Is The VAT Flat Rate About To Fall Flat?

vatRobert Woolley of HPH Accountants LLP explains that VAT regulations are set to change at the beginning of April 2017. The new regime may effectively spell the end of the flat-rate VAT scheme for many small businesses.

For a number of years now, many businesses with a turnover of less than £150,000 have opted to make use of the flat-rate VAT scheme.

Rather than balance the VAT charged on sales with the VAT incurred through purchases, businesses are given a percentage figure to apply to the gross sales over a three-month period. This rate will depend on the industry the business is in and can vary quite considerably.

In compensation for the beneficial repayment rate, businesses are not allowed to claim back VAT they have been charged, the only exception being capital items costing above £2,000.

In December 2016, the government entered into consultation on the flat-rate VAT scheme which makes it much less attractive to many small businesses.

Originally, it was effectively possible for small businesses to gain from the charging of VAT, by retaining a proportion of the money collected as taxable profit. HMRC seems determined to close off what is now seen as a loophole, but which may have been presented originally as a benefit to encourage registration and growth rather than supressing sales to stay below the VAT threshold.

From 1st April 2017, a large proportion of businesses on the flat-rate scheme will have to apply the figure of 16.5% to their gross sales.

So with £100,000 in sales and £20,000 in VAT on top, charged out to customers, the payback rate becomes £19,800. As a result, many small business owners currently on the flat-rate scheme may choose to opt out and record VAT in the traditional way.

There is, however, one way in which a business can stay on the flat-rate scheme and retain its more favourable terms. That is if they can prove they are not a ‘limited cost trader’.

The definition of the limited cost status is that the expenditure on goods is less than 2% of the VAT-inclusive turnover. In some circumstances, it may be more than 2% but less than £1,000 per annum.

The issue giving accountants sleepless nights is over the precise definition of goods. We know that it excludes capital expenditure, food and drink and any type of vehicle maintenance or fuel (unless you’re running a taxi service).

Where things become more complex would be, for instance, over the purchase of something like a software subscription. It seems that if the software is bespoke to your business, it will probably count as a service not goods.

It’s these kinds of assessments that small businesses will need to make and it’s important to take professional advice, as the situation is still fluid and everyone is racing to interpret what exactly the new regime will mean.

HMRC will be writing to all affected companies in due course, but given the short time frame, it is well worth starting now a conversation with us at HPH to be prepared for 1st April.

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The information contained within the above blog article is for general information purposes and may be time critical; it does not constitute professional advice. We accept no responsibility for any loss which may arise from reliance on the information contained in the blog article. Always seek professional advice before acting.

In Good Company?

sole-trader-limited-companyChanges in legislation make the choice of operating as an unincorporated business (sole trader or partnership) or incorporated business (limited company) more complex today, argues Paul Hudson, Tax Manager at HPH Accountants LLP and puts forward some points to consider.

If you’re setting up a business for the first time, one of the key choices you’ll make is over how you choose to structure it.

The simplest option is often to become a sole trader or, if there are two or more individuals in business together, a partnership. Many businesses start life in this way.

Alternatively, some might set-up in business as a limited company, appointing themselves as company director.

There is no right or wrong answer here, but the way in which a business is structured will probably depend on a number of factors including possibly the business owners’ personal circumstances and the likely profits of the business.

It’s worth remembering that the Taxes Acts and the Companies Act are vast and complex, which means it’s important to get support from those who have knowledge and experience of the rules.

Limited liability

If you are a sole trader, you do not benefit from ‘limited liability’ and as a result are potentially at risk of losing your own personal assets if the business fails. A company is a separate legal entity and therefore it is possible for the business owner(s) to benefit from ‘limited liability’.

Administration and formalities

If you run an unincorporated business, you prepare annual business accounts and a Self-Assessment tax return. The accounts are not filed at HM Revenue & Customs or Companies House, although some of the information contained within the accounts is declared on the tax return.

If you run a limited company, you are required to prepare accounts in a specific Companies Act format. Company accounts are filed at HM Revenue & Customs and at Companies House. You need to observe certain formalities before taking profits from a company, including the necessary recording of board meetings. It’s possible to pay salaries and bonuses, provided the company operates a payroll scheme.

