MTD for VAT – Changes to VAT from April 2019

From 1st April 2019 HMRC will be introducing MTD for VAT, a new digital VAT regime, as the first step towards ‘Making tax Digital’ (MTD).   Yesterday HMRC launched a campaign to inform businesses, and will be writing to all affected businesses.

MTD for VAT will be compulsory for all VAT registered businesses with taxable sales above the VAT threshold.  The VAT threshold is currently £85,000, and not expected to change in 2019.

Businesses currently registered for VAT, but trading below the VAT threshold will be encouraged to sign up voluntarily.

Continue reading MTD for VAT – Changes to VAT from April 2019

A summary of tax changes from April 2018

Changes to tax and NIC from April 2018

MTD

From the beginning of April 2018 the personal tax allowance will increase to £11,850 per year.   Tax rates will be:

England and Wales
Basic rate 20% On the next £34,500 above the personal tax allowance
Higher rate 40% On £34,501 to £150,000 (the personal allowance reduces once earnings reach £100,000)
Additional rate On earnings above £150,000

 

Scottish rates and bands

On the 20 February 2018 the Scottish Parliament set the following income tax rates and bands for 2018/19.

Bands Band name Rates (%)
Over £11,850*-£13,850 Starter Rate 19
Over £13,850-£24,000 Basic Rate 20
Over £24,000-£43,430 Intermediate Rate 21
Over £43,430-£150,000** Higher Rate 41
Above £150,000** Top Rate 46
Tax on Dividends

The dividend allowance of £5,000 at 0% personal income tax, will reduce to £2,000 per year from April 2018.  Shareholders will be worse off by £225, £975 or £1,143 a year depending on whether they pay tax at the basic rate, higher rate or the additional rate.   Dividend tax rates have not changed, and the rate of tax on dividends remains at 7.5% for basic rate taxpayers, 32.5% above the higher rate threshold and 38.1% for those in the additional rate band (ie. Earning over £150,000).    For many owner-directors, the dividend/salary split will still be the most tax efficient method of remuneration, but it may not suit all.

Corporation tax remains at 19%

National Insurance

Self-employed people will continue to pay Class 4 and Class 2 National Insurance Contributions (NIC).  The abolition of Class 2 NIC was scheduled for this April, but it has been delayed until April 2019.  Class 4 NIC will be 9% on profits over £8,424. Class 2 NIC will be £2.95 per week, to be added to your 2018/19 tax bill as one total for the tax year.

Other changes

The national living and minimum wage rates increase from 1st April 2018 to:

Category of worker Hourly rate
Aged 25 and above (national living wage rate) £7.83
Aged 21 to 24 inclusive £7.38
Aged 18 to 20 inclusive £5.90
Aged under 18 (but above compulsory school leaving age) £4.20
Apprentices aged under 19 £3.70
Apprentices aged 19 and over, but in the first year of their apprenticeship £3.70
Pension Contributions

Minimum auto-enrolment (workplace pension) contributions have been 1% from both the employee and employer.  From 1st April this changes to 3% contributions paid by the employee, and 2% paid by the employer.  This will change again in April 2019.

GDPR

Something not directly related to tax and accountancy, but that will affect all businesses will be the introduction of the General Data Protection Regulation (GDPR).  This is a fairly significant upgrade from the Data Protection Act 1998, which just wasn’t sufficient for the online environment that we use now.  The GDPR comes into effect from 25th May 2018.  There is no exemption for small business, and fines for non-compliance will be from 4% of turnover.

Businesses complying with the DPA 1998 shouldn’t have too much trouble preparing for 25th May, but assessing the data you hold, documenting what you do with it, rewriting policies and communicating with data subjects (customers, suppliers, employees) can be time consuming.   The ICO website is a good place to start, if you’ve not already looked at this.

Making tax Digital (MTD)

Making tax digital (aka quarterly accounting), has been delayed for a couple of years.  It will start for VAT only from April 2019.  The new rules will encompass VAT registered businesses with a turnover above the VAT threshold (currently £85,000)  From 1st April 2019 records will need to be kept using ‘functional, compatible’ software. Compatible meaning it must be able to upload information direct to HMRC each quarter.

