GETTING THE UK “MATCH FIT” FOR BREXIT – Autumn Statement

GETTING THE UK “MATCH FIT” FOR BREXIT – AUTUMN STATEMENT 2016

The Chancellor Philip Hammond announced that his first Autumn Statement will also be his last. In future the main Budget announcements will be made in the autumn rather than the spring. We were not expecting that many tax announcements and many that were made we already knew about. He could not afford too many give-aways as he expects the economy to have a bumpy ride during the BREXIT transition.

There will still be a Budget next March but thereafter the annual Budget will be in the Autumn to allow longer consideration of the announcements and draft legislation before enactment the following summer.

KEY TAX ANNOUNCEMENTS:

Personal allowance to increase to £11,500 in 2017/18, rising to £12,500 by 2020/21
Higher rate tax threshold to increase to £45,000 in 2017/18, rising to £50,000 by 2020/21
National Insurance threshold to be raised to £157 a week for employees and employers
Corporation tax rate to reduce to 17% in 2020
Business tax “roadmap” to continue, in particular new rules for company losses
Insurance premium tax to increase from10% to 12% from 1 June 2017
More anti-avoidance measures, in particular a new VAT flat rate percentage for “limited cost traders”

HELP FOR THOSE JUST ABOUT MANAGING (JAM)

The Chancellor made a number of announcements that were intended to help those families that a just about managing, given the acronym – JAM. Raising the personal allowance to £11,500 and higher rate threshold to £45,000 will mean they pay less income tax and keep more of what they earn.

This group will also benefit from the increase in the National Living Wage to £7.50 an hour and the changes to Universal Credit.

The Universal Credit taper rate will be cut from 65% to 63% from April 2017 which will mean that fewer benefits will be clawed back as claimants’ income increases. The planned reductions in the overall benefits caps will however go ahead.

CORPORATE AND BUSINESS TAX CHANGES

Many of the corporate tax changes had already been announced and are set out in the business tax “roadmap” which details the government tax strategy for the life of this Parliament and beyond.

The currently 20% corporation tax rate is planned to fall to 19% from 1 April 2017 and then to 17% on 1 April 2020. The government is committed to keeping the UK corporate tax rate the lowest in the G20 and there is talk of a rate as low as 15% in the future.

The Chancellor raised concerns that there continues to be a rise in tax-driven incorporations as there are still tax savings compared to unincorporated businesses operating at a similar level of profit. That may suggest that the government is still considering the introduction of a new “look through entity” suggested by the Office of Tax Simplification so that the tax treatment will be the same, thereby creating a level playing field.

The new flexible corporate tax loss rules announced in the spring budget have been subject to consultation and will go ahead from 1 April 2017.

CAPITAL ALLOWANCES

From 23 November 2016 to 31 March/ 5 April 2019, businesses will be entitled to a 100% First Year Allowance (FYA) for the cost of installing electric charge-point equipment for electric vehicles. This measure is intended to complement the 100% FYA available for low CO2 emission vehicles and to encourage their uptake.

HIGHER RATE TAX RELIEF FOR PENSIONS CONTINUES

There has been much speculation that the government would further limit tax relief for pension contributions by removing higher rate tax relief. That measure would save the country £34 billion in tax but the only change announced concerns a new lower limit on amounts that can be saved in a pension when individuals have started drawing down from their private pension.

Currently the net effect of pension tax relief for a higher rate taxpayer is that saving £10,000 in a pension costs £6,000. The taxpayer pays £8,000 into their pension and the government tops this up by £2,000 with a further £2,000 deducted from the individual’s income tax liability, reducing the net cost to £6,000. For additional rate taxpayers the net cost would be just £5,500.

Remember that there is currently an annual pension input limit of £40,000 which caps the combined contributions by an individual and his or her employer. For those with high income this is tapered and can be as low as £10,000.

One new pension restriction that was announced was a measure to limit pension “recycling”. Those individuals who have started drawing down their personal pension will in future only be able to reinvest up to £4,000 in their pension. Please contact us if you want to discuss pension planning further.

SALARY SACRIFICE RULES TO BE TIGHTENED UP

Many employers now provide flexible remuneration packages that allow employees to give up some of their contractual salary in exchange for benefits in kind. This can have the effect of saving tax and national Insurance contributions for both the employee and employer, particularly where the benefit provided is exempt from tax.

These tax and NIC advantages are to be withdrawn from 6 April 2017. Arrangements involving pensions, childcare, Cycle to Work and ultra-low emission cars will be excluded; existing arrangements will be protected for a transitional period until April 2018, and existing arrangements for cars, accommodation and school fees will be protected until April 2021.

