If you work for yourself, there’s a good chance that you will be able to claim motor expenses for running your business.  You may visit customers, suppliers, trade fairs, exhibitions, the bank and a whole host of other places in the course of running your business.  There are a couple of different ways to claim the cost, but keeping a log of your miles may be a good idea regardless.  We’ve identified 4 different times when this may be the case.

1. Sole trader – actual cost

If you use a vehicle for business which you claim the actual running costs (i.e. fuel, road tax, insurance, servicing, etc..) and you also use it for private use, then a record of business mileage will make any private disallowable proportions more robust if challenged.

2. Sole trader – pence per mile

If you are a sole trader and you claim mileage on the ‘pence per mile’ basis, then keeping a log of business mileage is essential.

3. Limited company – mileage claim

The default motor expense situation for company directors of small limited companies is to use their own personal cars for doing business travel.  Therefore, a detailed claim of mileage incurred is robust and will stand up to scrutiny.

4. Company van

If a company is paying the running costs of its vans, why would it want to keep a mileage record?  Because situations exists where a van is used simply for home to work travel and business travel, which avoids a benefit in kind on the driver.  A record of business mileage is further proof that a van is not being used for personal travel.

Mileage Claims and Keeping a Record of Business Mileage

When you own a property which is let out to tenants, this is known as a buy to let.  If you receive income from a buy to let, you need to register for self assessment, which will mean that you will have to complete tax returns each year.

Your net property income is assessed for income tax, which means that you take the income you receive from your tenant and deduct allowable expenditure.  Typically, the allowable expenditure includes the following:

• Letting agents fees
• Mortgage interest
• Property insurance
• Property maintenance, such as the gas safety certificate or decoration
• If the property is furnished, you can also deduct 10% of the income

If your property makes a loss, the only thing you can do is carry it forward to offset future property profits.  It cannot be offset against other income, or carried back to offset against property profits in earlier years.

If the property is jointly owned, then any profits or loss are jointly split.  The only way that profits could be assessed under 1 name is if the deeds are changed.

When the property is disposed of, any gains would be subject to capital gains tax, which is chargeable after the annual exemption (currently £10,900).  NB if the property is jointly owned, then each individual will receive an annual exemption.

These are the more common issues which affect buy to lets.  However, if you have more specific issues or want help, please do not hesitate to contact us.

Buy To Let and Tax – An Introduction

The 2013 Tax Returns cover the year to 5 April 2013.  They will be issued in early April 2013 and the deadline for submission is 31 October 2013 (if submitting by paper) or 31 January 2014 (if submitting online).  We are always advising clients to get their tax returns, or any filing with HMRC really, done sooner rather than later.  Other than the purely selfish reasons that it will help our workflow, why do we do this?  The following are some of the more common reasons.

1. You will know how much tax you owe

Personal tax returns are issued in April and the deadline for online submission is the following January, when the tax is also due.  The sooner you know how much you owe, the sooner you can start saving for it, certain in the knowledge that you know how much you need to save.

2. If you a due a refund, get your money sooner

If you submit a tax return and you are due a refund, the refund will be issued shortly after submission.  If you file your return in May, you will get your refund in May.  If you wait until January, you are leaving your refund with HMRC for a further 8 months, which is jolly nice of you, but does nothing for your bank account.

3. Reduce your payments on account at the end of July

If you have to make payments on account, payments are due at the end of January and July.  If you get your tax return sorted before the end of July, you will clarify the position and possibly avoid having to make a payment.

4. You may need the info for Tax Credits

Tax credit renewals are due by the end of July, so if you get your tax return sorted, you will be able to use the same figures for the renewal.  If you don’t, you can always use estimates, but you run the risks of your current year’s payments being wrong, and possibly continuing to receive more money than you are entitled to.

5. Avoid any unexpected problems

You may be planning to do your tax return shortly after Christmas, but then get a terrible case of flu which means that you miss the deadline.  Is this a reasonable excuse to avoid a late filing penalty?  Unfortunately not.

6. The enquiry window is shorter

The enquiry window – the length of time which HMRC have to investigate your tax return – used to be 12 months from the end of the filing deadline date.  Therefore, early submission used to give HMRC longer to look into your return.  This is no longer the case, the enquiry window is now 12 months from the date of submission.

7. Relax and enjoy the summer

We all feel easier and better knowing that we’ve got a horrible job like completing your tax return out of the way, so why not get it done and enjoy the summer.

So there you are.  Several reasons to get on top of your tax affairs, plan your future and enjoy the summer.

