What is Making Tax Digital (MTD)?

Making Tax Digital is a key part of the government’s plans to digitise the tax system.  The objective is to reduce mistakes and streamline the sharing of data with HMRC.

From 1st April 2019, all business with a taxable turnover that exceeds the VAT registration threshold (currently £85,000) are required to store their VAT records digitally and submit VAT returns to HMRC via MTD compliant software.

Note: The ability to submit a VAT return via the HMRC portal is being removed.

When does it start?

The first mandatory MTD VAT returns will be for businesses with a VAT quarter which ends on 30th June 2019.

Most businesses will have received a letter from HMRC about MTD and you may have noticed a high volume of accounting software advertisements in the media.  However, do you realise that it applies to you too?  And what steps do you need to take to be compliant?

This blog aims to resolve some of the concerns you may have.


a4c’s Frequently Asked Questions on MTD

1. Will I automatically be registered for MTD?

No, you will need to sign up for Making Tax Digital for VAT with HMRC.

  • If a4c are already preparing and filing your VAT returns, then we will sign you up in plenty of time to file your next VAT return.
  • If you file your own VAT returns then you need to sign up yourself, see below.

2. How long does it take to sign up for MTD?

If you are signing up yourself, it takes around 1 hour to start the process and then once you’ve made the submission you will receive email confirmation 72 hours later.  This means that you shouldn’t leave it until your VAT returns needs to be filed as you may miss the submission deadline (visit https://www.gov.uk/guidance/sign-up-for-making-tax-digital-for-vat for more information).

3. Does MTD apply to me if I already use accounting software?

Yes, MTD applies to every VAT registered business.  You will still need to sign up for MTD but assuming your software provider is on HMRC’s approved MTD list then the VAT return preparation and submission should be straight forward, once the MTD link is in place.

4. I’ve read about a soft landing; does this mean I don’t have to comply right away?

No, everyone must start to file MTD VAT returns for quarters ending 30th June 2019 onwards.  The soft-landing means that HMRC will be lenient in relation to penalties on returns filed late, where there are technical problems.

5. I understand that MTD is mandatory but are there any benefits to business owners?

Making Tax Digital means that HMRC will only accept VAT returns sent using MTD compliant software, like Xero.

If you haven’t used accounting software before then you’ll be amazed at how much of the heavy lifting can be done for you; automation, intelligent machine learning and streamlined access will enable you to manage your books quickly and be confident in your numbers.

As Gold Xero Partners, a4c are experts in this software and would be very happy to give you a free, no obligation demo.

In the meantime, the key benefits to Xero software are:

  • Automation

From importing bank transactions to sending invoice reminders, with Xero the leg work is done for you.  Plus, because the software is cloud based you can access your records from any device (PC, laptop, tablet or smartphone).  Saving you time and keeping your business moving, even when you’re on the go!

  • Feel confident in your numbers

When Xero is combined with Receipt Bank, automated data extraction from your receipts and supplier invoices will ensure that the correct amount of VAT is reclaimed every time.  Also in Xero you can set up bank rules to ensure that VAT rates and rules are applied correctly and consistently.

  • Proactive accounting support from a4c

Software which is cloud based can be accessed by you and us, as your accountants, throughout the year.  This means we can give real time support and assist you in making key decisions which can help to grow your business or to save you tax.

Act Now!

If you are a VAT registered business and don’t have MTD compliant software in place then now is the time to act!

Speak to a member of the a4c team for more information on how Xero could help you to comply, whilst affording lots of other worthwhile benefits too!

 

Has it been three years already?!

Every three years employers must put certain members of staff back into an automatic enrolment pension scheme. This is called ‘re-enrolment’.

Re-enrolment duties must be completed approximately three years after your automatic enrolment staging date.  You will also need to complete a re-declaration of compliance to tell The Pensions Regulator how you have completed your duties.

Re-enrolment and the re-declaration of compliance are legal duties and if you don’t act you could be fined.