Rates of tax and national insurance contributions

As an unincorporated business owner, your tax and national insurance contributions on profit are at rates of 20% (basic rate), 40% (higher rate) and 45% (additional rate).

In addition, class 4 national insurance contributions are due on profits falling between £8,060 and £43,000 at 9% and 2% on profit over £43,000. Class 2 national insurance contributions of £145.60 pa are due if profits exceed £5,965.

Regardless of the value of the amount you draw, tax and national insurance contributions are due on the taxable profit of the business.

As a company owner, you are able to control the level of income on which you pay tax by drawing only the level of income required to fund your lifestyle. Depending on circumstances, it is also possible to control the type of income on which you pay tax by voting yourself a tax-efficient remuneration package.

Companies are currently subject to corporation tax at 20%.

Should I review my existing business structure?

The Finance Act 2015 introduced major changes to the way in which business owners are taxed on profits extracted from a company – in particular by way of dividend. These included:

• the abolition of the notional 10% tax credit on dividends;
• a new £5,000 tax-free dividend allowance;
• and a new rate of taxation on dividends of 7.5% (basic rate taxpayers).

For most small business owners the result of these changes will be an increase in taxation.

In light of the changes introduced in the Finance Act 2015, business owners should consider whether the vehicle through which they trade is still appropriate for them and, if trading as a company, whether they are extracting profits in the most tax efficient manner. That’s why, whether you’re just setting up or already in business, it is always worth having a discussion with us at HPH about the most appropriate option for you.

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The information contained within the above blog article is for general information purposes and may be time critical; it does not constitute professional advice. We accept no responsibility for any loss which may arise from reliance on the information contained in the blog article. Always seek professional advice before acting.

Fail to Plan, Plan to Fail

How manmanagement-accountsagement accounts help you to plan

Robert Woolley of HPH Accountants LLP answers some of your questions about management accounts and how they can assist in making your company more efficient and potentially more profitable.

I recently visited a client who was very much stuck in the past with his accounting methods.

As an owner, he was heavily dependent on his finance team and book-keeping staff for information and they were using outdated software. Much of the data the business relied on was entered manually and many records were still in paper form, sitting in filing cabinets.

It made me think about how much progress we’ve made in recent years and how important it is to maintain proper management accounts.

What is the main advantage of keeping management accounts?

Essentially, they’re about being in control of your business and looking to the future. If you want to make proper projections for cashflow, for instance, your working capital requirements or whether you’re likely to exceed an overdraft limit, management accounts are an essential starting point. If you’re a small one-person operation, they’re not really necessary. But as any business grows, they become essential.

How frequently should they be produced?

We would always recommend quarterly reports at a minimum if you’re a proper trading business, but monthly management accounts are ideal.

How much time and effort are involved?

There are very few excuses these days for not having management accounts, because there is so much technology out there to help. With cloud software, it’s an easier process than it’s ever been. You can work collaboratively with your accountant, which makes everything more seamless. And of course the integration of automated banking feeds cuts down on a lot of time too.

What will it cost?

Well, there’s obviously a one-off investment in software, but in the longer-term, you may see significant benefits in terms of staff costs. You may be able to outsource more work to your accountant. And, of course, there may be significant gains in terms of visibility within your business.

If you would like some assistance in preparing your management accounts just contact us at HPH.

Back to main website: http://www.hphonline.co.uk/

The information contained within the above blog article is for general information purposes and may be time critical; it does not constitute professional advice. We accept no responsibility for any loss which may arise from reliance on the information contained in the blog article. Always seek professional advice before acting.

OUT! Brexit: What will it mean for UK taxes?

Umpire - OutIn the historic referendum of 23 June 2016, the UK public voted to leave the European Union (EU). The following period has been filled with political and financial uncertainty, as the country contemplates its future outside the EU says Robert Woolley of HPH Accountants LLP.

Travelling down through France on Eurostar and the TGV on Friday 24 June 2016, en route to our holiday, my wife and I were greeted with Gallic shrugs of pity and incomprehension – “What have you done?” Things were certainly uncertain!

