It is a long established practice that small businesses who are structured as a Limited Company might pay themselves a small salary and dividends to potentially save tax.
However in the run up to this tax year there have been multiple legislative changes that have affected the most tax efficient way of doing this. So all small Limited Companies should be reviewing their remuneration strategy with their accountant to check that it is still the best way forward.
- The abolition of the Employer’s Allowance for one Director Companies has actually simplified the issues around what is the best salary to take.
- There is no point in paying additional National Insurance in order to save a smaller amount of tax.
- Therefore in the majority of cases small business owners should be paying themselves a salary of £8,632 a year.
The advantages of this are:
- No National Insurance,
- A year’s credit toward the State Pension (now need 35 years)
- The Dividend Tax allowance has been reduced to £2,000 from April 6th 2018
New Scottish Tax Bands:
- There are new Scottish tax bands from the 5th April 2018 which along with the dividend allowance and the savings allowance make planning remuneration even more complex than it was before.
There are a number of ways of mitigating dividend tax including transferring shares to your spouse, Company Pension contributions and employing members of your family where they are actually doing proper work for your business.
Give us a call if you would like a review of your remuneration strategy.
MTD for VAT is fast approaching. This cheatsheet shows some helpful information and resources that should assist a smooth transition.
Who has to register and what records do you need to keep:
From April 2019 VAT registered businesses and organisations with taxable turnover above the VAT threshold of £85,000 will be required to:
- Maintain their accounting records digitally in a software product or spreadsheet. Maintaining paper records will cease to meet the legal requirements in tax legislation.
- Submit their VAT returns to HMRC using a functional compatible software product that can access HMRC’s API (Application Program Interfaces) platform.
The requirements do not apply to VAT registered businesses with taxable turnover below the VAT threshold (eg, those that have registered voluntarily).
What does this mean in practice:
- You must be doing your book keeping in a package. Ideally a cloud package like Xero, Quickbooks Online, or Freeagent. Or on the desktop with MTD enabled software like Sage 50. You must then use this software to submit your returns.
- You must register with HMRC for MTD VAT. This is a new requirement so everyone must do this.
- You must configure your software to use the MTD portal.
What are the key dates?:
We recommend that assuming you have suitable software you take action the day after the submission of your last non MTD VAT return. This will give you 3 months to ensure you have registered with HMRC and switched your software to use the new system.
- March/June/September/December VAT periods
- First mandatory VAT period: 1st April to 30th June 2019
- Deadline for first MTD VAT return: 7th August 2019
- Take action date: 8th May 2019
- April/July/October/January VAT periods
- First mandatory VAT period: 1st May to 31st July 2019
- Deadline for first MTD VAT return: 7th September 2019
- Take action date: 8th June 2019
- May/August/November/February VAT periods
- First mandatory VAT period: 1st June to 31st August 2019
- Deadline for first MTD VAT return: 7th October 2019
- Take action date: 8th July 2019
How to register with HMRC:
HMRC have published a handy video on Youtube to show how to register with HMRC:
HMRC MTD VAT Video
How to switch your software to using MTD:
We will Publish seperate articles on this as the software vendors publish information.
If you need more information please get in touch: Contact Us
A very brief summary of the some of the major points from the budget that we think will be of most interest to our clients. If you have any further questions about any of these changes please give us a call. We will put more details on some of these points on our site over the next couple of weeks.
The personal allowances will be increased to £12,500 from April 2019. However the increase to the basic rate band where individuals start paying 40% tax doesn’t apply to Scotland.
Despite the pre-budget speculation, entrepreneurs’ relief will continue. However, the qualifying ownership period has been extended from 12 months to two years. Transitional rules will apply where the claimant’s business ceased before 30 October 2018.
Annual investment allowance
Businesses will now enjoy a higher AIA of £1,000,000 for the two years beginning January 2019, this should encourage capital investment.
Research and development
Refunds arising from research and development claims will be restricted to the PAYE paid by the company. This will restrict the benefit of R&D claims by companies that do not have employees.
The new IR35 rules will not be introduced to the private sector until April 2020 and it will only affect large and medium sized businesses. This will bring the private sector into line with the current public sectors rules.
The main residence relief will be restricted. The final qualifying period of ownership will be reduced to nine months.
The VAT registration threshold will be maintained until 2022.
Automatic Protection Ltd in Biggar have been a client of ours since 2013. They were established in January 2001 by Father and Son team Neil and Stuart Harrison. Based in the border town of Biggar, South Lanarkshire, APL has over 45 years of experience in the fire and security industry with unparalleled expertise in Automatic Fire Extinguishing & Fire Suppression systems. See more details at: http://www.autoproltd.co.uk
Making Tax Digital – The Short Version
Making Tax Digital sounds complex but in the first phase all that it means is that all VAT registered businesses must be submitting VAT returns straight from Software starting in April next year.
Making Tax Digital – The Slightly Longer Version
HMRC’s Making Tax Digital initiative is edging ever closer. So with just six months to go until it comes in here is a review of where we are.
Here is HMRC’s take on it https://www.gov.uk/government/publications/making-tax-digital-how-vat-businesses-and-other-vat-entities-can-get-ready/making-tax-digital-how-vat-businesses-and-other-vat-entities-can-get-ready
Whilst the later phases are still clouded in confusion, the initial phase which covers VAT is now coming and clients will need to submit their VAT returns straight from software. No more totting up invoices on a calculator and then typing the VAT return numbers in to the HMRC VAT portal. It isn’t even clear if a spreadsheet will suffice.
So the bottom line is that in practice all VAT registered businesses should be converting to electronic book keeping by the end of 2018 to be ready for the change. Clients using old unsupported versions of Sage will either have to upgrade to the latest version or even better convert to a cloud accounting package.