Your re-enrolment steps:

1) Choose a re-enrolment date

You have a six month ‘window’ from which you can choose a re-enrolment date. This window starts three months before and ends three months after the third anniversary of your automatic enrolment staging date.

2) Assess and re-enrol staff

You need to assess staff who have:

  • asked to leave (opted out of) your pension scheme
  • left your pension scheme after the end of the opt-out period
  • stayed in your pension scheme – but chosen to reduce the level of pension contributions to below the minimum level, and who meet the age and earnings criteria to be re-enrolled.

 

You can leave out any staff member who, on your chosen re-enrolment date:

  • is already in the pension scheme you use for automatic enrolment
  • is aged 21 or under
  • is at state pension age (SPA) or over
  • has not yet met the age and earnings criteria for automatic enrolment, or has been postponed.

3) Write to staff you have re-enrolled

You must do this within six weeks of your re-enrolment date.  It is your legal duty to write to each member of staff you have put back into your pension scheme.

4) Complete your re-declaration of compliance

You must do this within five months of the third anniversary of your staging date

Completing and submitting your re-declaration of compliance is a legal duty to show how you have fulfilled your employer duties for re-enrolment. You must complete your re-declaration even if you don’t have any staff to put back into your pension scheme. You can start your re-declaration at any time after you have re-enrolled staff, or as soon as you work out you have no staff to put into your pension scheme.

We recommend that you don’t leave your re-declaration until the last day to complete as some information may take time to prepare.


Ongoing duties after re-enrolment

Each time you pay your staff you should carry out the following ongoing duties:

  • monitor the age and earnings of your staff to see if you need to put any of them into a pension scheme
  • manage requests to join and leave your pension scheme
  • keep accurate records of what you have done
  • pay money into a pension scheme if you have put staff into it.

Re-enrolment is also part of your ongoing duties and you must continue to do this every three years.

Spring is in the air and you’re thinking about fulfilling that new year’s resolution to get fit. What better way than by getting on two wheels and bagging a tax break into the bargain. How should you go about it?

Summer’s here (well nearly)!

These days Britain is a nation of cyclists, perhaps not yet to rival the Dutch but we’re pedalling fast to catch up. And with summer on the way many fair-weather riders are looking forward to getting back in the saddle. But if your bike is looking a bit tired and needs replacing the cycle-to-work scheme is worth considering. It’s a little more flexible than its name suggests.

Cycle to work (and elsewhere)

Broadly, the cycle-to-work scheme means businesses can offer their employees, including directors, use of a bike that it owns or rents as a tax and NI-free perk. Naturally there’s a little more to it than that, but the basic conditions of the scheme are fairly simple:

  • use of bikes must be offered to all employees, although to obtain the tax break it’s not necessary for all employees to take up the offer
  • employees must not own the bikes. But they can be given to the employees or directors after a period of time. Alternatively, the bike can be sold to them at a price that results in no taxable benefit in kind (BiK)
  • the bike must be used mainly for work-related journeys, e.g. to or from a workplace, to or from the station as part of a commute or even between branches, depots, etc.

 

Tip. The tax and NI exemption extends to cycle safety and protective wear provided by employers, e.g. helmets, gloves, etc.

Cycling records

HMRC’s guidance says employees aren’t required to keep detailed records and that tax inspectors should accept that the business use test is met unless there is clear evidence to the contrary.

End of the cycle

After a while you can sell or give the bike to the employee. There’s no set period for which the business must own it, but at least a year seems sensible. While the gift of a bike is a BiK, the tax bill is typically quite small. You can avoid it entirely if you sell the bike for no less than HMRC’s guide price.

Example. Using HMRC’s guide price, a bike which cost £500 (including VAT) when new can be given to an employee after one year and the taxable BiK is 18% of its original price, i.e. £90. For a 20% taxpayer that means a tax bill of just £18. The employer will have to pay £12 in Class 1A NI. If the bike is sold to the employee for at least £90 there’s no taxable BiK.

