Reverting to the 17.5% VAT rate in Jan 2010

Reversion of the Standard Rate of VAT from 1 January 2010

The purpose of this article is to provide you with a basic understanding of the upcoming changes and most importantly cover the tax point rules and the treatment of deposits and prepayments during the change over.

Attached at the bottom is the full guidance provided from HMRC which covers the different schemes which will be relevant to your clients.

Reversion of the Standard Rate to 17.5%

Before I begin to break down some of the main points from HMRC’s document on the reversion, there is some good news for your clients who run restaurants, pubs and clubs for the 31st of December. It was officially announced that restaurants, pubs and clubs could carry on charging the lower rate until 6AM on New Year’s Day.


Handling mistakes

As the saying goes, “mistakes are part of being human...” so if one of your clients discovers a mistake it can be corrected through the normal procedures by submitting a form VAT 652 (Notice 700/45).

HMRC have stated in their Working Together release that they will be taking a “light touch” approach to errors made that relate specifically to a change of rate issue.

When to start charging
The 17.5% rate has to be charged on sales of standard rated goods and services made from the 1st of January and should be used on all invoices issued on or after this date.

Special rules

There are special rules for supplies which span the change of rate. If the goods or services are provided before the 1st of January but the invoice is raised after that date then under the change of rate rules the 15% rate of VAT can be charged. The change of rate rules are optional.

Tax point rules


The normal rules:



Basic Tax Point

The basic tax point takes place when goods are removed or made available to the recipient and the date services are performed.

Actual Tax Point
Either the date of:
a) Issue of the invoice if it is before the basic tax point or up to 14 days after the basic tax point.
b) Payment if it is before the basic tax point


Applying the tax point rules on the 1 January 2010

Where a tax point occurs before 1 January 2010 the supply (or the part of it covered by the tax point) will remain liable to VAT at 15%. Tax points occurring on or after 1 January 2010 will be liable to VAT at 17.5%.

In many cases there will be a single tax point for example the customer of a retailer enters a shop to purchase an item for which they pay cash and take away with them.

Where two or more tax points have been created for example where a deposit is received before 1 January 2010 it will be liable to 15% VAT but the VAT on the deposit can be increased to 17.5% under the special change of rate rule (see section 3 of the guidance) or if the anti-forestalling legislation applies (section 11).

If the goods are not delivered and the remaining balance of the price is not invoiced or paid for until or after 1 January 2010 then the rate of 17.5% will apply when it comes to accounting or the remaining VAT that is due.

What I need to declare on my tax return

Many people don't realise that they need to declare all income on their personal tax returns even if tax has already been stopped.

The top three items people miss are:

1. Interest on bank and savings accounts ( But not ISA accounts)
2. Pensions received
3. Salary from employment

Remember all income has to be declared on your tax return. You also add the tax alrerady paid.

Your then calculate the tax due on you total income, take off the tax already paid and this leaves you with the tax still to pay or in some cases refunded.

Don't Leave it to the Last Minute

The filing deadline for Self Assessment Tax Returns is 31st January.

Each year a huge number of people leave their tax returns right until the last minute.

But consider the disadvantages of doing this:

• You will not know you tax bill until the last minute leaving you very little time to save up to pay it.
• If you find information is missing you have all the stress of rushing to try and replace it.
• We accountants may not have enough time to work to reduce you tax bill because we don't have the time to ask you all the right questions. There's no time to ask you to go and check things.
• Because it is peak filing season many accountants will charge a premium to help you.
• HMRC help lines are busy and overstretched.

So why do people leave it to the last minute?

Do you need to file a tax return?

Many people believe if you stop being self employed and go back to employment there is no need to file a tax return. What is often overlooked is that the last bit of self employment, the bit between 6th April and starting work, still has to be reported on a tax return. So don't ignore that tax return just because you now think its all handled through PAYE.


Who needs to complete a tax return?

 

• self employed people (including members of a partnership)
• company directors (except not for profit organisations)
• ministers of religion (any faith)
• people who get rent or income from land and property in the UK (but if you are an employee and this income is less than £2,500 a year a tax return may not be necessary)
• people who have other untaxed income and the tax due on it cannot be collected though a PAYE tax code
• people with taxable foreign income, even if they are not normally resident in the UK (this includes non-resident landlords)
• employees and pensioners with more complex tax affairs - see below

 

Remember, if you have any income that is not taxed at source, like rents or freelance earnings, you may need to complete a tax return.

