Tax

On Wednesday, March 3rd, 2021, Rishi Sunak, Chancellor for the UK unveiled the budget for this year. Continued support for businesses dealing with the effects of Covid was the main focus, with plans for the recovery of the economy. I won’t be going through every aspect of the budget but will highlight some of the key points that affect businesses. As always, as further information is related I will provide more updates both on the blog and the Ihelm Enterprises FB Page.

1) Coronavirus Job Support Scheme

The Job Retention Scheme that has helped employers throughout the pandemic is being extended to Sept 30, 2021 and employees will continue to receive 80% of their unworked wages (up to £2,500) but the amount employers must contribute will change.

From July 1st, 2021 the amount the scheme covers will be reduced and the amount employers contribute will increase.

July 2021 – 70% of wages (up to £2187.50) covered
– employers must pay 10% (up to £312.50) of hours not worked

August and Sept 2021 – 60% of wages (up to £1875) covered
– employers must pay 20% (up to £625) of hours not worked

Employees will continue to receive 80% of the wages for hours not worked until the end of the scheme.

Any employees that were employed and on your payroll as of March 2nd, 2021 (ie you have made an RTI Submission for them between March 20, 2020 and March 2nd, 2021) can be included in any claims from May 1st, 2021 onwards.

Read here for changes to the scheme: https://www.gov.uk/government/publications/changes-to-the-coronavirus-job-retention-scheme/changes-to-the-coronavirus-job-retention-scheme

This is the main page for the JRS: https://www.gov.uk/guidance/claim-for-wages-through-the-coronavirus-job-retention-scheme

2) Self-Employed Income Support Scheme

Further information about the fourth grant has now been published as well as news of a fifth grant being made available, bringing the support inline with the Job Retention Scheme.

The fourth grant will pay out 80% of 3 months’ average trading profits up to £7,500. The grant will also take into consideration the 2019/2020 tax return, meaning those who became self-employed during the 2019/2020 tax year are now eligible for this grant! The rest of the eligibility criteria is still the same.

This means that HMRC will now include your 2019/2020 tax return when calculating your average trading profits, so if you received the other grants it could mean you receive a different amount compared to before.

You will need to have traded in both the 2019/2020 and 2020/2021 tax years and submitted your 2019/2020 tax return by March 2nd, 2021. The grant will be available from late April 2021 to May 31, 2021 and if you are eligible, HMRC will contact you in mid-April.

The fifth grant will cover the period May 2021 to September 2021 and it will be based on how much your turnover has reduced in the year April 2020 to April 2021. It will be worth 80% of 3 months average trading profits up to £7,500 for any business with a reduction in turnover of 30% or more and 30% of 3 months average trading profits up to £2,850 for those with a turnover reduction of less than 30%.

For more information read here: https://www.gov.uk/government/publications/self-employment-income-support-scheme-grant-extension/self-employment-income-support-scheme-grant-extension

3) New Restart Grant

A scheme that will help businesses to restart after being in lockdown has been announced. It will be a one-off grant of up to £18,000 and only available to those businesses that have not been allowed to trade normally due to lockdown restrictions. This includes non-essential retail shops, restaurants, hotels, personal care businesses, the leisure sector and other businesses that were forced to close.

Non-essential retailers will receive up to £6,000 while those in the hospitality, personal care and leisure sectors will receive up to £18,000.

The grant will be provided by local authorities. The new scheme replaces two other local support schemes that had been set up and that close at the end of March 2021.

At the time of writing, I haven’t been able to find any additional information about these grants on the UK Government website, but I will share it as soon as I do.

4) Recovery Loan Scheme

This is a new loan scheme that will be accessible to any business within the UK, no matter their size. The loans will be for between £25,001 and £10 million, and asset and invoice finance between £1,000 and £10 million. The new loan scheme will launch in April 2021 and replace the current BBL and CBIL schemes. Further details are supposed to be released in the next few weeks and as this information is made available I will share it.

5) VAT Cut Extended

The VAT cut to 5% for hospitality, accommodation and attractions will now continue until the end of September 2021. The rate will then be increased to 12.5% until March 31, 2022.

6) Business Rate Relief

The business rates relief has been extended until the end of June 2021. At that point in time, rates will be discounted to 1/3 of the normal charge for a further 6 months up to a value of £2 million for all businesses that have been forced to close this year.

7) Corporation Tax

An increase of corporation tax up to 25% will be put in place from 2023 and affect businesses with profits of £250,000 or more. Businesses with profits of £50,000 or less will continue to be taxed at 19% while businesses with profits between £50,000 and £250,000 will be taxed using a tapered rate. As more information is released, I will share it with you.

