Tax Advice

A Simplified Tax Reporting for Small Businesses | Making Tax Digital (MTD) | Simplifying Tax
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A simplified tax reporting for small businesses

As part of the Government’s Making Tax Digital (MTD) plans to simplify the tax system and to speed up the time it takes for self-employed professionals and small business owners to complete their tax returns, the Government are proposing changes to the existing tax reporting rules.

The changes, planned by 2023, would mean that any business not incorporated would be taxed on profits arising in the tax year as opposed to profits on accounts ending in the tax year.

In short, the changes will see all businesses having to align their basis period with the 5/6th April tax year. Whilst the majority of businesses already do this, there are about 7% of sole traders who choose not to as it fits better with their business model.

For example, a business who runs their accounts to the 30th of June each year, their income tax for 2023/24 would currently be based on profits for the year ending 30th June 2023. Under the new rules the income tax for 2023/24 would be based on 3/12 of the income for the year ending 30th June 2023 in addition to 9/12 of the income for the year ending 30th June 2024.

The Government estimates that around 3% of sole traders and 15% of partners will face an increase in costs as a result of these proposed changes but believes that they will reduce errors and overpayments and bring tax returns in line with other assessments such as property income.

Whilst the changes are broadly welcomed and the consensus is that it will simplify life for business owners, the consultation period is due to conclude on 31st August. Some claim that this is too quick and businesses need more time to prepare and propose a delay of 12 months in order for business to provide proper feedback and ensure that the scheme works for everyone.

If you have any questions or would like to discuss this further please feel free to call us on 01173 700 079 or e-mail hello@steppingstonesaccountancy.co.uk.

Have Your Claimed Correctly For Your R&D Project | Tax Claim for R&D | R&D Tax Advice
Have you claimed correctly for your R&D project? 758 513 Stepping Stones Accountancy

Have you claimed correctly for your R&D project?

An R&D project basically encompasses the research and development activities that a company will undertake when developing new products and services or when improving products or services which already exist. The R&D phase is the first stage of the project that involves all of the research around market needs and then development of prototypes and products.

Of course, with any R&D project, there is uncertainty. It is not until you complete the process, that you know whether it will be successful or not. This issue is actually something that causes lots of uncertainty when a company is claiming for R&D tax relief. In fact, those companies that only focus on applying with successful R&D projects could be missing out.

If we look at the HMRC guidelines it clearly states that, “not all projects will succeed in their aims. What counts is whether there is an intention to achieve an advance in science or technology”. So, if we translate that it basically means that if the R&D project has met the correct criteria then you can apply for the relevant R&D tax relief.

Often, we are asked about the eligibility of an R&D project and if a claim can be made. In simple terms the following applies:

ELIGIBLE NOT ELIGIBLE
The project did benefit science and technology but was stopped due to commercial reasons The project did not benefit science and technology but was stopped due to commercial reasons
The project did benefit science and technology but was stopped due to commercial reasons The project did not benefit science and technology but was stopped due to technical reasons

Calculating the cost for any R&D tax credit, both successful and unsuccessful is the same. You simply total the time spent on the project, summarise the materials used and then add the 2 costs together. This then forms the eligible expenditure for the claim.

If you are looking for some help with your R&D tax credits claim, please feel free to call us on 01173 700 079 or e-mail hello@steppingstonesaccountancy.co.uk.

HMRC Explore Options for Changing Tax Payments | HMRC Tax Advice | Modern Tax Administration | HMRC Tax Help Bristol
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HMRC exploring options of changing tax payments

The Government have recently announced a 10-year strategy to build a modern tax administration systems and as part of this they have begun a consultation period which lasts until 13 July 2021. This will involve a “call for evidence” approach which focuses on the benefits and challenges of the current tax payment system with a view to reducing the gap between when income/profits increase and income tax or corporation tax is paid. 

As with any new scheme there will be some issues to overcome. For example, how do you consider payments that are made under the income self-assessment heading or corporation tax for small companies, as these do not fall under the quarterly tax instalments?

How it currently stands

As it currently stands any self-employed taxpayer who has just started trading will have up to 22 months to pay their first tax bill. For an established trader, payment will typically be made twice a year and a balancing payment on any outstanding liability.

If we look at corporation tax there is also a delay between making profit and when a corporation payment is due. Payment is due in 1 instalment no later than 9 months after a company’s accounting period.