 

Employees and pensioners with complex tax affairs

 You need to fill in a tax return if you:

• have an annual income of £100,000 or more
• have annual income from savings or investments of £10,000 or more (before tax)
• claim against tax for expenses or professional subscriptions of £2,500 or more
• have untaxed income of £2,500 or more (although some pensioners may be able to pay the tax on this through their PAYE tax code)
• owe tax at the end of the year that cannot be collected through a change to your PAYE tax code for the following year

 

 

Those bits of paper are really important

It is sometimes difficult for me to persuade clients the importance of keeping copies of P60's, P45's and letters from their employers, especially about redundancy payments.


I have had a couple of recent cases that emphasis the problem:
The first is a story of a redundancy payment, P45 and a final bonus were not clear and missing information meant it was not clear what the figure on the P45 was made up of as the client had not retained payslips. The result was we didn’t get the tax return right. HMRC picked this up and launched an investigation where they found the client negligent in submitting an incorrect tax return.

My second is a client being chased for a late 2008 tax return. The client was annoyed that they should be asked to complete a return as they argued they were all PAYE. This is a common mistake as the client’s affairs were complex. There were two private pensions being received, state pension and change of job and they were well into the 40% tax bracket. The client was also missing many P60’s. Once we had obtained all the information they actually had a fairly substantial tax bill because the employer was using a BR tax code which would not collect any 40% tax.

So my advice is to keep all your payslips for a couple of years. Make sure you get and keep copies of P45’s ( them for you get if you leave a job) the P60 ( the form you get each April when you are in a job or are in receipt of a pension) the P11D ( the form you get each April to June) from your employer if you have a company car, medical insurance or other benefit from your employer.


These forms are important.

Beware the Bank's Add Ons

I have recently had a number of new clients who have gone to the bank and have signed up not only for a business bank account (which is good) but additional add on services.

For example a recent new client of mine has been paying a certain bank monthly, for the past 18 months, for a business document support service that he has never used, doesn't need or even understand.

A few hours later another new client informed me he had signed a 3 year deal with his bank for a credit card machine. Now he does use the machine and finds it a great asset to his business but I could have referred him to suppliers giving far better deals and on a much shorter contract.

It all got me thinking of all those monthly payments I have seen to banks for 'support' services which when I query with the transactions with my client they say they have no idea what it for.

So my advice is open a bank account with a bank but the talk to your TaxAssist Accountant to find out the best deals around for other services and check with them if you actually need such services.

PAYE – Issues for Employers and Employees.

Employers

If you employ staff, you have obligations to the Inland Revenue. If you ignore these obligations, penalties and interest will soon be added to your employment costs! Most penalties arise if you either: miss certain statutory deadlines for remitting tax and national insurance you have deducted from your employees, or are late submitting returns to the Inland Revenue. Unfortunately ignorance is not bliss - make a late payment or forget to send off a particular return and you will be penalised

Employee Benefits.

If you provide employees with benefits, for example company cars and health insurance; be sure to watch out for the following:

• Identification is difficult – sometimes seemingly unrelated expenditure can be classified as a benefit, for example excessive staff entertaining.
• Benefits attract their own national insurance charge which has to be paid by employers in July each year.
• Benefits have to be declared to the Revenue on specific returns which must be submitted on time to avoid penalties.

Employers – other points of interest.
Small businesses are able to pay their deductions quarterly rather than monthly - this can help with cash flow especially for new ventures.

Employers have to make their own national insurance contributions based on salary levels. This is added to tax and employees national insurance deductions when paid to the Inland Revenue each month/quarter.

Income Tax Rates

The table below shows how much you can earn before paying tax. I've given the figures for the last tax year and the current tax year.
                       


Income tax personal and age-related allowances           2009-10   2008-09 
                                                                               (£)            (£)

Personal allowance (age under 65)                                  6,475        6,035

Personal allowance (age 65-74)                                      9,490        9,030

Personal allowance (age 75 and over)                             9,640        9,180

Do you save money by doing it yourself?

It is common for self employed people to think that they are saving money by doing everything themselves, such as their web site, sales/marketing, bookkeeping and tax returns.

But if you stop and think about it and count the number of hours this actually takes at the rate you could earn from a client or customer you can get a bit of a shock.
 
You are not an expert so you will take much longer to do these things and the result will not be as good as that produced by a professional.
 
You will actually find that in most cases that you can save significant money, time and hassle by getting some help from an expert at an early stage!
 

Record and Measure

It never ceases to amaze me that many small businesses do not record their financial and marketing information as they go along.




Record and measure in all your business activities!



There is a legal requirement to keep proper business records but more importantly how do you know what your business is doing if you have no records. Many potential clients that come to me cannot even tell me their annual turnover!



