Open Banking

An Accounting Revolution

While everyone was celebrating the New Year in January a new piece of seemingly obscure banking legislation came into place in the UK which has the power to revolutionise the way that small businesses integrate technology with their banks.

Previously if a third party application like a piece of book keeping software wanted to import bank transactions instead of manually entering them there were a few alternatives. Most banks will let you download a csv file of transactions and then you could import that. Some banks had individual arrangements with software providers to allow direct access but each agreement had to be individually negotiated so many combinations of software and banks weren’t available. Lastly businesses could use a third party such as Yodlee to sit between the two however this meant providing bank logins to third parties which potentially was against the terms and conditions of the bank.

The new legislation however seeks to sweep away these restrictions. The 9 biggest banks must now give access to authorised third parties through an “API”. This means transactions can be read (and potentially updated) by third party applications. This isn’t just book keeping software. This is going to mean an explosion in “Fintech” products that access bank accounts directly. Yolt is an early example of this in the consumer area.

What Does This All Mean in Practice?

What does this mean in practice for small business and accountants. Well in short it means that live bank feeds are now not really optional! Every small business should be using live bank feeds in their book keeping software. This not only speeds things up but reduces errors as well.

In the future apps will be able to not just read transactions but make payments as well. So there will be a time soon where software rules will be able to set. An example might be: “If the bank balance is above £5,000 pay outstanding supplier invoices in date order”. Automation is coming whether we like it or not!

PS. The banks that are legislated to do this are: Barclays plc, Lloyds Banking Group plc, Santander, Danske, HSBC, RBS, Bank of Ireland, Nationwide, AIBG. Interestingly Clydesdale is not on this list who we have a number of clients with!

Save Tax! Year End Tips

Its nearing the end of the Tax Year! Here are our top tips on year end planning and how to Save Tax.

Director’s salary levels:

Many small business owners pay themselves a small salary and take the rest of their income in dividends in order to be tax efficient. These salary levels should be reviewed every year. There are two critical thresholds that need to be noted for the 18/19 tax year:

  • In order to receive a credit for the year towards the State Pension the salary should be above the “Lower Earnings Limit”. This will now be £503 a month. This has the happy outcome of getting a year credit for the state pension without paying any National Insurance.
  • In order to be the most tax efficient and avoid paying any National Insurance for the Director the optimum salary is £702 a month. This level can be affected if the Director has Benefits in Kind and depending on how many employees the Company has. If you want personalised advice please get in touch.

Workplace pension minimum contribution up to 5%

For those already running a workplace pension the minimum contributions are set to rise to:

  • Employer Contribution 2%
  • Staff Contribution 3%

Full details here: http://www.thepensionsregulator.gov.uk/employers/contributions-funding-tax.aspx

Remember for those clients who use us for their payroll we can offer a very cost effective Workplace Pension admin service.

End of Year Tax Planning Items for Companies:

Remember that some Company actions impact Personal Tax. Here are our ideas of the main things you should be thinking about:

  • If you are making Company Pension payments then consider making them before the end of the tax year to use the current year’s allowance. This stands at £40,000 a year currently.
  • If you are going to declare dividends then consider which Personal Tax year you would like them to fall in to. If you would like them to be in the 17/18 tax year then they should be declared before the 5th of April. The 17/18 tax year is the last year of £5,000 of tax free dividends. The dividend tax allowance falls to £2,000 from April.

 End of Year Tax Planning Items for Individuals:

Individuals should be planning for the end of the tax year too. Here are our top tips of what to be thinking about:

  • ISA allowances: If you have spare cash the ISA allowances are extremely generous. The current year total is £20,000. Details are here: https://www.gov.uk/individual-savings-accounts
  • Personal Pension Payments: Remember if you are making Personal Pension Payments that the level you can contribute is limited by the “Earnings” that you have received. Payments will need to be received by the 5th April to use this year’s allowance. Small business owners should nearly always be paying Pension Payments straight from the Company so this limit is removed.

Major Tax Changes for Next Year:

  • New Scottish Tax rates
  • Reduction of interest relief on Buy To Let Property
    • Remember that the tapering down of higher rate interest relief on Buy To Let Property is continuing. 2018/19 will see it go from 25% to 50%.