8) Income Tax Personal Allowance

After the increase of the personal allowance in April 2021 to £12,570 per year, the rates will be frozen until April 2026. This will mean that as people’s income increases, more people will move into the higher tax brackets.

The 2021-2022 National Insurance Contributions threshold will increase – the primary threshold/lower profits limit to £9,568 and the upper earnings limit to £50,270. The UEL will then stay the same until April 2026.

There are many other items that have been announced with the budget, but I am not going to cover them. You can read the announcements made yesterday here: https://www.gov.uk/government/news/budget-2021-what-you-need-to-know.

As more information is released, I will continue to share it within the blog posts and on the Ihelm Social Media platforms.

This post has been updated and the new post can be found here: https://www.ihelm-enterprises.co.uk/vat-and-your-business/

This blog post is going to talk about VAT – what the threshold is, the basics of it and how it affects your tax returns. It won’t cover how to use the different VAT codes, go into detail about the different VAT schemes or how to file your VAT return.

What is VAT?

It is value-added tax and it’s charged on pretty much everything you buy within the UK.  Most prices will be displayed including VAT, or it will state whether it is excluding VAT.  Different products/services can have different rates of VAT.  For the consumer, it will only affect you in terms of the price you pay.  However, if you are a business, you might have to register for VAT, track the VAT you charge and pay, submit your returns to HMRC on a regular basis, and then pay them the VAT that is owed.  The VAT that is charged on your sales does not belong to you – it is a tax that you are collecting on behalf of HMRC.

When do I need to register for VAT?

For the majority of businesses, you won’t need to register for VAT unless your income (your sales) reaches the threshold set by HMRC.  The current threshold as of 31/01/2021 is £85,000.  It is calculated on a rolling 12-month period, so you need to be aware of what value your sales are at continuously so you can register if you need to.  Once you reach the threshold, you will have 30 days after the end of the month in which you reached that threshold, to register with HMRC.

What happens once I register?

As I mentioned in the introduction, there are several different schemes, but the main ones are the Accrual scheme where you would record the VAT for all your sales and purchases as of the invoice date, the Cash VAT scheme where you would record the VAT for all of your sales and purchases as of the date they were paid, and the Flat Rate Scheme which is where the amount of VAT a business pays is a fixed rate and is only based on your sales.

After you are registered, you will receive your VAT registration number from HMRC and you must display this on all your invoices and sales receipts that you issue to your customers, record the VAT on your sales and purchases, add VAT to your prices, file your VAT returns as instructed and pay any VAT due to HMRC, keep digital VAT records and a VAT account.

The amount of VAT you will pay to HMRC each time you submit your VAT return will depend on which scheme you are using and whether you charged more VAT on your sales than you reclaimed on your purchases.

It is advisable that when you register for VAT, you set up a business savings account so that you are holding back 10-15% of the amount you are paid for sales, and you will then be able to pay any VAT you owe to HMRC.  This is because the amount of VAT you are paid by your customers doesn’t belong to you, it is money that is owed to HMRC that you are collecting on their behalf.  Normally, you would charge your customers 20% VAT which is the standard rate, but you would also have purchases that you have paid VAT on, so by setting aside 10-15% of the amount you are paid for sales, you won’t then be scrambling at the end of each quarter to find the money to pay HMRC as you will have saved at least some of what you may owe to them.

How often you have to file your VAT return and when by will depend upon the scheme you are using and when you registered, usually it is once every quarter and you will have 1 month plus 7 days to file and pay your return.  For example, if you had to file a VAT return that covered April to June, you would have until August 7^th to file the return and pay any amount due to HMRC.

How do I record the VAT on sales and purchases?

The easiest way to record your VAT and to be able to submit your returns is to use MTD compliant software like QuickBooks Online to help you to track the amount of VAT you owe to HMRC and to submit the return.  All VAT returns must be submitted online using MTD compliant software.  This will also help you with recording your transactions digitally as you will be able to attach proof of what each transaction is for.  You can do this within QBO or use third-party software like AutoEntry to help with entering the information into QBO and storing your digital receipts.

How does VAT affect my self-assessment and corporation tax returns?

As VAT is money you are collecting on behalf of HMRC and it is owed to them, if you are VAT registered the VAT portion of your sales and purchases are not included within your tax returns and are not included in the calculations of how much tax you owe.  These figures are actually shown on the balance sheet as money owed to a creditor.

What else do I need to know?

The majority of products and services will have the standard VAT rate charged, but there are also items that are zero-rated or even exempt, which you will need to be aware of.  You will also need to be aware of how to record any items that are bought or sold to people who live outside of the UK, as the way they are treated is different – especially now that Brexit has happened.  HMRC have many pages about the different VAT rates and how to treat items, so you can read about the different rules on there. However, if you are VAT registered, it is a good idea to have an accountant who can help you to know how to deal with anything that does not follow the standard VAT rules, especially if you are dealing with importing/exporting products with the EU.