7 Reasons To Get Your Tax Return Submitted Sooner Rather Than Later

When you start self employment, tax rates start having more relevance.  Unlike PAYE, where your taxes are taken off you by your employer throughout the year, self employment will result in a tax bill at the end of the year.  If you are currently self employed, either as a sole trader or a partner in a partnership, you can expect to be subject to the following taxes (all rates relate to the 2013-14 tax year):

Income Tax

The main 3 bands affecting most people are as follows:

Personal allowance                             £9,440

20% income tax                               £9,440 – £41,450

40% income tax (‘higher rate’)           £41,450+

NB these figures apply to all sources of income, not just self employment

National Insurance (NI)

If you are self employed, it is more than likely that you will be paying Class 2 NI, currently £2.70 p/w.  You should also be subject to Class 4 NI which is based on your self employed income (unlike income tax, this is only based on self employed income).  The bands of Class 4 NI are as follows:

0%                   up to £7,755

9%                   £7,755 – £41,450

2%                   £41,450+

The following table shows what tax you may expect to pay from the appropriate level of earnings (all assumed to be from self employment):

How Much Tax Will I Pay If I’m Self Employed?

The Chancellor announced his 2013 Budget on 20 March 2013.  The following are some of the major announcements which are relevant to the self employed and small business:

Income Tax

The personal allowance threshold is due to increase to £9,440 from 6 April 2013 and then to £10,000 from April 2014.

The 40% tax rate is reached in the 2013-14 tax year when income is £41,450 and will be £41,865 for 2014-15.

The top tax rate of 50%, payable on income in excess of £150,000, is to be cut to 45% from April 2013.

National Insurance

Employment Allowance - from 6 April 2014 every business and charity that is registered for PAYE will be entitled to a discount of £2,000 against their employer’s NIC liability for a tax year.  Where the liability would have been less than £2,000 there will be no employer’s NIC payable for that year.

Corporation Tax

The main rate of corporation tax, which applies to profits in excess of £300,000, is currently 24%.  It will reduce from next month to 23%, and will fall to 21% in 2014 and to 20% in 2015.

Also, the Government are tightening up on the operation of loans to participators, in relation to intermediaries, non money advances and ‘bed and breakfasting’. 

Capital Allowances

The threshold for the Annual Investment Allowance (AIA) has been kept at £250,000 until 31 December 2014, when it is due to revert to £25,000.

VAT

The VAT registration threshold will increase to £79,000.

The Budget 2013

In conjunction with the article ‘limited company – common myths’, we thought it may be useful to highlight some of the myths of self employment, many originating from speaking to someone ‘down the pub’!

If you’re self employed, you can claim for much more than an employee

There is an element of this, which can be squared with the risks that the self employed take by being self employed in the first place.  However, the test for a cost being allowable for tax purposes is “wholly and exclusively for the purposes of running the trade”.  Therefore, not everything automatically qualifies.

You don’t pay any tax in your first year of trading

Whilst this is technically true, you would be very unwise to believe it!  Tax is paid in arrears, just over 9 months after the end of the tax year, 31 January.  However, there are two things which are going to spoil this.  Firstly, if your tax liability is over £1,000, you also have to make ‘payments on account’, which is 50% of the tax liability at the end of January and 50% at the end of July.  Secondly, when you finish trading, your final tax return will apply in the same way as all tax returns.  In other words, there will be final tax payment just over 9 months after the end of the final tax year, well after you’d finished self employment.

Your shop is a gold mine

Contrary to popular opinion, having a shop – which has customers – does not necessarily constitute a gold mine.  Bear in mind that most shops have fixed costs like rent and rates to pay before they even open the door.  Closely following these two costs are light and heat and staff wages.  Even the most basic shop therefore can have considerable costs to absorb, which partly explains the success of online shopping and specifically Ebay, where you may purchase goods from a vendor who doesn’t have these costs to pay.

Claiming for use of home will result in capital gains tax

If you are self employed and use your home for running your business from, you can claim a portion of your running costs as an allowable expense.  However, stories get told about how this then brings your house into capital gains tax when you sell it.  The truth is, unless you’re using your home in a major way to run a business, such as converting your front room into a shop, it is unlikely you will be caught.

Finally, we hear many stories of what other people claim that they receive tax relief on.  However, just because someone claims it, it doesn’t necessarily mean that it is right!  As always, if in doubt, it is better to get professional advice.

