Blog 2

This is a popular topic for our self employed clients…

Subsistence includes accommodation, food and drink costs whilst away from the permanent workplace. Subsistence expenditure is specifically treated as a product of business travel and is therefore treated as part of the cost of that travel.

The cost of food, drink and accommodation is generally not an expense incurred wholly and exclusively for business purposes, since everyone must eat in order to live. They are normal costs of living incurred by all and not as a result of trading.

Occasional business journeys outside the normal pattern

Extra costs may be incurred wholly for business purposes where occasional business journeys outside the normal pattern are made. Modest expenses incurred in these circumstances may be deducted from business profits.

HMRC allow that “where a business is by its nature itinerant” i.e. you do not have a base but work at customer sites travelling from site to site to perform your work, then expenses may be claimed in relation to the costs associated with this travelling. Examples would be a self-employed travelling salesman, or a taxi driver, where it is part of the very nature of the business to travel. The cost of subsistence and accommodation while travelling is allowable.

Travel between home and work

If a self employed person has a base of operations that is separate to their home, then the cost of travelling between home and that base will be treated as ordinary commuting and therefore is not tax deductible.

Where the base of operations is away from home, and overnight accommodation and subsistence is incurred to allow the person to be at or close to the base of operations, then the expenditure will not be allowable.

However, where a person’s base of operations is at their home then the cost of travelling between their home and where work is carried out should be allowable. Difficulties can arise in determining whether there is a specific ‘base of operations’ and where this is. Claims for relief which are later challenged by HMRC could prove costly.

The crucial point is to establish precisely where the base of operations is. Each case will clearly depend on its own merits but in recent cases the fact that business records were kept and written up at home, that tools of the trade and equipment were kept at home and that new work was sourced from home were all contributing factors taken into account in determining where the base of operations was.

Overnight subsistence and accommodation expenses

Where a business trip necessitates one or more nights away from home, the hotel accommodation and reasonable costs of overnight subsistence are deductible.

This does not extend to overnight accommodation and subsistence at the base of business operations, even if there is a contractual requirement for the trader to reside in a particular place.

The reasonable costs of meals taken in conjunction with overnight accommodation are allowable, whether they are paid on the same bill, or meals and accommodation are paid on separate bills.

If you receive a tax return, you are legally obliged to complete it, even if you think it is not relevant to you. If you do not complete and submit the tax return you will be fined. HMRC may also issue a bill for estimated tax due.

You must file your tax return with HMRC by 31 January following the tax year end date of 5 April. For example, the 2018 tax return (for the tax year 2017-2018) is due by 31 January 2019. You will be sent your tax return around May after the end of the tax year.

What happens if I submit my tax return late?

There are penalties for late filing:

• You will be charged a penalty even if you do not owe any tax.
• If you miss the filing dates of 31 October (for paper returns) or 31 January (online submission), you will be charged a penalty of £100.
• If you are three months late, you will be charged an automatic daily penalty of £10 per day, up to a maximum of £900.
• If you are six months late there will be a penalty of £300 (or 5% of the tax owing if this is greater).
• If you are 12 months late, you will be charged another £300 (or 5% of the tax owing if this is greater). In exceptional circumstances a higher penalty of up to 100% of the tax due is possible.

The are also penalties are late payment are:

• 5% of tax unpaid after 30 days
• Another 5% of tax unpaid after 6 months
• Another 5% of tax unpaid after 12 months

The penalties can result in a substantial amount of money so it is essential that you complete and submit your tax return and pay any tax due on time.

If you are self-employed your business may well be based at your home address, although you perform the majority of your work at your customers’ sites. This can apply to a range of trades from plumbers to computer consultants, and even medical professionals.

In order to claim the costs of travelling to your customers’ sites against your taxable profits, you need to show that your trading activity does not cease when you arrive home. The following records should help prove this:

• Precise records of all journeys to your customers’ sites, including the date, the mileage, and any public transport tickets and parking receipts.
• A diary of the time spent working on proposals, quotes and other business related paperwork at your home address.
• Business-related paperwork such as invoices and quotations should show your home address as the business base.
• Any insurance policy you need for your business should show your home address as the operational base for the business.
• Where your business is operated through a company, having the registered office for that company at the home address can also help. HMRC will be able to see these details, but you can hide them from prying eyes on the Companies House register.

Further information

You can also make a claim for the cost of running your business from home.

Drop us a message if you need help in determining what can and cannot be claimed as a business expense.

‘Tis the Season to be Jolly’!