The Chancellor has announced a wider review of the taxation of benefits, with the intention of making this area ‘fairer and more coherent’. This appears likely to have a significant effect on any employee who is in receipt of benefits from their employer.

OTHER EMPLOYEE BENEFIT CHANGES

MAKING GOOD

An employee who repays to their employer, or ‘makes good’, the cost of a benefit, avoids a tax charge. As previously announced, from April 2017 such making good will have to take place by 6 July in the following tax year if it is to be effective.

CHANGES TO TERMINATION PAYMENTS TO GO AHEAD

As announced in March, from April 2018 termination payments over £30,000, which are subject to Income Tax, will also be subject to employer’s NIC. Tax will only be applied to the equivalent of an employee’s basic pay if their notice is not worked. The first £30,000 of a genuine termination payment will remain exempt from tax and NIC.

“ABUSE” OF THE VAT FLAT RATE SCHEME

The VAT flat rate scheme is a simple scheme that enables small businesses to calculate and pay their VAT based on a flat rate percentage of total takings rather than deducting input tax on purchases and expenses and deducting that from total output tax on sales in the period. HMRC believe that the scheme is being abused by certain traders who have minimal costs who charge 20% VAT to their customers and then pay a lower percentage over to HMRC.

The flat rate percentage varies depending on the nature of the trade, ranging from 4% for food retailers up to 14.5% for IT consultants and labour only construction workers. A new 16.5% rate will apply from 1 April 2017 for businesses spending less than 2% of their turnover or less than £1,000 per year on goods, excluding capital goods, food, vehicles and fuel. Any business affected will almost certainly be better off returning to the normal VAT system with effect from that date. If you are currently using the flat rate scheme please contact us to check whether this change is likely to affect your business.

What is the best VAT scheme for your business?

Am I using the right VAT scheme?

Many business owners should be asking themselves this question, otherwise they may not be using the best VAT scheme for their business.

Do you know if you are on the right VAT scheme?

Is the one you use benefiting your business’s cash flow and saving you time and money?

VAT is a tax charged on most goods and services and is administered and collected by businesses on behalf of HM Revenue & Customs (“HMRC”). Most businesses will use the standard VAT scheme because it is the default scheme for any newly registered business.

It’s important to determine whether this is the right VAT scheme for your business. The VAT scheme you use determines how much, and when you pay HMRC. The chosen scheme may also cause administrative burdens that could be simplified with VAT planning.

Below is a quick guide to some of those schemes which may help the business’ main goals, your cash flow and save you time.

Cash accounting scheme

Most businesses will account for VAT using the standard scheme. This means the date of the sales or purchase invoice determines in which quarterly VAT return it is declared – not when you have paid or been paid for an invoice. If you invoice your customers well in advance of being paid, in addition to financing the sale amount you will have to also finance the vat on the invoice. However, under the cash accounting scheme, VAT is not paid over to HMRC until invoices have been paid. This obviously has a cash flow advantage as you do not pay the VAT to HMRC until your customers has paid you. Being able to legitimately delay paying over VAT to HMRC by 3 months may help overall business funding requirements and interest costs too. To qualify for this scheme the business’ VAT taxable turnover (basically sales) must not exceed £1.35m.

Flat rate scheme

This scheme was introduced by HMRC to help reduce the administrative burden imposed on many small entrepreneurial businesses by VAT registration. Under the scheme, the VAT paid over to HMRC is calculated simply as a flat rate percentage of the businesses gross sales, e.g 12%. The exact percentage depends on the industry the business operates in. Although you cannot reclaim VAT on purchases – it should be taken into account in HMRC’s advised flat rate percentage for the industry you are in.

It would need to be checked, but in addition to the administration benefit of not having to split the VAT element out of every expense, you could also end up paying less VAT overall. This scheme is available to smaller businesses with VAT exclusive turnover less than £150k. Once in, you can stay in until your VAT exclusive turnover reaches £230k.

Annual or monthly reporting

It is possible to prepare and submit your VAT returns on a annual or monthly basis rather than every three months (the standard). If you are a business that regularly reclaims VAT from HMRC, then cash flow may be significantly improved if the rebate payment arrives monthly rather than quarterly. For businesses of a certain size there is also the option of submitting VAT returns on an annual basis, however, HMRC will want monthly payments on account, so any cash flow advantage may likely be minimal.

Do you even need to be VAT registered?

If you are, but your annual turnover is below £77,000 you should be able to deregister your business for VAT. This may be of particular help if your end customers are unable to reclaim the VAT they are being charged (i.e. retail customers). At this point you have a choice to either reduce your selling price or keep it the same and make the VAT you would have charged become extra profit for you.

