Reporting PAYE in real time (RTI) has been in effect for most UK employers for well over a year now. While the system has worked well for most of these businesses, there also has been a fair share of criticism.
According to a recent article there are 5.5m people that have either overpaid or underpaid taxes in 2013-2014 – an increase of 300,000 from the previous year. If this is true, it is not necessarily a positive outcome for a system that’s cost £357m to implement.
As is always the case most of the mistakes that have occurred are easily avoidable, the following are some of the most common and, at least in some cases, easily avoidable issues.
Copyright © Brian Palmer 2014. Brian is tax policy adviser at the AAT and owner of Palmer & Co (accountants).
A survey of the self-employed carried out by Crunch Accounting found that just 44% of respondents have started saving towards their retirement, while only 34% are paying into a pension. Almost a quarter (24%) admitted “the thought of retirement hasn’t even crossed their mind”.
According to Crunch (quoting figures published in April by the Office for National Statistics) “one-man/woman-band” businesses now account for 15% of the country’s workforce. Their number has grown at twice the rate of “traditional employees” since the beginning of the financial crisis, up almost 750,000 to reach 4.58m, while traditional employment has only grown by 325,000.
The survey further found that of those who have started saving for retirement, nearly two thirds don’t believe they’re saving enough, with just 15% believing they are. If the survey is representative, it shows just how financially unprepared for the future many self-employed people are (but they’re not alone, of course).
As reported by This Is Money: “Millions of workers face the unenviable choice of working well into their old age or surviving on what they may judge a paltry income when they reach retirement.”
That’s according to a study of Britain’s savings habits conducted by financial firm True Potential. Based on responses from 6,000 people, it found that savers in Britain “are seeing just over £2,500-a-year going into their pension pot, which by the time they retire could be worth £116,083, the equivalent of just under £16 a day when spread over retirement. While that works out as about £450 a month above their state pension, it is far less than the £25,000 a year many plan to live on.”
The same survey had an Express headline writer concluding that: “Savings chasm means workers will NEVER retire”, with the very real prospect of “MILLIONS of Britons facing having to work until they drop”.
But maybe things started to change slightly? As reported by the BBC, according to pensions expert LCP: “Radical reform of the UK pension system announced in the Budget has already encouraged pension saving,” with the outlook now being at “its brightest for many years”.
Good news for the government, too, it seems, with The Guardian predicting that “Pension shakeup could net £4bn UK tax windfall”, with “650,000 people expected to exploit George Osborne's changes and cash in part of their pensions over the next five years.”
But the article goes on to say that pension experts are warning that “when withdrawing lump sums people may jump to higher tax bands” [currently the tax rate rises from 20% to 40% when someone’s income reaches £41,866], while “George Osborne's changes could turn into a ‘mis-selling scandal’.”
The Guardian adds: “More than 130,000 Britons are preparing to withdraw money from their pension pots every year between 2015 and 2020 under the sweeping changes which scrap rules that force people to buy an annuity, according to HM Revenue and Customs documents.”
Tom McPhail, head of pensions research at financial services firm Hargreaves Lansdown, told the Daily Telegraph: “It is essential that suitable safeguards are put in place to ensure that [people] are alerted to the tax implications of taking all their money out.
“This is undoubtedly clever politics from the Chancellor, but if we're not careful he could end up creating a one-man pension mis-selling scandal.” McPhail advised people to spread their pension fund withdrawals over several years, so their income tax remains at 20%.
Taxation is a complex area, but there are a number of opportunities to reduce tax bills that small businesses do not always consider.
Firstly, research and development (R&D) relief is highly valuable and is often missed due to a lack of knowledge. Others ignore it because they think it’s only for super high-tech or pharmaceutical companies. To see if you’re likely to be able to claim, ask yourself these questions:
If you can answer yes to all the above, it’s likely you would be successful if you claimed R&D relief. This would increase your tax relief by 125% to £4,500 on every £10,000 spent on R&D, so it’s well worth considering. This relief is available to all companies, no matter how large or small, and can be backdated for up to two years from the company’s year-end.
Secondly, companies need to consider claims for capital allowances on their building. These transactions can be quite complex, so the opportunities to reduce corporation tax are often overlooked. The buildings themselves don’t usually qualify for capital allowances, but the plant and machinery within the building does. This will typically include:
The value of such capital allowances can be very substantial. If you are buying a commercial property, the seller's capital allowance position must be determined as early as possible. You will both need to make elections and certain steps must be taken to preserve the capital allowances. Otherwise these valuable allowances will effectively be lost, so that they can’t be claimed by anyone. As with R&D relief, this is available to all companies and claims can be backdated for up to two years. Seek tailored professional advice from lawyers and accountants before going ahead with a property purchase.
© Michael Burgess, Tax Director at Stoke-on-Trent-based chartered accountants Mitten Clarke.
HM Revenue & Customs (HMRC) is running a series of live interactive webinars in August aimed at making tax quicker, easier and simpler for those who are self-employed or running their own business.
You can take part in the free live webinars by pre-registering on the HMRC website and submitting questions in advance to be answered on the day. Each webinar will last an hour.
The HMRC webinars are:
This webinar is aimed at Sole Traders and Ordinary Partnerships and is not suitable for directors of limited companies.