Again I come across many small businesses spending money on advertising with no idea if it is working. They should be asking every new customer where they heard about them and recording that bit of information. Then they can tell of it is worth renewing that advertising.



So in business plan, record and measure all your business activity. Sales, expenses, new customers, lost customers, marketing methods.



From these simple records you will be able to understand the growth (or lack of ) your business and make informed decisions on what to do next.

National minimum wage

The new rates from 1 October 2009 are:

 £5.80 per hour for employees aged 22 and over (currently £5.73),

£4.83 per hour for employees aged 18 to 21 (currently £4.77)

£3.57 for employees aged 16 to 17 (currently £3.53).

Business Start-ups

At TaxAssist Accountants we welcome start-up businesses to come and talk to us. We can help you from day one to find the best methods of bookkeeping, the best tax saving positions and help you to break down that accountancy fee by paying monthly. Cashflow is one of the most important factors for any start up business.

Business Structure

Are you going to launch your business as a sole trader, partnership or limited company? Some of the criteria that should be considered are commercial risk, expected profitability, financing, use of cars for company purposes, and of course tax planning preparation and VAT considerations.


Business Plan
Have you set out your business objectives in writing? Can you demonstrate qualified experience in the type of business that you want to launch? How are you going to finance the company? What are your expectations for sales, profitability and investment in assets? Have you consolidated all this information in a formal business plan?



Banks and Finance companies
Identify your "friendly bank manager" and make sure that you are well prepared for the critical first meeting. We already have well established relationships with all the major banks in the UK and this can be one of the most important contacts for your business.



VAT (Value Added Tax)
You should decide whether it is in your best interests to register for VAT from commencement, at some future date, or not at all if your trade is outside the scope of VAT. The decision you make on this point will affect both profitability and cash flow of your fledgling business. Please look at our VAT section for more information.



Tax Traps to avoid!
Tax Penalties - as soon as you have set a start date, ensure that you notify HMRCof your intention to commence trading. Self employed businesses face a fine of £100 if this is not done within 3 months of start up, limited companies face an even stiffer penalty of £300!

VAT Penalties - do not represent yourself as registered for VAT if you are not, this is considered fraud. If you do register for VAT submit your returns and pay your dues on time to avoid interest and surcharges.

Missing Invoices - always obtain a proper invoice for any business purchase, a VAT invoice if you are registered for VAT, otherwise you may find that your claim for tax relief will be denied, as will your VAT reclaim.

Company Car - whether you are self employed or a limited company planning for the use of a car in your business needs to be thought through carefully. Self employed persons will need to keep a log of business mileage to backup any claim for tax relief. Limited company owners will need to compare the cost of running a car either inside or outside the company - potentially high personal tax charges may be payable if this cost comparison exercise is not undertaken.



How we can help.
We are often asked to advise businesses who have failed to adequately plan their business start-up. It is much easier to avoid making mistakes, and to maximise your future chances of success, if this pre-launch planning is undertaken with professional help. As with most new ventures it is not what you know that catches you out, but what you don't know!



We would be delighted to assist with the preparation of a business plan, and to help you choose the best business structure for your business. We can also help you with raising finance for all aspects of your business.

Limited Company - How to limit your liabilities and keep more of your business profits.

VAT - How to get registered and what to consider.

PAYE - Issues for Employers and Employees

Keep those records!

There is a legal requirement to keep proper business records. No successful business can survive without proper records. I know many small businesses are hopeless at keeping records so my advice is to get a bookkeeper or ask your accountant for help.

The centre of all your record keeping should be your bank account. Now there is no legal requirement for a self employed person to run the business through a business account but I always strongly advise my clients to do so.

The reason is it is always best to seperate your business and personal affairs. HMRC can ask to see all the records from which you prepare your accounts and tax return. That means if you are using your personal account for business they will have access to you personal expenses and life style. They may well take the view that your business profits do not match your lifestyle.

So keep proper records and keep the business seperate.


The advice given in this blog is general and generic and you should always obtain professional advice on your
specific situation from an accountant.

Motor Expenses for the self employed

In practice I find the most misunderstood business expenses is the humble motor expense.

When a self employed person uses their own car for business I often find a batch of petrol receipts amongst their paperwork. Now let us just stop and think about this.

The key rule for a business expenses is that it has to be wholey and exclusively for the trade in question.

So how can we prove that a £20 petrol receipt is for the business and not also used for the weekly shop or dropping the kids off at school? The answer is you cannot.

So what do we need to do?

KEEP A BUSINESS MILEAGE LOG !

For every business journey record the date, where you went and the round trip mileage.