However, one thing seems to be certain: in the words of our new Prime Minister, Theresa May, “Brexit means Brexit”.

The precise impact of the decision on UK taxes will depend on the new terms negotiated with the EU. The most likely scenarios for a post-Brexit UK, however, include:

  • The UK joining the European Free Trade Association and the European Economic Area, and so retaining access to the single market, in the same way as Norway, Iceland and Liechtenstein;
  • The UK negotiating a standalone free trade agreement with the EU, as Switzerland does; or
  • The UK negotiating an ongoing customs union with the EU, as Turkey does.

The good news is that much of the UK’s tax legislation is independent from EU influence and will therefore be largely unaffected by Brexit. This includes income tax, capital gains tax and inheritance tax.  However, there are a few notable exceptions:

VAT

UK VAT has been harmonised with the EU since 1977. Following Brexit, while the UK may no longer be required to give effect to any EU VAT Directives or regulations, it seems likely – in the short term at least – that that the country will maintain its current VAT system.

The most tangible consequence of Brexit is that VAT may need to be charged when goods enter the EU from the UK and when EU goods move in the opposite direction. The VAT will often be recoverable, but this could still cause unwelcome cashflow issues for many businesses.

Customs duties

To the extent that the UK ceases to be part of the customs union, then customs procedures would need to be reintroduced for exports between the UK and the EU.

We are unlikely, however, to see the imposition of any significant duties, as this would disadvantage the UK’s exports. Around 50% of UK exports are to the EU.

Corporation tax

Although corporation tax is determined only by the UK government, we have still been required to amend our tax legislation on several occasions, to comply with EU Law. After Brexit, UK tax legislation should no longer be open to challenge on the basis that it is contrary to EU law.

On a wider scale, Brexit may also accelerate the harmonisation of corporate taxes across the rest of the EU – a move which the UK has historically opposed.

In summary, there remains significant uncertainty around how great an impact Brexit will have on UK taxes. However it is likely that any changes will be focused on the technical rules, rather than increasing (or decreasing) the overall burden on taxpayers.

If you have any concerns how Brexit will affect your business contact us here at HPH, we will always be on hand to advise on how any changes might affect our clients.

Back to main website: http://www.hphonline.co.uk/

The information contained within the above blog article is for general information purposes and may be time critical; it does not constitute professional advice. We accept no responsibility for any loss which may arise from reliance on the information contained in the blog article. Always seek professional advice before acting.

In Out, In Out, Shake It All About

EU FlagStepping aside from the “Hokey Cokey” of the referendum debates, Robert Woolley of HPH, Accountants LLP looks at some recent findings and views from the business community on the matter.

As 23 June 2016 looms large on the horizon, nothing is surely more topical than the EU referendum at the moment.

As our politicians continue to hotly debate the topic (or rather sling mud at each other), only one thing seems to be certain at this moment in time… it’s going to be a close-run thing.

Recent data from the British Chambers of Commerce, released from their final survey before the poll, showed that the lead held by the ‘Remain’ camp has narrowed.

Interestingly, when looking at the results a little closer, we can see that a 54.1% majority of senior business people surveyed intend to vote to remain.

Those trading with other EU markets expressed the strongest support for that particular campaign. Another intriguing finding was that business people representing micro-businesses were significantly more likely to vote ‘Leave’ than those from large entities.

If the last General Election taught us one thing though, it was that such polls and surveys should very much be taken with a pinch of salt. As such, there is still all to play for.

Although it isn’t my place to pass on my opinion to you, I would say that history dictates that whatever the outcome, neither solution will prove totally positive, or totally negative.

Some will benefit while others will find themselves suffering as a result.  It could even be that things get worse before they get better. The truth is that nobody really knows with any certainty!

Whatever the outcome on the 23 June, life will go on and business will continue.  The likelihood is that once the dust has settled and Westminster has tried to glue itself back together, the attention will quickly turn back to economic growth, with so much time and attention having recently been given to the build-up to the referendum.

Here at HPH, we will always be on hand to advise on how any changes might affect our clients.

Back to main website: http://www.hphonline.co.uk/

The information contained within the above blog article is for general information purposes and may be time critical; it does not constitute professional advice. We accept no responsibility for any loss which may arise from reliance on the information contained in the blog article. Always seek professional advice before acting.