 

What are the key rates and bandings for the year ahead?

Income tax

All UK except Scotland (see below)

2018/19

2019/20

Basic rate 20% 20%
Higher rate 40% 40%
Additional rate 45% 45%
Starting rate for savings rate (applicable to savings income up to £5,000) 0% 0%
Basic rate taxpayers £1,000 £1,000
Higher rate taxpayers £500 £500
Additional rate taxpayers N/A N/A
Higher rate applies to taxable income above (up to £150,000) £34,500 £37,500
Additional rate applies to taxable income above £150,000 £150,000
Dividend nil rate band (the amount on which 0% tax applies) £2,000 £2,000
Dividend rate up to basic rate limit 7.5% 7.5%
Dividend rate up to higher rate limit 32.5% 32.5%
Dividend rate on income above higher rate limit 38.1% 38.1%

For 2018/2019 (and later years) the tax-free dividend allowance is reduced to £2,000. Dividends above this amount, but within the basic rate band, are taxed at 7.5%. The dividend you receive is the gross amount.

Basic rate taxpayers are able to receive up to £1,000 of savings income tax free. The limit is £500 for higher rate taxpayers. There is no savings allowance for additional rate taxpayers.

 

Income tax allowances and reliefs

2018/19

2019/20

Personal allowance £11,850 £12,500
Transferable personal allowance (marriage allowance) £1,190 £1,250

Personal allowances. Since 5 April 2010 personal allowances are withdrawn from those with taxable income above £100,000 at the rate of £1 for each £2 of taxable income received above that amount.

One spouse or civil partner can transfer up to 10% of their unused personal allowances to their partner as long as neither is liable higher or additional rate tax. Claims can be backdated for up to four years where conditions are met.

 

Scottish income tax

The Scottish tax rates apply to earned income only. Where a Scottish rate taxpayer has investment income the same rates apply to it as they would to taxpayers in the rest of the UK.

2018/19

2019/20

Personal tax-free allowance £11,850 £12,500
Starter rate 19% on income between £11,851 and £13,850 £12,501 and £14,549
Basic rate 20% on income between £13,851 and £24,000 £14,550 and £24,944
Intermediate rate 21% on income between £24,001 and £43,430 £24,945 and £43,430
Higher rate 40% on income between N/A N/A
Higher rate 41% on income between £43,431 and £150,000 £43,431 and £150,000
Additional rate 45% on income above N/A N/A
Top rate 46% on income above £150,000 £150,000

National Insurance

Description 2018/19 2019/20
Lower earnings limit, primary Class 1 (per week) £116 £118
Upper earnings limit, primary Class 1 (per week) £892 £9,692
Primary threshold (per week) £162 £166
Secondary threshold (per week) £162 £166
Upper secondary threshold for under 21s (per week) £892 £962
Apprentice upper secondary threshold for under 25s £892 £962
Employees up to the primary threshold and employers up to the secondary threshold. 0% 0%
Employees’ Class 1 rate between primary threshold and upper earnings limit 12% 12%
Employees’ Class 1 rate above upper earnings limit 2% 2%
Married women’s reduced rate between primary threshold and upper earnings limit 5.85% 5.85%
Married women’s rate above upper earnings limit 2% 2%
Employer’s secondary Class 1 rate above secondary threshold 13.8% 13.8%
Class 2 rate (per week) £2.95 £3.00
Class 2 small earnings exception (per year) £6,205 £6,365
Special Class 2 rate for share fishermen (per week) £3.60 £3.65
Special Class 2 rate for volunteer development workers (per week) £5.80 £5.90
Class 3 rate (per week) £14.65 £15.00
Class 4 lower profits limit (per year) £8,424 £8,632
Class 4 upper profits limit (per year) £46,350 £50,000
Class 4 rate between lower profits limit and upper profits limit 9% 9%
Class 4 rate above upper profits limit 2% 2%

Rent-a-room relief

Rent-a-room relief amount is set at £7,500. Individuals letting accommodation in their only or main residence, whether or not they are resident at the same time, as furnished accommodation are exempt on rental and related income (rent-a-room receipts) up to a limit of £7,500 a year.

