Freelancers and other self-employed face hefty new interest charges from HMRC if they miss this month’s July 31 tax bill deadline.

HMRC has hiked its payment-on-account late payment interest rate from 5.5 per cent at the start of 2023 to the current rate of 7.5 per cent.

Dawn Register, head of tax dispute resolution at accountancy firm BDO, told the Financial Times: “This is the highest rate we’ve seen for 15 years, and the unwary may be alarmed at how quickly this charge can ramp up your debt.”

Small firms account for 56% of UK tax gap – The government’s latest Measuring tax gaps report shows that small businesses account for over half of the UK tax gap

Many of the UK’s 4.4m freelance workers pre-pay income tax bills in instalments twice a year, in amounts based on their previous year’s earnings.

The first of the so-called “payments on account” falls due on January 31 each year. The second is on July 31.

If there is still tax to pay after the payments on account are made, there will be a balancing payment due by midnight on January 31 in the following year.

Freelancers could avoid tax because of IR35 loophole – Employers who wrongly classify self-employed as being outside IR35 will have to cover their PAYE and National Insurance, says HMRC, meaning tens of thousands of freelancers could avoid paying any tax at all

Late payment could also put freelancers and others under increased scrutiny from the taxman.

Stefanie Tremain, a partner at tax and advisory law firm Blick Rothenberg, said: “Late payment may also raise the individual’s ‘profile’ with HMRC and increase the possibility of a HMRC enquiry into their tax returns.”

Can I pay less than what HMRC is asking for?

It is possible to reduce your payments on account for the next tax year, if you think your tax liability will be lower than the year before. However, HMRC will charge interest and possibly penalties if you over-reduce and subsequently underpay.

What if I paid less than was due on account in 2022/23?

Now that the April 5 2023 has passed, any taxpayer who reduced their 2022/23 payments on account should doublecheck their income for the year, adjust payments on account if necessary, and pay any shortfall as soon as possible to minimise interest charges. Don’t forget that interest may have been running since January 31 2023 (when the first payment on account was due) if the payments were over-reduced.

What should I do if I can’t make my payment on account?

Freelancers and self-employed experiencing financial problems now should not just ignore their POAs – rather, they should contact HMRC, so that they can talk through their position. You may be able to agree a ‘payment plan’ with HMRC, which could enable you to spread out tax payments over a longer period.

More on self-employed tax

Making Tax Digital mothballed for millions of self-employed – HMRC postpones Making Tax Digital income tax reporting for millions of small businesses, raising threshold to £30,000 income from April 2026

The post Self-employed hit with interest rate hike on overdue tax bills appeared first on Small Business UK.

Business minister Nigel Huddleston has asked businesses hurt by the decision to scrap VAT-free shopping for overseas tourists to supply him with evidence.

The Treasury scrapped VAT-free shopping for overseas visitors in December 2020, during the pandemic. Former Chancellor Kwasi Kwarteng then restored VAT-free in his disastrous September 2022 mini-Budget.

Figures by Oxford Economics, commissioned by the Association of International Retail, concluded that rather than costing £2bn a year, as the Treasury had estimated, reinstating tax-free shopping would result in a net gain in taxes of about £350m each year once the full impact is taken into account.

Furthermore, restoring VAT-free shopping would boost the economy by £21bn over five years. It would inject £4.1bn each year into the economy and supports 78,000 jobs, experts claim.

Rishi Sunak, however, argues that VAT-free shopping costs the Government billions in lost revenue and benefits only “a very small group of wealthy travellers who are coming predominantly to just central London”.

What is the VAT threshold? – At what point does your small business have to start paying VAT? Should you voluntarily pay VAT? And what are legitimate ways to stay under the VAT threshold?

Yet experts estimate there would be a net gain of around £350m a year if VAT-free shopping was restored because of the trickle-down benefits of tourists spending across the country and more widely on hotels, restaurants and attractions.

Being able to scrap VAT for all overseas customers, including EU residents, as well as those from China, the Middle East and the US, was seen by retailers as a key Brexit benefit, giving UK plc a leg-up over rivals.

Since then, companies including Selfridges, Burberry and The Ritz, along with luxury goods trade body Walpole, have made fresh calls to restore tax-free shopping.

Sole traders increasingly avoid charging VAT – Tens of thousands of small businesses deliberately stay small to avoid charging VAT, which means you have to hike prices if you wander over the £85,000 threshold

They warn that London is losing tourism to cities such as Paris and Milan.

Mr Huddleston told LBC Radio that Chancellor Jeremy Hunt would consider restoring VAT tax-free shopping in his next autumn statement.

He stressed, however, that the Chancellor’s decision would be based on the need to balance raising funds to pay for public services and encouraging tourism.

Mr Huddleston told listeners: “The appeal is please give us the data and the information and then that will help inform our decision-making.”

Michael Ward, managing director of Harrods, seemed exasperated when he spoke to The Times about the Oxford Economics research.

“We commissioned the piece of work by Oxford Economics which clearly showed there was a benefit to the UK economy as a consequence of tax-free shopping,” Ward said. “Asking us for more figures when we’ve employed an external consultant is a bit, ‘haven’t really read my papers’.”

If your business has been affected by the scrapping of VAT-free shopping, you can send evidence to Nigel Huddleston MP here

Further reading

Hunt scraps VAT-free shopping and presses on with IR35 reforms – Chancellor Jeremy Hunt reverses nearly all of Kwasi Kwarteng’s tax cuts, loading billions onto bills of small business owners

The post Minister mulls U-turn on VAT-free shopping appeared first on Small Business UK.

HMRC is doubling the length of time it takes to payout on R&D tax relief claims from one month to two months.

Small businesses face having to wait longer for R&D tax relief because of a rise in fraudulent or wrongly filled out applications.

The taxman is asking for additional information to check merits of claims for the R&D tax credits claimed by small and medium-sized businesses, which totalled £5.9bn in the year to April.

