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Key Changes for 2019/20 Tax Year

There are numbers of changes that will affect the personal and business taxes for 2019/20. We have endeavored to highlight some of the key changes coming into effect from 06th April 2019.

Personal Tax

  • Tax-free amount or Personal Allowance will increase from £11,850 to £12,500 in year 2019/20.
  • The higher rate of tax @ 40% will now be paid on income on £50,000 or more rather than current threshold of £46,350.

Dividends Tax

Tax-free Dividend allowance of £2000 has sustained for tax year of 2019/20. Having said this, with higher threshold set for Higher Tax Rate to be applied on income, it will now be possible to take extra dividends before having to pay the dividend tax at higher rate.

Changes in Minimum Wages

From 01st April 2019, hourly national minimum wage for UK adults aged 25 or more will be increased from £7.83 to £8.21. For other changes to national minimum wage, please visit Gov.UK.

Expert Tip* by UGS Accountants!

With above changes in mind, UGS accountants suggest the following tax efficient amounts to be withdrawn by Ltd company directors (for individuals with no other source of income):

Salary: £8,632

Dividends: £41,368

Estimated Tax Liability: £2,662.50

We strongly suggest that you contact UGS accountants for individually tailored advice best suited to your personal and business circumstances before planning your salary and dividends withdrawals.

At UGS Accountants, we offer specialised advice and support to new and developing small businesses. We recognise the importance of how different each business and its needs can be. For this reason, we proactively work with you to make the structuring of business, preparation of your accounts, bookkeeping, VAT and tax return a highly beneficial process, not merely a statutory one.

*Please see HMRC website for Scottish Tax Changes

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Making Tax Digital

Introduction

Making tax digital or MTD is UK government initiative to digitise the way tax is administered by HMRC. MTD aims to bring ease to the process of managing taxes for individuals and businesses. This would not only help businesses to stay on top of their tax affairs but also create a digital link between the transactional processing, recording keeping and tax returns submission to HMRC.

What is Changing?

Currently, businesses can choose to keep their records either manually or digitally and then submit various kinds tax returns using a commercial software or using the HMRC online system. However, from 1 April 2019, this would change. During the first phase of MTD implementation, HMRC would require VAT registered businesses to prepare and submit their VAT returns using a MTD-enabled Software. Legally speaking, HMRC has issued a VAT Notice which makes the 1 April 2019 as official date when MTC comes into effect.

Summary of Key Changes:

Some of the key changes that will come into effect on 1 April 2019 are as below:

  • Businesses with turnover of £85,000 or over – current VAT threshold – will be affected by the initial MTD changes.
  • There will be no immediate requirement for Businesses to keep digital records and file other tax returns such as Corporation Tax return until April 2020. Further details concerning this shall be potentially issued by HMRC in a due course.
  • Some businesses with not-so-straight-forward business affairs  have been given the extra time until October 2019 to join the MTD for VAT filing.

What are the new Requirements under MTD?

Brief summary of the new requirements are as below:

• Businesses will be expected to maintain digital business records

• VAT returns shall be filed using the MTD-enabled software.

  • There is no requirement to keep the digital records in onc centralised digital location.
  • Digital link is mandatory between different digital systems or software used for record keeping and VAT filing.
  • Complying with MTD is a legal requirement and hence businesses don’t have the option of opting out of it.

What records are required to be kept Digitally?

There is nothing significant that is changing in terms of what records shall be kept in our view. It is rather a transition from manual to Digital and from scattered records to a more connected and centralised system of business record keeping.

The following records must be kept digitally via the digital system (if you use one) and MTD-enabled software:

  •  Designatory data:
  •  Business name.
  •  Address of your principle place of business.
  •  VAT registration number.
  •  A record of any VAT accounting schemes used.

When you make Sales:

The time of supply.

The value of the supply (Net excluding VAT).

The rate of VAT charged.

When you make a business Purchase:

The time of supply.

The value of the supply.

The amount of input tax that you will claim.

VAT Return Summary or Filing Data:

  • Total value of output tax due
  • Total value of output tax due on acquisitions from
  • other EU member states.
  • The tax payable on behalf of your supplier under a reverse charge procedure.
  • The tax that needs to be paid following a correction or error adjustment.
  • The input tax claimable from business purchases.
  • The input tax allowable on acquisitions from other EU member states.
  • The tax reclaimable following a correction or error adjustment.
  • Misc. adjustments (VAT related).

How will my business be affected?

There are number of changes that would occur after the implementation of MTD. Most vitally, all businesses within the scope of MTD as of 1 April 2019 should ensure that they are using a MTD-enabled software for digital record keeping and VAT Filing. Any businesses that are currently using manual or excel based accounting system shall review switching over to a digital platform.

