VAT - a killer for some small businesses

The quarterly VAT bill.

It can literally be the death knell for some small businesses. The worst affected are those who deal with 'Joe public' rather than trading with other businesses in competitive sectors like retail and the trades.

Unlike VAT registered businesses, individuals cannot recover any VAT charged on to them so the VAT is just part of the price they pay. If the VAT registered business is competing with other businesses who are not VAT registered this makes things even more difficult.

Businesses on the cusp of the VAT registration threshold of £85,000 feel the pain the most. They don't quite have the volume or profit to be financially comfortable and they have the double whammy of charging and paying VAT and being less competitive.

Many are faced with the 'Hobson's choice' of keeping their businesses small and staying below the VAT registration threshold or going for growth and volume and dealing with the extra cost and administration of VAT

So how can small businesses manage the dreaded VAT and stay solvent and viable?

Well firstly they should investigate whether any of the special VAT schemes will help. There are retail schemes, a flat rate scheme, a cash accounting scheme and others. Choosing the right scheme can save on tax and also make administration simpler. Your accountant should be able to help you evaluate which scheme (if any) is best for you.

The next thing is to 'know your numbers'. I would strongly recommend modelling your business profits, allowing for VAT and ensure that you can achieve your desired profits and the business model 'stands up'.

What is not generally an option is to split your business into two or more smaller businesses to keep one or both of the businesses below the VAT threshold. HMRC would consider this to be an 'artificial separation of trade' if the purpose of splitting the businesses is to avoid paying VAT.

Examples of artificial separation could be:

• a pub which separates drinks and catering.
• a retail outlet which opens a smaller branch or branches but the branches have the same brand, ownership and resources.
• an entertainer with business (VAT registered) customers and non business (not VAT registered) customers.

If HMRC investigate a case of 'artificial separation' and the business is at fault the arrears of tax and penalties can be significant, not to mention the stress caused by a lengthy tax enquiry.

So there is no easy fix for the smallest businesses to deal with VAT

With care and planning it can be managed however and the most important factor is the underlying business model

VAT is just a cost of doing business.

The passive or disorganised business owner will blame VAT for all their woes.

The savvy and proactive owner will accept that it is something which needs to be dealt with and adapt accordingly

www.base52.co.uk

8 tips to save tax this year

Record high temperatures and a change in the air.

Spring is approaching and we are also not far away from the end of the tax year on 5 April.

A little planning and action now could save you tax when this becomes due in January next year.

Here are some ideas:

1) Buy business assets and bring forward business expenditure before the year end

If you are thinking of investing in business assets - new plant & machinery, vehicles, office furniture, computer equipment it is sensible to make your purchase before the end of current financial year, rather than the start of the next one.

Timing your investment could mean that you can claim your capital allowances sooner, saving on cashflow. Similarly if you are intending to carry out some repairs or maintenance work, doing this before the year end will reduce your next tax bill.

2) Manage your income

If you are in the fortunate position of being able to manage your income, plan now to optimise your income for tax purposes. For example, as a company director and shareholder, you may be able to reduce salary or dividends to keep your income below the key tax thresholds of £46,350, £100,000 or £150,000. An income level of £50,000 where child benefit is withdrawn from the highest earner in a household is another key threshold to monitor.

The £100,000 threshold is particularly unattractive from a tax perspective as the personal allowance is gradually withdrawn at a rate of £1 for every £2 of income. This gives an effective rate of tax at a very painful 60% at income levels between £100,000 and £123,700.

So best avoided if you don't need the income and can defer this to another year.

3) Consider the effect of the dividend Tax

A dividend tax was introduced from 6th April 2016. This affects people who receive a significant amount of dividend income each year – mainly business owners with their own limited companies.

The 'tax free'  dividend allowance has reduced to only £2,000 per annum from 2018/19 onwards. It makes sense to use this allowance if you have scope to pay a dividend. Above this level different rates of dividend tax apply for varying levels of income.

The dividend tax has a significant impact on business owners who may be used to drawing a relatively high proportion of their income as dividends. If possible the higher and additional dividend rates of 32.5% and 38.1% respectively are best avoided by capping gross income at the basic rate threshold of £46,350 if this is feasible.

Gifting shares to a spouse so that they can utilise the dividend allowance may be appropriate in some cases.

4) Contribute to a pension

Pension contributions before the year end are a tax efficient way of saving for the future and reducing your tax bill. The tax savings are particularly attractive for higher and additional rate taxpayers. Advice should be sought from a suitably qualified Independent Financial Advisor to ensure that your particular circumstances are considered.