Christmas isn’t too far away but we’d rather put that to one side for the time being. So if like us, you’re not ready for Christmas just yet, here’s a reminder of what is allowable for income or corporation tax purposes and what VAT you can reclaim so that you can plan your business celebrations in the most tax efficient way.

• Gifts to customers of the products or services you normally sell are tax allowable, as long as you are not in the food business.
• Small promotional gifts of any item are also treated as tax allowable for your business if they cost less than £50 each and carry a clear advertisement for the business. However, you cannot get income tax or corporation tax relief for the cost of gifts of food, drink, tobacco and gift tokens of any value.
• A number of gifts worth more than £50 in total should not be made to the same person in any 12-month period.
• If you are VAT registered you can reclaim the VAT on small gifts that cost up to £50 each, including gifts comprising of tobacco and alcohol.
• If the gift cost more than £50 (net of VAT) you must account for the VAT on the item as if you had sold it at cost.

Gifts to your staff are tax allowable, but your employees could be taxed on the value of the gift as a benefit in kind. In that case you would also have to pay Class 1A national insurance on the value of those gifts.

HMRC do consider some small items to be trivial benefits, which can be given as tax-free gifts to staff members. Trivial items can include seasonal gifts such as a turkey, an ordinary bottle of plonk (not fine vintage or champagne), or a box of chocolates.

Where you are considering making larger gifts to each employee such as a Christmas hamper, you can include the cost of those gifts in a PAYE Settlement Agreement (PSA) with the tax office. The PSA allows you to pay the tax and NI due on behalf of your employees.

From 1 April 2013, the self employed have been able to account for their income and expenditure on a cash basis. Limited companies are not able to use the scheme.

Under the previous HMRC system, self employed individuals were required to account for income and expenses as they were incurred. This is known as accrual accounting and can be time consuming for small businesses. Here’s a very simple example to illustrate this:

Let’s say you invoice a client for work you carry out for them in March 2018 but the client does not actually pay you until May 2018, which is when the money reaches your bank account. You would need to account for this income during the 2017-2018 tax year because this is the period the income was earned, i.e. March 2018.

The new system will allow you report the income in the period it was received, May 2018 in this example, which falls into the 2018-2019 tax year and therefore you will pay the tax on that income later than before.

No. The scheme will certainly make accounting simpler for small businesses but it does not mean that those businesses will pay less tax.

Small businesses that are unincorporated and with income of £150,000 or less are able to choose whether to use the simplified cash based scheme. You can stay in the scheme up to a total business turnover of £300,000 per year.

The main differences of the new system compared to the previous system are summarised by HMRC as follows:

• No need to understand rules designed for larger businesses
• No need to pay tax until cash is received
• No need to keep complicated records (for example stock, debtors and creditors), over and above those needed to run a business effectively
• No need to understand capital allowances
• No need to keep detailed records for certain key expenses – use a standard rate instead.

What are the pitfalls of the cash basis scheme?

• Capital allowances cannot be claimed. Expenditure on assets used in a business is allowable under the cash basis but certain types of capital expenditure are still excluded.
• Purchases of long-lasting assets such as cars and properties are not allowable. Business losses can only be carried forward to set against the profits of future years and not carried back or offset against other sources of income as they can currently.
• Interest payments are only allowed up to a limit of £500.

• Expenditure on vehicles – a standard fixed rate allowance can be claimed which will replace relief for actual expenditure on purchasing, maintaining and running a motor vehicle. Any small business using the cash basis must claim this way.
• Use of home for business purposes – optional for those businesses using cash accounting.
• Premises used for both home and for business purposes – optional for those business using cash accounting.

Yes you can although if two separate trades are taking place is the combined income total of both trades that will determine whether you are eligible to join the scheme.

When you use a personally owned car in your business, some of the costs associated with running the car are allowable for tax purposes so you can claim these expenses in your accounts to reduce your profits and pay less tax.

If you’re a sole trader there are two methods of claiming these expenses:

1. You can claim 45p for every business mile that you travel up to 10,000 miles. After 10,000 miles the approved  mileage rate drops to 25p per mile.
2. Claim a proportion of all running costs such as fuel, servicing, repairs, insurance and  road tax based on the number of business miles you have travelled. If you use the car privately, you can only claim a proportion of the costs that relate to business mileage, this is usually the ratio of your business mileage compared to your total mileage. You can also claim “Capital Allowances” (a form of tax relief spread over a number of years to reflect the purchase cost of the vehicle) and again these are claimed in proportion to business usage.

The capital allowances you can claim on your car are based on CO2 emissions, which are shown on the car’s V5 certificate. If you buy a new, unused car with emissions of 75g/km or less you can claim 100% allowance. So if the vehicle cost £10,000 to buy, you can claim the full amount as a capital allowance and reduce your tax bill.