HMRC has compiled a list of MTD-enabled software for businesses. You can access it here to check if your existing software is on the list or to choose a suitable solution for your business.

At UGS Accountants, we offer specialised advice and support to new and developing small businesses to meet the new MTD requirements. We have extensive experience in using MTD-enabled software such as Xero, Sage one Cloud and FreeAgent and our advisors can help your business set up your VAT records on MTD-enabled software. We recognise the importance of how different each business and its needs can be. For this reason, we proactively work with you to make the structuring of business, preparation of your accounts, bookkeeping, VAT and tax return a highly beneficial process, not merely a statutory one.

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Corporation Tax – Loss Relief Claim

It is a routine thing for businesses operating in today’s competitive markets to suffer a setback of declining sales or losing customers to a competitor due to varying reasons. The ultimate financial consequence of these setbacks is the loss incurred by the business. Loss relief claim for corporation tax purposes can be real help during a dismayed situation like this.

This relief can be claimed in two ways. One way is to offset the loss amount against the past profit (previous accounting period) made within the same business (not just same trade)*. Another way is to carry it forward to offset it against the future profits. The amount of loss carried back or forward is called the adjusted loss.

Following example demonstrates the way adjusted loss is used for corporation tax relief:

Profit for year ending on 30th Apr 2018£15,000
Corporation tax at 19%£2,850
Lose incurred for the year end on 30th Apr 2019(£2,500)
Carryback of above loss to the year end on 30th Apr 2018(£2,500)
New/amended amount of profit for year-end 30th Apr 201812,500
Corporation tax at 19%2,375
Corporation tax repayment due £475

HMRC sets the time limit to claim the loss relief for corporation tax as 2 years after the end of relevant accounting period unless you are claiming Terminal Loss Relief. Our next blog Corporation Tax – Part 4 will cover the topic of Terminal Loss Relief.

Claim Process 

The process of claim is to either carry it back to April 2018 and offset it against the profits. Alternatively, you can choose to amend the original return and bring back the loss incurred in April 2019.

One vital point to be noted here is about the total amount being claimed under loss relief. In the case where total amount of loss incurred is more than the profits made in prior year, it is possible to claim the part amount and carry the remaining forward to next accounting periods.

*Please note that since 1 April 2017, it is possible to claim loss from one trade and offset it against the profits from another trade, in the same accounting period, carried out under the same limited company. It was not allowed prior to 1 April 2017.

At UGS Accountants, we offer specialised advice and support to new and developing small businesses. We recognise the importance of how different each business and its needs can be. For this reason, we proactively work with you to make the structuring of business, preparation of your accounts, bookkeeping, VAT and tax return a highly beneficial process, not merely a statutory one.

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Corporation Tax – Part 1

Corporation Tax Adjustments

Clients often ask about why their corporation tax liability is not exactly the 19% of their profit. This is due to the adjustments that are made before calculating the liability for corporation tax. By these adjustments, we mean the addition of disallowable expenses back to profits as well as the deduction of capital allowances or losses from the profits.

Following is the list of some of the common disallowable expenses that are usually added back to profits for corporation tax purposes.

Company Setup or Incorporation Expenses

Company set up or incorporation costs are disallowable expenses. It is acceptable to include these costs as part of profit and loss account, however, these are added back to profits before calculating the corporation tax liability.

Depreciation Expenses

It is a standard accounting practice to capitalise the company assets which can be used for more than a year. This is to say that cost of these assets will not be expensed but rather recorded as a balance sheet item under Assets. It is then estimated that how much this asset would depreciate over its useful life. This estimation is expensed through the profit and loss account as depreciation expenses. However, for corporation tax purposes, this amount is added back to profits.

For example, fixtures bought by the company with the initial cost of £5,000 and 5 years of useful life will be depreciated by £1,000 each year. This £1000 will be recorded as depreciation expenses under the profit and loss account but will be added back in each of the Financial years before calculating the corporation tax.

Client Entertainment

Monies spent on client entertainment (such as lunch or dinner) are not allowable expenses for corporation tax purposes. Let’s say the Profit and Loss account of a company shows a profit of £8,000 for a given year. Now, if this includes an expense of £500 under the Client Entertainment category, this would be added back to profits before calculating the corporation tax. In this case, 19% of CT rate will be applied on £8,500 rather than £8,000.

Fines and penalties

Fines or penalties suffered by the company are also disallowable for corporation tax purposes. The same method of adding back (as explained earlier) will be applicable for corporation tax calculation. List of fines and penalties falling within the scope of this type of disallowable expenses can be found on HMRC website.