These are just a few of the VAT schemes available and some of the points to note. You need to carefully consider your VAT planning options and particular circumstances is essential. If you have any VAT queries or would like a help determining the best VAT scheme for you then please contact us today.

Five top VAT saving tips

Top 5 VAT tips

Lots of business owners prepare their own VAT returns. This can take up a lot of time that they would rather use to do something else. It is therefore important you make sure to claim back all you can and reduce the risk of error at the same time. Here are our top five vat tips for making your tax position more efficient:

1 Remember to claim VAT on mileage

Many business owner’s, especially those who own limited companies, will claim mileage to cover their business motor expenses, typically at a rate of 45 pence or 20 pence a mile. It is possible to claim VAT back on the fuel element of these mileage claims. The fuel element is determined according to HM Revenue & Customs’ advisory fuel rates, which can be found here. Find the relevant fuel rate per mile, multiply by the number of miles done, and then apply the VAT fraction of 1/6 and hey presto, that’s how much you can claim back.

2 Let us help you choose the right VAT scheme for your business

There are several VAT schemes that your business could benefit from. For example, depending on the relevant industry sector, you may benefit by being on the flat rate VAT scheme. On the flat rate scheme, VAT is simply calculated as a percentage of your gross sales (e.g 12.5% for catering businesses). As well as being simple to calculate you may also pay less to HM Revenue & Customs as the VAT calculated using this method could be less than the standard method.

3 Claim VAT back on bad debts.

When a customer’s debt has been outstanding for more than six months, and you are unlikely to receive payment, you can reclaim any sales VAT previously paid to HM Revenue & Customs. Regular review of who owes you money is essential. One way to avoid having to reclaim the VAT on bad debts would be to use the VAT cash accounting scheme. This is where you do not include VAT from a sale on your VAT returns until your customers have paid you (or the VAT from purchases until you have paid for them).

4 Have a separate bank account for VAT

VAT is effectively a tax that business owners collect on behalf of HM Revenue & Customs. It’s important to manage your cash flow and it’s easy to fall into the trap of accidently spending the VAT as if its your own working capital. The result being that the cash is not available when the quarterly payment to HM Revenue & Customs is due. A good way to stop this problem arising is to set up a separate bank account so you can set aside your VAT each month. That way you won’t have a nasty surprise at the end of the quarter.

5 Use good software

Reduce the risk of errors by adopting user friendly accounting software. Good accounting software will record when invoices have been included on a particular VAT return. This should eliminate the risk of VAT being declared twice and VAT on late received invoices not being claimed at all. Using cloud based software would make it much easier for your accountant to review your VAT returns prior to filing. If you are interested, we can advise on whether Xero, Kashflow or FreeAgent would be the right package for your business.

For more advice regarding different VAT schemes please see our earlier blogs. Should you wish to discuss how we can help you with VAT matters, please contact us today.

Flat Rate VAT Scheme Tips and Traps

In our last post we looked at how the Flat Rate VAT Scheme can have some unexpected benefits for small businesses. Rather than just simplifying their accounting, as intended, adopting the Flat Rate Scheme can result in some businesses making more profit by allowing them to keep some of the VAT they would otherwise have paid to HMRC.

Although the Flat Rate Scheme is supposed to be there for simplicity, it has its own set of tips and traps!

Flat Rate Scheme Tips

First year discount

If it is the first year your business has been registered for VAT, then it’s allowed to deduct 1% from its Flat Rate Percentage.

So, if its normal Flat Rate Percentage was 11% for Advertising businesses, say, then 10% would be the percentage applied to its gross sales to determine the amount of VAT to pay to HMRC.

The 1% discount lasts until the day before the anniversary of your VAT registration.

Capital Expenditure

Usually under the Flat Rate Scheme you cannot claim any relief on VAT incurred on items you purchase. This is taken into account as part of the Flat Rate percentage for each trade.

The exception to this is capital expenditure. If you buy a fixed asset that costs more than £2,000 (including VAT) then you can claim that VAT back on your next Return.

There are some catches. The most important one is that the fixed asset must be one purchase.

Bad debts

If you are unlucky enough to have a customer who doesn’t pay you, then under normal VAT accounting if you’ve accounted for the VAT on the sale, you can deduct it from your next VAT Return.

You can also claim relief for bad debts on the Flat Rate Scheme. But you don’t claim the relief at your Flat Rate percentage. You claim relief for the VAT you actually charged on your invoice. Result!