MTD for income tax, corporation tax etc. will follow after 2019.  It will mean 5 updates to HMRC being made each year, instead of the one annual tax return.  There will be an obligation to keep records electronically.  You’ll upload sales, expenses and profit figures each quarter, then a 5th report (if necessary) will be used to claim allowances and reliefs that are not included in normal day-to-day bookkeeping.

The well-known software companies are developing solutions, as well as some of the lesser known software houses. HMRC has said it will not be providing free software, as it currently does for both VAT and personal self-assessment tax returns.

This is a very brief summary, and there could be many other factors to consider in your own business. If you’d like any help with your tax, bookkeeping or accountancy, please get in touch.

Management accounting, bookkeeping and forecasting.

All of the above can help to avoid liquidation of limited companies.

It has been announced that Rangers FC is to be liquidated by HM Revenue and Customs (HMRC), after an attempt to reach a CVA(Company Voluntary Arrangement) failed.  HMRC’s decision is based on it’s policy of “not agreeing to a CVA where there is strong evidence of non-compliance by a company with its tax liabilities.”

A CVA is a legally binding agreement between an organisation owed money (creditor), and the company that owes the money.  It means that the company can continue to trade, while paying off an agreed proportion of the debt regularly. Any company reaching this stage is likely to have been trading involvently, and there is a risk that the directors could face disqualification, or even prosecution.

In rejecting the arrangement, HMRC is forcing Rangers into liquidating its assets to pay the debt. To do this and continue a football club Rangers is set to reform as a new company, buying the assets from the old. The proceeds of which will be used to partially settle the debt. There are no winners in cases like this. The company’s creditors lose out, as the debts are much higher than the value of the assets. Taypayers lose out, as the goverment will not receive the money owed to the state. HMRC is not the only creditor, and many creditors will not receive a penny of the money owed to them. The former owner of Rangers has the burden of admitting he waited too long to put the company into administration.  The owners of the new company have a great deal of work ahead to turn Rangers into a financially viable proposition.

The situation is not restricted to prominent companies, with millions of pounds passing through their bank accounts. Any company, of any size, can drift into insolvency. If your limited company owes more out that it can generate, it could be insolvent.  If you run a limited company, you need to keep track of its financial health.

There are several stages to this:

1. Regular bookkeeping, weekly or, at the very least, monthly. With bank accounts reconciled, supplier statements checked, petty cash checked as a minimum.

2. Management accounts, monthly or quarterly. Get them done as soon as possible after the period end. Relying on your accountant to give you the good/bad news up to 9 months after your company’s year end is not good enough.  Management accounts can be simple or complex, but add value by giving you valuable information about your business.

3. Acting on the information in your management accounts. Prepare financial forecasts. If you don’t like them, or it looks like your business is going down hill, make changes. Save costs, use your management accounting information to identify poor performance of products and services, and improve them or drop them.

4. Keep reviewing, keep making changes. Employ others when you need to. Outsource if it’s easier or cheaper.

5. Don’t be afraid to make difficult decisions. Large organisations are often criticised for making redundancies quicky, but by acting fast, and losing 1,000 jobs they could be saving the remaining 30,000. Fail to act and all 31,000 could go.

6. Pay creditors on time. They do notice if you’re late, and good payers will be treated well when a problem arises.

The same principles apply to small and large companies. However good you are at your core business activity, don’t overlook the value of managing your finances and accounts.

If you would like any help with bookkeeping, management accounts or forecasting, please get in touch.

Bookkeeping Terms and Definitions

Bookkeeping terms and definitions can be confusing.  Especially the debits and credits.  Accountants and bookkeepers, like many tradespeople and professionals use jargon. Sometimes we get so used to it that, again like other business people, we forget it’s jargon.  So if you’re wondering what it all means, maybe this will help.

Bookkeeping is done (or should be) by any type of business, charity, company and organisation. The words organisation, company and business are used interchangeably in this post, just because I get bored typing the same word repeatedly.