Self Employment – Common Myths

The intention of the Flat Rate Scheme is to simplify the process of reporting VAT for businesses.  VAT payable becomes simply a factor of VAT inclusive sales for a quarter – removing the need to analyse input VAT on purchases.  See here for our recent blog on the Flat Rate Scheme.

There is also an opportunity to make money by using the Flat Rate Scheme.  This centres around small service companies, but could be considered for other businesses.

Say Mike has a management consultancy which registers for the Flat Rate Scheme.  In the first quarter, he invoices £10,000 + VAT = £12,000.  The Flat Rate Scheme rate for management consultancy businesses is 14.0%. Thus, the VAT he pays over to HMRC is £12,000 x 14% = £1,680.

Therefore, he charges his customer £2,000, but only pays over £1,680, giving him a profit of £320.  Simply for being VAT registered.  Essentially, this is to compensate for not reclaiming any input VAT.  However, for a service business, any input VAT would be minimal.

This is a very simple example, but it illustrates the potential upside.

Note: in our view, we believe that it is imperative that you take professional advice before registering for VAT and/or the Flat Rate Scheme.

How to Make Money on the VAT Flat Rate Scheme

We speak to a lot of businesses, and the clear (and probably obvious) message is that they don’t like paying tax.  They may recognise the importance and the reason for paying tax, but it still doesn’t make it any more palatable.  However, there are quite a few ways to legally reduce your business tax bill, some of which you may already be using.  We thought it would be useful to highlight 3 of the main ways, which are legal and can be taken by simply planning your affairs.

Income Tax and National Insurance

If you trade as a sole trader or partnership, you pay income tax and national insurance on your business profits.  Income tax is currently 20% for profits over £8,105, rising to 40% for profits over £42,475.  Class 4 NI is 9% of profits over £7,605, then 2% of profits over £42,475.  Therefore, a sole trader making £30k of taxable profits will receive a tax bill of £6,395.  In addition, there will be class 2 NI of £2.65 p/w (= £137.80 p/a).

However, an increasingly popular way of reducing the tax bill for your business is to incorporate – in other words, trade through a limited company.  The tax bill would shift from you personally to the company, which pays corporation tax at 20%, but no NI.  For the same business above, earning £30k profits and paying the director (i.e. you) the advised salary, the tax bill drops to £4,502 p/a, a saving in excess of £2k.

Cue health warning: a limited company may not be the best option for every business, there are legal obligations to adhere to and certain items of expenditure which are treated differently, but it may be an option worth considering and which we are more than happy to advise on.

VAT

VAT registration is compulsory when your business turnover over the last 12 months (which is a rolling measure) exceeds £77,000.  In theory VAT is supposed to be a neutral tax; if you have to register for VAT, you simply increase your prices by the VAT amount – so sales of £100 would become £100 + £20 VAT = £120.  However, anyone in business knows that this may not be viable, particularly where your customer base is private individuals who would effectively be getting a price increase of 20%.  Depending upon your business, you may be able to reclaim input VAT on costs of stock and overheads, although this won’t fully bridge the gap.

An extreme case is hot food outlets, such as Chinese takeaways, where there is little input VAT to reclaim, but all sales are subject to VAT, and are made to private individuals who cannot reclaim this VAT and therefore suffer it as a cost.  If their turnover is £76k, they have no legal requirement to register for VAT.  However, if their turnover jumps to £78k, they must register for VAT, and the result – assuming that prices cannot be raised – would be an annual VAT bill of somewhere in the region of £12k.  This is a significant barrier to growth.

There are a number of legitimate ways that you can keep your turnover below this threshold, including:

• Closing part of the week to suppress your income.
• Asking customers to buy their own materials.
• Ignoring the effect of large one-off contracts which are not part of your usual business
• Having a significant change in your business which means that your turnover level will drop.

These issues were covered in this blog in more detail.

Employer’s National Insurance

When you take on an employee and pay them in excess of £144 p/w, you have to pay employer’s NI, at the rate of 13.8%.  For instance, an employee earning £200 p/w would cost you an additional £7.73 (£200 – £144 x 13.8%).  Pay an employee £300 p/w and the employers NI jumps to £21.53 p/w (= £1,119.56 p/a).  This is a ludicrous tax, it is a real cost disincentive to take more employees on.  After all, shouldn’t the Government be trying to encourage employers to take more staff on?  OK, there is a scheme for new businesses, but reports suggest that this is not having the impact that was envisaged.

