Why it\’s important to plan

Consider this case study:

Bill Smith, a self-employed electrician, purchased a brand new van 15 March 2014 for £18,000. Due to a downturn in the local economy his trading profits for the year to 31 March 2014 were just £9,400. Fortunately, he had secured a number of regular contracts for the following year that should net at least £30,000 in the trading year to 31 March 2015, however, he would be required to travel and hence the purchase of the new van.

Towards the end of June 2014 Bill took his books to his accountant to work out his tax position for 2013-14. In July 2014 Bill was called in for a meeting.

His accountant informed him that his adjusted taxable profits for 2013-14 were £10,400. His accountant also informed him that he could claim a reduced Annual Investment Allowance for the purchase of the van of £1,000 that would clear any tax liability for the year.

Bill was feeling good, no tax to pay. Then, the bad news…

As the initial claim for the van had been made in 2013-14 (due to purchase during March 2014) the balance not written off for tax purposes (£18,000 – £1,000) £17,000 would only be available in later tax years for an 18% writing down allowance. So for the tax year 2014-15 Bill could claim (£17,000 x 18%) £3,060 as a reduction of his profits for that year. Based on estimated profits of £30,000 this would produce a tax bill of approximately £3,400.

Then more bad news, Bill was advised that if he’d delayed the purchase of the van for three weeks, until after 5 April 2014, he could have written off the entire purchase price of the new van against his profits for 2014-15 and reduced his tax bill for that year to £400 instead of £3,400. With no claim for the van in the earlier tax year, his tax bill for 2013-14 would have been £200 and £400 for 2014-15. In total a cash flow saving of £2,800 (£3,400-£200-£400).

The moral of the story is – planning is important.

If you are considering any significant change in your business activities talk it over with us BEFORE you under take the change. The old cliché is supremely relevant: there really is no point in closing the stable door after the horse has bolted.

NIC employment allowance

HMRC have published further clarification regarding who can, or cannot, claim the new £2,000 a year NIC Employment Allowance. Extracts from the update are set out below:

Public authorities

Public authorities (such as local authorities, town councils and parish councils) are not eligible for the Employment Allowance unless they have charitable status.

Pharmacies

Independent pharmacies conducting a business, including over the counter sales as well as dispensing NHS prescriptions, are entitled to claim the Employment Allowance.

Educational Institutions

Schools, academies, further education colleges and universities are entitled to claim the Employment Allowance if they are private businesses or charities. This includes local authority or central government funded institutions provided they have charitable status.

If your charity is connected to another charity, then there will be entitlement to just one allowance for all of the connected charities. So, an education trust which controls several academies with charitable status will be entitled to just one allowance and it will be up to them to decide which academy makes the claim.

Domestic staff

Employers of domestic staff will be unable to claim the Employment Allowance as the employees are all being employed in a personal capacity to support the running of a household.

Franchises

Where a person operates a franchise, the employer (franchise holder) will be entitled to the Employment Allowance. However, if the franchise holder controls more than one franchise of a business, there will only be entitlement to one Employment Allowance for all of the franchises of the business controlled by that franchise holder.

Self employed

Can the self-employed claim the Employment Allowance? Yes, but only if you have employees and your business pays employer Class 1 NICs on your employees’ earnings.

Small business VAT scheme

If you are a registered VAT trader and your present turnover is below £150,000 you may be advised to take a look at the VAT Flat Rate Scheme (FRS).

FRS users pay VAT as a fixed percentage of their total sales including VAT. You still add 20% VAT to your invoices but you cannot reclaim VAT on purchases or expenses paid.

The flat rate that you apply depends on the business sector in which you trade. Rates vary from 5% to 14.5%.

Benefits of using the Flat Rate Scheme

Using the Flat Rate Scheme can save you time and smooth your cash flow. It offers these benefits:

  • You don't have to record the VAT that you charge on every sale and purchase, as you do with standard VAT accounting. This can mean you spending less time on the books, and more time on your business. You do need to show VAT separately on your invoices, just as you do for normal VAT accounting
  • If you are in your first year of VAT registration you get a one per cent reduction in your flat rate percentage until the day before the first anniversary you became VAT registered
  • You no longer have to work out what VAT on purchases you can and can't reclaim
  • With less chance of mistakes, you have fewer worries about getting your VAT right
  • You always know what percentage of your takings you will have to pay to HMRC

Potential disadvantages of using the Flat Rate Scheme

The flat rate percentages are calculated in a way that takes into account zero-rated and exempt sales. They also contain an allowance for the VAT you spend on your purchases. So the VAT Flat Rate Scheme might not be right for your business if:

  • You buy mostly standard-rated items, as you cannot generally reclaim any VAT on your purchases
  • You regularly receive a VAT repayment under standard VAT accounting
  • You make a lot of zero-rated or exempt sales

It is well worth crunching the numbers to see if a switch to FRS would be advantageous. It is possible that using the FRS would save you money as well as time.