Receipts in excess of £7,500 are taxed in full, but the taxpayer can elect to be taxed instead on either the full rent less expenses incurred under a normal rental business computation; or to be taxed on the rents in excess of the rent-a-room relief amount.

 

Trading allowance and property allowance

With effect from 6 April 2017 two new tax-free allowances are available to individuals with small amounts of income from trading or property rental sources. A “trading allowance” and a “property allowance”. Both allowances are £1,000 each.

In each case the £1,000 allowance applies to “income” (the receipts of the trade or property rental business) not profits.

 

Trading allowance

The trading allowance can be used against business income and certain miscellaneous income from providing assets or services in the course of a trade. Elections can be made so that the allowance is not given partially or at all. The amount of relief depends on whether the trading income exceeds £1,000.

If the income is less than £1,000, there is complete exemption and there is no need to notify HMRC or enter it on a tax return

If the income is more than £1,000 there is a choice. Either deduct actual business expenses or elect to treat the £1,000 as tax deductible in place of the actual expenses incurred.

A decision whether or not to elect can be made on a year-by-year basis.

There is no relief if the income has been received from:

an employer, or spouse’s (or civil partner’s) employer

a partnership in which you (or a connected party) are a partner

a close company in which you (or an associate) are a participator.

 

Property allowance

The property allowance can be used against rental income and certain miscellaneous income from providing assets or services in the course of a trade. Elections can be made so that the allowance is not given at all, or partially. The amount of relief depends on whether the income exceeds £1,000.

if the income is less than £1,000 there is complete exemption and there is no need to notify HMRC or enter it on a tax return.

if the income is more than £1,000 there is a choice. Either deduct actual property expenses or elect to treat the £1,000 as tax deductible in place of the actual expenses incurred.

A decision whether or not to elect can be made on a year-by-year basis.

The property allowance cannot be claimed where:

rent-a-room relief applies or could apply to the income; or

where the restriction (which took effect on 6 April 2017) on tax-deductible loan interest and other costs used to buy or improve residential accommodation applies.

As you will be aware the tax year in the UK runs from 6th April to 5th April – but why such random dates?

It all dates back to Julius Caesar!

Back in 45 BC we used the Julian Calendar and New Year’s Day was officially 25th March.  However in the 16th century Pope Gregory Xiii decided that the ‘Julian’ calendar wasn’t accurate enough as it had lost 9 days since its introduction, compared to the solar calendar.

So with this in mind, Pope Gregory introduced the Gregorian calendar.

The Gregorian calendar reduced the length of the calendar year from 365.25 days to 365.2425, a reduction of 10 minutes 48 seconds per year!  This meant his calendar was a much more accurate time keeper.

At that point the Gregorian Calendar was introduced by many countries including Italy, Spain, Portugal and what was then the Polish-Lithuanian commonwealth. However the British Empire didn’t adopt it until 1752, by which point we were 11 days off the rest of Europe!

As the old New Year’s Day was 25th March and in order to avoid losing revenue the British Treasury decided that the tax year which started on 25th March 1752 would be the usual 365 days, thereby running until 5th April.

This ran smoothly and accurately until 1800, when a leap year hiccup meant that a day was lost and therefore the British Treasury once again moved the start of the tax year to 5th April and it has remained there ever since!

And who said accountancy was boring lol 😊

 

At a4c we’ve always provided transparent, all inclusive pricing, so that our clients know what they’re getting and how much it will cost them up front.

No hidden extras. No nasty surprises.

And now we have a jazzy new logo to prove it!

To find out how a4c can support you and your business, please get in touch today for a free and friendly chat.