From Xero to Hero!

Xero to HeroMore and more accountancy professionals are encouraging their clients to use the cloud-based platform Xero. Robert Woolley of HPH Accountants LLP outlines exactly what it is the technology can offer.

Xero’s cloud-based accounting software not only allows for multi-user access from anywhere, but it also creates the opportunity for banks to provide direct daily feeds.

Alongside the intuitive reconciliation process, businesses really do have a tool which can now produce up-to-date financial data at the touch of a button. No wonder that Xero is increasingly recommended by so many accountants.

An added advantage to the platform is that it’s led to much greater co-operation between business owners, their employees and professional advisers. Because data is both live and visible, your accountant is now “The Real Time Accountant” adding value throughout the year: monitoring how your business is performing, spotting book-keeping errors and providing support when you need it.

What about when you’re on the move? The Xero app allows you to reconcile your banking, create invoices and submit expense claims from a smartphone or tablet, which means that you’re always in touch with your financial information wherever you go.

How does it work in practice?

You can send a quote to a customer and the software allows them to accept, reject or amend it online. It’s then easy to convert this data into a sales invoice which can be paid at the touch of a button. The same is true when it comes to raising purchase orders

What about cash collection? Well, the Xero dashboard allows you to see at a glance which customers’ invoices are outstanding. And there’s no need to hang on to paper copies of purchase invoices, as Xero will store an electronic record for you.

If you choose to give your accountant access, they’ll be able to review your VAT records alongside your invoices and check everything before filing the return via Xero to HMRC.

To understand the full potential of Xero, talk to us at HPH Accountants LLP; contact our Xero Champions Richard Clarkson (richard.clarkson@hphonline.co.uk) and Emily Broadhead (emily.broadhead@hphonline.co.uk). They may even be able to suggest add-ons which integrate with the platform. WorkflowMax, for example, allows employees to input and allocate material costs, as well as their hours worked on specific jobs. A great way of managing business performance.

Back to main website: http://www.hphonline.co.uk/

The information contained within the above blog article is for general information purposes and may be time critical; it does not constitute professional advice. We accept no responsibility for any loss which may arise from reliance on the information contained in the blog article. Always seek professional advice before acting.

Rolling, Rolling, Payrolling

Wagon TrainSarah Meek, Payroll Administrator at HPH Accountants LLP, looks at a new kind of approach to benefits in kind.

“From the tax year 2016-2017, big changes are planned in the reporting of tax due on benefits. The new system promises to be more efficient, as it will operate through payroll.

The reporting of benefits in kind has traditionally been done via the Revenue’s P11D form. Thanks to changes in the Finance Act 2015, however, it’s now going to become possible to process most of these benefits through your payroll system instead.

From 6 April 2016, your employees will pay tax on the benefit at the time they receive it, which removes any risk of underpayments occurring. At the moment, the system is pretty inefficient, as a P11D is only filed after the end of a tax year, which can lead to a significant time lag before payments are properly coded and reconciled.

To take advantage of the new service, you will need to register the benefits you intend to operate via the payroll before a deadline of 5 April 2016. There, are however, some things you need to bear in mind.

First of all, there are three categories of benefits that you will not be able to put through the payroll, which are:

  • Vouchers and credit cards
  • Living accommodation
  • Interest-free and low-interest (beneficial) loans.

You should also note that only PAYE tax will be collected through the payroll, not National Insurance. The Class 1A National Insurance will still be due and must be paid by 19 July by post or 22 July electronically. As a result, a P11D(b) will still have to be submitted to account for the Class 1A payable.

HPH has already aligned their payroll software to ensure that the right amount of tax is collected on benefits in kind, so it makes sense to have a chat with us before registering your intention online at https://www.tax.service.gov.uk/payrollbik/payrolled-benefits-expenses.

Back to main website: http://www.hphonline.co.uk/

The information contained within the above blog article is for general information purposes and may be time critical; it does not constitute professional advice. We accept no responsibility for any loss which may arise from reliance on the information contained in the blog article. Always seek professional advice before acting.