It can be in a note book, on an expense form or a piece of paper. It does not matter but you need to write it down and keep that record.

What do we do with this log.

There are two ways a self employed person can claim motor expenses using this business mileage log.

Method 1. Simply claim 40p per mile for each business mile on your Business Mileage Log.
If you have over 10,000 buiness miles in a year for each mile above the inital 10,000 the rate drops to 25p per mile. The 40p per mile covers fuel, depreciation, servicing, repairs, tyres, RFL, insurance and MOT. So do not add any additional motor expenses over and above the mileage claim.

Method 2. Put through all your motor expenses; fuel, servicing, repairs, tyres, MOT, RFL, insurance. Plus you add the car in as an asset and depreciate it. Now this is where the business mileage log comes in as you need to disallow an element for personal use. So take the overall mileage for the year and work out using your business mileage log the percentage that was business and the percentage that was personal, You need to disallow the personal percentage of all your motor expenses.

As you can see method 2 is far more complicated and you really need professional advice to operate it. It is also prone to loss of receipts.

That is a quick run through of motor expenses. I would recommend that you get an accountant to advise you on the best method.

The advice given in this blog is general and generic and you should always obtain professional advice on your specific situation from an accountant.

The Basics of Keeping Proper Business Records

I work with many micro businesses and many struggle to understand the basics of keeping proper business records.

The first thing to remember is to keep all business and personal expenses separate.

The second is record every business transaction.

For sales that means either issue an invoice or receipt every time you accept money. The exception to this would be if you are using a cash till and then the till will record ( Via its Z reading) the amount of money taken each day.

For business expenses that means a receipt for everything you buy.

File them in date order.

The next step is to record all these transactions in a book or a spread sheet or if you are really brave a computer package. Do not use a computer package until you are very comfortable with manual bookkeeping.

The simplest thing to do is use a hard back book.
On the left hand page list the money coming in and on the right hand page the money going out.

For every entry put the date, what it is and the amount.

Generally accountants and the tax man group expenses into categories such as;

• Materials
• Stock
• Rent/Rate
• Wages
• Telephone
• Printing, Postage and Stationary
• Insurance
• Motor Expenses
• Professional Fees
• Subscriptions
• Repairs and Maintenance
• Plant and Equipment

So on that right hand page divide it into columns for each type of expense. Now every business is different and will have a different mix of expenses so only use those heading you need.

This only scratches the surface of recording your business expenses but if you can do this you will be way ahead of many micro businesses

Thinking of working for yourself?

Becoming self employed is the simplest way of working for your self. One of the first things you must do is register with H M Revenue and Customs.

How?

There is a form called SE1 available from HMRC or simply call the Helpline for the Newly Self _employed on 0845 914 4515 and have your National Insurance Number handy.


As a self emplyed person (sometimes called a sole trader) you will be issued with a Unique Tax Reference Number ( UTR) a 10 digit number.

You will begin paying Class 2 National Insurance of £2.30 per week

You must start keeping proper business records of all the sales you make and all the business expenses you pay out. Get receipts for everything you may need to prove you have spent the money.

Each year you will need to complete a Self Assesment Tax Return and pay Income Tax and Class 4 National Insurance on any profit you make.

For further information call us for advice 01908 375433
http://www.taxassist-mk.co.uk/

Tax Returns

Completing a tax return can be a stressful exercise even if there are few entries to make. When the January self assessment filing deadline approaches the stress levels will rise even further!

A tax return is routinely issued to taxpayers whom HMRC (formerly the Inland Revenue) believes have:

• Income from self-employment
• Rental income from Property
• Other income which is received where tax has not already been deducted

Complex tax affairs, for example, higher rate taxpayers or company directors.

There are two main types of tax return. If you have simple tax affairs including, employees, pensioners and the self employed with turnover less than £64,000 (and expenses less than £30,000), you'll receive the shorter tax return. If your affairs are more complicated you'll receive a full tax return. This tax return has more pages plus supplementary sections and you may need to complete extra pages, depending on what sort of income you receive.

If your affairs are more complicated you'll receive a full tax return. This tax return has more pages plus supplementary sections and you may need to complete extra pages, depending on what sort of income you receive.

At TaxAssist Accountants we use HM Revenue & Customs approved software to:

• complete your tax return
• calculate your final tax liability
• file the return on line
• liaise with you on the amounts to be paid and when they are due
  

In addition to this we can analyse your self assessment tax return to see if any tax savings can be made and, if we have information for two or more years, then we can look to see if there are any anomalies that need to be addressed before the latest tax return is submitted.

Call us now on 01908 375433
www.taxassist-mk.co.uk