International tax competitiveness

David Gauke, the Exchequer Secretary to the Treasury, recently gave a speech to the Lord Mayor’s Taxation Forum. His presentation focussed on international tax competitiveness, and how the UK’s system fares compared to our overseas competitors.

Here’s an extract of his comments:

Competitiveness

“Since 2010 we’ve cut corporation tax from 28% to 21%. And this time next year it will fall again, to just 20%. To spur innovation, we’ve introduced the Patent Box and the ‘above the line’ tax credit for Research and Development.

  • we’ve modernised our Controlled Foreign Company (CFC) regime
  • we’ve cultivated a generous environment for oil and gas exploration
  • we’re supporting the creative sector through a number of targeted tax reliefs

And at the Budget last month, we announced further tax incentives to support business, by:

  • doubling the Annual Investment Allowance
  • increasing the R&D credit for innovative companies
  • overhauling the UK Export Finance direct lending programme

It is not just about the competitive tax rates, reliefs and allowances. How we make tax law is important. In 2010, we published a Corporate Tax Roadmap, setting out what we were going to do and also, perhaps more importantly, explaining what we were not going to do.

We have also established a new tax policy-making process, ensuring proper consultation and the early publication of draft legislation – enabling us to refine and improve our legislation. And the importance of tax administration can be under-estimated. We recognise that our tax administrators need to understand major taxpayers. We’ve made sure that the largest two thousand corporations in the UK have their own dedicated relationship managers at Her Majesty’s Revenue and Customs, who can support those organisations and help to ensure that they are paying the correct amount of tax.

And that system exists, because it’s in everyone’s interests to have a strong working relationship that will ensure revenues are paid fully, and that any disputes or queries can be played out quickly without expensive litigation.

This is not about being a soft touch. Tough action is taken wherever necessary. But a constructive relationship built on trust between the taxpayer and the tax collector continues to bring in the revenue for the UK exchequer and add to the attractiveness of the UK system.”

Be interesting to see how this “carrot and stick” approach works in the real world as the UK promotes itself as a low-tax jurisdiction, but beware if you don’t pay your dues…

Businesses in automotive supply chain to benefit from new grants

Skills and Enterprise Minister Matthew Hancock unveiled £25 million of additional support for businesses to take the lead in improving training for new and current employees. Businesses can submit their proposals from 6 May 2014 and the offer will be open for 12 weeks.

Speaking at a UK Commission for Employment and Skills Investment Showcase, the Minister pledged to support businesses in the automotive sector supply chain with £20 million to fund training. This marks the next development in support of employer ownership, making sure skills support meets the needs of business. He also announced the successful bidders in the next phase of Employer Ownership Pilot (EOP) funding as well as unveiling the way in which previous winners have chosen to invest their funding.

The £20 million fund for the automotive sector supply chain will support the skills essential for the continued growth of the automotive sector. From next week, businesses in the sector will be able to submit proposals in order to access funding and address skills shortages.

Skills and Enterprise Minister Matthew Hancock said:

“Our goal is to bring employment and education closer together, to deliver the skills employers need. This straight forward, flexible employer ownership fund will allow employers in the supply chain to develop their skills so they can take advantage of significant growth opportunities in the sector. By having a highly skilled workforce, companies will be able to grow and meet the imminent and longer-term needs of automotive manufacturing companies.”

Second incomes under HMRC microscope

In the first week of April 2014 HMRC issued guidance on its latest tax gathering campaign. The target group this time is UK taxpayers who have second incomes and are not presently declaring these income streams on their tax return.

The information published by HMRC about the scope of the campaign is reproduced below:

About the Second Incomes Campaign

Introduction

The Second Incomes Campaign is an opportunity for individuals to bring their tax affairs up to date if they have additional income that is not taxed through their main job or another Pay As You Earn (PAYE) scheme. People with undeclared income can get up to date with their tax affairs in a simple, straightforward way and take advantage of the best possible terms. If you owe tax on your income you must tell HMRC about any unpaid tax now. You will then have 4 months to calculate and pay what you owe.

The scope of the Second Incomes Campaign

The Second Incomes Campaign is an opportunity open to individuals in employment who have an additional untaxed source of income.

Examples could include:

  • fees from consultancy or other services such as public speaking or providing training
  • payment for organising parties and events or providing entertainment
  • income from activities such as taxi driving, hairdressing, providing fitness training or landscape gardening
  • profits from spare time activities such as making and selling craft items
  • profits from buying and selling goods, for example regular market stalls, boot sales etc

Taxpayers who take advantage of this scheme should benefit from lower penalty charges in order to bring their tax affairs up-to-date.

David Cameron writes to crown dependencies

Our Prime Minister has written a letter to the UK’s overseas territories and crown dependencies promoting the value of a public register that would show the ultimate owners of companies registered in their jurisdiction.