01737 652 852

What is your Tax Efficient Strategy for Salary & Dividends in 2019/20?

From April of 2019, the most tax efficient remuneration strategy for a director, wishing to remain within the basic rate tax band, will be to keep your monthly withdrawals from the limited company below £4,165 per month, and to save £222 per month of that amount to cover your personal tax bill.

The breakdown is as follows:

1. Monthly Salary

  • £719

  • Beneath the tax and NI threshold but high enough that you will still qualify for state pension & benefits

2. Dividends

  • £3,446*

  • This assumes you have sufficient company profits available after Corporation Tax

3. Save

  • £222

  • To cover the tax on dividends, which will be payable 31/01/2021. You may want to save more to also cover your payments on account for 2020/21.

 

If you follow the above, you will avoid going into the higher rate tax bracket.

Note these figures are purely based on earnings from your business and do not consider other personal income you may receive.

*We don’t advise declaring dividends monthly, these may be challenged as salary.  The above have been provided purely to help you budget and instead you should consider declaring dividends quarterly or six monthly.

Higher Earnings

If you need to declare larger dividends then just remember that for every £1,000 that you pay yourself in dividends, over and above the £3,446 per month, you will be liable for £325 in tax (as you fall into the higher rate bracket where income is taxed at 32.5%).

Grab your free Salary Guide

Want more information? We’ve created a Salary Guide with Dividend Tax Illustrations for the year ahead.  To get your hands on a copy get in touch today!

 

HMRC has issued new guidance on the VAT position for goods imported after a no-deal Brexit. Imports from inside and outside the EU may be affected.

How might this affect your business?

No deal

At the time of publication, a “meaningful vote” on whether to accept the government’s Brexit deal is imminent. The odds are stacked against it being approved by Parliament so businesses need to be ready in case we exit the EU without a deal.

There’s official guidance on changes to customs procedures in that event and now there’s information about how to account for VAT on imports.

The key think is that if you import, or intend to import, goods from the EU and don’t have a UK Economic Operator Registration and Identification (EORI) number already, you’ll need to obtain one in case of a no-deal Brexit.

An EORI number can be obtained online in a matter of minutes by visiting www.gov.uk/eori.

Pending imports

Unless it’s delayed, Brexit will occur at 11.00pm on 29 March 2019 and the procedure for accounting for VAT changes for imports arriving after that point.

Goods in transit to the UK at that time are subject to the new VAT procedure.

Accounting for VAT

HMRC will generate monthly lists of imports linked to your EORI number. You must download and keep these with your records as you’ll need to account for VAT on this value in your next return instead of paying it at the time of entry into the UK.

If you’re entitled to reclaim VAT on goods you’ve purchased from outside the UK, the new procedure will mean that you don’t suffer cash-flow problems as a result of Brexit, i.e. because usually you’ll be accounting for and reclaiming the VAT on the imports on the same return.

Read all about it!

There are various nuances and exceptions to the new procedure so it’s vital that if you import goods you read HMRC’s latest guidance on the new procedure, which might change at very short notice.

Visit www.gov.uk/guidance/accounting-for-import-vat for more information.

We’re approaching the end of the current tax year.

What tax savings strategies should you be considering before 5th April 2019?

If you are a limited company director then find time in March to review your income levels so far this year.

You can then establish if there are any remaining tax rates and allowances available to use, before they change on 6th April 2019.

We’ve composed a quick year-end tax planning 2018/19 guide to help you.

Firstly list your earnings in the 2018/19 tax year.

Remember to include:

  • Salary
  • Dividends
  • Property rental income
  • Pension income
  • Self employed earnings
  • Capital gains
  • Interest received
  • Foreign earnings
  • Savings income

Next, work through the tax bands below to see where your income level sits:

Tax Band

Tax Rate

Basic rate

£0-£34,500

20%

Higher rate

£34,501 – £150,000

40%

Additional rate

Over £150,000

45%

Dividend ordinary rate

£2,000-£34,500

7.5%

Dividend upper rate

£34,501– £150,000

32.5%

Dividend additional rate

Over £150,000

38.1%

(Most people’s Personal Allowance in 2018/19 is £11,850)

Finally, using our tips below, decide what action you want to take and do it quickly, before it’s too late!

