budget’ that supports self-employed individuals, urging the government to help more people start up in business. Commenting on the issue, Mike Cherry, National Chairman of the FSB, asserted that the FSB is seeking ‘changes to the social security system so that it better reflects today’s economy’, alongside ‘incentives to help the self-employed pay for their retirement’.
Reflecting on the government’s response to its Making Tax Digital (MTD) consultation feedback, the FSB also proposed that HMRC alters its tax digitisation timetable, and implements the MTD initiative in 2020, rather than in 2018 as is currently planned.
The Chancellor will present the 2017 Spring Budget on Wednesday 8 March. Coverage of the key announcements will be available on our website.
The Bank of England has once again significantly increased its growth forecast for the year. It now expects the UK economy to grow by 2% in 2017 – a major rise from its November forecast of 1.4%.
That forecast was itself an upgrade from the 0.8% forecast made in August.
The Bank was criticised last year for its overly pessimistic predictions following the June Brexit vote. Announcing the latest forecast, Governor Mark Carney admitted that the Bank had misjudged the strength of consumer confidence following the referendum.
He commented: ‘The thing that we missed is the strength of consumer spending and consumer confidence associated with that.
‘After an initial wobble in terms of consumer surveys… it bounced back pretty quickly.’
However, he warned that the implementation of Brexit could still cause difficulties, saying: ‘The Brexit journey is really just beginning. While the direction of travel is clear, there will be twists and turns along the way. Consumers have not been affected by the uncertainty around Brexit.
‘Uncertainty over future arrangements is weighing on business investment, which has been flat since the end of 2015.’
In the longer term, the Bank still expects the economy to slow down, with growth in 2018 predicted to fall to 1.6% in 2018.
As expected the Bank’s Monetary Policy Committee (MPC) kept interest rates on hold at 0.25%.
The initiative is intended to create a ‘transparent and accessible tax system fit for the digital age’, and is due to be implemented between 2018 and 2020.
HMRC sought the opinions of businesses, the self-employed and landlords, who are amongst those likely to be the most affected.
The government published a raft of proposals, taking into account the views of consultation respondents. These include:
- providing free software to those businesses with the ‘most straightforward’ tax affairs
- allowing businesses to use spreadsheets for their record-keeping, which can be linked to the software in order to send updates to HMRC
- excluding charities from the requirement to keep digital records
- deferring MTD until 2020 for partnerships with turnover exceeding £10 million
- giving taxpayers at least 12 months to familiarise themselves with the changes before any late submission penalties are applied.
HMRC also stated that it will introduce changes gradually, and that any such changes will be thoroughly piloted with businesses before they are fully implemented.
The government hopes that pilot schemes will help to ensure that the MTD software is ‘user-friendly’, and will give businesses and individuals time to prepare and adapt.
Jim Harra, Director General of Customer Strategy and Tax Design, commented: ‘MTD will help businesses to get their tax right first time; it will help reduce the likelihood of errors, lower the chance of unwelcome compliance checks and give them greater certainty that they are getting things right.’
The government’s response to the consultation feedback can be viewed here.
Implementing some key tax-saving strategies ahead of the end of the tax year could help to ensure that your business and personal finances remain tax-efficient. Below we outline some tax planning tips and strategies to consider before 5 April.
Make full use of your ISA allowance
ISAs can offer a useful tax-free way to save, whether this is for your children’s future, a first home or another purpose. Individuals may invest in a combination of cash or stocks and shares, up to a limit of £15,240 for the 2016/17 tax year.
The new Innovative Finance ISA is designed to encourage peer-to-peer lending. Interest and gains, along with loan repayments, will be eligible to be held in an Innovative Finance ISA and will not be subject to tax.
Meanwhile, those looking to save for the purpose of purchasing a first home may wish to make use of a Help to Buy ISA. Savings of up to £12,000 attract a 25% bonus from the government (which is capped at a maximum of £3,000). If you are considering this type of ISA, please ask us for details – various rules apply.
A saver may only pay into a maximum of one Cash ISA, one Stocks and Shares ISA and one Innovative Finance ISA per year. Savers have until 5 April 2017 to make their 2016/17 ISA investment.
Take advantage of capital allowances
By making the most of capital allowances, businesses may be able to write off the costs of capital assets against taxable profits.
From 1 January 2016, the Annual Investment Allowance (AIA) has been set at a permanent rate of £200,000. This means that up to £200,000 of the year’s investment in plant and machinery (excluding cars) is allowed at 100%. Businesses of any size and most business structures can make use of the AIA. However, there are provisions to prevent multiple claims.
You may also wish to consider ‘greener’ investments. 100% allowances are available for some investments, including on energy-saving equipment and low CO2 emissions cars with emissions of up to 75 g/km.
Build a tax-efficient retirement plan
Effective retirement planning can play a crucial role in your tax-efficient planning strategy, but in our experience many individuals do not take full advantage of tax reliefs and (tax-deductible) employer contributions during their working lives. This is despite the fact that personal contributions to pension schemes may attract tax relief of up to 60%.
Pension contributions must be paid on or before 5 April 2017 for them to be applied against 2016/17 income. Annual contributions limited to the greater of £3,600 (gross) or the amount of your UK relevant earnings may be eligible for tax relief. However, these will be subject to the annual allowance, which is generally £40,000.
An annual allowance taper was introduced in April 2016, applying to those with net income over £110,000 and adjusted annual income (their income, plus both their own and their employer’s pension contributions) over £150,000. For every £2 of adjusted income over this figure, a person’s annual allowance is reduced by £1 (down to a minimum of £10,000).
Utilise allowances across the family
Individuals are entitled to a tax-free personal allowance (PA), which is set at £11,000 for 2016/17. For couples where one person has little or no income, you may wish to consider transferring income (or income-producing assets) to them, to make full use of their PA. However, care should be taken to avoid falling foul of the settlements legislation, and you should consider the legal consequences of transfers.
Some married couples and civil partners may also be eligible for the Marriage Allowance, which allows individuals to transfer 10% of their PA to their spouse or civil partner where neither pays tax at the higher or additional rate.
This is only a selection of options that you may wish to consider as part of your tax planning strategy.
For more information, and for advice on how we can help you to minimise your tax bill, please contact us.
Glamorous holidays abroad, luxury watches and Friday nights out feature in HMRC’s latest list of the most outlandish expenses which customers tried to claim back on their 2014-15 Self Assessment returns. With a week to go until the 31 January deadline, HMRC is releasing the strangest expenses to ensure other customers don’t make similar claims:
1- Holiday flights to the Caribbean
2- Luxury watches as Christmas gifts for staff – from a company with no employees
3- International flights for dental treatment ahead of business meetings
4- Pet food for a Shih Tzu ‘guard dog’
5- Armani jeans as protective clothing for painter and decorator
6- Cost of regular Friday night ‘bonding sessions’ – running into thousands of pounds.
7- Underwear – for personal use
8- A garden shed for private use – plus the costs of the space it takes up in the garden
9- Betting slips
10- Caravan rental for the Easter weekend.
The expenses above were all rejected.
Ruth Owen, HMRC Director General of Customer Services, said:
“Year after year we receive a number of ludicrous expense claims, ranging from international holiday flights to expensive designer clothing, which we would never uphold. Why should the honest taxpayer pick up the bill for others? HMRC will only accept those claims which are genuine, such as legitimate travel expenses or the cost of tools for the job.
“The seven day countdown to the 31 January Self Assessment deadline is now on. Don’t delay and risk a penalty, the time to submit your tax return is now.”
Contact us if you need help with your tax return.