A Guide to Making Tax Digital for VAT

Making Tax Digital (MTD) is the government’s scheme that makes online tax filing and payment ad digital record keeping mandatory. Whilst all types of business related tax will be included in the scheme, only Making Tax Digital for VAT has so far been given a roll-out date.

The government’s aim with MTD is to reduce tax errors and generate over £600 million in additional revenue. There are however benefits for businesses says the government, namely more straightforward record-keeping.

The MTD for VAT pilot programme is already in operation. Having started in October, it is open to any business that wishes to take part. The pilot will come to a close on 1 April 2019, at which point MTD for VAT will become mandatory for all VAT-eligible businesses, other than a minority which have had their roll-out date deferred until October 2019.

Let’s take a look at what will be involved for businesses once the official MTD for VAT roll-out date kicks in.

What do I have to do under MTD for VAT?

If you are a VAT registered business with a Taxable turnover above the VAT threshold, then you will need to keep and preserve your VAT records digitally and send your VAT returns to HMRC using MTD-compatible software.

To see what records you will need to keep digitally, take a look at VAT Notice 700/22.

When do I need to start following MTD rules?

Your start date will vary depending on your individual VAT period. You must start following MTD for VAT rules from the first day of your first VAT period that starts on or after 1 April 2019. After this date you will no longer be able to submit a paper based VAT return, or manually complete a VAT return online.

Your current VAT filing deadlines will not alter once MTD for VAT is introduced.

What should I do to prepare for MTD for VAT?

If you are not already using accounting software then you should make the switch as soon as possible. Bear in mind that by 2020, virtually all business taxes will fall under MTD rules, and without accounting software you will not be in a position to comply.

Remember that MTD for VAT is not just about online filing of VAT returns; it is also about maintaining digital VAT records.

If you are considering your options concerning accounting software, our guide to keeping your books in line should prove helpful.

If you are in any doubt as to your responsibilities concerning Making Tax Digital for VAT you should not hesitate to discuss the matter with your bookkeepers or accountant.

The Pros and Cons of Traditional Accounting

Last month we looked at what is involved in cash basis accounting. This month we are exploring the alternative: traditional accounting.

What is traditional accounting?

Traditional accounting, also known as ‘accrual’ accounting, involves recording income and expenditure at the point where an invoice was issued, or when a bill was submitted. This is opposed to cash basis accounting, where records are only made when money physically enters or leaves a business.

Who uses traditional accounting?

In practice, traditional accounting may not suit smaller businesses or sole traders. This is because invoices are recorded at the point they are issued, rather than when they are paid.

This means that you may find invoices included in your tax return figures that are yet to be paid. The risk here is that the invoice payment may take some time to come in, or may not even transpire at all. However, that invoice will still count as income for tax purposes. With cash accounting, there is no need to pay tax on anything you have not yet been paid for.

Traditional accounting tends to be more suited to the larger business, although for the smaller business expecting to grow rapidly, it is usually the better option because the turnover limit for cash accounting is £150,000.

Limited companies and limited liability partnerships must use traditional accounting.

What do I need to do if I use traditional accounting?

Traditional accounting requires you to keep records of all income and expenditure. This includes stock and equipment and its value at the end of your accounting period; all payments made to employees such as wages, benefits and bonuses; vehicle and travelling costs associated with the business; any interest accrued on bank and building society accounts, and all income.

What are the benefits of traditional accounting?

Most benefits of traditional accounting come in the form of being able to set off losses against other income, and being able to claim significantly more capital allowances. Cash accounting only allows capital allowances to be claimed against cars.

Traditional accounting, or cash accounting – which is best for your business? If you are in any way unsure as to the best accounting method for your individual circumstances, you are best advised to discuss the matter with your bookkeepers or accountant.

A Guide to Limited Company Allowable Expenses

Last month we looked at allowable expenses for self-employed workers. We pointed out that limited company rules on expenses are different and that we would look at those separately, which is precisely what we are doing in this post.

What are allowable expenses for a limited company?

The key rule to follow concerning limited company expenses is that they must be genuine. In other words, the expense must be something that was incurred exclusively, wholly and necessarily during the course of running your business.

Expenses that cross over both business and personal use cannot be claimed. It is important to retain all receipts and invoices so that if it becomes necessary, you can prove that your expenses claims were genuine.