Get in Touch:

If you would like any more specific advice on anything in this newsletter please don’t hesitate to get in contact. Keep an eye on our website for news and stories relevant to small business owners. Wishing all our clients a Happy New Tax Year in advance!

Self Assessment Returns For Directors

We always recommend that Directors of Limited Companies do a self assessment return every year and ensure that our clients do so. If you go here: https://www.gov.uk/check-if-you-need-a-tax-return and tick the box that you are a Director HMRC will tell you that you need to do so.

However occasionally we take on a Company Client where the Directors for whatever reason haven’t been completing a Self Assessment return. If they have never done so then they need to fill in one of these to obtain a Unique Tax Reference (UTR) https://www.gov.uk/government/publications/self-assessment-register-for-self-assessment-and-get-a-tax-return-sa1

Unfortunately on this form you need to state when you became a Director, and if it was say 10 years ago then HMRC are keen on issuing all the intervening Self Assessment forms with associated penalties. Even if the Director only had for example PAYE income that was taxed at source.

HOWEVER:

HMRC are being a bit disingenuous. The law does not say that a Director has to submit a tax return. Indeed this tribunal case http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j9898/TC05929.pdf has just upheld that fact. A person should submit a self assessment return if they have taxable income or get a notice to file from HMRC.

So whilst we are not going to change our advice on Directors submitting self assessment returns, there is definitely a case for arguing about missed returns that had no taxable income on them.

If you need any help getting your tax affairs in to order please do not hesitate to get in contact.

 

 

 

Budget Update

Here are the highlights from a fairly content free budget. The main budget is moving to the Autumn from this year.

 

TAX FREE DIVIDEND ALLOWANCE TO BE REDUCED TO £2,000
The Chancellor also announced measures to limit the rise in tax-driven incorporation. The £5,000 tax free dividend allowance introduced by George Osborne will be reduced to just £2,000 from 6 April 2018. Mr Hammond claimed that many smaller owner-managed businesses have incorporated as limited companies mainly for tax reasons. Typically the director/shareholders of such businesses have paid themselves in dividends and paid less tax than similar unincorporated businesses.

Currently, once the dividend allowance has been used the remaining dividends are taxed at 7.5%, 32.5% and then 38.1% depending upon whether the dividends fall into the basic rate band, higher rate band or the additional rate. There are rumours that these dividend rates may also be increased in future years.

Although the cut in the tax-free dividend allowance is clearly aimed at owner managed companies, it will also impact on those with substantial share portfolios. Mr Hammond reminded us in his speech that the annual ISA investment limit increases to £20,000 from 6 April 2017 and that dividends on shares held within an ISA continue to be tax free.

START OF DIGITAL REPORTING DELAYED FOR SMALLER BUSINESSES

The Government is committed to the “Making Tax Digital” (MTD) project which is scheduled to start in April 2018 with the first quarterly updates being submitted by the self-employed and property landlords in July 2018.

Many business owners, professional advisors and the Treasury select committee had expressed concerns about the timescale for the introduction of MTD. The Chancellor announced that there will be a one year deferral in the start date to 2019 for self-employed businesses and property landlords with gross income below the VAT registration limit.

CORPORATE TAX MEASURES

The Chancellor announced that the Government is committed to continue to have the lowest corporate tax rate of the G20 major trading nations.  As already announced the corporation tax rate reduces to 19% from1 April 2017 and then to 17% from 1 April 2020.

The corporation tax rate for small and medium sized companies trading in Northern Ireland will be reduced so that such companies can compete with those in the Republic where the rate is 12.5%.

The Government is also keen to continue to encourage investment in research and development (R&D) and the Chancellor announced that the R&D tax credit claim procedure would be simplified.

TAX FREE CHILDCARE SCHEME STARTS 2017

The chancellor also announced that the new tax-free childcare scheme is due to start in 2017.

The scheme will provide up to £2,000 a year in childcare support for each child under 12 where the parents save in a special account. If they save £8,000 the government will top up the account with 20% to a total of £10,000 which can then be used to pay for childcare costs.