 Capital Allowances

Assets, as discussed above, are depreciated in every useful year of their life but this cost is not allowable for corporation tax purposes. To compensate for this, HMRC allows for Capital Allowances to be claimed for fixed assets in the Business. One of these allowances is the Annual Investment Allowance which is deducted from the profits before calculating the corporation tax and hence reducing the corporation tax bill.

Let’s say a business purchases fixtures that are eligible for Annual Investment Allowance claim. Total purchase price of these fixtures was £10,000. Under the Annual Investment Allowance claim, business would be allowed to claim the full cost of £10,000 before arriving at taxable profits. 

Losses

HMRC allows for losses incurred in previous accounting periods to be brought forward and offset against the current year profits. Under this principle, if a company incurs a loss of £5,000 in the previous accounting period and earns profit of £10,000 in the current accounting period, the total profit subject to corporation tax in the current year would be £5,000.

Corporation Tax Rate

From accounting perspective, it is self-evident that if the corporation tax rate changes during a tax year, the change cannot be applied in a universal manner to all companies due to each company having their Accounting Periods ending in different months of the year. For this reason, any changes in corporation tax rate are applied by apportioning the profits for relevant months. So, the profits arising during the months falling under previous rate would be calculated by the relevant corporation tax rate and later profits would be subject to the new tax rate.

Other Adjustments

There can be other adjustments depending on the nature of expenses incurred and capital allowances available. We advise that you seek professional advice for correct calculation of corporation tax.

At UGS Accountants, we offer specialised advice and support to new and developing small businesses. We recognise the importance of how different each business and its needs can be. For this reason, we proactively work with you to make the structuring of business, preparation of your accounts, bookkeeping, VAT and tax return a highly beneficial process, not merely a statutory one.

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Sole trader vs limited company–Which business structure is more beneficial?

It is vital to have the right business structure when you first set up your business. Financially, commercially as well as tax-wise, business structure will have long-term and lasting impact on your business and it’s sustainability. Rather than discuss the different liability between sole trading and limited company, this blog will prefer the tax implications of trading as sole trader or limited company.  In general, this widely debated topic affects the owner-managed small businesses, contractors and freelancers.

Sole trader – a brief introduction

Different from Limited company, when an individual sells his or her services or products themselves, it will be classified as sole trade and the concerned individual as Sole Trader. From tax perspective, sole traders are required to register with HMRC to file an annual self-assessment or tax return to report their income and expenses for each tax year.

Following points are important when trading as sole trader:

  • Rate of tax sole traders pay depend on the level of profits for each tax year.
  • In term of VAT, HMRC requires businesses including sole traders to register for VAT once their turnover reaches the VAT registration threshold. For 2018-19 tax year, this threshold is set at £85,000.
  • VAT registration can also be voluntary when business turnover is under the set threshold. (This point will be discussed in our follows blog)
  • Sole Traders can also register as Employers if they hire any staff to work in the business.

Limited company – a brief introduction

An individual can register a limited company to do business. All limited companies need one or more director as it’s owner. For the purposes of this blog, we assume a single individual as sole director and shareholder of the limited company. It is also worth noting that limited company is treated as a separate legal entity from its owner (YOU). We shall explain this and relevant legal consequences further in a separate blog.

Being the director and shareholder of a limited company – you assume the responsibility of running, managing and developing the business. You can take the salary, and when the company is profitable, you are entitled to withdraw the profits as shareholder in the form of Dividends.

Following points are important when trading as Limited Company:

  • Company registration is required with Companies House.
  • Corporation tax registration and administration is dealt with by HMRC.
  • Director can withdraw salary as well as take dividends from company profits (dividends can only be withdrawn from profits after company expenses, salary and corporation tax are paid). There might be a personal tax liability of the Dividends withdrawn.
  • In term of VAT, HMRC requires companies to register for VAT once their turnover reaches the VAT registration threshold. For 2018-19 tax year, this threshold is set at £85,000.
  • VAT registration can also be voluntary when the company turnover is under the set threshold. (This point will be discussed in our follows blog)  

Tax Implications Sole trader vs Limited Company

After understanding the structural differences between the sole trader and limited company, let’s now look at the tax implications of choosing either of these business structures.

Sole Traders

Sole traders pay tax on their profits each tax year. Tax is paid on any profits earned above the personal tax allowance of an individual. Income tax rates start with 20% for basic rate taxpayers with additional rate of 45% for income over £150,000.  Sole traders also pay Class 2 and Class 4 NICs on their profits.

Class 4 national insurance

This is calculated on self-employment profits. For 2018-19, It is calculated and payable at 9% of profits between £8,424 & £46,350 and 2% for any profits above this.