What are typical limited company expenses that can be claimed for?

The following are some of the allowable expenses which can be set off against Corporation Tax:

Salaries – all PAYE salaries including directors and staff.

Subcontractor fees – if you engage subcontractors or freelancers to undertake work for your business then these will be classed as allowable expenses.

Pension contributions – all pension contributions paid to staff, providing they are made via an approved scheme.

Employer’s National Insurance Contributions – any contributions payable on employee salaries can be claimed for.

Travel and parking costs – travel expenses is another topic that needs its own dedicated post which we will cover in the future but suffice to say in general that most travelling costs will be classed as allowable expenses. Company car expenses can also be claimed, although there is a benefit in kind charge for private use.

Accommodation costs – if you are staying away from your normal place of business then you can claim accommodation costs, providing you do not claim for more than 24 months at a temporary place of work.

Subsistence costs – you can claim for subsistence whilst away from your normal place of work, but again as with accommodation costs, you cannot claim if you have exceeded 24 months at a temporary place of work. Incidental overnight expenses can be claimed at £5 per might or £10 per night if abroad should you be working away from home.

Training fees – providing the training delivers skills that are relevant to your business then you can claim for the costs involved.

Business insurance – all genuine business insurances such as employer’s liability, professional indemnity, property and vehicle insurance are classed as allowable expenses.

Telephone, mobile and internet fees – providing the contracts are in the name of the business you can offset the costs against your Corporation Tax. If you work from home then you can claim the cost of business calls made from your residential telephone line.

Use of home as office – home workers can claim £4 per week without receipts, or calculate a proportion of the household bills.

Computer equipment – all computer equipment and software used for business purposes can be claimed for.

Advertising and marketing costs – anything you spend on promoting your business is an allowable expense.

Business gifts – you may gift up to £50 per individual before complex rules apply.

Professional fees – anything you spend on accountants, solicitors, surveyors, etc. can be claimed for.

Health care – any employee who uses a computer is entitled to an eye test, the cost of which you can claim for. You can also claim for annual employee health checks.

It is advisable to always consult with your bookkeepers or accountant if you are unsure as to whether an expense is a genuine business one that can be included in your Corporation Tax return.

Cash Basis Accounting Explained

Cash basis accounting is a method often used by sole traders and partners to work out income and expenses for a Self-Assessment tax return. Many small business owners choose to use cash basis accounting rather than traditional accounting. Here we look at why that is, and how cash basis accounting works so you can decide whether it’s for you.

With cash basis accounting, you only need to declare money when it comes in and leaves your business. So, at the end of the tax year, you only have to pay Income Tax on the money you have received during your accounting period.

Is cash basis accounting right for me?

There are some instances when cash basis accounting won’t be the right choice for you. For example, if you run a business that is not straightforward, for example with extensive stock levels; if you wish to claim bank charges or interest in excess of £500 per year as an expense; if you have losses that you wish to offset against other taxable income, and if you have a need to obtain business finance, because you may be asked for accounts drawn up using traditional accounting.

Who can use cash basis accounting?

Any small self-employed business such as a sole trader or partnership can use cash basis accounting providing their annual turnover is £150,000 or less. If you run multiple businesses, then if you use cash basis accounting for one of them, then you must use it for the others. If the combined turnover for all your businesses exceeds £150,000 then you cannot use this accounting method.

You can however remain within the cash scheme if your income rises during the current tax year. So for example if you commence the tax year earning £140,000, but by October your turnover has increased to £200,000 then you can continue to use cash basis accounting for the rest of that tax year, providing your turnover does not exceed £300,000. If it does, then your next tax return will need to use traditional accounting.

Limited companies and limited liability partnerships are not permitted to use cash basis accounting. There are also certain other exceptions, a list of which can be found here.

Can I switch from traditional accounting to cash basis accounting?

If you qualify for cash basis accounting then you can switch from traditional accounting, however there may be some adjustments that need to be made, for which it is likely you will need professional guidance.

If you are in any doubt as to whether cash basis accounting is right for your business, talk to your bookkeepers. They will be able to advise you on an individual basis and guide you as to the best accounting method depending on your current and future needs.