VAT Flat Rate Scheme – Limited Cost Traders

As noted before in summary a change to the Flat Rate VAT scheme was announced in the Autumn Statement. This change comes in to effect on the 1st of April 2017.

This change is intended to target businesses on the Flat Rate Scheme who would only be reclaiming a minimal amount of VAT if they were calculating VAT as normal. Thes businesses will be classed as Limited Cost Traders. A new rate of 16.5% for the flat rate scheme will be introduced which potentially means that people will be better reverting to the standard VAT schemes.

HMRC has defined a Limited Cost Trader as:

A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure
  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.

So as you can see this is definitely targeted at contractors and the like who are operating through Limited Companies with low costs.

If you are on the Flat Rate Scheme and would like some help transitioning please do not hesitate to contact us. We will be writing to HMRC on behalf of our clients who are affected and helping them transition if they need to.

HMRC reference is here: https://www.gov.uk/government/publications/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note

 

 

State Pension and Class 3 National Insurance

The new flat rate State Pension which started last year https://www.gov.uk/new-state-pension/eligibility requires 35 years of National Insurance contributions to receive the whole amount which is currently £155.65 a week. This may not sound a lot but at current annuity rates you would need a private pension pot of more than £200,000 to receive the same amount.

If you are married or have a partner then this obviously doubles up to £311.30 a week to live on in retirement before any other pension arrangements are taken in to account.

Most of our clients run Limited Companies and pay themselves a large enough PAYE salary to get themselves a credit towards their State Pension. This amount is currently £5,824, the Lower Earnings Limit. At this level no National Insurance is payable but the credit still applies.

Alternatively they are self employed, pay Class 2 National Insurance which is currently £2.80 a week, and thus get a year towards their state pension. 

However there are a number of circumstances where these amounts aren’t getting paid and people will end up with holes in their National Insurance record. For example people starting a Company may not pay themselves a salary. Sole Traders with a profit under £5,965 dont have to pay Class 2 NI. Spouses who don’t work may not be contributing, especially as the rules were changed a few years ago so the credits while you are receiving Child Benefit only carry on until the child is 12.

This may not matter if the magic 35 years will be hit. But if people reach state retirement age with too few years they are going to get a nasty shock.

The new HMRC Personal Tax Account (the online login for taxpayers) now has a record of the historic National Insurance payments. If there are holes or an ongoing situation where no credits are being received then Voluntary Class 3 National Insurance can be paid. https://www.gov.uk/voluntary-national-insurance-contributions/why-pay-voluntary-contributions This can usually be backdated for the past 6 years.   

With final salary pensions closing and annuity rates at an all time low making sure your National Insurance record is up to date is even more important than ever.

If you would like any advice on National Insurance please give us a call.

2017 is here. Tax Changes Coming.

Happy New Year to everyone.

2017 has started and is going to be a busy year. There are many tax changes arriving this that we will be helping our clients to negotiate. Some of the highlights (if you can call them that) are:

So as you can see there are quite a few changes that will affect small business owners. If you would like advice on any of these please let us know.

Autumn Statement Update 2016

Welcome To Our Autumn Statement Update

Many of the changes below were already flagged up. The change to Flat Rate VAT however was a bit of a bombshell. We will be in contact with all our clients on Flat Rate VAT to see if the change affects them. If you have any queries about anything in this newsletter please don’t hesitate to give us a call.

GETTING THE UK “MATCH FIT” FOR BREXIT


The Chancellor Philip Hammond announced that his first Autumn Statement will also be his last.  In future the main Budget announcements will be made in the autumn rather than the spring. We were not expecting that many tax announcements and many that were made we already knew about. He could not afford too many give-aways as he expects the economy to have a bumpy ride during the BREXIT transition.
 
There will still be a Budget next March but thereafter the annual Budget will be in the Autumn to allow longer consideration of the announcements and draft legislation before enactment the following summer.

KEY TAX ANNOUNCEMENTS:

Remember that come of the key Personal Tax thresholds are being devolved to Scotland from April 2017 so may not follow these limits.