While I am a bookkeeper and understand the fundamentals of VAT and how it is to be dealt with, some areas like dealing with importing/exporting products with the EU are quite specialist areas, so I always work closely with a client’s accountant to make sure we are recording the information within the accounts correctly.

If you would like further information on VAT and whether you need to register, feel free to e-mail me.

Things have been a bit quiet about Making Tax Digital and the timescales that had been announced have been delayed and even paused due to the Covid-19 pandemic. However, the government made an announcement on July 21, 2020, and provided some new timelines for going forward with MTD.

What is Making Tax Digital?

Making Tax Digital (MTD) is the government’s plan to make it easier for individuals and businesses to know what tax they have to pay before the end of the year. Businesses will need to submit their tax information to HMRC digitally.

What’s the latest on MTD?

Currently, only those businesses that have had to register for VAT due to reaching the £85,000 turnover threshold, have had to file their VAT returns through MTD. Live pilots have been continuing to be run to help HMRC get the system in place for the remaining taxes.

HMRC are going to be ready to continue with getting all businesses and individuals filing their taxes through MTD starting with those businesses who have voluntarily registered for VAT. From April 2022 all VAT registered businesses will need to file their returns through MTD. In April 2023, all self-employed businesses and landlords with business turnover above £10,000, will need to follow MTD for filing tax returns and they will need to do this quarterly.

How can I get ready for MTD?

Even if you don’t need to file your taxes with HMRC through MTD yet, you can start to get prepared so that when you do need to follow the guidelines, you are already up and running.

1) Start using MTD Compliant software like QuickBooks Online – now.

Keep your accounts on MTD compliant software so that you know the software will be able to file your tax information with HMRC without needing to use bridging software, or change how you do your accounts. This will help to reduce your stress and panic, because by the time you need to file your taxes with HMRC through MTD, you are confident in using the software and already all set up.

2) Get into the habit now of attaching copies of invoices/receipts to your transactions within the accounts software.

Part of following MTD and filing your accounts, is ensuring that you are sending digital information to HMRC – they will no longer accept paper records. You need to have all of your transactions digitally, and have an audit trail for what those items are. You can do this by ensuring that you attach a copy of any invoices/receipts to each transaction in the software. Depending on your accounts software, you can often take photos with the app on your phone/tablet, enter a small amount of information and save it – this then puts the transaction into your accounts and attaches a physical copy of the invoice/receipt to it. You can also use a third party software like AutoEntry which will not only attach a physical copy of the invoice/receipt to your transactions, but it also stores your paperwork digitally for you! By ensuring you are attaching a physical copy of the invoices/receipts to your transactions, you won’t need to store the paperwork, because you will have a copy stored digitally.

3) Keep watching for announcements!

This is probably the simplest of the steps, and the easiest one to do. Keep an eye on our Facebook page and our blog as we will share any further updates about Making Tax Digital so that you know when you need to start following the guidelines. You can find our Facebook page here: https://www.facebook.com/ihelmenterprises.

Now that you have registered as self-employed and your business is up and running, it is very important that you ensure you are keeping track of your sales and expenses.  However, it isn’t as straight forward as keeping track of all the money coming in and going out of the business.  You need to make sure that you are only claiming for those expenses that HMRC recognise as allowable expenses, as otherwise, you could end up with unexpected fines.

There is a lot of information out there about what expenses a self-employed person can claim through the business and the HMRC website does have a pretty comprehensive set of articles on this topic.  I wanted to be able to give business owners an overview of what can be claimed to get them started.  If you are unsure as to whether something can be claimed as an allowable business expense or not, contact HMRC or your accountant or bookkeeper.

For the most part, the majority of business expenses can be claimed on your self-assessment.  There may be some expenses that you enter into the accounts for accounting purposes but then need to discount for tax purposes – ie. Depreciation of assets, entertainment costs relating to clients/suppliers/customers or charitable donations.  The main thing you need to keep in mind is that the expense is “wholly and exclusively” for business use.

Some of the expenses are straightforward to deal with.  You simply enter them straight into your accounts as long as they are for the business.  They include:

• Stationery
• Printing costs
• Postage
• Advertising
• Computer software
• Business premises expenses: rent, utility bills, insurance
• Staff costs: salaries, NI contributions, PAYE, pension contributions
• Legal and professional costs: accountants, solicitors
• Purchase of stock or raw materials and other associated costs
• Business insurance
• Membership to trade/professional bodies relevant to your business

There are then some types of expenses that aren’t as straight forward.