HMRC have also created an online video tutorial explaining the differences between Cash Basis and Simplified Expenses
This webinar is aimed at people who are either newly self-employed or perhaps thinking about going self-employed.
It will cover:
Starting and running a business is challenging so HMRC provide a wide range of help and support to help you run your business including videos, e mails, e-learning, record keeping apps and online presentations (webinars).
During this webinar will show you how to access and make the most of the latest help available.
Find out about allowable expenditure including, motor expenses, working from home and what happens when you use something privately and for business.
This webinar is aimed at people who are either newly self-employed or perhaps thinking about going self-employed.
If you have surplus cash in your business, it makes sense to get it working for you. There are many investment options, of course. With interest rates remaining low for the moment, buying woods or a forest is becoming increasingly popular.
Recently the value of commercial woodlands has been increasing and they offer many tax advantages for investors. For example, where there is a commercial occupation of woodlands in the UK, the income and profits made from sales of the timber are not subject to income tax or corporation tax.
Occupation is deemed to be commercial if the woodland is managed for the realisation of profit. On the other hand, it is important to understand that any revenue receipts or rents resulting from further activities (eg sporting rents) are taxable.
Broadly speaking, if you wish your investment to be assessed as being "commercial" you will need to:
For capital gains tax purposes, where a person who owns commercial woodlands with a view to generating profit, no capital gains tax will be payable in respect of:
In addition, the sale price or transfer value of the trees is also left out of capital gains tax calculations. Only the increase in the value of land is assessed for capital gains tax.
The investment in woodlands is deemed as a business asset and is therefore eligible for rollover relief. If any gains on the disposal of business assets arise within the period of one year before, and three years after the acquisition of the woodland, the gain could be rolled into the base cost of the woodland. This defers the gain until the woodland is disposed of.
In relation to inheritance tax, the entire value of commercial woodlands, including both the land and the trees, attracts Business Property Relief - currently at 100% - once it has been owned for two years. There is no inheritance tax liability as long as this condition is met.
Commercial woodlands are not exempt from VAT registration and woodland sales can constitute a taxable supply. The registration for VAT purposes is compulsory where taxable supplies exceed £81,000 in the previous 12 months. Voluntary registration by the occupiers of commercial woodlands is generally desirable, particularly during the development of a plantation, because the effect of the registration is that VAT incurred on expenditure in the woodlands may be recovered.
On the sale or gift of a woodland by a registered trader, the disposal of standing timber usually escapes a tax charge if the business is transferred as a going concern.
Woodlands are commercial properties for the purpose of stamp duty land tax and attract duty on sales above £150,001.
Despite the noticeable tax incentives associated with commercial woodlands, when it comes to investing it is important to assess both the risks and rewards, and review in detail whether this opportunity is suitable for you. It is always advisable to seek professional advice.
© Carol Cheesman, Principal of Cheesmans Accountants.
Your invoice is a document that you send out from your business, so make sure it reflects your brand. Think logo, colours, fonts and wording of the item descriptions and of payment terms. For example, if the brand message you want to convey is “fun and quirky”, make sure your payment terms are not written in lawyers’ English.
There is some information that you must legally include. If your business is a limited company or LLP, your invoices must show its Companies House registered number and address, and if you put the name of one director/member on your invoice, you must include the names of all directors/members.
If you’re registered for VAT, you must include your VAT number on your invoices and comply with HMRC’s rules about VAT invoices. These rules include that an invoice must show:
For each different type of item listed on the invoice, you must show:
And if you issue a VAT invoice that includes zero-rated or exempt goods or services, you must:
If you make retail sales and you make a sale of goods or services for £250 or less (including VAT), you can issue a simplified VAT invoice. For more information, look at HMRC's guide.
If you are a sole trader and you're not registered for VAT, you’re not subject to legal requirements like these, but I would say it’s best practice to keep to the same rules as for VAT invoices, except of course that you would not charge VAT.
This is to help make your invoices look ultra professional and avoid any queries from either HMRC or your customers. In particular, if you use sequential numbering for your invoices, HMRC can easily see that you have reported all your income.
It’s important to make sure the “Price is Right”, otherwise you could find yourself in the highly embarrassing position of either having to ask your customers for more money, or give them some back.
When you include your price in your invoice, make sure you use your most recent pricing - and don’t forget any discounts or special offers that you might have promised to all your customers or to just this particular customer.
Remember that if your business is VAT registered, HMRC says you must include the price per unit on your invoices.
Avoid queries from customers by making the product/services description on the invoice as clear as you can. If not and a customer has to phone up to query an invoice, they may see this as poor service on your part – and it may also mean they take longer to pay.
Make it as easy as possible for customers to pay you. Include your bank account details on your invoices if you are taking payment from online banking or by BACS. If you send your invoices by email and use a service such as PayPal or GoCardless to collect payment from customers, include a link when you email the invoice, so customers can pay with one click.
Remember that it’s for you to decide how quickly you want to get paid. Set your payment terms and make sure your customers keep to them.
Make sure that your invoices are clearly laid out with all the information a customer needs. Your aim is to make your customers’ lives as easy as possible, because that way they will come back and buy from you. Remember, happy customers are also more likely to refer more people to you.
© Emily Coltman FCA, chief accountant to FreeAgent, which “provides the UK’s market-leading online accounting system specifically designed to meet the needs of small businesses and freelancers. Try it for free at www.freeagent.com.”