>See also: Sunak eyes reining in small business R&D tax credits

Fraudulent claims increased to 4.9 per cent of all claims by smaller businesses in the year to April, at an estimated cost of £469m.

That was up from £336m (3.6 per cent) of all claims the previous year.

The Office for Budget Responsibility estimates that the cost of the reliefs will increase from £7.7bn in 2021-22 to £11.9bn in 2026-27.

Back in March it was reported that then chancellor Rishi Sunak wanted to tighten up which companies qualify for tax breaks on research and development, as the amount spent by smaller companies on R&D has actually gone down since the tax credit was introduced in 2000.

How to ensure your R&D tax relief gets paid

• Pre-notify your intention to claim no later than six months before the financial year-end. This will apply for accounting periods beginning on or after April 1, 2023.
• If your accountant is unsure about claiming research and development tax credits, there are specialist advisers:
  RDS
  Haysmacintyre
  Catax
  Leyton
• Do not include expenses that are ineligible for relief. Broadly the following R&D activities qualify:
  – Software development
  – Designing new products
  – Precision engineering
  – Products with new materials
  – Enhancing existing products or technologies
  – Typical R&D expenditures can cover staff costs and subcontractor costs

Further reading

How businesses can maximise their R&D tax credit benefits

The post HMRC doubles payout time for R&D tax relief appeared first on Small Business UK.

97% of eligible SMEs not claiming for R&D

Despite being described as a flagship scheme to stimulate the economy, conservative estimates show that a staggering 97 per cent of those companies eligible for R&D tax credits are not currently engaged with the scheme.

Small businesses across the UK could be benefitting from significant investment back into their companies through the HMRC tax incentive, but for many reasons, the majority are not claiming.

About tax credits

The HMRC Research and Development Tax Scheme was created in 2000 to encourage business innovation and stimulate the economy. Businesses that can demonstrate an attempt to innovate, bringing a new product or a bespoke service to market, can claim thousands back in tax relief, which can be offset against corporation tax.

Chancellor Rishi Sunak recently announced plans to widen the scheme further, ensuring businesses receive even more back against their investment, as well as widening the criteria to make more IT/software claims eligible.

>See also: Sunak eyes reining in small business R&D tax credits

The overall aim is to increase UK R&D expenditure to 2.5 per cent of GDP by 2024.

But figures show that the scheme is greatly underused as is evident from the low percentage of claims. It’s thought that less than £1bn of relief against more than £25bn spent on R&D in the UK.

The question is, why?

The majority of our clients simply don’t have the time to look into it, or don’t believe they would have the time/resources to manage the process through to completion.

Awareness is an issue too. Some of our most successful clients had never heard of the scheme before engaging us. Many others doubt its authenticity. And there is also some weight to the notion that the scheme is overly complicated, but of course companies like ours are on hand to help with all of the above.

>See also: Why small businesses are missing out on millions in R&D tax credit relief

Who can claim for a tax credit?

Any UK limited business can claim for R&D. There are no restrictions on the type or size of business, although the scheme differs depending on whether a business fits HMRC’s definition of a SME or large company.

Eligibility is focused on the research project rather than the type of business. The product or service doesn’t have to be finished or even successful. The research/development phase is often enough for you to qualify, but it does have to be entirely new – it cannot be an off-the-shelf solution.

For the SME scheme, a company must employ fewer than 500 people and have a turnover of less than £85m or a balance sheet total of less than £73m. An SME’s eligible R&D costs receive an additional 130 per cent deduction when calculating the taxable profit.

R&D project criteria to be aware of…

The project must relate to a company’s trade, and you must be able to explain how the project:

• Looked for an advance in science and technology
• Had to overcome uncertainty
• Tried to overcome this uncertainty
• Could not be easily worked out by a professional in the field

Broadly the following R&D activities qualify:

• Software development
• Designing new products
• Precision engineering
• Products with new materials
• Enhancing existing products or technologies
• Typical R&D expenditures can cover:
• Staff costs
• Subcontractor costs

What is an R&D claim worth to your business?

Our average claim currently stands at around £53,000, but when the new changes announced in the Spring Statement come into play this is likely to rise further.

Specialist firms such as our own will interview SME clients, prepare the returns, and charge a fee only against successful credits.

Some recent examples of R&D Tax Credits from our own portfolio of 120 SME clients include a fleet management firm from York receiving £50,000 over consecutive years, and a modular portacabin firm which received almost a £68,000 boost in one year alone.

Having worked in this arena for five years, it still surprises me how many SMEs aren’t taking advantage of the scheme. Companies can benefit from thousands of pounds to reinvest in their businesses, through a successful corporation tax reclaim and from thereon in annual reductions on future corporation tax bills. It only takes 15 minutes to ascertain if you’re eligible so for me it’s a no brainer.

Mark Joyner is company director of Research & Development Specialists LTD (RDS)

Further reading

R&D tax credits: Facts you need to know and mistakes you need to avoid

The post How businesses can maximise their R&D tax credit benefits appeared first on Small Business UK.

This April, a new tax rise is coming into effect, in the form of the first stage of the planned Health and Social Care Levy (the levy). The Government has resisted all calls to abolish the increase, including a symbolic non-binding motion that was passed in the House of Commons on March 9 2022.

Much has been made of the significant impact the introduction of the levy will have on employees – it will, however, also have substantial consequences for employers.

So, what are the changes that are about to come into effect, and what steps can businesses take to reduce the impact of the levy being introduced?

The two-stage process

To give HMRC enough time to update their systems, the levy will be introduced in two stages. From April 6 2022 there will be a temporary 1.25 per cent percentage point rise in National Insurance Contributions (NIC) for both employees and employers, as well as for self-employed individuals. Additionally, there will be a rise of 1.25 per cent for dividend income tax rates.

For employers, Class 1/1A and 1B NIC rates will rise, reaching 15.05 per cent. HMRC have been in touch with businesses to suggest that they print a message on payslips that states: ‘1.25 per cent uplift in NICs, funds NHS, health and social care’. This move has been criticised, with some businesses arguing that the job of their HR departments is not to promote, or defend, a government tax rise.