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End Of Year Tax Planning

£11,850 Personal Allowance

This is the amount most people can earn tax free, between 6th April 2018 and 5th April 2019.

For most limited company directors this tax free allowance will have been used up by your monthly salary payments.  If not then consider paying yourself an end of year bonus.

Remember however that this may trigger a National Insurance bill.  Email payroll@a4cgroup.co.uk if you’re unsure of your salary payments so far this year and Tom will be happy to give you a quick update.

Any unpaid expenses?

Your limited company should reimburse you for any legitimate business expenses that you have paid for personally (such as mileage, professional subscriptions, home working allowance start up costs etc).

Therefore if you haven’t repaid yourself these costs throughout the year, you can extract this money from your company now, free from tax.

Remember that all expenses must be “wholly, exclusively and necessarily” incurred in the performance of your duties, check out our Expenses Guide for more info.

Tax Free Dividends

The first £2,000 of dividends taken from your company are tax free.  Over this you’ll need to pay Dividend Tax, as outlined above.

Remember that dividends are the distribution of profits from your limited company – after Corporation Tax.  So your company needs to be making a profit or have retained earnings for dividends to be declared.

Dividend Timings

Dividends are considered part of your income for personal tax purposes either when they are paid or when they are declared (the earliest date applies).

This means that you can declare dividends in the 2018/19 tax year to fully utilise your allowances, but you could actually take the money out of your business bank account in a later tax year.

£100k Personal Allowance Reduction

If your income exceeds £100,000 during the tax year your personal allowance will reduce by £1 for every £2 earned, until £125,000 which in most cases is when it’s removed altogether.

Therefore if your income levels are close to this and you would normally take dividends with your salary at the end of March, you might want to consider delaying the payment until 6th April, thereby making the dividend payment fall into the next tax year.

Of course if your earnings are expected to remain the same or even increase in the 2019/20 tax year then you push the problem forward, but this is wise tax planning if it looks like you might have some downtime!

Pump up your pension…

If your personal income is likely to push you into the higher tax band then pension contributions are a great way of reducing your liability, as well as saving for your future.  If paid from the limited company they also reduce it’s Corporation Tax bill so win : win!

If you don’t yet have a pension in place and need some advice then get in touch as we work with a number of Independent Financial Advisers who would be happy to help.

Profits don’t have to be taken!

Don’t feel that you always have to remove available profits from your limited company.

If the money is not a necessity to fund your living requirements then you can leave the profits in the business and declare dividends in later months or years.  Alternativley you could qualify for Entrepreneurs Relief and withdraw the retained profits in the future, when the business is closed, thus only paying tax at 10%  on the funds.

Remember if you work as a contractor then you may need to keep reserves in the business to support you in between contracts, known in the sector as a war chest for time on the bench!

Give to charity

If you make a charitable donation under the Gift Aid scheme, the charity can claim back 20% basic rate tax on any donations.

Using Gift Aid can also generate a refund for higher rate and additional rate taxpayers. Higher rate taxpayers can claim back the tax difference between the higher rate and basic rate on the donation.

A cash gift of £80, made under the Gift Aid scheme, will generate a refund of £20 for the charity, which receives £100. The donor claims back tax of £20, making the net cost of the gift only £60.

How and when is personal tax paid?

If, based on the above, you have personal tax to pay then you will need to declare this in your 2018/19 self assessment tax return.  This needs to be filed with HMRC, with your tax paid, by 31st January 2020.

Further reading…

For more information on self assessment tax returns visit the HMRC guidelines at https://www.gov.uk/self-assessment-tax-returns.