For cars with emissions between 96 and 130g/km, capital allowances can be claimed at 18% and 8% for cars over 130g/km. Again, using a vehicle cost of £10,000, if the car has 100g/km emissions, £1800 (18%) would be claimed as a capital allowance in the year of purchase (reducing for personal use if necessary) and the £8200 balance would be claimed in future years.

It is essential to keep a mileage log when claiming actual running costs of the car and capital allowances because any claims made need to be based on the amount of business use and adjusted for any personal use. Keep a note of dates, journeys and the miles travelled together with a note of personal miles so that it’s easy to work out the proportion of business miles to personal miles. At the end of the tax year, if your vehicle has been used for 60% business and 40% for personal journeys, 60% of the total running costs for the year can be claimed and 60% of any capital allowances that are available.

There is no best method to use as it will vary depending on the vehicle, the mileage travelled and the overall running costs incurred. In many cases it is simpler and tax beneficial to use HMRC’s approved mileage rate of 45p per mile. Ask your accountant for advice if you’re unsure of which method is best suited to your circumstances.

If you’re a Director of a limited company, you will be able to claim 45p per business mile when carrying out business journeys in your personal vehicle, again up to 10,000 miles and the rate then falls to 25p per mile. You could also consider selling or transferring your vehicle to the company so that the company takes legal ownership of the car and bears all of the running costs. The disadvantage is that if you’re still using the car for personal journeys, you have been provided with a company car which is a taxable benefit and needs to be reported on a P11D to HMRC who will tax you accordingly.

If you lease a car rather than buying it, the rules are slightly different when it comes to tax relief on the lease payments. Cars with CO2 emissions above 111g/km suffer a 15% restriction on the lease rentals that are deductible against tax, meaning you can only claim 85% of the lease rental. There is no restriction on cars with emissions of 110g/km or less and the full cost of the lease is deductible.

Company contracts and pays for the broadband service

If a broadband contract is undertaken in the name of a limited company and the service is provided at the home of a Director or employee but paid for directly by the company, the monthly broadband cost is a tax deductible expense for the company for corporation tax purposes. If it is not possible to breakdown work and private usage, HMRC accept that providing any private use is insignificant there is no taxable benefit for the employee.

If the broadband connection is used for a mixture of business and personal use then a benefit in kind will apply with the full amount paid by the company becoming taxable on the individual.

Business use of a personal broadband service

HMRC guidance is quite clear under Section 316A ITEPA 2003. If there is already a broadband service in place at the Director’s (or employee’s) home, HMRC argue that there is no additional cost to you in using an existing broadband package for business use:

Becoming self employed is the quickest and easiest way to get your business up and running. However, there are a number of different structures under which you can operate a business so you should take professional advice before making a decision. It’s important to get it right and there are a number of aspects to consider.

What is Self Employment?
This means that you’re working for yourself, although you may also have people working for you. You’ll pay income tax on your taxable profits, through Self Assessment. You will also pay Class 2 and Class 4 National Insurance through Self Assessment. It is important to realise that you are responsible for paying your own income tax and national insurance, unlike when you are employed and work for somebody else. The law makes no distinction between you and the business which means that you are personally liable for any debts that the business may incur.

Registering as Self Employed
When you start working for yourself you need to advise HMRC straight away otherwise you may receive a financial penalty.

You can register online at www.hmrc.gov.uk.

Keeping Records
Once you’ve started your business it is essential to keep full and accurate records of your income and expenditure. It’s a legal requirement to do so. The amount of tax and national insurance you pay will be based on your business profits so you must keep good records of everything you sell and purchase.

Paying Tax and National Insurance
You will pay income tax and Class 4 national insurance by completing a self assessment tax return every year. After the tax year ends on 5th April you will need to complete the tax return online. HMRC must receive your tax return by 31 January the following year when submitting online. If your tax return is late you will receive an automatic financial penalty of £100.

You also need to pay any tax due by 31 January. You will also need to make Payments on Account on 31 January and 31 July (see below).

The current rate for Class 2 national insurance contributions is £2.85 (2017-2018) a week. However, if your earnings are below £6,025 per year (2017-18) you might not need to pay. You can apply to HMRC for this exception using form CF10.

Class 2 National Insurance contributions give entitlement to a range of contributory benefits including Incapacity Benefit, Maternity Allowance, Basic State Pension or Bereavement Benefits.