The need for change

The current situation brings with it a range of issues, having a large liability to pay at a specific time of the year can cause problems, especially when a tax bill comes out higher than what was expected. Changing this to a more regular payment based on the end of year reports could provide more accurate figures and greater control.

The issue

The HMRC are focussed on trying to improve how they receive funds, especially considering that 34% of their outstanding debts are for income tax and corporation tax.

What are the plans?

Consideration is being given to whether payments should be on either a monthly or a quarterly basis. As it stands HMRC are exploring all options.

Tax payments could be calculated in the year, developed as a result of up-to-date information and with projections on annual liability. Alternatively, tax payments could be based around the previous year’s tax liabilities. Finally, it could be based on estimations of the taxpayer’s liability for the operating year.

Of course, all ideas are on the table at the moment. The focus is to develop ideas that can be given careful consideration before a framework for moving forward can be finalised. HMRC also recognises that plans might need to be different for specific industries or taxpayer types.

If you have any questions or would like to discuss your tax liabilities please call us on 01173 700 079 or e-mail hello@steppingstonesaccountancy.co.uk.

VAT Oddities | UK VAT Rules | VAT Advice Bristol
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VAT Oddities

VAT rules are known for their complexities and the headaches that they can cause businesses around the UK. But it’s the peculiarities of the system that can have people scratching their heads, particularly in the world of food!

Recently, the case of Nesquik flavoured milk has been highlighted. Bizarrely chocolate flavoured milk is already VAT exempt, however, strawberry and banana are classed as standard rated and so 20% VAT is applied. Nesquik tried, and lost, to argue that all three flavours should be exempt

Fancy a biscuit with your milkshake? Depending on whether or not it has chocolate on can make all the difference when it comes to VAT. A plain biscuit, traditionally a zero-rated product, when coated in chocolate, a standard rated item, suddenly becomes a luxury item and has 20% VAT added.

Sounds fairly straight forward? Think again. If the chocolate is included inside the biscuit, in the case of chocolate chip cookies, it is back to being zero rated. This is also the case where the chocolate is sandwiched between two biscuits.

Think that is peculiar? Spare a thought for the poor gingerbread man. If he just has two chocolate eyes there is no VAT charged, but as soon as he starts to put on any clothing made from chocolate, such as trousers or a nice smart bow tie, he suddenly has VAT added.

And don’t even mention Jaffa Cakes….. McVities have very cleverly argued that they are classed as a cake not a biscuit and so no VAT is not applied despite being coated in chocolate.

VAT rules – they really take the biscuit!

Changes to Tax Relief for Residential Landlords | Financial Advice for Property Investors
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Changes to Tax Relief for Residential Landlords

For many years, investors have seen their buy-to-let properties as an excellent source of income. However, the Government has acknowledged the need to discourage savvy investors from procuring properties that would otherwise have been sorely welcomed by first time buyers.

As of 6th April 2017, a phased implementation began of new rules, designed to restrict the relief available for higher rate taxpayers. When calculating taxable profits, landlords will no longer be allowed to deduct the interest costs of their mortgage. In its place, tax relief on mortgage interest payments will be reduced incrementally until 2020, with tax calculated on the total rental income instead.

Despite the changes taking place gradually until 6th April 2020, the changes could have huge implications for individuals that are near the higher tax rate threshold. For those with high interest costs, the new rules could push them over the tax threshold without them being aware.

For detailed information on how these changes will impact investors go to the GOV.UK website where there are some clear examples on what this means in practice. Essentially though, the changes certainly mean larger tax bills for property investors and in turn lower profits.

Spring Budget 2017 Tax Summary 640 289 Stepping Stones Accountancy

Spring Budget 2017 Tax Summary

Highlights

  • Class 4 National Insurance paid by the self-employed to rise to 11% by April 2019.
  • Dividend allowance to fall from £5,000 to £2,000 in April 2018.
  • Corporation Tax decrease to 19% in April 2017 and to 17% in 2020 confirmed.
  • Some small businesses and landlords given extra time to prepare for Making Tax Digital.
  • Pubs with a rateable value of less than £100k will get a £1,000 a year rates discount.

National Insurance

Class 4 National Insurance paid by the self-employed was announced to increase from 9% to 10% in April 2017 and to 11 in April 2018. Class 4 National Insurance is paid on profits earned over £8,060. The change will affect 2.84 million people with an average annual increase of £240.