So how to do you avoid this tax?  By taking on part time employees.  In the above scenario, if you took on 2 employees each earning £100, you are paying the same amount of wages, but not paying any employers NI, an annual saving of £401.96.  There is obviously the issue about the kind of work which is being done, and it may be easier to employ one person, but you would be giving yourself more flexibility in terms of sickness and holidays – i.e. if you have 2 people working part time and one is sick, there is a good chance that the other person would be able to provide cover.

So there you are, 3 areas of tax which many businesses face and which can be reduced or avoided.  Please note that there may be other issues affecting the taxes mentioned above that are specific to your business/circumstances, and we would always advise you to seek professional help in clarifying whether these courses of action are relevant for you.

Businesses – 3 Taxes You Can Easily (and Legally) Avoid

Nobody starts a business with the intention of failing, but the facts indicate that quite a few new businesses fail within the first 2 years.  This is startling, why should this be?

The following are some of the more common reasons.

A Man With a Plan

Every business should have a business plan, to show it knows where it wants to go.  A business plan considers the finances, customers, markets, suppliers, products and risks of a business.  It should not be done simply to raise finance, but to show that a business is sustainable; that, for instance, you can provide a service, pay your suppliers, taxes, and still have enough for your personal requirements.

Reason for failure: no business plan, no idea where the business is heading, no idea what the break even point is, and not saving for tax bills such as PAYE, VAT or corporation tax.

Give the People What They Want

Market research is a good way of determining whether a business will succeed.  Be realistic.  If you have a great new product, don’t just ask your family and friends (who won’t want to offend you), get some critical feedback too.  If you’re opening a shop, make sure you’re selling what people want to buy, not what you want to sell.

Reason for failure; providing a service for which there is no or little demand, or is in the wrong area.

Mind the Expectation Gap

If you think that working for yourself is easy, then you may have a rude awakening.  The vast majority of businesses we have come across over the years succeed due to a number of factors, top of which is often motivation and determination.  The buck stops with you.  It is not uncommon to work many late nights and weekends, get stress from customers and suppliers, and generally feel as though the world is against you.

Reason for failure: expecting that ‘working for yourself’ includes an option to stay in bed if you don’t fancy working and still expecting to be paid!

Cash Really is King

You hear this time and again, and that’s because it is true.  If you don’t have enough cash to pay your suppliers, staff, landlord, you will struggle.  Cash flow is the blood that gives business life.  Profit is not enough.

Reason for failure: running out of cash.

Get Help

Given the current lack of jobs, many people are turning to self employment as a way to make money.  Unfortunately, there are pitfalls along the way that can trip people up.  Even seasoned entrepreneurs still get things wrong.  It is useful to realise that advice and help is available from a variety of sources, which can help steer businesses through some of the trickier times.  Even if help costs money, it may still be preferable to finding out the hard (and possibly expensive) way.

Reason for failure: trying to do everything yourself.

So there you have it, a few reasons why businesses fail.  They’re not mystical, but it is easy to get swept along with a new business, and sometimes it makes sense to step back and make sure that things are going as they should.

5 Reasons Why Businesses Fail

For years, many small businesses have stated that being registered for VAT is an administrative burden on their business.  By being VAT registered, a business is effectively an unpaid tax collector.  In order to try and help small businesses, the Flat Rate Scheme (FRS) was introduced by HM Revenue and Customs (HMRC) in 2002.

If you are VAT registered, the usual way of accounting for your VAT is to calculate how much you have charged your customers, which you need to pay over to HMRC, and how much VAT you have incurred on your purchases, which can be deducted from the amount you have to pay over.

The main way in which the FRS tries to help business is by removing the need to separate input VAT from expenses, which can take a lot of time and effort.  Instead, the VAT liability of a business is calculated using a pre-determined % (based on the industry in which the business operates), which is applied to the gross amount charged to customers.

For example, Helen is an IT consultant.  If she registers under the FRS, she still charges her clients standard rated VAT.  So a bill for £1,000 has £200 VAT added on.

Under her sector, the relevant % is 14.5%.  Therefore, the total VAT liability is £1,200 x 14.5% = £174.

So although she charges her client £200, she only has to pay £174 over.  The balance effectively represents an estimate by HMRC of the input VAT that she cannot reclaim.

Obviously one of the biggest advantages of operating the FRS is that it dramatically simplifies the VAT process, plus removes some of the ambiguity of whether input VAT can be reclaimed on smaller receipts.  However, it does not remove the need for normal bookkeeping requirements.

Although you cannot reclaim any input VAT, there is a provision for reclaiming input VAT on capital assets with a VAT-inclusive cost of at least £2,000.

The full details of the FRS can be found here:

http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm

VAT – What is the Flat Rate Scheme?