Many of our clients wont notice the difference as the are already on Xero, Freeagent or Kashflow either supported by us or with us doing their book keeping. However the few that are still calculating VAT returns manually and then giving us a shoe box at the end of the year will need to convert as soon as possible.
If you are unsure about what you need to do give us a call and we will point you in the right direction.
There is more detail on Making Tax Digital here from the Tax Institute. https://www.tax.org.uk/policy-technical/technical-news/making-tax-digital-vat-main-issues-consideration
First introduced in 2000 the IR35 rules (more correctly known as the intermediaries legislation for income tax) have forever since been a source of stress and worry for contractors. Someone who works in a “Personal Service Company” is supposed to do a self assessment as to whether they are caught by the legislation that in effect says that they are a disguised employee. If so they then have to pay a deemed payment to themselves through PAYE as described here: https://www.gov.uk/guidance/how-to-calculate-the-deemed-employment-payment
The practical upshot is that if the deemed payment is applied then the contractor ends up paying the Employer’s and Employee’s National Insurance. Not a scenario most would want. So many contractors assume they are outside IR35 and proceed as such.
Contractors can use HMRC’s CEST tool to try and determine their status. But this tool is potentially not always accurate. HMRC lost yet another tribunal recently https://www.ipse.co.uk/our/news-listing/defeat-puts-to-pasture-hmrc-s-argument-about-moo.html where CEST may well have not reported the answer that the judge found.
Another change came in April 2017 when the Government brought in rules to tighten up the use of contractors in the public sector. The IR35 status decision in Public Sector contracts is now made by the client, not the contractor. The risk of getting the status wrong now resides with the client. This might seem good for the Contractor but in practice has led to the reduction of Public Sector contracts that are available.
If this all seems opaque then there is possibly more to come. The Autumn budget 2017 contained the information that the Government would be consulting about extending the new Public Sector IR35 rules to the private sector. So watch this space!
If you would like common sense advice on a potential or existing contract that you have please give us a call or fill in the contact form below.
The government announced the abolition of Class 2 NI last year.
However as is so often the case the law of unintended consequences kicked in and this week the government announced that Class 2 would not be abolished after all.
One of the consequences of this change was that people with self employed profits below £5965 (18-19 rate) would not receive a credit for that year towards their state pension. Currently a person needs 35 years of National Insurance credit to get the new flat rate state pension. https://www.gov.uk/new-state-pension/how-its-calculated
In this case a person would have to pay Class 3 National Insurance at a rate nearly 5 times the rate of Class 2! So for example if a person was starting a business and made losses in the first year they would either not get a credit towards their state pension or have to pay £761.80 (18-19 rate) in Class 3 contributions.
The U Turn has widely been reported as the reversal of a tax cut for the self employed https://www.independent.co.uk/news/uk/politics/philip-hammond-tax-cut-self-employed-scrap-conservatives-national-insurance-contributions-nic-class-a8526236.html
However for low paid Self Employed workers paying Class 2 NICs is an essential method of ensuring they get the full state pension.
The Autumn Budget of 2017 announced that there would be a change to the VAT regime for Contractor Labour starting in October 2019. Similar to the existing CIS scheme this will mean that VAT charged on labour will be paid over by the recipient of the labour service rather than the supplier.
This means yet another scheme for contractors to run alongside CIS when using subcontractors.
The government published a response to their consultation on the 1st of December 2017. In it they confirmed that:
- The scope of the reverse charge will follow the Construction Industry Scheme definition of construction services.
- There will be no threshold applicable to the measure and no exemption for Flat Rate Scheme users (even though they will effectively have to leave the scheme to be able to recover VAT on the costs).
- Sales to the final customer in the chain will not be covered by the reverse charge. Respondents to the initial consultation warned that there may be particular definition issues for joint ventures and special purpose vehicles in the voluntary and public sectors so the definition of ‘the final customer’ will be subject to further consultation in Spring 2018.
If you would like any advice on how this will affect your Contracting business please get in touch!
A change in coming in April 2020 that will affect landlords and second home owners when they come to sell up.
In the past a Capital Gain on the sale of a second property could be reported in a self assessment return. This meant that if a gain was made on the 6th of April that the tax would not be due for nearly 22 months! The gain would be reported at the end of the tax year and the tax wouldn’t be due until January 31st of the following year.
Full details here.
Consultation has just finished on a change that will mean that payment will be due withing 30 days of the disposal. The seller will have to submit a “payment on account” return at the same time.
Obviously this wont affect people selling their main residence as Principle Primary Residence Relief normally applies.
Get in touch if you are thinking of selling a rental or holiday home.
Click here to go to our homepage and fill in the contact form and we will get back to you.
Sutherland Black have just become a Xero Silver Partner! This recognises our rapid growth in bringing Xero to our clients. Our listing on the Xero website has been updated with our new status: https://www.xero.com/uk/advisors/accountant/2012/sutherland-black-chartered-accountants/
The advantages of Cloud Book Keeping software are clear to see for our clients. Automatic bank feeds reduce errors and thanks to open banking direct bank feeds are now available for all the major banks.
Making Tax Digital (MTD) for VAT is starting from April 2019. Xero will be MTD compliant meaning that clients who already use Xero will not see any impact to their processes. Clients who use spreadsheets and then enter their VAT returns on the HMRC portal will not be able to do this any more. Converting to Xero is an easy way to be MTD ready.
We have helped many of our clients convert to Xero. With MTD looming the pace of conversion will only increase. Give us a call if you would like us to show you how easy it is.
For more information have a look at www.xero.com