5) Use gift aid for donations

Using gift aid for charitable donations has the effect of raising the basic rate tax band and saving 20% tax for higher rate tax payers. So for every 80 pence you donate, your chosen charity receives £1.00.

6) Use your tax free savings allowance

If you are lucky enough to have surplus cash, make sure that you use your annual ISA allowance. Within an ISA, all income and gains are tax free. You can save up to £20,000 for 2018/19.

You can choose how you split this between stocks & shares and cash ISAs. There are also ISAs such as the Lifetime ISA and ͚Help to Buy͛ ISA which are aimed at first time home buyers and offer additional incentives.

7) Use your annual capital gains exemption

If you have personal assets (shares, property etc) and are intending to sell them soon,  consider the capital gains tax implications in advance. You may be able to time the sales of shares for example to spread over 2 or more tax years and utilise your £11,700 annual exemption for 2018/19 effectively.

For married couples and civil partners consideration should be given to each spouse/civil partner using their allowance.

8) Set money aside for your tax bill

If you take some of the steps above you should be able to reduce your 2019 tax bill. It is unfortunate that however much we plan, many of us will still be faced with a tax bill for 2018/19 payable in the following January.

Setting aside a percentage of your income to cover your tax bill and placing it in a deposit account is a sensible measure and will help avoid any last minute panics trying to find the funds.

Another tip is to get your tax return completed as soon after the end of the tax year as possible. This gives you an early warning of any additional tax due so that you have sufficient time before the payment deadline in January.

If you would like Base52’s advice and assistance with any aspect of your tax planning, please contact us.

www.base52.co.uk

How much? What to do when you get a big, unexpected tax bill

Your accountant has just finished your personal tax return.

The nasty surprise is that you have an eye-watering tax bill to pay by 31 January. You were expecting to pay something. You have a vague memory of your accountant mentioning last year that you should put some money aside to cover the tax bill. But you didn't quite get around to it.

It's been an expensive year. There was that 'once in a lifetime' holiday, new iPads and phones for the kids, Christmas was expensive. You have no savings. And now this.

Accountants don't like this time. Inevitably they will be giving bad news to some of their clients and sometimes it is not well received. Their clients sometimes mention 'Joe down the pub' whose accountant always gets him a refund. How does that happen? Well if Joe is making losses every year, or buys expensive assets in his business or if he works in construction and has tax deducted at source, he may well get a refund every year.

On the other hand, if he is self employed with a growing, profitable business or has other untaxed income like a buy to let portfolio, the consequence will usually be tax. If he tips into 'higher rate' or 'additional rate' tax territory, the tax bill might be very significant indeed.

Well what's to be done? Well after the initial shock and anger...'Why me?', it's time to think practically. What can you afford to pay over the next 6 months? If you are open and honest with the taxman and present a payment plan you can stick to, generally they will strike a deal.

When you have a plan to pay this year's bill sorted, now is the time to start planing for next year. Being surprised one year is unfortunate. Being surprised the next year is just bad planning.

Talk to your accountant about how you can minimise your tax bill. Is your business structure appropriate? Can you make use of your spouse's personal allowance and lower tax thresholds more effectively? Make the changes now.

And most importantly, set some money aside every month for your next tax bill. Set up a savings account, transfer the money every month and don't touch it until your next tax bill is due.

Paying a big tax bill is never pleasant but if you are prepared and have the funds available, the pain is much reduced.

I hope your tax season has gone well. In just a couple of months it's the end of this tax year and the cycle starts again.

It's in your hands to be prepared this time...

www.base52.co.uk

Tax, lies and stereotypes

Let's start with the stereotypes. Accountants are steady, boring and cautious. Phillip Hammond rather than Bojo. Well, some are but many aren't.

I've been told many times that I'm not a 'typical' accountant because I'm approachable and easy to talk to. I'll take that as a complement but I can do dull, boring and cautious if I need to.

I had an accountant pal who was (and probably still is) charismatic, energetic and persuasive. He is also a risk taker and his cv is a roller coaster of exceptional highs and near catastrophic lows.

He also has a tendency to be 'economical with the actualite'' to use Alan Clarke's phrase. I found this out to my cost which is why he is now an ex pal. I think this expression is particularly apt. Often it's what's not said rather than what's said by an untruthful person that is most deceptive and damaging. 'Risks? You never asked about the risks'

My ex buddy's gambling tendencies mean that he is willing to push the boundaries with tax planning. This, along with his charm and persuasive skills can be attractive to a hard-pressed business owner. Saving a load of tax - what's not to like?