From the 2023/24 tax year, a separate tax known as the levy, is due to be introduced, with NIC rates reverting back to their March 2021 levels. This new levy will appear separately on payslips and will apply to both the employer and employee at a rate of 1.25 per cent percentage points for each, resulting in a combined levy rate of 2.5 per cent.

However, benefits that attract employer NIC liability will continue to be subject to charges even when the levy is a standalone charge. Although one key difference from regular NIC to be noted is that employees over pension age will be subject to, and have to pay, the new levy.

The plain financial impact

According to the Office for Budget Responsibility, the levy will raise £12.4bn a year for the next three years to pay for increased funding for health and social care, aiming to relieve the burden on the NHS.

The average employer should expect to see their monthly NIC bills increase by roughly 10 per cent, as a result of the changes. The Federation of Small Businesses’ (FSB) independent analysis puts the additional cost for employers at £3,000 p.a. This, coupled with the rises in National Minimum/Living wage, reduction in government support and removal of lower rate of VAT in the hospitality sector will add a considerable cost – especially given that businesses are currently facing high levels of inflation and rising prices across many areas. The FSB has asked the Government to consider providing support to mitigate the levy costs, such as increasing the employment allowance to £5,000 and adjusting the business rates criteria so up to 200,000 small businesses are exempt.

National Insurance Contributions (NIC) is not a devolved tax, so it will apply to the whole of the UK. IR35 legislation will also be affected by the changes, with the charge being included within the deemed employment tax and NIC calculations for workers who are engaged by the fee payer.

Reducing impact: what steps can be taken?

Before the changes come into effect on April 6, businesses have an opportunity to move swiftly and mitigate the impact of the planned tax rises, with a number of options available. Firstly, employers should consider the possibility of paying employees any discretionary bonuses before April 6 2022.

Furthermore, a sensible step for employers to take would be to increase the usage of salary sacrifice arrangements that businesses currently have in place. If businesses have no such arrangements in place, it would be wise to review this. This includes cycle to work schemes and any car schemes for electric or ultra-low emission vehicles that employees can use, as well as pension contributions for employees participating in defined contributions schemes.

The implementation of these schemes if they are currently lacking would have significant benefits for businesses, as this would reduce the earnings of employees, who are subject to the levy. Aside from the tax benefits, schemes of these kinds can also pay dividends as retention and recruitment tools – worth keeping in mind for employers, especially given the current talent shortages in various industries.

It is also worth implementing reviews of any share incentive schemes employers currently have in place. Given that employees are required to pay the employers Class 1 NIC liabilities in some of these schemes, some elective options may need to be updated or amended to include the upcoming levy for 2023/24. Moreover, a wise move would be for employees to switch out bonuses, or pay rises, and instead consider the use of share schemes that come with greater tax advantages.

Employers may have employees on secondment, perhaps from the UK to countries where the UK does not have a formal social security agreement in place. In these cases, the employees’ NIC situation should be reviewed. If there is a secondee that has arrived from countries with whom the UK does not have a reciprocated social security agreement, an option may be to employ the secondee locally before they are seconded – this would reduce UK NIC liabilities during the first 52 weeks of the UK secondment.

The importance of reviewing existing policies cannot be overstated – herein lies tax savings. For instance, private medical care could be reviewed to identify cost savings. An additional route to consider would be the use of tax-exempt benefits which could include, but are not limited to, annual medical check-ups and the introduction of services and goods discounts. If it is possible to declare dividends, and pay them, before 6 April 2022, then businesses should also contemplate doing so.

All businesses should also look to undertake a comprehensive review of budgets and forecasts and – once this is done – the areas in which savings can be made will become more apparent.

The introduction of the Health and Social Care Levy next month is likely to add significant costs onto all employers UK-wide. There are steps that employers can take to ensure that the introduction of the levy is made much more manageable. However, with the clock ticking until the changes come into force, the time to act is now.

Nick Bustin is the director and Dinesh Pancholi is senior manager at haysmacintyre.

Read more

How much national insurance hike will cost your business

The post How to reduce the impact of the 1.25% National Insurance rise appeared first on Small Business UK.

When you are running your own business, it’s almost a certainty that you’ll have to pay some kind of tax at some point.

But with so many complicated tax rules currently in place in the UK, it can be difficult to know exactly which ones apply to you or your business, and which types of tax you’ll actually have to pay to HMRC.

Here are the five small business taxes to check up on.

Income tax

Sole trader tax is paid on your business’s profit. Assuming you don’t have any other income, such as salary from a job, as well as what your business makes, then you’ll start paying income tax on your business’s profit once it goes over the personal allowance, which is £12,570 if you’re under 75 (2022/2023 will be the same as 2021/2022 rates).

If your business is a limited company, you could pay income tax on any salary or dividends you take from the company. Whether you pay income tax, and how much you pay, depends on how much you take out.

Income tax kicks in on your salary if it’s over £12,570, you’re under 75 and you have no other income (2022/23 rates). If your circumstances are different – say you have another job as well as working for your own company – then you may start paying income tax on your salary sooner.

If you’re paying income tax on your salary, your employer, in this case your own company, will deduct it from your salary under the PAYE (Pay As You Earn) scheme. PAYE isn’t a tax in its own right; it’s a method HMRC use to collect income tax.

National Insurance

While not strictly a tax, National Insurance (NI) is money that’s paid to the government, so it’s often referred to as a tax in all but name!

Sole traders pay two kinds of NI. If you’re a sole trader, you’ll pay a flat weekly rate of NI called Class 2 NI, unless your business’s profits are under the Small Profits Threshold, which will be £6,725 for the 2022/23 tax year. Class 2 NI will be £3.05 per week. If your business’s profits are under the Small Profits Threshold, you can still pay Class 2 NI voluntarily, to protect your entitlement to State Pension and other benefits. You will also pay Class 4 NI if your business’s profits are between £9,880 and £50,270 (at 10.25 per cent) and at 3.25 per cent on any further profits over £50,270, (2022/23 rates).

If your business is a limited company, and the company is paying you, then it will have to deduct Class 1 employee’s NI from your wages and pay that over to HMRC. The company will also have to pay Class 1 employer’s NI to HMRC unless that’s covered by the employment allowance. National Insurance from April 2022 to April 2023 will be set at 13.25 per cent for pay £9,880 to £50,270 and 3.25 per cent for any pay over £50,270. The National Insurance rise is otherwise known as the health and social care levy and rates will return to normal in the 2023/24 tax year.

Corporation tax

Limited companies pay corporation tax on their profits. There’s no equivalent of the personal allowance for limited companies, so as soon as a company makes any profit, unless it’s previously made losses, it will start paying corporation tax.

Main rate Corporation Tax will be 19 per cent for 2022/23 and will increase to 25 per cent, applying to profits over £250,000, and it is payable nine months and one day after the company’s accounting year end so, for example, a company with a year end of March 31 will have to pay its corporation tax by January 1.

Sole traders do not pay corporation tax.

Related: Tax code changes when setting up as a sole trader while working

VAT

No matter what kind of business you have – sole trader, partnership, LLP or limited company; if your business makes VATable sales of more than £85,000 a year, you’ll have to register your business for VAT.

‘VATable sales’ mean sales of goods or services that would have had VAT charged on them if made by a VAT-registered business. The pandemic has skewed this somewhat. At the moment the standard VAT rate is 12.5 per cent for hospitality, holiday accommodation and attractions and this will revert to the previous 20 per cent in April 2022. All other businesses have the 20 per cent standard rate. A reduced rate of 5 per cent applies to food and non-alcoholic drinks which are eaten on the restaurant premises or takeaway, and there is 0 per cent (Zero) rate for some exceptional goods such as children’s clothes, newspapers and water.

Business rates

If your business operates from office or retail premises, then you may have to pay business rates; this is like council tax, but for business properties.

Some premises are automatically exempt from business rates, such as farm buildings, while others may be entitled to business rates relief.

If you run your business from home, you won’t usually have to pay business rates as well as council tax.

The exceptions are:

• Employing staff who also come and work at your home
• Selling goods or services from your home to visiting customers
• You have adapted your home to work there (such as converting your garage or shed to a dog grooming parlour)
• Your property is part business and part domestic, for example you run a pub and live above it

If you are in any doubt about what taxes your business might be subject to and when you might have to pay them, speak to your accountant or HMRC for help.

Emily Coltman FCA is chief accountant at FreeAgent.

The post Five small business taxes you need to know about appeared first on Small Business UK.

Rishi Sunak is thinking about reining in R&D tax credits for small businesses and concentrating them on larger corporates.

The Chancellor is frustrated by the lack of investment by small businesses in research and development, with the amount of self-funded investment actually dropping since the £7.7bn R&D tax credit was launched – despite what has has called “one of the most generous tax regimes for R&D investment anywhere in the world”.

>See also: Why small businesses are missing out on millions in R&D tax credit relief

A Centre for Business Research report published last year said that self-funded business investment in R&D was between 10 and 15 per cent lower than before tax credits were introduced in 2000.

Mr Sunak believes that the R&D tax credits are not doing enough to boost growth despite “huge and rapidly growing sums” being spent on them – as he told his audience while giving last months’ Mais lecture.

The Office for Budget Responsibility estimates that the cost of the reliefs will increase from £7.7bn in 2021-22 to £11.9bn in 2026-27.

>See also: Growth hack: Tap Into R&D tax credits

The Chancellor is looking at whether tax credits would be better focused on larger companies, rather than small and medium-sized businesses, Government insiders told the Financial Times.

“In spite of spending huge and rapidly growing sums, clearly it is not working as well as it should,” Mr Sunak told his audience.

Emily McCarthy, director of tax advisory at Leyton, the largest player in the R&D tax relief market, said she was concerned that scrapping R&D tax credits for small businesses “could have a detrimental impact on many SMEs”.

R&D tax relief has a positive impact on the many SMEs Leyton works with, she said, enabling them to hire people, develop new processes and contribute to the UK economy.

HMRC has found that SMEs generated between just £0.60 and £1.28 of additional R&D expenditure for each £1 of tax relief claimed, compared with up to £2.70 for larger companies.

“Businesses simply aren’t investing enough,” Mr Sunak said in his Mais lecture.

However, Mark Joyner of R&D tax credit specialist RDS pointed out that many of his clients have found the last few years challenging with the rising price of energy, materials and the pandemic preventing companies from investing in their businesses.

But one person familiar with Government thinking said that it wasn’t a case that R&D tax credits would be taken away from small businesses completely – rather that they would be merged with the existing RDEC scheme for larger companies, something the Treasury has been quite open about.

“Reading between the lines, they’re not seriously considering removing the scheme from SMEs entirely. Politically that would be very difficult. Scrapping the tax relief that encourages R&D spend wouldn’t help investment,” this insider told SmallBusiness.

The next set of changes to R&D tax credits come into effect from April, tightening up the rules so that research and development expenditure can only be claimed for work being done in the UK, for example.

More on R&D tax credits

R&D tax credits: Facts you need to know and mistakes you need to avoid

The post Sunak eyes reining in small business R&D tax credits appeared first on Small Business UK.

Throwing in the towel isn’t done lightly. It requires a complete and utter admission that you can’t win. In this light, following the implementation of the government’s IR35 reforms in the private sector in April 2021, IPSE research has shown that a third of self-employed workers have followed Muhammad Ali, Joe Frazier III and Danny O’Sullivan’s example by throwing in the towel and giving up. For those that remain as self-employed workers, the changes to off-payroll working have left them bruised and on the ropes.

The reforms have completely changed how affected freelancers are taxed. Rather than determining their own taxes, the reforms to IR35 have put hiring organisations in charge of making notoriously complex employment status decisions. This change, while seemingly minor to those outside of the sector, has had far-reaching consequences for thousands of freelancers across the country.

A report recently published from the National Audit Office into the implementation of IR35 in the public sector in 2017 found that the measures generated significantly more revenue than expected, suggesting that clients were incorrectly determining that IR35 applied to more engagements than it should. Moreover, research from The Association of Independent Professionals and the Self-Employed (IPSE) found that the reforms have been so difficult to understand that almost half (48 per cent) of companies using a freelancer did not know the percentage of contractor engagements that were inside or outside IR35.

While a significant number of self-employed workers have managed to bob and weave past the flawed reforms over the past year, it is currently unclear how many will be able to face a few more rounds with IR35. If the changes to off-payroll tax are allowed to continue, then the economic uncertainty that IR35 generates could result in more and more self-employed workers throwing in the towel and leaving contracting altogether. With freelancers providing skills, dynamism and ideas to businesses and the economy as a whole, the continuation of the reforms could also damage the country’s long term growth.

No IR35 changes from the government

Tackling the confusion around the changes to off-payroll tax is therefore paramount to the success of the country and the self-employment sector. Predictably, however, there is no sign from the government that it might be prepared to reconsider this poorly designed policy. Despite numerous campaigns from organisations like IPSE, the Treasury and HMRC have so far have failed to address the problems surrounding the reform.

But IPSE’s messaging is cutting through in some quarters. It was positive to read Lord Frost, the recently departed Brexit Minister, calling for ‘the intrusive new IR35 rules to be scrapped’ in the Telegraph last Saturday. If the newspaper really is seen by the Prime Minister as his ‘real boss’, as has been reported, then there may be hope yet.

If the government doesn’t relent soon, then IR35 will continue to land punch after punch on the self-employment sector. It could jeopardise the industry’s ability to recover post-Covid and lead to further economic uncertainty for the country’s self-employed. Inaction will also dissuade former freelancers to rejoin self-employment and it will allow the reform to continue to deal financial damage to a sector that has been hit considerably hard during the pandemic.

One of the greatest strengths of the UK economy has always been its flexible labour market and at the heart of that has been a vibrant and growing self-employed sector. Right now, the sector is feeling the strain of IR35 and while it isn’t completely knocked out, it isn’t moving like a butterfly and stinging like a bee like it used to do. If the government is serious about boosting economic growth, it must do more to enable self-employment to flourish by reviewing IR35 and solving the issues around the flawed reform.

Read more

Freelancers could avoid tax because of IR35 loophole

The post IR35: How the controversial tax changes have left self-employment on the ropes appeared first on Small Business UK.

Thousands of freelancers could duck out of having to pay any tax if their employer wrongly categorises them as being outside of IR35 tax reforms.

HM Revenue & Customs extended its IR35 tax changes last April, hoping to bring 180,000 private-sector freelancers, mostly IT contractors, within pay-as-you-earn tax (PAYE) and National Insurance.

The tax authority’s gripe was that self-employed contractors using limited companies – and just paying tax on dividends – for all intents and purposes enjoyed the security of full-time employment, while not paying what it saw as their fair share of tax.

>See also: HMRC lays down IR35 compliance principles ahead of the new tax year

However, employers whose decision to classify freelancers as still being outside IR35 since last April could face having to shoulder all of their PAYE and National Insurance contributions, if HMRC successfully challenges them.

This is because when paying freelancers, it is assumed that payments are net of income tax and National Insurance. So employers could face tax bills running into millions – and make them more risk averse than ever to hiring contractors outside of IR35.

Dave Chaplin chief executive of tax compliance company IR35 Shield, told the Financial Times: “We now have this bizarre situation where the whole policy was about getting contractors to pay more tax, and now they could end up paying no tax.”

>See also: One third of freelancers say IR35 changes affecting their mental health

This situation has already cropped up in the public sector, where public bodies have had to pay out £263m to HMRC in taxes in 2020-21.

Meg Hillier, chairman of the House of Commons public accounts committee, told HMRC officials on Monday: “Here is the public sector, the taxpayer, paying £263m to you [HMRC] and then you’ve got private contractors that can be claiming that tax back, so basically having their tax paid by the taxpayer.”

Seb Maley, CEO of contractor insurance firm Qdos, told SmallBusiness: “As made explicitly clear in the NAO’s investigation into IR35 reform, HMRC has no plans to address this issue as things stand. However, given HMRC is actively targeting private sector businesses regarding their IR35 compliance, it’s something that needs resolving very quickly indeed.

“Left unresolved and HMRC will net more tax than it’s actually owed, creating a massive problem when contractors quite rightly start the process of reclaiming the tax they’ve already paid to the Treasury.”

Further reading on IR35

IR35 freelance tax changes will go ahead in April 2021 – are you ready?

The post Freelancers could avoid tax because of IR35 loophole appeared first on Small Business UK.

Just nine people are taking part in the pilot scheme for rolling out Making Tax Digital to more than 4m self-employed from 2024.

According to an investigation by the Financial Times and accountants Saffery Champness, the number of volunteers taking part in the pilot has fallen from 900 in 2018-19 to just nine, says HMRC.

Making Tax Digital for Income Tax (MTD ITSA) will mean 4.3m self-employed and landlords will have to file digital returns from April 2024. Anybody with a combined income of more than £10,000 from self-employment and being a landlord will be brought into the scheme.

>See also: Making Tax Digital April 2022 – what’s changing

Currently the self-employed have to file just one end-of-year tax return but MTD ITSA will involve having to submit updates quarterly every three months. Plus there will be an end-of-year statement plus a “finalisation return” (now called a tax return) each year. This means six reports to HMRC in total replacing the current single annual self-assessment tax return.

On top of which, the self-employed and landlords will have to license accounting software from approved providers, although the Government is currently offering discounts of up to £5,000 for small businesses to rent software.

Emma Rawson, technical officer at the Association of Taxation Technicians, a professional body, said many self-employed she had spoken to were unaware of Making Tax Digital and were “quite horrified to learn they’d have to buy software in a couple of years [to do their taxes]”.

>See also: Five steps for small businesses Making Tax Digital

Stuart Miller, product compliance and industry engagement manager at accountancy software provider Xero, told the Financial Times that having just nine people trialling MTD ITSA was too small a number.

“Until there are a significant number of taxpayers included in the pilot, it’s difficult to determine how fully robust the system will be,” he told the newspaper.

Zena Hanks, a partner at Saffery Champness, warned there may be problems when the system goes live if the number of people who have tested it was too small to be representative.

More on Making Tax Digital

A guide for Making Tax Digital for VAT

The post Just nine people trialing digital tax for self-employed appeared first on Small Business UK.

Each year, the Government sets aside an estimated £1.5 billion for business rates rebates. That’s a staggering figure but there are two sides to that (very large) coin. One way to view this is that there is a pot ready for businesses to benefit from should their business rates be miscalculated. That is, of course, a positive thing, but the business community should also question why this figure is so high. Just how prevalent is business rates overpayment and how often does a business miss out on a rebate or reduction? How can you challenge your business rates calculation?

‘Business rates are an archaic and deeply flawed system’

Steve Hughes of RVA Surveyors

All too often businesses assume that they are paying the correct business rates for their commercial premises. On the face of it, that’s a reasonable assumption. We are programmed to accept that our tax is calculated based on our circumstances and we very rarely question the accuracy. Some may even assume that they will be notified by the relevant Government department if they are paying too much tax. It is this kind of apathy that makes business rates an archaic and deeply flawed system. Querying your business rates is an unfamiliar, daunting and time-consuming process and one that many will avoid.

>See also: Business rates relief fund yet to pay out single penny

How is my business rate calculated?

The Valuation Office Agency (VOA), which oversees business rates, calculates a property’s rate from its “rateable value”, which is based on a property’s open market rental value, its size and its usage. Rateable values are published in the VOA’s ratings list, which have historically been re-evaluated for properties in England and Wales every five years.

Having a rateable value for a property should, in theory, create a simple and consistent system.

The trouble is that basing a business rate on simple desktop calculations doesn’t take into account the different features of a building that may entitle a business to a lower rate.

How do I know if I am on the correct business rate?

The VOA has a digital system called Check Challenge Appeal through which a business can first check if their rate is correct, then challenge if they believe their rate is incorrect, and then finally appeal if the previous steps have been unsuccessful in achieving a reduction.

Check Challenge Appeal can be challenging to navigate but, when undertaken by a specialist who can scrutinise the detail and inspect a property, can bring about huge reductions. It is important that businesses don’t take anything for granted with business rates.

At RVA Surveyors, we have an 85 per cent success rate when it comes to reducing our clients’ business rates liability, which just shows the prevalence of overpayment.

>See also: Government delays business rates reform yet again

What happens if my business rate is too high?

If a business undertakes the Check Challenge Appeal process and is found to be overpaying on their business rates, they could be entitled to a rebate for the historic overpayment from the beginning of the current ratings list (2017) and a reduction to the end of this ratings list and beyond.

Will the Valuations Office Agency get in touch with me to check I am on the correct business rate?

No. This is one of the greatest pitfalls of the business rates system. The VOA is held to account through the Check Challenge Appeal process and cases lodged should be managed to strict deadlines, although the VOA is currently very behind and has a backlog of Check Challenge Appeal requests. Neither the VOA or a local authority will approach a business to check or reduce their business rates liabilities. The onus is on a business to challenge them on business rates.

The Government has moved the ratings period to three years. How will this impact me?

In last year’s Autumn Budget, the Government announced that it will increase the frequency of the new ratings list, moving to more frequent three-yearly valuations. This essentially means that business rates will be recalculated every three years. This move is supposed to ensure that properties are subject to fairer business rates that represent their property and the wider market, but what we have seen in recent years is that the Government can extend or shorten the ratings list whenever they choose.

For example, the VOA has amended the ratings lists seven times in recent years. So there is a lot of doubt and uncertainty in the system. There is also a worry that moving to three-yearly valuations could place even greater strain on the VOA, which could exacerbate the issues of overrating and overcharging.

I am due to modify my property. Will this impact my business rates?

Yes. If you make changes to your commercial property, it could impact your rateable value. For instance if you installed air conditioning, built an extension or upgraded the property in some way then your business rates may increase, however depending on the changes you make you can equally reduce them.

Steve Hughes is chief executive of RVA Surveyors

More on business rates

What are business rates? A guide for small businesses

The post How to challenge your business rates appeared first on Small Business UK.

HM Revenue and Customs (HMRC) is waiving late filing and late payment penalties for businesses that have missed the 31 January self-assessment tax deadline for one month.

This will give small business owners and the self-employed impacted by Covid-19 more time, if they need it, to complete their 2020-21 tax return and pay any tax due.

In a normal year, a failure to submit a tax return by the 31 January tax deadline would trigger a £100 fee, with further charges if the delay is three months or longer.

>See also: HMRC to go easy on small business strangled with Covid debt

HMRC has revealed that just 6.5 million taxpayers out of 12.2 million who need to submit their tax return by 31 January have done so to date.

The deadline to file and pay remains 31 January 2022.

The penalty waivers mean that:

• Anyone who cannot file their return by the 31 January deadline will not receive a late filing penalty if they file online by 28 February
• Anyone who cannot pay their self-assessment tax by the 31 January deadline will not receive a late payment penalty if they pay their tax in full, or set up a Time to Pay arrangement, by 1 April

Time to Pay allows any individual or business who needs it the option to spread their tax payments over time. Self-assessment taxpayers with up to £30,000 of tax debt can do this online once they have filed their return. 

>See also: How much national insurance hike will cost your business

Any late-paid amounts will attract daily interest at 2.75 per cent and a 5 per cent surcharge if not paid by 1 April.

Angela MacDonald, HMRC’s deputy chief executive, said: “We know the pressures individuals and businesses are again facing this year, due to the impacts of Covid-19. Our decision to waive penalties for one month for self-assessment taxpayers will give them extra time to meet their obligations without worrying about receiving a penalty.”

The 2020 to 2021 tax return covers earnings and payments during the pandemic. Businesses will need to declare if they received any grants or payments from the Covid-19 support schemes up to 5 April 2021 on their Self Assessment, as these are taxable, including:

• Self-Employment Income Support Scheme
• Coronavirus Job Retention Scheme
• Other Covid-19 grants and support payments such as self-isolation payments, local authority grants and those for the Eat Out to Help Out scheme

Emily Coltman, chief accountant at accounting software firm FreeAgent, said: “Self assessment season is always a fairly stressful time for freelancers and small business owners, so the news that fines for late filing will be waived in January will be a relief for many people. For those who have been recently impacted by Omicron, in particular, it will certainly be positive to have a bit of breathing space to help get their Self Assessment returns completed.

“However, it’s important not to be complacent about this news. Just because the Government is choosing not to implement fines in January, this should not be taken as carte blanche to put off doing your tax return until February – as you will still face the same scramble to complete it at the last minute. Plus, although HMRC are also postponing the late payment penalty for tax till 1 April, they will still charge interest on any tax paid after 31 January.”

Kevin Sefton from sole trader tax app untied said: “The current Covid wave will be affecting not just those who need to file, but accountants and others supporting the 51 per cent of filers who use an adviser and HMRC themselves.”

Further reading

Making Tax Digital April 2022 – what’s changing

The post Penalties waived for businesses missing tax deadline appeared first on Small Business UK.

Which products / services do I have to charge VAT on?

As is generally the case with tax, when it comes to VAT – it all depends.

There are always exceptions to the rule, but VAT seems to have exceptions to the exceptions. And with Brexit, new construction rules, the rise of digital sales and businesses moving online and having a wider geographical reach during Covid, the rules on VAT have become even more complex.

Brexit

Exporting goods to the EU actually has less reporting now as there is no need to complete an EC Sales List. Goods to an EU business are zero rated and UK companies will have import VAT and custom duties when goods arrive in the UK from outside the UK (including from EU countries, which is the same process that UK companies already had when goods arrived from non-EU companies before Brexit – and continue to do so).

There may however be a requirement to register for VAT in EU countries, dependent upon their own VAT thresholds and rules.

Supplying individuals in the EU (or anywhere outside the UK) is now zero rated.

It is worth noting that you need to keep evidence of the export and ensure that the goods are, indeed, exported. You should also make sure you get the evidence within three months of the sale. If you are sending goods to a UK based forwarding company, then the place of supply is in the UK. As such, you would need to apply standard rated VAT.

>See also: VAT on taxi fares, vehicles, fuel and staff travel – what can I claim?

Services

Services are generally dependent on the “place of supply” rules. These state that the place of supply is where the customer is based if it is a B2B (business to business) sale. If it is B2C (business to consumer – i.e. individuals) sale, then the place of supply is normally where the supplier is based/where the service is performed, unless it relates to one of the following services, in which case it is outside the scope of VAT

• transfers and assignments of copyright, patents, licences, trademarks and similar rights
• acceptance of any obligation to refrain from pursuing or exercising a business activity
• advertising services
• services of consultants, engineers, consultancy bureaux, lawyers, accountants, and other similar services – data processing and provision of information, other than any services relating to land
• banking, financial and insurance services
• the provision of access to, or transmission or distribution through, natural gas and electricity systems and heat or cooling networks and the provision of other directly linked services
• supply of staff
• letting on hire of goods other than means of transport
• emissions allowances

Supplying services to a business in the EU, therefore, will not attract VAT but suppling them to an individual could.

There are then special rules for certain services (including land, hire of transport, digital services and others).

Supplying digital services to individuals in the EU means that the “place of supply” continues to be where the customer resides. VAT on those services is due in the EU member state in which the customer resides.

Remember that there is also the hospitality rate (which includes holiday accommodation) that is now 12.5 per cent (previously 5 per cent until 1 October 2021) and this will increase to 20 per cent in April 2022.

>See also: 7 tax myths for small business owner/managers exploded

Digital services and MOSS VAT scheme

You need to consider:

• Location of the customer
• Confirm if it is a digital service
  • If not, the general place of supply rules will apply
• Is your customer a business or an individual (B2B or B2C)?
• If the supply is outside the UK you may need to register for VAT in the country of your customer

VAT rules for digital services

This is a brief overview. Further details can be found here and here.

Construction CIS

From 1April 2021 the rules in the construction industry changed. If you are in this sector, then it is worth seeking specialist advice.

In summary, while HMRC does have some useful information online, rules are complex and varied and it is always worth speaking to a professional.

Stuart Clark is managing director of Glasgow-based Russell & Russell, which serves owner-managed businesses throughout the west of Scotland

Further reading on VAT

The essential VAT guide for SMEs in the UK

The post Do I have to charge VAT? appeared first on Small Business UK.

When it comes to tax planning for family businesses, the main thing is making sure you are proactive.

You need to be prepared consistently to make forward-thinking decisions since many of the rules which permit the optimisation of tax payable cannot be applied retrospectively.

Equally, we often see people letting “the tax tail wag the dog”. So, for example, you would not spend £10 in normal everyday life to save £1.90, but oddly, some business owners are prepared to do so because they hate paying corporation tax.

From our perspective, if you are not paying tax it normally means one thing: your business is failing. Too often, motivated by an aversion to paying more tax on their family businesses, we see owners restrict the growth of their business rather than allowing it to achieve its full potential.

Tax can be estimated in advance and getting a handle on it and setting aside the relevant funds is a very simple first step to help owners manage their cashflow and not have to worry about a nasty tax bill. As with anything in your business, managing it is key.

Business structure

Ideally, you should speak with a reputable qualified accountant before you even set up your business as the structure can have different implications. For example, if you as an individual have a limited company, you are taxed on the income that you take from the company, either via salary or dividend. On the other hand, as a sole trader or a partnership, you are taxed on the profits it generates no matter what money you take personally.

Companies, too, are taxed on their profits, and dividends are paid out of profits after tax.

‘Most businesses aim at nothing and hit it with amazing accuracy’

Paying yourself

Tax rates are constantly changing but at present it is more tax efficient to pay yourself via a low salary, roughly £9,000 a year and dividends.

Let’s consider the following example:

Salary vs dividends: how tax is calculated

In each of these instances, the limited company has generated £50,000 profits in the year and has paid this out fully to the director leaving £nil retained profits. The net cash received by the director varies in each circumstance, however, with a total variation of £5,836, nearly £500 a month extra cash in hand:

• £34,268 – Salary only
• £38,550 – Dividends only
• £40,104 – Salary and dividends

The low salary of £8,844 maximises corporation tax relief and net take home pay – there is no National Insurance Contribution (NIC) deduction, but it is enough to count as a qualifying year for your state pension.

Other tax benefits for family businesses

There are a number of other benefits that can be considered for yourself and the team. When we take on new clients, we go through a 90-point tax checklist that covers a number of items including:

• Mobile phones
• Electric vehicles
• Employee encouragement awards
• Long service awards

Let’s just take a quick look at electric vehicles. If a business owner wants £60,000 net cash in hand, then they will currently be taking dividends at the higher rate of 32.5 per cent and due to increase to 33.75 per cent from 6 April 2022.

If an electric car lease is £600 a month, the owner would need to take a gross dividend of £889 to be left with £600 after tax to pay for the lease, that is, a £0 net cash position overall.

The company, however, could pay for the car and recover 50 per cent of the VAT (£50) and get corporation tax relief on the remaining £550. The net cost after tax is therefore £446 a month rather than £889. An annual saving of £5,316.

The director would have a benefit in kind, currently 1 per cent, and so if we assume the car has a value of £50,000 = £500 benefit. Even if we assumed tax at 40 per cent = £200 so a £296 dividend would be required to pay the additional tax. The saving is therefore still over £5,000.

>See also: How to buy an electric car through your business

Corporation tax and family businesses

A company pays tax on its profits at the year end, but there is a difference between the taxable profits in the corporation tax return and the figure in the accounts. In fact a company may show losses on its P&L but still have a tax liability.

This is because depreciation is an accounting adjustment and is added back in the tax computation. Consider the following:

• Net loss of £15,000
• Depreciation of £35,000
• Fixed asset additions in the year of £7,500

The taxable profits are actually £12,500 (the £35,000 depreciation charge is added back but there are capital allowances on the fixed asset additions of £7,500).

Fixed asset additions have a number of different treatments under the capital allowance rules, hence another reason why it is worth having a pre-year-end tax planning meeting with your accountant.

As noted above, you would not spend £10,000 just to save £1,900, but if you are going to spend £10,000 anyway timing is important. For example, a piece of equipment needs to be replaced, then bringing this forward means the company will get the corporation tax and cashflow saving nine months earlier. That is to say that if the company has a 31March 2022 year end and spends £10,000 on 30 March 2022, it will reduce its corporation tax payment on 1 January 2023 by £1,900. However, if it makes the payment on 1 April 2022 the £1,900 saving would be deferred to 1 January 2024.

There are a number of other reliefs to be considered, including the Super Deduction for new equipment and R&D.

>See also: Super-deduction tax break – what is it and how does it work?

Pensions

This can be another useful way to extract long term value for business owners, while also being tax efficient since the pension contribution is deductible for corporation tax. Again, the payment needs to be made before the year end; that is to say, it cannot be accrued or carried back, and you have an allowance of £40,000 a year, although there are yet other rules, so it can get quite complicated. Again, a pre-year-end tax planning meeting means that you can review this proactively.

VAT and PAYE

Once your business reaches a turnover of £85,000 in a 12-month period you need to register for VAT. This applies also if you think you will have £85,000 of sales within the next 30 days.

VAT can have a serious impact on cashflow as business owners often treat the income they receive as their own, but in fact one-sixth of it is due to HMRC and the business is merely the “collector” of this tax.

• Gross sale of £1,200
  • £200 VAT – payable to HMRC
  • £1,000 sales income – recorded in the profit and loss account

You can offset VAT on expenses against the sales VAT and there are cash accounting schemes so you do not need to pay VAT to HMRC until you have received the cash yourself, but the rules regarding VAT and these schemes can be quite complex, so again, seeking professional advice is always best.

While accounting software purports to be able to deal with this at the “click of a button”, the reality is much more complex and it can be easy to create issues if not dealt with correctly.

PAYE

If you have employees, you need to report the payments you make to HMRC and pay the PAYE and NIC (employee deduction and employers’ contribution) to HMRC.

If you pay your employees weekly this means 52 reports a year compared to 12 if done monthly, which can lead to an admin headache. In addition to PAYE you also need to consider pensions and auto-enrolment for employees.

Recordkeeping

It goes without saying that making proactive decisions means that you need to have up to date information and with Making Tax Digital it is going to be even more important in future to have a good record system.

Exit?

Finally, what is your end goal for the business? Most businesses aim at nothing and hit it with amazing accuracy. Making your business “sale ready” should always be the aim as it gives you maximum flexibility. It means the business can run without you so that if you had to sell it you could get the maximum return for all your hard work.

Stuart Clark is managing director of Glasgow-based Russell & Russell, which serves owner-managed businesses throughout the west of Scotland

More on tax for family businesses

7 tax myths for small business owner/managers exploded

The post Top tax tips for family businesses  appeared first on Small Business UK.