If your taxable profits are above the lower Class 4 profit limit (£8,164 for 2017/18) you will pay Class 4 contributions of 9% on profits over this limit. You pay both Class 2 and Class 4 National Insurance with your income tax – usually due by 31 January and 31 July each tax year. If profits are high (over £45,000 in 2017/18) then the rate of Class 4 National Insurance falls to 2% on profits over this higher limit.

First Year of Self Employment
For the first year you are self employed, there could be a long delay before you pay any tax, but, when it arrives, the bill is likely to be large. This because if you start business on 6th April 2017 you will not need to pay the tax until 31 January 2019. It is important that you set aside funds to settle any potential tax bill during this period.

Payments on Accounts
After your first year in business you will normally have to make two tax payments each year – 31 January and 31 July. If your annual tax bill is £1,000 or less, you will have only one payment to make on 31 January each year.

These two tax payments will include “Payments on Account” which are advance payments of your income tax bill. These are estimated tax amounts of what your tax liability may be at the end of the tax year and the amounts you pay are based on the previous years profits. Once the final tax liability is known at the end of the tax year you may have paid too much (or too little) income tax in advance and a balancing payment (or refund) may be required.

You will receive regular statements of your account from HMRC once your tax return has been submitted and these statements will tell you how much tax you owe and how much you have paid.

Personal Drawings
When you work for yourself, you will pay yourself what is known as “drawings”. This is any money that you withdraw from your business for private purposes, such as to pay your  personal bills and living expenses. You do not pay tax on these drawings. You will pay tax on the profits of the business at the end of the tax year i.e. income less expenses.

Other things to consider
Depending on your trade, you may need a licence to run your business and you must have adequate insurance for the business. If you have employees, you must have employers liability insurance.

If you own or rent premises, you must ensure that these comply with regulations. If your business is based at home, you need to consider whether your title deeds, mortgage or tenancy agreement places any restrictions on this.

Further information
If you need further advice on self employment please telephone us on 01386 366741 or message us and we’ll be happy to help. You can also sign up for our free regular tax tips through our website www.accountancyoffice.co.uk.

What is it?

The VAT Flat Rate Scheme has been popular with small businesses since 2002, enabling them to pay VAT at a considerably lower percentage of turnover rather than paying VAT on the difference between sales and purchases. It was a chosen scheme by many businesses as it helped to simplify accounting for VAT and in the majority of cases it generated VAT savings each year.

What’s changing?

All good things must come to an end of as of 1 April 2017 HMRC are implementing changes to prevent what they believe is abuse of the scheme and a new 16.5% flat rate is being introduced for businesses with limited costs to be known as a “limited cost trader”.

What’s a limited cost trader?

A limited cost trader is one whose VAT inclusive expenditure on goods is either:

• Less than 2% of their VAT inclusive turnover in a prescribed accounting period
• Greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000).

Goods, for the purposes of this measure, must be used exclusively for the business so you cannot include anything partly used for private purpose. Other exclusions include:

• Capital expenditure (office equipment, laptops etc)
• Any services (rent, internet, phone bills and accountancy fees)
• Food or drink for consumption by the flat rate business or its employees
• Gifts, promotional items and donations
• Goods you will resell or hire out unless this is your main business activity
• Vehicles, vehicle parts and fuel (except where the business is one that carries out transport services)

These exclusions have been included in the new rules to prevent businesses buying either low value everyday items or one off purchases to inflate their costs beyond the 2% and avoid the increased rate.

Who will it effect?

The new change will increase the VAT bill of businesses that are labour based and which spend little on goods. Examples of the kind of businesses that may be affected are IT contractors, consultants and construction workers who supply their labour but are not responsible for purchasing the raw materials.

What do I need to do?

As business owners, it is your responsibility to ensure the correct flat rate scheme percentage is used on each and every VAT return. HMRC have published a tool to find out whether you meet the “limited cost trader” criteria:

https://www.tax.service.gov.uk/check-your-vat-flat-rate/vat-return-period

If you meet the definition of a limited cost trader and staying on the flat rate scheme means an increase in your VAT bill, you may wish to consider moving to the standard VAT scheme. It’s straight forward to do, ask your accountant for further details. Alternatively, if viable for your business, another option would be to consider de-registering for VAT. Seek advice from your accountant and whether it is beneficial for you to do so.

Can I still claim my first year discount?

If you are still within the first 12 months of VAT registration, you will still be eligible for the 1% first year discount. This would mean that you are still on the most tax efficient and simplistic scheme to calculate your VAT liability.

Need help?

For further advice on how the changes may affect your business, please contact us on 01386 366741. Alternatively, you can find further information on HMRC’s website: https://www.gov.uk/vat-flat-rate-scheme/overview