Well, each to their own but when it comes to choosing an accountant I think risk taking, charisma and persuasiveness are overrated. There lies the probability of early and easy wins, followed by inevitable losses and possibly worse.

As an entrepreneur and business owner I am happy to take calculated risks. I don't want my accountant to be a risk taker too so I'll settle for steadiness and caution every time

www.base52.co.uk

8 things to do before the end of the tax year

It may not feel like it with the UK in the grip of snow and ice but we have already had the first day of Spring and the end of the tax year will soon be upon us. 

A little time spent planning in these last few weeks before the end of the tax year could provide useful savings. The tax year end for individuals is 5 April 2018.  Many self employed people also have their accounting year end as 5 April or 31 March to coincide with the tax year. For private limited companies, 31 March is also a common date for the year end. 

Here are some ideas: 

1) Buy business assets and bring forward business expenditure before the year end 

If you are thinking of investing in business assets - new plant & machinery, vehicles, office furniture, computer equipment it is sensible to make your purchase before the end of current financial year, rather than the start of the next one. 

Timing your investment could mean that you can claim your capital allowances sooner, saving on cashflow. Similarly if you are intending to carry out some repairs or maintenance work, doing this before the year end will reduce your next tax bill. 

2) Manage your income

If you are in the fortunate position of being able to manage your income, plan now to optimise your income for tax purposes. For example, as a company director and shareholder, you may be able to reduce salary or dividends to keep your income below the key tax thresholds of £45,000, £100,000 or £150,000. An income level of £50,000 where child benefit is withdrawn from the highest earner in a household is another key threshold to monitor. 

The £100,000 threshold is particularly unattractive from a tax perspective as the personal allowance is gradually withdrawn at a rate of £1 for every £2 of income. This gives an effective rate of tax at a very painful 60% at income levels between £100,000 and £123,000. So best avoided if you don't need the income and can defer this to another year. 

3) Consider the effect of the dividend Tax 

A dividend tax was introduced from 6th April 2016. This affects people who receive a significant amount of dividend income each year – mainly business owners with their own limited companies. 

There is a £5,000 dividend allowance for 2017/18 where dividends are free of tax. The dividend allowance is reduced to only £2,000 per annum from 2018/19 onwards. It makes sense to use this allowance if you have scope to pay a dividend. Above this level new rates of dividend tax apply for varying levels of income. 

The dividend tax has a significant impact on business owners who may be used to drawing a relatively high proportion of their income as dividends. If possible the higher and additional dividend rates of 32.5% and 38.1% respectively are best avoided by capping gross income at the basic rate threshold of £45,000 if this is feasible. Gifting shares to a spouse so that they can utilise the dividend allowance may be appropriate in some cases. 

4) Contribute to a pension 

Pension contributions before the year end are a tax efficient way of saving for the future and reducing your tax bill. This tax savings are particularly attractive for higher and additional rate taxpayers. Advice should be sought from a suitably qualified Independent Financial Advisor to ensure that your particular circumstances are considered. 

5) Use gift aid for donations 

Using gift aid for charitable donations has the effect of raising the basic rate tax band and saving 20% tax for higher rate tax payers. So for every 80 pence you donate, your chosen charity receives £1.00. 

6) Use your tax free savings allowance 

If you are lucky enough to have surplus cash, make sure that you use your annual ISA allowance. Within an ISA, all income and gains are tax free. You can save up to £20,000 for 2017/18. You can choose how you split this between stocks & shares and cash ISAs. There are also new ISAs such as the Lifetime ISA and ͚Help to Buy͛ ISA which are aimed at first time home buyers and offer additional incentives. 

7) Use your annual capital gains exemption 

If you have personal assets (shares, property etc) and are intending to sell them soon,  consider the capital gains tax implications in advance. You may be able to time the sales of shares for example to spread over 2 or more tax years and utilise your £11,300 annual exemption for 2017/18 effectively. 

For married couples and civil partners consideration should be given to each spouse/civil partner using their allowance. 

8) Set money aside for your tax bill 

If you take some of the steps above you should be able to reduce your 2018 tax bill. It is unfortunate that however much we plan, many of us will still be faced with a tax bill for 2017/18, payable in the following January. Setting aside a percentage of your income to cover your tax bill and placing it in a deposit account is a sensible measure and will help avoid any last minute panics trying to find the funds. 

Another tip is to get your tax return completed as soon after the end of the tax year as possible. This gives you an early warning of any additional tax due so that you have sufficient time before the payment deadline in January. 

If you would like Base52’s advice and assistance with any aspect of your tax planning, please contact us.

www.base52.co.uk

9 things to do before the end of the tax year

It's that time of year again when some planning in the last few weeks before the end of the tax year could provide a useful tax saving.