  • Personal allowance to increase to £11,500 in 2017/18, rising to £12,500 by 2020/21
  • Higher rate tax threshold to increase to £45,000 in 2017/18, rising to £50,000 by 2020/21
  • National Insurance threshold to be raised to £157 a week for employees and employers
  • Corporation tax rate to reduce to 17% in 2020
  • Business tax “roadmap” to continue, in particular new rules for company losses
  • Insurance premium tax to increase from 10% to 12% from 1 June 2017
  • More anti-avoidance measures, in particular a new VAT flat rate percentage for “limited cost traders”
HELP FOR THOSE JUST ABOUT MANAGING (JAM)
 
The Chancellor made a number of announcements that were intended to help those families that a just about managing, given the acronym – JAM. Raising the personal allowance to £11,500 and higher rate threshold to £45,000 will mean they pay less income tax and keep more of what they earn, however remember that these thresholds will be devolved to Scotland from April 2017.
 
This group will also benefit from the increase in the National Living Wage to £7.50 an hour and the changes to Universal Credit.
 
The Universal Credit taper rate will be cut from 65% to 63% from April  2017 which will mean that fewer benefits will be clawed back as claimants’ income increases. The planned reductions in the overall benefits caps will however go ahead.
 
CORPORATE AND BUSINESS TAX CHANGES

 
Many of the corporate tax changes had already been announced and are set out in the business tax “roadmap” which details the government tax strategy for the life of this Parliament and beyond.
 
The currently 20% corporation tax rate is planned to fall to 19% from 1 April 2017 and then to 17% on 1 April 2020. The government is committed to keeping the UK corporate tax rate the lowest in the G20 and there is talk of a rate as low as 15% in the future.
 
The Chancellor raised concerns that there continues to be a rise in tax-driven incorporations as there are still tax savings compared to unincorporated businesses operating at a similar level of profit. That may suggest that the government is still considering the introduction of a new “look through entity” suggested by the Office of Tax Simplification so that the tax treatment will be the same, thereby creating a level playing field.
 
The new flexible corporate tax loss rules announced in the spring budget have been subject to consultation and will go ahead from 1 April 2017.

CAPITAL ALLOWANCES

From 23 November 2016 to 31 March/ 5 April 2019, businesses will be entitled to a 100% First Year Allowance (FYA) for the cost of installing electric charge-point equipment for electric vehicles. This measure is intended to complement the 100% FYA available for low CO2 emission vehicles and to encourage their uptake.
 

HIGHER RATE TAX RELIEF FOR PENSIONS CONTINUES

 
There has been much speculation that the government would further limit tax relief for pension contributions by removing higher rate tax relief. That measure would save the country £34 billion in tax but the only change announced concerns a new lower limit on amounts that can be saved in a pension when individuals have started drawing down from their private pension.
 

Currently the net effect of pension tax relief for a higher rate taxpayer is that saving £10,000 in a pension costs £6,000. The taxpayer pays £8,000 into their pension and the government tops this up by £2,000 with a further £2,000 deducted from the individual’s income tax liability, reducing the net cost to £6,000. For additional rate taxpayers the net cost would be just £5,500.
 
Remember that there is currently an annual pension input limit of £40,000 which caps the combined contributions by an individual and his or her employer. For those with high income this is tapered and can be as low as £10,000.
 
One new pension restriction that was announced was a measure to limit pension “recycling”. Those individuals who have started drawing down their personal pension will in future only be able to reinvest up to £4,000 in their pension.  Please contact us if you want to discuss pension planning further.
 
SALARY SACRIFICE RULES TO BE TIGHTENED UP
 
Many employers now provide flexible remuneration packages that allow employees to give up some of their contractual salary in exchange for benefits in kind. This can have the effect of saving tax and national Insurance contributions for both the employee and employer, particularly where the benefit provided is exempt from tax.
 
These tax and NIC advantages are to be withdrawn from 6 April 2017. Arrangements involving pensions, childcare, Cycle to Work and ultra-low emission cars will be excluded; existing arrangements will be protected for a transitional period until April 2018, and existing arrangements for cars, accommodation and school fees will be protected until April 2021.
 