HMRC says this is because “the flat rate includes an allowance for input tax which only occurs if you have been paid by your customer. As you will not have been paid, you will not have had full credit for any input tax.”

Flat Rate Scheme Traps

Getting the right flat rate percentage

You’d think that this wouldn’t be too difficult. But HMRC keeps the list well hidden and apparently some businesses get confused.

In the VAT Notice for the Flat Rate Scheme, HMRC says:

“We will not normally check your choice of sector when we process your application. So if you have made a mistake you may pay too much tax or too little. Paying too little could mean that you are faced with an unexpected VAT bill at a later date.

“However, if we approve you to join the scheme, we will not change your choice of sector retrospectively as long as your choice was reasonable. It will be sensible to keep a record of why you chose your sector in case you need to show us that your choice was reasonable.”

So if there’s any doubt as to the correct trade sector to use (perhaps your business has more than one trade), make sure you keep a note of why you chose the trade sector you used. This will show you have used reasonable care and protect you against the risk of tax geared penalties.

Cash accounting

Lots of small businesses use cash accounting for VAT. This means they account for VAT on their sales and purchases when things are actually paid for, rather than when an invoice is raised. That way they don’t pay the VAT on invoices that haven’t been paid yet by their customers.

The bad news is that you cannot use cash accounting on the Flat Rate Scheme.

However, you can use the Flat Rate Scheme’s own special cash based method. This means that you account for the Flat Rate VAT due on your invoices when the invoices are paid. The proviso is that if HMRC changes the Flat Rate percentages, you use the rate in force when the invoice was paid, not when the invoice was raised.

Will the Flat Rate VAT Scheme work for you?

Despite its quirks, the Flat Rate Scheme can work really well for lots of businesses. At Accountancy Edge, every year we check whether clients whose businesses are eligible for the Flat Rate Scheme would make more profit by joining it. Even if it doesn’t look like it would work for them, they still know we’ve looked out for them!

If you like us to review your VAT affairs, then get in contact with us today.

Would the flat rate VAT scheme work for your business?

When VAT was introduced in the UK, one of its virtues was supposed to be its simplicity. It’s no surprise then that VAT turned into one of the most complicated taxes that business owners have to deal with.

So HMRC did something uncharacteristic. They introduced a VAT scheme designed to make things simpler for smaller businesses.

The Flat Rate VAT Scheme

The Flat Rate Scheme was meant to make record keeping easier for smaller businesses.

You charge VAT on your sales in the normal way, but there’s no need to keep track of VAT on your purchases. Instead you just need to know your VAT inclusive sales figure (and any VAT on assets you bought that cost more than £2,000).

You take your VAT inclusive sales figure for the quarter and multiply it by the flat rate percentage HMRC provides for your trade sector, and that’s the VAT you have to pay.

An unexpected upside

For some businesses the simplicity of the scheme isn’t the main benefit.

Quite often the amount of VAT the company would pay to HMRC under the Flat Rate scheme is a lot lower than what they would pay under standard VAT cash accounting.

So what happens to the difference? It’s extra profit for your business.

At Accountancy Edge, we check all of our eligible VAT registered clients each year to see if the scheme would work for them. In the last few months we’ve identified several businesses that have been more than £4,000 a year better off just by changing VAT scheme.

And that’s not just a one off. Your business can benefit every year.

So, who is eligible?

Your business can join the Flat Rate Scheme if in the next year your VAT exclusive turnover is likely to be less than £150,000.

Would it be right for your business?

If you’re interested in finding out, then why not get in contact with us?

We can look at our last four VAT returns and tell you whether the Flat Rate Scheme would work for your business. If it would work for you, we’ll also tell you how much extra profit you could make just by changing VAT scheme.

An introduction to VAT

We’re going to publish a series of posts looking at the different VAT schemes and how they could help your business keep a little more of the money it makes. But first here’s a nice introduction to VAT courtesy of Sage UK:

If you would like your VAT circumstances reviewed to make sure that you are on the right scheme for your business, then contact us today.

Pay Less Tax – Summer 2013

Our latest newsletter is now available free to download. It only has one focus: helping you pay less tax.

This edition has lots of interesting ideas that should be relevant to your business. Some of them are ones that we’ve been discussing a lot with businesses lately, including whether a business should trade as a limited company, what’s the most tax efficient remuneration for company directors, and whether the VAT Flat Rate Scheme could help your business keep a little more from its gross income.

Other issues looked at this time include making use of your Annual Exemption for Capital Gains Tax.

The newsletter is free to download here:

Pay Less Tax – Summer 2013

If you would like our help to see whether you could save tax as a result of any of the ideas in this newsletter, then contact us today: