What the Budget means for small business finances

Economia, the magazine of the Institute of Chartered Accountants in England & Wales, very kindly published my summary of the Budget.

Unlike most of the summaries from other firms of chartered accountants it doesn’t focus on the detailed tweaks to the tax system which don’t really make a great deal of difference to businesses, especially small businesses. Instead, I have tried to point out what is important now that the Budget is over and what action you should take to make sure your business is a success.

 

Licensees – don’t lose out when summer starts

I hadn’t thought about this until I’d read it but some licensed premises may need to extend their hours to cope with the change to British Summertime on 30 March.

South Lakeland District Council (SLDC) have highlighted a problem on their website for pubs and clubs that normally open on a Saturday through to beyond 1am on a Sunday morning. SLDC are advising  any business which may be affected to apply for a temporary event notice (TEN).

Next week’s Budget – what to expect

 

This will be the last Budget which can have any significant impact on the May 2015 General Election.

The economy is finally beginning to grow but the Chancellor will be keen to say that there is still work to be done in addressing the public finances and rebalancing the economy.

So if you’re the owner of a small business what should you expect and more importantly what should you do?

  1. The Annual Investment Allowance was raised for a two year period from £25,000 to £250,000, and at the moment comes to an end on 31 December this year. If you’re thinking of spending money on equipment (including vans) during the coming year listen to what the Chancellor says about changing the Annual Investment Allowance. It may be worth bringing forward your spending plans.
  2. The Personal Allowance has increased enormously during this Parliament and it will be interesting to see what further announcements the Chancellor will make and whether there will be some announcement about the income level at which the 40% higher rate tax band begins. There is a great deal of correcting to be done! More and more people have been sucked into 40% tax because of ‘fiscal drag‘ and sadly there is very little that can be done about it. If you’re self employed, however, or own your own company you may be able to employ other ‘family members’ to utilise their basic rate (20%) bands to mitigate the effects.
  3. Business rates may change but until we have the details there is little which can be done.

Finally, and this relates to the 2013 Budget, make sure you take full advantage of the government’s Employment Allowance

 

Please may we have a bo***cks button for government statements?

A few months ago my daughter suggested that we needed a bo***cks button, in addition to the Like button, on Facebook to comment on our relative’s Facebook posts.

At about the same time, Paul Aplin, the chairman of the ICAEW Tax Faculty’s Technical Committee, in the Hardman Lecture asked why the ‘one-in,two-out‘ rule about red tape didn’t apply to tax law. Recently I  had to write to the Chief Executive of HMRC, so I took the opportunity to ask Paul’s question.

This is HMRC’s reply.

As you know in 2010, the Department  for Business  Innovation  and Skills launched  an
initiative to reduce the number  of new regulations  for businesses.  However,  tax law is not
included  in the ‘one-in, two-out’  rule because tax is not the same as regulation.  The
obligation  that tax law imposes  on business  represents  the essential  information  needed for
us to calculate  the tax charge,  or check compliance.  This distinguishes  them from pure
regulation,  where the aim is to change  behaviour.  The Government  initiatives to reduce red
tape are appropriate  for managing  regulatory  burdens  rather than tax policy.

Why did I bother?  And where’s the button?

Essential reading if you’re VAT registered – VAT Notes No. 1 of 2014

Yet another copy of VAT Notes has  been released by HMRC.

I have said previously that it isn’t the most exciting read you’ll come across but HMRC do expect you to read it (even though they don’t send you a copy any more!)

The full notes are here.

As a director in 2014/15, what should I pay myself?

The introduction of Employment Allowance and the increase in the personal allowance to £10,000 has muddied the waters yet more in deciding the optimum salary to take as a director.

Last year I said

Like so many tax issues, a simple question produces a complicated answer!

This year I’m going to keep it really simple – the optimum salary is £10,000 per annum (£833.33 per month). Any less and you will waste personal allowances, any more and you will start paying too much in National Insurance.

Please note that if the company doesn’t qualify for Employment Allowance or the Employment allowance can be utilised against other employees, £10,000 per annum is wrong.

Likewise, if you have other income (not dividends) to set against your personal allowance, then £10,000 is wrong.

P.S. The reasoning behind paying £10,000 even though it creates a personal NIC liability of £245 is as follows:

  • If you wanted to avoid NIC your annual salary would have to be less than £7,956
  • You would therefore ‘waste’ £2,044 of personal allowance (£10,000 – £7,956)
  • The company would have to pay £408.80 corporation tax on the ‘extra’ profit of £2,044.
  • Your (personal) NIC saving would be £245.28
  • Overall the company and you would be £163.52 ‘worse off’.
  • The company will have to pay £282 NIC on the ‘extra’ £2044 salary but this will be refunded under the Enterprise Allowance scheme.
  • Once your salary exceeds £10,000 you will start paying tax at 20% and NIC at 12% (the company will have to pay a further 13.8%*) compared to the company paying corporation tax at 20% on the ‘extra’ profit if you do nothing.

* 11.04% after tax relief

Employment allowance

With effect from 6 April 2014 employers can reduce the amount of National Insurance contributions (NICs) they pay for their employees by up to £2,000. This is called the “Employment Allowance“.

The allowance can be claimed using payroll software or HMRC Basic PAYE Tools. So don’t forget to check with your payroll supplier that the necessary changes will have been made before 6 April 2014. Once made, HMRC will automatically carry the claim forward each year.

Certain employers cannot claim the allowance (e.g. if the employee is a nanny) and it cannot be claimed against deemed payments under IR35.

It’s important to remember that the £2,000 is only available to reduce the employer Class 1 NIC not employee Class 1 NIC. So don’t forget that the employees will still be paying their NIC and and the employer will have to pay the money over to HMRC.

How to avoid the High Income Child Benefit Tax Charge

More than 100,000 parents who were dragged into self assessment by changes to child benefit (the High Income Child Benefit Tax Charge) will miss next Friday’s deadline for filing their tax return because the sign-up process takes too long.

HMRC in view of this have relented slightly and have said provided you phone them early this week to arrange payment of the High Income Child Benefit Tax Charge by Friday’s deadline, you will have three months to complete your tax return, and you will not receive an automatic penalty of £100.

HMRC don’t set out what you should do so I suggest you:

  1. Phone the HMRC Self Assessment Helpline on 0300 200 3310;
  2. Explain that you are liable under the High Income Child Benefit Tax Charge but you haven’t registered for Self Assessment;
  3. Ask to register under Self Assessment;
  4. Ask for a call reference to prove you phoned. You won’t get one, so make a note of the name of the person you spoke to and the name of the office and the time of the call;
  5. Ask how you pay the tax due;
  6. Calculate the tax due using the Child Benefit tax calculator ;and
  7. Make sure you pay the tax on or before Friday, 31 January 2014.

And finally, don’t forget to complete and submit your 2013 tax return (online) within the three months.

An open letter to HMRC on behalf of all small and micro businesses

I have just sent this letter to the chief executive of HMRC in the hope she will take notice of my concerns.

 

An open letter to Lin Homer, the chief executive of HMRC, on behalf of small businesses and their advisors
Your recent press release (RTI package of help for micro businesses) which proudly tells us that

almost 93% of employers …..are now using the new process[RTI] to send PAYE information about their employee in real time, and the majority are finding the new system easy to use

glosses over the issues facing small businesses and their advisors.

Yesterday morning your Colchester Debt Management Unit contacted one of my clients to ask them to pay the £609.20 still owing in respect of their Month 6 PAYE.

When we spoke to the office, on behalf of our client, we were told that they had only paid £7,311.78 but the Full Payment Submission ( FPS) showed a liability of £7,920.98. On checking our records we discovered that the FPS we had submitted showed a liability of £7,311.78. No tax was due. When we explained this to the office we were told that it was must be a fault in our software, rather than HMRC’s, and we should contact our software provider.

When we did, moneysoft, our software provider, was surprised that HMRC should suggest that it was their software at fault as there was evidence that this was a common problem affecting many different software providers. Your Colchester office had, in fact, told us the same but were still not prepared to accept that the HMRC software was at fault.

Moneysoft showed us how to extract the information supplied to HMRC in XML format which we checked and found in agreement with the paper report we had discussed with HMRC.

Having proved our figures we contacted your Colchester office who were unable to explain why the figures differed. We were told to write to your Customer Operations Employer Office, enclosing a paper copy of the XML submission report, asking for the difference to be investigated.

All in all, we spent an hour and a half investigating an error caused by a fault in your computer system. Our client will not pay us for this work. HMRC will not reimburse us. Why should small businesses and their advisors be penalised for faults in a system which has been forced on us?

Your press release mentions giving micro businesses up to two years to adapt. Leaving aside the problem of adapting to a system which doesn’t work, why should businesses yet again have to change their ways, at considerable cost, to fit in with HMRC?

Paul Aplin, in this year’s Hardman Lecture  (I understand you were a guest) asked why the one-in-two-out rule for business red tape does not apply to HMRC?

Small and micro businesses cannot be expected to be the government’s unpaid tax collectors and administrators. The time has come to call a halt to the red tape.

The tax tail has to stop wagging the business dog.

All mouth and no trousers

I’m not a big fan of industry awards. Very few firms enter and I’m convinced that the winners are better at winning competitions than “doing the job properly”. Too many of these awards don’t test what is most important to clients – technical knowledge and competency.

We recently lost a client to a multi-award winning firm, who managed to send me an e-mail showing all their awards above their e-mail disclaimer. Unfortunately the disclaimer had been borrowed from another firm and they had forgotten to remove that firm’s name from the wording.

Unusually, they insisted on preparing the accounts despite us having already prepared draft accounts, which immediately put them under pressure because of a looming deadline at Companies House. What amazed me in this digital age was that they didn’t file the accounts electronically, relying instead on Royal Mail.

Finally, despite having sent them a copy of the last corporation tax return which showed a £nil (s445) liability they e-mailed me and asked

Could you also confirm that no s445 tax was paid in respect of the overdrawn director’s loan account?

A case of all mouth and no trousers?

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