The tax year end for individuals is 5th April 2017. Many self employed people also have their accounting year end as 5th April or 31st March to coincide with the tax year. For private limited companies, 31st March is also a common date for the year end.

Here are some ideas:

1) Buy business assets and bring forward expenditure before the year end

If you are thinking of investing in business assets - new plant & machinery, vehicles, office furniture, computer equipment it is sensible to make your purchase before the end of current financial year, rather than the start of the next one. Timing your investment could mean that you can claim your capital allowances sooner, saving on cashflow. Similarly if you are intending to carry out some repairs or maintenance work, doing this before the year end will reduce your next tax bill.

Click here for more details

2) Manage your income

If you are in the fortunate position of being able to manage your income, plan now to optimise your income for tax purposes. For example, as a company director and shareholder, you may be able to reduce salary or dividends to keep your income below the key tax thresholds of £43,000, £100,000 or £150,000. An income level of £50,000 where child benefit is withdrawn from the highest earner in a household is another key threshold to monitor.

The £100,000 threshold is particularly painful from a tax perspective as the personal allowance is withdrawn. This gives an effective rate of tax at a very painful 60% at income levels between £100,000 and £122,000. So best avoided if you don't need the income and can defer this to another year.

3) Consider the effect of the new dividend tax

A new dividend tax was introduced from 6th April 2016. This affects people who receive a significant amount of dividend income each year. There is a £5,000 dividend allowance where dividends are free of tax. Above this level however new rates of dividend tax apply for varying levels of income. 

The dividend tax has a significant impact on business owners who may be used to drawing a relatively high proportion of their income as dividends. If possible the higher rate dividend rate of 32.5% is best avoided by capping gross income at the basic rate threshold of £43,000. Gifting shares to a spouse so that they can utilise the dividend allowance may be appropriate in some cases

Click here for more details

4) Contribute to a pension

Pension contributions before the year end are a tax efficient way of saving for the future and reducing your tax bill. Advice should be sought from a suitably qualified Independent Financial Advisor to ensure that your particular circumstances are considered.

5)  Use gift aid for donations

Using gift aid for charitable donations has the effect of raising the basic rate tax band and saving 20% tax for higher rate tax payers. So for every 80 pence you donate, your chosen charity receives £1.00. 

6) Use your tax free savings allowance

If you are lucky enough to have surplus cash, make sure that you use your annual ISA allowance. Within an ISA, all income and gains are tax free. 

You can save up to £15,240 for 2016/17 and the limit will be increased to £20,000 for 2017/18. You can choose how you split this between stocks & shares and cash ISAs. 

Click here for more details

7) Use your annual capital gains exemption

If you have personal assets (shares, property etc) and are intending to sell them soon, consider the capital gains tax implications in advance. You may be able to time the sales of shares for example to spread over 2 or more tax years and utilise your £11,100 2016/17 annual exemption effectively. For married couples and civil partners consideration should be given to each spouse/civil partner using their allowance.

Click here for more details

8) Review use of the VAT Flat Rate Scheme

For businesses using the VAT Flat Rate Scheme the government have introduced a new definition of a 'Limited Cost Trader' whose expenditure on goods is less than 2% of VAT inclusive turnover. If using the scheme you should consider if you are a LCT in which case it is likely to be advantageous to revert to Standard VAT Accounting from 1 April 2017.

Click here for more details

9) Set money aside for your tax bill

If you take some of the steps above you should be able to reduce your 2017 tax bill. 

If all or some of your income is not taxed at source however, it is likely that you will be faced with a tax bill for 2016/17.

Setting a percentage of your income to one side to cover your tax bill and placing it in a deposit account is a sensible measure and will help avoid any last minute panics in January trying to find the funds. Another tip is to get your tax return completed as soon after the end of the tax year as possible. This give you an early warning of any additional tax due so that you have sufficient time before the payment deadline in January.

Note - This draws on a Blog first published in February 2016 and is updated for new tax rates and allowances.

www.base52.co.uk

Join our VAT simplification scheme - oops no, that's aggressive tax abuse

The VAT Flat Rate scheme was introduced by HMRC in 2002 as a 'simplification scheme'. The idea being that it was simple and beneficial for the small businesses who were eligible to participate and simpler for HMRC in terms of compliance. Essentially the way it works is that a business pays a lower 'flat rate' VAT to HMRC which varies according to their sector. As a trade off the businesses are not able to recover any VAT on expenditure. So a win/win and small businesses signed up for the flat rate scheme in droves. HMRC even offered a 1% discount on the flat rate for the first year of VAT registration.