This follows the publication of the “Company ownership: transparency and trust discussion paper” last week. It concluded:

“… we plan to proceed with the following policies:

  • establish a publicly accessible central registry of UK company beneficial ownership information
  • improve transparency of company ownership and control, including:

    • abolishing bearer shares
    • prohibiting the use of corporate directors (with exceptions)
    • increasing the accountability of those who control company directors
  • improve trust in the UK regime for disqualifying company directors
  • increase the likelihood of creditors being compensated where they have suffered loss from director misconduct”

David Cameron seems keen to share the insights gained. Here’s an extract from his letter:

“As you know, I believe that beneficial ownership and public access to a central register is key to improving the transparency of company ownership and vital to meeting the urgent challenges of illicit finance and tax evasion. So I am proud that the establishment of a publicly accessible central registry of company beneficial ownership information will now form a key pillar of our G8 legacy.

“We have conducted an in-depth consultation and now look forward to introducing legislation in the UK Parliament as soon as possible.

“I am firmly of the view that making company beneficial ownership information open to the public is by far the best approach. It will give businesses and individuals a clearer picture of who ultimately owns and controls the companies they are dealing with and make it easier for banks, lawyers and others to conduct due diligence on their customers. It will shed light on those who have provided false information, helping to tackle crime where it occurs and deterring people from providing this false information in the first place. And it will help reduce the cost of investigations for tax and law enforcement authorities here and overseas, particularly in developing countries, by making information more easily available to them at the very start of an investigation.

“I am very keen that we should move forward together in raising standards of transparency globally. I therefore wholeheartedly welcome all those Overseas Territories who are joining us in leading this work, either by already having a central registry in place or by consulting on establishing one.

It would seem that the net is tightening on organisations that use off-shore arrangements to avoid paying tax.

Tax Diary May/June 2014

 1 May 2014 – Due date for Corporation Tax due for the year ended 31 July 2013.

 19 May 2014 – PAYE and NIC deductions due for month ended 5 May 2014. (If you pay your tax electronically the due date is 22 May 2014.)

 19 May 2014 – Filing deadline for the CIS300 monthly return for the month ended 5 May 2014.

 19 May 2014 – CIS tax deducted for the month ended 5 May 2014 is payable by today.

 31 May 2014 – Ensure all employees have been given their P60s for the 2013-14 tax year.

 1 June 2014 – Due date for Corporation Tax due for the year ended 31 August 2013.

 19 June 2014 – PAYE and NIC deductions due for month ended 5 June 2014. (If you pay your tax electronically the due date is 22 June 2014.)

 19 June 2014 – Filing deadline for the CIS300 monthly return for the month ended 5 June 2014.

 19 June 2014 – CIS tax deducted for the month ended 5 June 2014 is payable by today.

VAT Mini One Stop Shop (MOSS)

Currently, the place of taxation for broadcasting, telecommunications and e-services (BTE) supplies is determined by the location of the supplier of the services. However, from 1 January 2015, the place of taxation for private consumers will be determined by the location of the consumer.

Business to business supplies are unaffected; this change will only concern suppliers of BTE services to private consumers.

To save you having to register for VAT in every EU Member State where you supply BTE services, you may opt to use the VAT Mini One Stop Shop online service (VAT MOSS). This will be available on 1 January 2015, but you will be able to register to use it from October 2014.

For example, if you register for the VAT MOSS online service in the UK, you will be able to account for the VAT due on your business to private consumer sales in any other Member States by submitting a single VAT MOSS return. This will include any related payment to HMRC. HMRC will send an electronic copy of the appropriate part of your VAT MOSS return, and the related VAT payment, to each relevant Member State's tax authority on your behalf. The VAT rate used will be that of each Member State of Consumption at the time the service was supplied.

The changes in the underlying VAT place of supply rules are complex. If you feel you may be affected please contact us at an early date so we can advise you on any alterations, if any, you will need to make to your record keeping systems.

Pension decision period extended

Last month we touched on the changes that HMRC is introducing to the treatment of defined contributions pensions. HM Treasury has now issued the following update that clarifies the position of people who have recently taken a tax-free lump sum from their defined contribution scheme.

“The government has announced today (Wednesday 9 April) that people who have recently taken a tax-free lump sum from their defined contribution pension will be given 18 months rather than 6 months to decide what they wish to do with the rest of their retirement savings, and will not be put at a disadvantage should they wish to wait to access their pension savings more flexibly.

This follows an announcement on 27 March confirming that the government would take action to ensure that people do not lose their right to a tax-free lump sum if they would rather use the new flexibility this year or next, instead of buying a lifetime annuity.

Under current tax rules, once a tax free lump sum has been taken, individuals have six months before they are required to make a decision regarding their pension, either by buying an annuity or entering into capped drawdown.

Currently, if this is not done, the lump sum is then taxed at 55%. This extra time will allow people to make the right decision for their pension.”

Exchequer Secretary to the Treasury, David Gauke, said:

“At Budget the government announced the most fundamental change in the way that people access their pension in almost a century, ensuring that over 400,000 people who have worked and saved hard will be able to access their retirement savings more flexibly. However, we recognise that decisions people take regarding their pensions are important and take time. This extension to the decision making period will give people the opportunity to take full advantage of the new flexibilities introduced at the budget.”