The newly announced change in Class four also coincides with an announcement in an earlier budget that class 2 is to be abolished in April 2017. Class 2 was a flat rate of £145.60 annually in 2016/17 and was payable where profit exceeded £5,965.

The net effect is that the self-employed with profits of more than £16,250 will see an increase in the National Insurance they pay.

The government have sold the tax rise on a platform of fairness as the employed pay Class 1 National Insurance at a current rate of 12%. But the employed are entitled to more government benefits and there has been no talk of making this equal.

Dividend Allowance

A new tax on dividends was introduced in April 2016 and it came with a £5,000 dividend allowance. It was announced in the budget that from April 2018 the dividend allowance will be reduced to £2,000. For small company owners who receive most of their income as dividends this will cost them an extra £225 in tax per year.

Most small company owners have yet to prepare a tax return and see the effect of the new dividend tax. This announcement is clearly aimed at increasing the tax take from small business owners even more.

Corporation Tax

The chancellor has committed to the decreases announced on Corporation Tax meaning a reduction from 20% to 19% in April 2017 and further decrease in 2020 to 17%. This goes someway to offsetting the Dividend Tax and the reduction in the Dividend Allowance.

Making Tax Digital

Making Tax Digital is the government programme to abolish tax returns and replace them with automatic data collection and a quarterly reporting structure. The plans are highly controversial and have been criticised by the accounting profession and small business groups.

There was a bit of relief announced for the smallest businesses and landlords in that they will be delayed by a year to April 2019. This is welcome news to help the smallest businesses prepare for the change from an annual tax return to quarterly reporting of their profit.

Rates

Pubs with a rateable value of less than £100k are to get an annual discount of £1,000 on their rates. The net effect of the rates rise and the discount could still see some pubs paying an increase in rates but the impact will be reduced and some pubs could even see a fall in rates.

A cap in rate rises has been introduced for those losing small business rate relief they will see their rates increase by no more than £50 per month.

Dividend & Tax Support in Bristol
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Dividend Tax

The largest change to the taxation of small company owners in a generation came into effect on 6 April 2016 but small company owners are yet to see the effect on their tax bill. With the 2015/16 tax returns now all submitted it’s time to look ahead to the impact the dividend tax will have on your 2016/17 tax return.

Under the previous rules dividends were taxed at effectively 0% if they were within the basic rate. They also included a complication in the 10% tax credit where the actual dividend would be increased by 10% with this then refund by way of a tax credit. With the introduction of the dividend tax the tax credit has been removed which should make the numbers on your return a bit easier to understand.

Tax on dividends within the basic rate band will now be at a rate of 7.5% with the higher rate taxed at 32.5%. this will mean the majority of small business owners that operate through a company will now need to pay personal tax as well as corporation tax.

There is some relief as a new dividend allowance, which is essentially a personal allowance that can only be used against dividends, of £5,000 per person has been introduced.

Let’s see an example of a small business owner who takes £8,000 in salary and £32,000 in dividends. Under the old rules no tax would be payable but with the introduction of the new dividend tax their tax position will look like this:

  • Income                           £40,000
  • Less
  • Personal allowance        (£11,000)
  • Dividend allowance        (£5,000)
  • Net income                     £24,000
  • Tax payable (24,000×7.5%) £1,800

That’s an increase of £1,800 in tax but it’s not the worst part. If your personal tax liability exceeds £1,000 you need to make payments on account every January and July. These are payments in advance towards the following tax year. They are calculated as 50% of the last year’s bill and the first payment is due with all of last years tax. In our example above the January 2018 payment will be the £1,800 in tax due for 2016/17 plus a payment on account of £900 towards 2017/18 giving a total amount payable of £2,700. From then on if everything remains equal payments of £900 will be payable every July and January.

So what can be done to help ease this tax bill? Generally, we’ll look to other family members to gift shares to starting with your spouse. A gift of shares to a spouse will attract no capital gains tax and you can then take advantage of the £5,000 dividend allowance that your spouse has available. Gifts of shares to other family members can work but need planning to avoid capital gains tax and you’ll need to be careful not to fall foul of anti-avoidance legislation and make sure the dividend is spent by the family member and doesn’t come back to you. Another option would be to reduce the dividends down and keep investments within the company, this of course assumes you have excess cash.

Whatever measures taken to reduce the tax bill it’s likely a great deal of small company owners will be paying this tax. It’s essential small company owners understand the impact and save for that first January 2018 bill.

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