A Guide to Self Employed Expenses

If you work on a self-employed basis, there are certain running costs that you are allowed to deduct from your overall turnover before you calculate your taxable profit. These are known as ‘allowable expenses’, and as a self-employed worker, it is important that you are aware of what these are, because if you don’t factor them in when you calculate your annual tax return, you could be missing out on potential savings which could be quite significant.

Allowable expenses do not include anything you take from your business to pay for things you buy for personal use. Limited company rules on expenses are different, and we’ll look at those in a separate post in the future. 

What can I claim as allowable expenses?

The following are allowable expenses which can be deducted from your taxable income as a self-employed worker:

Office costs – these include things like rent, rates, security costs, utility bills, insurance costs, telephone and internet, printing and printing supplies, postage, computer software and stationery.

Travelling costs – costs for the likes of fuel, parking and public transport fares are all classes as allowable expenses, as are hotel rooms, vehicle licence fees, repairs and servicing, vehicle insurance, breakdown cover and meals on overnight business trips.

Clothing expenses – if you wear a uniform for work or use protective clothing then you can claim expenses for these. Actors and entertainers can also claim for their costumes.

Staff costs – if you employee staff on any basis, or use subcontractors, then their salaries or fees are classed as allowable expenses. Bonuses, pensions, benefits, agency fees and employer’s National Insurance are also included.

Goods for resale – any goods you purchase to sell on are allowable expenses, as are raw materials and any direct costs incurred from the production of goods.

Financial costs – your costs for professional services such as an accountant, a solicitor, surveyors and architects are all allowable providing they are for business use. You can also claim for professional indemnity insurance cover, bank charges, interest paid on loans and hire purchase and leasing payments.

Advertising and marketing – if you advertise your business via any medium then you can claim those costs as allowable expenses. So for example print advertising, mailings, digital marketing costs, website hosting and free samples. You can also claim for subscriptions to professional or trade journals and trade or professional body membership, providing it is connected to your business. Client or supplier entertainment and event hospitality are not allowable expenses, neither are gym membership fees, payments to political parties or charity donations.

Any fines issued for breaking the law are not allowable expenses.

If you want to make sure you are claiming everything possible, why not take advice from your local bookkeepers? They know precisely what can and cannot be claimed for, and could even help to save you money on your annual tax return.

2018 Autumn Budget Summary

The Autumn Budget of 2018 has proved quite a beneficial one, particularly for the small business. Let’s take a look at some of the key points from this year’s Chancellor’s speech. 

Employment set to keep growing

With employment at a near record high, the Office for Budget Responsibility has forecast that it will keep growing. 3.3 million more people are in work since 2010, and it is reckoned that 800,000 more jobs will be available by 2022. 

National Living Wage to increase

From April 2019, the National Living Wage will rise from £7.83 per hour to £8.21 per hour, effectively benefiting in the region of 2.4 million workers, with a rise of £690 per year for those working full time. 

Tax-free Personal Allowance to rise

The tax-free Personal Allowance, the amount you earn before you start paying tax, will rise by £650 in April 2019 to £12,500. This is something that has been introduced earlier than planned, and it will be maintained in 2020. 

Higher Rate Threshold to increase

The amount higher earners can net before they pay tax at 40 per cent is set to increase from £46,350 to £50,000 in April 2019. So, in 2019-2020, there will be almost one million fewer higher rate taxpayers than in 2015-2016. 

Universal Credit work allowances increased

£1.7 billion will be invested into increasing existing work allowances in Universal Credit. This will see working parents and those with disabilities claiming Universal Credit £630 per year better off. There will also be additional help for people moving from existing benefits to Universal Credit as well as targeted support for those repaying debts. 

Travel benefits on the horizon

2019 will see fuel duty remaining frozen for the ninth year in a row, whilst short haul Air Passenger Duty will also stay the same for the eighth year running. Long haul rates are set to rise in line with inflation.

£30 billion will be invested to improve roads. A £28.8 billion National Roads Fund incorporates £25.3 billion for the Strategic Road Network to improve motorways, trunk roads and A-roads. It will also assist with the funding of the new network of local roads, to be called the Major Road Network, as well as larger local road projects. There will also be a fund of £420 million for local authorities to repair potholes and to repair tunnels and bridges, as well as £150 million to improve local traffic hotspots like roundabouts. 