Class 2 national insurance

It is payable at a rate of £2.95 per week when business profits are above £6,205.

Limited Company

Corporation Tax

For 2018/19, corporation tax rate for limited companies is 19%.

Tax on Salary and Dividends

Directors withdrawing salary and dividends will be taxed under relevant income tax rates depending on individual circumstances and level of income for each tax year.

For 2018/19, directors can draw a tax free salary of £8,424 in 2018/19 under the personal allowance of £11,850. In addition, rest of £3,426 from personal allowance can be withdrawn as Dividends along with £2,000 of tax free dividends above the personal allowance.

Business Structuring Cost

Registration

  • Sole trader structure is easy to set up with free registration with HMRC for self-assessment.
  • Limited Company is registered with Companies House and incurs a small registration fees.

Statutory Duties

Sole Traders

  • Sole traders file self-assessment for each tax year.
  • You will require business insurance if applicable in your profession or trade.
  • Register as Employer with HMRC if you have employees.
  • You are responsible to pay any Tax and NICs via self-assessment.

Limited Company

  • For limited company, director’s are legally responsible to file the annual accounts and file corporation tax returns.
  • Directors will have to file their own self-assessment (if required by HMRC) to account for their own taxes.
  • Limited company also needs to have designated registered address.
  • Limited company will also maintain its own business insurance.
  • PAYE scheme will be required to run staff payroll.
  • Confirmation statement to confirm the business address and shareholding details will need to be filed once a year.

Take Home Pay – Which structure wins?

Following table summarises the advantages of having a limited company over sole trader at various profit levels:

ProfitLTDSole TraderAdvantageous
40,00032,48931,375Ltd by £1,114
50,00039,92838,000Ltd by £1,982
60,00046,51243,800
Ltd by £2,712
70,00051,97949,600Ltd by £2,379
80,00057,44755,400Ltd by £2,047

Please note that there are other factors which might lessen the ultimate take home figure and expert advice should be obtained before making your decision.

Decision Time!

It is evident from the issues discussed in this blog that choosing between sole trader and limited company structure is a complex endeavour.

As a whole, limited company offers more tax-efficient business structure, nonetheless, all material factors should be factored in before making the final decision.

At UGS Accountants, offer specialised advice and support to new and developing small businesses. We recognise the importance of how different each business and its needs can be. For this reason, we proactively work with you to make the structuring of business, preparation of your accounts, bookkeeping, VAT and tax return a highly beneficial process, not merely a statutory one.

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Working from Home and which expenses to claim?

Working from Home and which expenses to claim? 

Being self-employed isn’t that easy, right? Well, reading this guide will make one thing easier for you. That is, working from home expense claim.

 

Simplified Expenses  

HMRC allows simplified expenses calculation for self-employed. Following table is a threshold of working hours per month and flat rate of expenses that can be claimed as business expenses.

Hours per  month    

Flat rate expenses per month       

         25 to 40

                           £10

         51 to 100

                           £18

       101 or more

                           £26

Based on the above threshold, the maximum that can be claimed for sold traders working over 100 hours per month is £26 per month. If you only occasionally use your home for working and total number of hours amount to less than £25 per month, you will be able to claim £10 per month.

 

Proportional Costs

Under the proportional costs method, you can claim an appropriate % of running cost of your home if you work from home. Let’s say you have 3 rooms in your house and only 1 room is being used for work purposes. Based on 25% of business use of this room and total running costs of £12000 per year, total proportional costs that can be claimed will be as below:

Total running costs/ Total £12000/3 = £4000 (running cost for each room)

Running costs of each room x % of usage = £4000 x 25% = £1000

So with proportional costing method, you can claim £1000 towards working from home expenses.

 

Which Method?

It would completely depend upon your business circumstances and no. of hours worked from home. In particular, you should seek professional advice to ensure which kind of expenses to include in running costs of your house. For example, expenses such as capital repayment of mortgage is disallowed for these purposes.

 

UGS Accountants is a specialist accountant firm for contractors and small businesses. Our packages start from £100 per month and include free Xero subscription for online accounting. 

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£1,000 tax-free trading allowance

HMRC has announced the new hobby trading allowance of £1,000. In simple terms, if your trading income doesn’t exceed £1,000 in the tax year, you won’t pay any tax on your profit. Nonetheless, this still has to be declared on your tax return if you are registered to submit your self-assessment. If you weren’t registered for self-assessment at the point of earning this income, there is no need to register and declare given the sales amount does not exceed £1,000. If your income exceeds the threshold of £1,000 in any tax year, you would be required to register and declare this on your tax return.

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