Travel:

While you can claim for business-related car/van costs like insurance, fuel and repairs – you would only be able to claim for the business portion and no personal use at all, so you would need to work out exactly what your business use is, which can be difficult to calculate.

Instead, you can use the simplified vehicle expenses from HMRC which is a flat rate per mile.  This would cover your costs for your vehicle.  If you use this method, you do need to keep using it until you have stopped using the vehicle.  In order to claim the fate rate, you will need to track your business mileage and have a record of it.

The current rates are (as of 06/04/2020):
Cars and Goods Vehicles (first 10,000 miles) £0.45p/mile
Cars and Goods Vehicles (over 10,000 miles) £0.25p/mile
Motorcycles £0.24p/mile

You can claim for all public transport costs – but only for the business portion, so if you take a journey that is not “wholly and exclusively” for business, you will need to separate out the business portion.

The same applies to hotels and meals.

It is very important to note that you cannot claim for travel between home and your main place of work.

Clothing:

There are very strict rules when it comes to claiming for clothing and this is down to the “wholly and exclusively” rule.  You can claim for uniforms, protective clothing needed for work, and costumes for actors or entertainers.  If the clothes are not branded with your logo or they could be worn outside of work, you cannot claim these costs on your self-assessment.

Use of Home:

The majority of sole traders work from home and therefore will want to be able to claim for a portion of the household bills.  The easiest way to do this is to use the simplified expenses that HMRC have set-up.  This method can only be used for those who work at least 25 hours or more a month from home.

Hours of business use/month	Rate/month
25-50	£10
51-100	£18
101 and up	£26

The other method is more complicated and you would need to calculate out the proportion of business use for your home.

These methods only cover things like gas, electricity, mortgage and council tax.

Telephone and Internet:

There are quite strict rules when it comes to claiming for the telephone and internet use when you are self-employed and work from home.

If the telephone/mobile is used for both personal and business purposes, you can’t claim for line rental and can only claim for business calls if they are identifiable on the bill.  With the way phone packages work nowadays it can be quite difficult to prove what is a legitimate business expense.  A way around it would be to get a completely separate phone line for the business so you are able to claim 100% of the costs.

The same applies to the internet – you need to work out the proportion of the business use and only claim that percentage of the bill. One way is to work out how many hours per month you work from home.  Ie. Monday to Friday 9 am to 5 pm – so 8 hours a day, 5 days a week which is 40 hours/week and 160 hours/month (in a 4-week month).  There are 672 hours in a month, so the percentage of the internet bill you could claim would be 23.81%.

This is only a brief guide to help get you on-track.  If you are unsure about whether an expense is tax allowable, I would encourage you to speak to HMRC or your accountant/bookkeeper.

What is Making Tax Digital and how will it affect me?

Making Tax Digital – better known as MTD – is the Government’s plan to make it easier for individuals and businesses to know what tax they have to pay before the end of the tax year.

Eventually, all businesses regardless of size and industry will be required to submit monthly figures to HMRC.

This will need to be done on Making Tax Digital (MTD) compatible software. So, anyone still using cashbooks, Excel or desktop accounting software such as older versions of SAGE 50, will need to move onto compatible cloud-based accounting software.

How will Making Tax Digital (MTD) work?

Everyone will have their own digital tax account that they can log into and check to ensure all the information HMRC hold on them is up to date and correct. HMRC will then use this information to ensure that each person is receiving all the services they should be. The theory is that by the end of 2020, customers will be able to see all their tax liabilities and benefits in one place.

How will Making Tax Digital affect my bookkeeping?

All businesses will have to use a software that is compatible with HMRC’s MTD software to keep their accounts – like QuickBooks Online for example. The software will send the necessary information to HMRC using an API key. All transactions in a business will have to be recorded digitally as paper records will no longer be accepted as meeting the legal requirements.

When will I need to be ready for Making Tax Digital?

At this point in time, only VAT registered businesses with a turnover above the VAT threshold of £85,000 will need to be compliant as of April 2019 and they only need to file their VAT returns. Eventually, all businesses within the UK will be required to file all information – including self-assessments and corporation tax returns – with HMRC using MTD compliant software.

When will Making Tax Digital start?

What should I do now?

As further information is released by HMRC we will update our clients so that they are able to be compliant in time.

Currently bookkeeping clients of Ihelm Enterprises are one step ahead as we only use QuickBooks Online to maintain accounts and the software is MTD compliant.

If you would like to discuss how we can help you with your accounts and become MTD compliant please contact us on info@ihelm-enterprises.co.uk or use the contact form.