Retail boost

Retail businesses will enjoy a £1.5 billion boost with business rates for smaller high street outlets seeing their rates bills slashed by a third for two years starting from April 2019. There will also be a £675 million investment into the improvement of transport links; the redevelopment of vacant shops into homes and offices, and the restoration of historic properties. 

Extra protection for businesses

The government will invest £1 billion more into defence over the next two years, providing the Ministry of Defence with more funds to help protect the country against cyber-attacks and other threats. 

Increase in the Annual Investment Allowance

The Annual Investment Allowance will rise from £200,000 to £1 million from 1 January 2019 to 31 December 2020 with the aim of helping businesses invest and grow. In addition, from October 2018 businesses will be able to deduct 2 per cent of the cost of any new non-residential structures and buildings off their profits before tax is due. 

Changes to the Apprenticeship Levy

Further changes to the Apprenticeship Levy will be introduced with a view to supporting employers. From April 2019, larger businesses may invest up to 25 per cent of their levy to support apprentices in their supply chain. For some employers there will be a cut of 50 per cent on what they currently pay for apprenticeship training, with the government to make up the shortfall. Further details will be released in early 2019.

Should you have any questions about how the latest Autumn Budget will affect your individual business, your local bookkeepers will make an excellent first port of call.

Time for Employers to Get Winter Ready

The UK is well known for coming to a standstill once extremes of weather kick in. With winter on the horizon, now is the time to get ready for the employment related implications of the impending cold, frosty weather and the potential upheaval to business that snow can bring.

Unpredicted, unusual weather often leaves employees in a spin as to whether they should be putting themselves at risk by tackling icy conditions to get into work. There is also the question as to whether staff who cannot make it in due to transport problems should be paid; what happens if you decide to close the premises and what obligations employers have for keeping staff safe and comfortable during cold weather spells. Let’s take a look at all these issues. 

The issue of pay

Where weather conditions are making it a challenge to get into work, employers are not under any obligation to remunerate staff for missed days. Whilst it is not the fault of the employee that they cannot make it in, neither is it the fault of the employer.

If you wish to maintain good relations with staff and to avoid causing them financial difficulties, you could offer to allow them to take the time as paid leave from their annual leave entitlement; or to make up the time in other ways, perhaps by getting in early or staying later once the weather has improved.

If you decide to close during inclement weather, it is customary to pay regular wages, unless it states otherwise in the contract of employment.

You could of course allow employees to work from home; getting key personnel set up for remote working is an excellent strategy which will help to keep your business running at all times of the year. 

The issue of childcare

Where workers with parental responsibilities are forced to take emergency time off because nurseries or schools are closed due to bad weather, this is a situation where there is an official entitlement to take unpaid leave. The time taken should be used to arrange alternative care for the dependent, rather than actually take care of them themselves. 

The issue of working conditions

For working environments where roles are stationary, the temperature must be at least 16 degrees Celsius. For active roles, the temperature must be a minimum of 13 degrees. This is according to Regulation 7 of the Workplace (Health, Safety and Welfare) Regulations 1992. If you have staff working outside during cold weather then you have a duty to ensure they are kept warm and hydrated. 

Ensure frequent breaks; provide advice on how to stay hydrated without resorting to alcohol or caffeine; show employees the importance of warming up muscles before commencing strenuous work and be sure to provide protective clothing such as insulated footwear, headwear and gloves. 

The issue of safety

It is vital that working conditions are safe for all workers. Make sure that slip hazards are minimised as far as possible by taking steps to clear ice and snow. If you have workers who are expected to drive as part of their role, ensure their vehicles are safety checked and equipped with torches, blankets, first aid kits, drinking water and other essentials. Also be sure to provide training in how to deal with typical cold weather related incidents. 

The issue of communication

Ensure you have a policy in place that sets out your expectations at times of extreme weather conditions. Without it, your workforce will be unclear as to the rules. Bear in mind the effect that adverse weather has on the overall supply chain, overheads and staff productivity when setting your policy so that you work to minimise the risk to your business.

Make it clear as to the methods by which staff will be advised about premises closures and any special arrangements. It could be a notice on the company website or intranet; an email or a text message.

You can talk to your local bookkeepers for advice on how to deal with these issues in the first instance, and of course you should take legal advice when it comes to putting together your extreme weather policy.