The Fizz! Blog

This kind of HMRC campaign really shouldn't be necessary

"HMRC has launched its latest campaign, aimed at VAT-registered traders who have one or more overdue VAT returns. The VAT Outstanding Returns campaign offers the opportunity to bring their affairs up to date."

The thing is, if HMRC were staffed appropriately, they'd just be able to take action against non-submitters as they went along, and then there wouldn't be so many overdue returns.  The rules are clear, HMRC know precisely which businesses are in arrears and what returns they're supposed to have submitted, and sanctions are available - there just isn't the workforce to chase it up properly.  If there were, I would speculate that the extra staff would more than pay for themselves.

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Wow, tax rates affect behaviour

Lots of fuss over the last couple of days about the idea that businesses like Goldman Sachs might delay paying bonuses until 6 April so that they're taxed on the recipient at 45% rather than 50%.

Well, yes, that's what happens when you change tax rates.  Behaviour changes too.  When the rate went up to 50% from 40%, the opposite happened - people paid bonuses earlier to take advantage of the lower rate.  It's basic tax planning, and it's naive to think that people won't wait a couple of months in order to save £20,000.  In this case, GS may well be bullied into not delaying, but there will be plenty of lower-profile businesses who will certainly delay.  They'd be crazy not to.

Most people have a pretty fixed income, little choice about its timing, and the 45%/50% dilemma isn't something that is of concern to them.  But that isn't the case for everyone.  For many business owners and high earners, incomes aren't a fixed amount that get taxed at whatever the rate happens to be at the time.  There's often flexibility over timing and any sensible person is going to at least consider the implications.

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This was our December client newsletter

Every month we send out an email to our clients updating them on what's going on in accounts and tax and how it might affect them.  This is what we wrote last month...

Here’s our latest update on topical tax, accounting and financial things.  The Chancellor made a few announcements in his autumn statement that could be of interest to business owners - especially proprietors of very small sole trader and partnership businesses.  And we've discussed Childcare Vouchers, which can be an easy way for owners of small limited companies to save a bit of tax on childcare costs.  Last month we suggested that we'd take a more detailed look at the new requirement from April for employers to tell HMRC about their salary payments every week or month, rather than at year-end - RTI.  HMRC haven't really released enough detailed information about it yet, though, so we're going to leave it for a bit.

Increased Annual Investment Allowance

First thing from the autumn statement.  There was an unexpected and massive increase in the "Annual Investment Allowance" - that's the spend on fixed assets (computers, vehicles, furniture, plant & machinery etc) that a business is allowed to deduct from its profits before working out its tax bill for the year.  That had recently decreased from £100,000 a year to £25,000.  Obviously, £25,000 was still more than enough for most small businesses but if, say, you're buying a couple of vans in a year you could go over that threshold easily, and the excess over £25,000 wouldn't save any tax immediately, but over a number of years.  Anyway, that allowance is going up to £250,000 a year next month - that really ought to be enough for small businesses!  It will cover the majority of bigger businesses too, and is aimed, we imagine, at encouraging UK companies to start spending on assets and infrastructure to get the economy moving more quickly (and get some VAT and PAYE flowing into the Exchequer as well).

Cash Accounting

The second thing from the autumn statement is potentially going to have a big impact on very small businesses.  From April 2013, small sole trader and partnership businesses (defined as those with annual sales of less than £77,000) will have an option to complete their tax returns on a cash basis.  At the moment, all businesses have to use what accountants call an "accruals" basis - i.e. what you've earned and the costs you've incurred, regardless of when cash actually changes hands.

One of the reasons we think that this an odd path to go down is because its overlooks the fundamental point of accounts.  Accounts are primarily a tool to help you to run your business.  They're not a tool to enable you to complete a tax return as easily as possible - being able to complete your tax return should be a byproduct of your accounts.  It might be easy to fill in your tax return purely on the basis of cash in and out, but if you don't keep proper accounts then there's always a risk that you're missing important information about your business and how it could be improved or changed.  Or whether you should just get a job!

We've written more about the shortcomings of cash accounting and the new proposals here:
http://tinyurl.com/bsddqx2

Our advice for most businesses is likely to be to continue to prepare accounts on a normal basis, but there will be occasions when cash accounting is appropriate.  We'll see how it pans out.  Limited companies won't be able to use the system, by the way.

Fixed expenses

The final significant announcement in the autumn statement for small business was really part of the cash accounting move.  Again from April 2013, small businesses (but not companies) will have an option to claim for fixed business expenses on their tax returns, rather than actual ones.  Again this is plainly nonsense - how are you supposed to know if it's worth being in business at all if you don't keep records including actual expenses?  You might be wasting your time completely.

Anyway, you'll also have the option of using those fixed expenses whether you're using the new cash accounting option, or keeping proper accounts.  That means that a sole trader or partnership with turnover of less than £77,000 will have four options when it comes to submitting their tax return for 2013/14:

• Cash accounting with actual expenses
• Cash accounting with fixed expenses
• Normal accounting with actual expenses
• Normal accounting with fixed expenses

So if a small business is keen to absolutely minimise their tax bill, in theory they'll need to do four sets of accounts in order to work out which one is best.

This is (genuinely) the work of the Office of Tax Simplification.

Childcare Vouchers

Employers are able, if they wish, to operate a Childcare Voucher scheme.  If they do, each employee (if you're running a scheme, it must be offered to employees generally, not just to one or two) can be given vouchers worth up to £55 a week tax-free, which the employee can use to pay for qualifying childcare costs.  The vouchers don't have to be used for traditional childcare - they can also be used to pay for extra-curricular activities.  Anything that's not part of the national curriculum that's being offered by an Ofsted-registered organisation qualifies - so it could be an efficient way of paying for music lessons, sporting activities or trips away.

If you're a director of your own company, with no other employees, it's still possible to use the scheme!  It can be a really simple way to save hundreds of pounds in tax every year.  If you'd like some more guidance on how a voucher scheme might work for you, then just let us know.

If you're a sole trader or a partner in a partnership, then bad luck - you can't benefit from childcare vouchers.  Anyone who you employ can, though!

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