So all this changed in the last Autumn statement. HMRC have introduced a new concept of a 'Limited Cost Trader' to describe businesses which have minimal expenditure on HMRC's definition of 'goods'. For these businesses they will need to use a new flat rate of 16.5% of VAT inclusive turnover which by my maths comes out at 19.8%. Er...no thank you, we might give that a miss. 

That's all fine but instead of HMRC saying they got it wrong initially and the rates were too generous (even without the 1% first year discount they threw in) or that economic circumstances have changed, low and behold, HMRC have blamed it all on the businesses who took up the scheme.  There is a Technical Note on HMRC's website with the heading, 'Tackling aggressive abuse of the VAT Flat Rate Scheme'  - as if these businesses were doing something wrong? I'm struggling to understand what is aggressive or abusive about adopting a scheme which HMRC devised and promoted and then changed their minds about.

For many businesses the best option will be to revert to standard VAT accounting and recover VAT on their expenses. Depending on their turnover and business sector some businesses will be a few thousand pounds worse off each year as a result of this change. Coming on the back of the dividend tax introduced last April and pensions auto enrolment it's another unwelcome burden for some of the smallest of small businesses. Implying that it was their fault that the scheme is being changed adds insult to injury.

www.base52.co.uk

Another busy January

I was just thinking about our January tax return workload and reflecting on how things have changed over 14 years at Base52.

In the early years there were just a handful of tax returns, mainly for our business clients. I did the tax returns myself along with most of the business accounts.

14 years on we now deal with a range of tax returns from the routine with self employment profits or PAYE and dividend income, to the more complex with capital gains tax computations, entrepreneurs' relief, foreign income, enterprise investments schemes etc. We have also seen the rapid growth in buy to let ownership. Nowadays, many of our clients have buy to let income on their tax returns. Another change has been the requirement for 'high income' taxpayers who earn more than £100,000 per annum to file a tax return.

One thing that hasn't changed is the January rush. Almost inevitably a high proportion of our tax return work still falls in December and January. There is a nothing like a deadline for focussing minds and helping everything to come together before HMRC penalties apply.

We do try and keep a little in reserve however so despite being a very busy time we are still, 'open for business' in December and January and delighted to welcome new clients.

There is more change on the horizon with the introduction of a dividend tax and changes in buy to let tax from this tax year and Digital Tax Accounts and quarterly reporting from 2018. We are already making plans for the new digital reporting regime and want to be in the best position to support our clients and help them adapt to the new requirements.

So it's heads down for a busy last few weeks to the end of a another tax season. Roll on January 31!

www.base52.co.uk

Tax planning makes perfect sense

In this age of austerity, taking steps to minimise your tax bill can be seen by some to be a little selfish. The Social Market Foundation reported last year that the gap between rich and poor has widened significantly in the last decade. So for the wealthier members of society to take steps to save tax, when such planning opportunities are less readily available for the less well off, perhaps increases the sense of unfairness.

We need to make a distinction here between tax avoidance and tax planning. Tax avoidance schemes are often complex and high risk arrangements that take advantage of loopholes in the tax regulations. A high profile example was the case of the comedian Jimmy Carr using a legal but morally questionable scheme several years ago which led to him paying as little as 1% tax on his earnings. HM Revenue and Customs has tightened up the rules on tax avoidance schemes in the last few years. Promoters of such schemes have an obligation to disclose them to HMRC and they have specialist task forces to seek out rule breakers. Many accountants and professional advisors would not recommend avoidance schemes to their clients. Leaving aside the ethical arguments, the risks are high with HMRC winning 80% of avoidance cases the taxpayer chooses to take to court.

Tax planning however, that is, working within the tax regulations to minimise your tax liability, is a sensible approach for many people, particularly those with more complex tax affairs. One of the most famous quotes in tax planning comes from Lord Clyde in a decision he gave in 1929, ‘No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores’.

So what kind of measures would come under the scope of tax planning? Well often this is taking advantage of tax breaks the government has put in place to encourage savings and investment eg maximising pension contributions, making use of annual ISA allowances, using business investment allowances etc. There are also planning steps for married couples and civil partners to spread asset ownership to make maximum use of capital gains exemptions and income tax allowances. Planning the timing of asset purchases and disposals across tax years can also be a useful planning step. For business owners, drawing income from their company in the most tax effective manner is good practice. None of these are radical steps likely to attract the attention of HM Revenue and Customs. With care and often with professional support such steps can help you keep more of your hard-earned income and gains. What you choose to do with the extra money is then up to you, rather than HM Government.

www.base52.co.uk