List of Bookkeeping Terms

Amortisation Similar to depreciation, but applied to intangible assets
Balance Sheet A financial snapshot of your organisation’s assets (things you own and money owed to you)and liabilities (money you owe to others), at a   particular date, prepared under UK accounting rules.
Bookkeeping recording, organising and filing financial documents. Does not include preparing accounts, tax computations or tax returns.
Capital This can have several meanings. Capital expenditure is money spent on fixed assets. Capital introduced is money input to a business by owners, investors, or shareholders etc. Working capital is the excess of current assets minus   current liabilities, or the amount of cash available to run your business.
Credit A credit is the opposite of a debit.
Creditors People and organisations you need to pay in the future.
Current Assets Stock, bank balances, amounts due to your company within one year. Assets  that are not long-term features of your business, and can be coverted to cash relatively quickly.
Debit A debit decreases your profit/surplus, or increases the assets on your balance sheet (statement of financial position).
Debits and credits The 2 sides of double-entry bookkeeping.  In   your accounts, think of it as the opposite of what you see on your bank  statement (ie. A credit in your bank account, will be a debit in your accounts). This is because the bank statement shows debits and credits from the bank’s point of view, not yours.
Debtors People and organisations that owe your company money. These are assets to your company.
Depreciation A proportion of the cost of a tangible asset, deducted from profit over a  number of years. The idea is to spread the cost of the asset over the period that it is used in running the business. Eg. A machine expected to last 5 years would be recorded as an asset, then written off to the P& account (deducted from profit) over 5 years.
Double-entry bookkeeping Recording the full nature of a transaction. For example, if you buy pens   for £5.00 cash, the first bookkeeping entry is to increase your costs by £5.00 (the debit entry), the second is to decrease your petty cash balance by £5.00 (the credit entry).
Fixed Assets Tangible or intangible property belonging to the business, and used to run the business activities.
Goods Items bought and sold.
Goodwill A value in incorporated companies that represents the value of the   company over and above the net value of assets minus liabilites, ususally   arising when a company is bought by another.
Income statement Equivalent to a P&L account, but compiled under different accounting   rules.
Intangible asset Something the organisation owns, but is not a physical item eg. A patent,   goodwill.
Liabilities Amounts owing to third parties, current liabilities are due within 12   months of the balance sheet date.
National Insurance Let’s face it, it’s just another tax.
Profit and loss account AKA P&L account. A statement of your income (sales, grants received   etc.), less costs and expenses, showing your profit for a particular period of time. Prepared under UK accounting rules.
Statement of Financial Position Equivalent to a balance sheet, but compiled under different accounting   rules.
Stock Items bought for resale, but not yet sold.
Tangible asset An asset with physical substance, eg. Stock for resale, money in a bank   account, buildings, machinery, equipment etc.
Tax Money you, and/or your company, have to pay even though you don’t want to.
Third party A person or organisation not connected to your own organisation.
Transaction An exchange of goods, services, money etc. with a third party, eg selling   a chair for cash is one transaction, selling a chair on credit is one   transaction, receiving a cheque for the credit sale is another transaction.
UTR Unique taxpayer reference.  A 10   figure number used by HM Revenue and Customs to identify the tax record of an individual (self-assessment tax system) or business.
Working capital The amount of money available to your business. Current assets less   current liabilities.
Written off Deducted from profit

 

Easy Business Record Keeping

Easy business record keeping.  Possible, or an oxymoron?  Are you running a business on the go?   If you’re using a smartpone, iPod Touch or iPad, there could be an easy way to record your business expenses.

Several companies have recognised that keeping paper records is a chore you don’t want to face at the end of a busy day, and developed apps to help.  Some of these have been around for a while, some are free, and some are simpler than others. You can choose which is best for you.

So, if your business is not VAT registered and you want a simple solution for recording income and expenses, why not try them out?

HMRC lists a few on their website here:  http://www.hmrc.gov.uk/softwaredevelopers/mobile-apps/record-keeping.htm

There are many others including https://www.expensify.com/, which can be used by employees to record expenses and submit claims.

Whichever you use, remember to download, back-up or save your data regularly.