The Chancellor has announced a wider review of the taxation of benefits, with the intention of making this area ‘fairer and more coherent’. This appears likely to have a significant effect on any employee who is in receipt of benefits from their employer.
 
OTHER EMPLOYEE BENEFIT CHANGES

MAKING GOOD

An employee who repays to their employer, or ‘makes good’, the cost of a benefit, avoids a tax charge. As previously announced, from April 2017 such making good will have to take place by 6 July in the following tax year if it is to be effective.
 
CHANGES TO TERMINATION PAYMENTS TO GO AHEAD
 
As announced in March, from April 2018 termination payments over £30,000, which are subject to Income Tax, will also be subject to employer’s NIC. Tax will only be applied to the equivalent of an employee’s basic pay if their notice is not worked. The first £30,000 of a genuine termination payment will remain exempt from tax and NIC.
 
“ABUSE” OF THE VAT FLAT RATE SCHEME
 
The VAT flat rate scheme is a simple scheme that enables small businesses to calculate and pay their VAT based on a flat rate percentage of total takings rather than deducting input tax on purchases and expenses and deducting that from total output tax on sales in the period. HMRC believe that the scheme is being abused by certain traders who have minimal costs who charge 20% VAT to their customers and then pay a lower percentage over to HMRC.
 
The flat rate percentage varies depending on the nature of the trade, ranging from 4% for food retailers up to 14.5% for IT consultants and labour only construction workers. A new 16.5% rate will apply from 1 April 2017 for businesses spending less than 2% of their turnover or less than £1,000 per year on goods, excluding capital goods, food, vehicles and fuel. Any business affected will almost certainly be better off returning to the normal VAT system with effect from that date. If you are currently using the flat rate scheme please contact us to check whether this change is likely to affect your business.

Dont Miss Out on Tax Relief on R&D

DON’T MISS OUT ON TAX RELIEF ON R&D

The government is concerned that many small companies are missing out on generous R&D tax credits.  For the last year HMRC have been offering companies an advance assurance scheme to check whether or not their activities qualify before they make a claim. So far over 200 applications for advance assurance have been made.

There is a general misconception that R&D involves scientists in white coats but it should be remembered that R&D may be necessary to resolve a problem with a product or a process.

So some of the work by your engineers or technical staff may qualify as R&D. For Small and Medium-sized Enterprises (SMEs) the tax credit is 230% of the expenditure on qualifying R&D, and where the company incurs a trading loss, HMRC will provide an immediate cash refund rather than waiting until there is a profit in a future period.

By applying for advance assurance the company’s R&D claim will not be subject to an HMRC enquiry and HMRC will then accept the first three years of claims.

Companies eligible to apply for advance assurance:

  •      turnover below £2m
  •      fewer than 50 employees
  •      no previous R&D claims

So don’t hestitate to get in contact if you think you may have a claim.

Christmas is Coming – New Rules for Gifts to Staff

CHRISTMAS IS COMING! – NEW RULES FOR GIFTS TO STAFF

From 6 April 2016 new rules were introduced to allow employers to provide their directors and employees with certain “trivial” benefits in kind, tax-free.

The new rules are a simplification measure so that certain benefits in kind will not need to be reported to HMRC, as well as being tax free for the employee. There are of course a number of conditions that need to be satisfied to qualify for the exemption.

CONDITIONS FOR THE EXEMPTION TO APPLY:

• the cost of providing the benefit does not exceed £50
• the benefit is not cash or a cash voucher
• the employee is not entitled to the benefit as part of any contractual obligation such as a salary sacrifice scheme
• the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services)

So this exemption will generally apply to small gifts to staff at Christmas or on their birthday.
Prior to this change in the rules, the benefit in kind would have had to be reported on the employee’s P11D form at the end of the year, or alternatively the employer would have dealt with the tax and national insurance under a PAYE settlement agreement. Under such an arrangement a £50 Christmas turkey to a higher rate taxpayer could end up costing the employer nearly £95!
Note that where the employer is a “close” company and the benefit is provided to an individual who is a director or other office holder of the company, the exemption is capped at a total cost of £300 in the tax year.

Please feel free to contact us if you are considering taking advantage of this new exemption.

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