Here is a summary of the main tax advantages of self-employment:

Expenses to Claim

• The cost of any goods or services you use fully for your business can be deducted from your sales revenue for tax purposes. Where an item is used partially for your business and partly for private purposes, such as your private car or home, you can claim the business proportion of the costs against your business profits. However, you must be able to justify the business proportion with evidence such as the miles driven, or space used by the business.

• Capital allowances – if you purchase an item that is expected to last several years, such as a van, you can claim a special deduction known as a capital allowance. The first £100,000 you spend on equipment each year qualifies for 100% capital allowances in the year of purchase. This does not include cars.

• Loan interest – if you take out a business loan the interest paid on that loan can be deducted from your sales revenue. The loan must be taken out to fund your business, rather than a personal loan or credit card borrowings.

Government Support

• Government funding – if you live in an area in the UK that has been designated as a regeneration area you may qualify for a government funded programme to help people start their own businesses.

• Charitable support is also available from the Prince’s Trust throughout Britain for those aged 18 to 30 who wish to start their own business.

• Self-employed credit – if you have been registered as unemployed for at least six months you may qualify for a self-employed credit of £50 per week if you start your own business. Ask at your local Jobcentre Plus office for more details.

• Working and child tax credits – You may qualify for these while you run your own self-employed business. Your tax credit award is based on your family’s joint income including your self-employed profits, but it will also be determined by the number of hours worked by the adults in the family, and the number of children aged under 16.

Please contact us to see how we can help you

2010 Budget News

This was a pre-election Budget but without many give-away prizes. Many of the standard allowances and thresholds have been frozen for two to five years, which introduces hidden tax rises by way of fiscal drag.

This summary concentrates on the main tax issues affecting our clients.

The good news points for small businesses are the extensions of entrepreneurs’ relief and the Annual Investment Allowance. The bad news includes the new anti-avoidance rule for loans provided to participators in private companies. There are also a large number of complex measures which may not pass into law before this Government runs out of Parliamentary time.

Business Tax

Capital Allowances

The maximum Annual Investment Allowance (AIA) available to each business or group of companies will double to £100,000 for expenditure incurred from 1 April 2010 (6 April 2010 for unincorporated businesses). The cost of all qualifying equipment (not cars or buildings), that falls within the AIA limit can be deducted in full from the business profits in the year the equipment is bought.

The AIA was introduced in April 2008 with a cap of £50,000, which was sufficient to cover the annual capital expenditure for about 90% of businesses. This increase in the AIA limit means the capital expenditure of about 99% of businesses will be covered by the AIA, and thus will be allowable in full when incurred. Any capital expenditure in excess of the AIA limit is taken into the relevant capital allowance pool where it receives tax relief at either 10% or 20% per year.

Partnerships where one or more of the partners is a company do not qualify for the AIA. Also a group of companies only qualifies for one AIA limit for the whole group.

Loans to Participators

This is bad news for private companies. It undermines an arrangement that is becoming popular in owner-managed companies; where the director takes a loan from his company to spread the taxation of that income into a future tax year. When the loan is written-off or released by the company, the director is taxed on the value of the loan as if it was a dividend. However, the Taxman may also insist that the company pays class 1NICs on the loan write-off where the loan may have been substituted for part of the director’s remuneration.

Before today’s Budget the company could claim a deduction in its accounts for the value of the loan written-off as well as any NICs paid on that amount. For loans written-off on or after 24 March 2010 the company will not be able to claim a deduction in its accounts for the value of the loan, which will make the whole exercise very expensive. This new rule applies where the loan is provided by a privately owned company to a participator of that company, which includes all shareholders, directors and loan creditors of the company and their associates.

Corporation Tax

The corporate tax rate for small profits remains frozen at 21% for the financial year that runs from 1 April 2010 to 31 March 2011 (2010/11). The small profits rate applies where a single company has profits of no more than £300,000. Companies with profits of £1.5 million or more pay corporation tax at 28%. Profits that fall in the band £300,000 to £1.5 million are taxed at a marginal rate of 29.75%. Companies with ring-fenced trades (basically those in the oil industry), pay corporation tax at 19% or 30% for the financial year 2010/11.

Where a company is part of a group or has associated companies the profit thresholds that determine where each tax rate applies are divided by the number of associated or group companies.

Business Rates

Businesses that occupy premises in England with rateable values of up to £6,000 per year will be able to claim full exemption from business rates for 12 months from 1 October 2010. In addition those businesses in properties with rateable values of up to £12,000 will be able to claim reductions in their business rates from that date. Different business rates relief schemes apply for properties in Wales and Scotland, but details of those schemes were not given in this Budget statement.

Individuals

Income Tax Allowances

All personal tax allowances have been frozen for 2010/11 at the 2009/10 levels as follows:

Under 65 – £6,475
65-74 – £9,490
75 and over - £9,640
Minimum marriage allowance* - £2,670
Marriage one partner born before 6 /4/1935* - £6,965
Blind person’s allowance – £1,890
Income limit for allowances for those aged 65 or more £22,900
* given at 10% rate only

This freezing of allowances for everyone amounts to a hidden tax increase as the value of the allowance is reduced in real terms by inflation, which from the latest measure of the consumer prices index (CPI) is now 3%. Unfortunately the annual adjustment in allowances is based on a different measure of inflation: the Retail Price Index (RPI) as reported for the year to September which was a negative number: (-1.4), which has resulted in frozen personal allowances for 2010/11.

Another hidden tax rise lies in store for those with total income of £100,000 or more. From 6 April 2010 those individuals will lose £1 of their personal allowance, for every £2 of their total income that exceeds £100,000. This equates to a marginal tax rate of 60% on that slice of income.

Income Tax Rates

The tax thresholds for 2010/11 at which each tax rate is imposed have also been frozen at the 2009/10 levels. This also introduces a subtle tax increase for those people whose income has increased, if that increase takes their taxable income over one of the tax thresholds.

Savings rate* – 10% - £0 – £2,440
Basic rate – 20% – £0 – £37,400
Higher rate – 40% – £37,401 to £150,000
Additional rate - 50% – Over £150,000

* Only applies to savings income such as interest where earned income is covered by allowances or is also within this band.

The 50% tax rate only applies on income over £150,000, it does not replace the 40% tax rate.

Capital Gains Tax

The much anticipated increase in the rate of capital gains tax (CGT) did not emerge, the CGT rate remains at 18% for 2010/11. The CGT annual exemption is also frozen for 2010/11 at £10,100, with the exemption for trusts set at £5,050.

The good news for all ambitious business people is that entrepreneurs’ relief is to be extended. Entrepreneurs’ relief reduces the effective rate of CGT to 10% on gains arising on the disposal of businesses and certain business assets. Taxpayers are limited to claiming this relief on up to £1 million of gains made from 5 April 2008 to the end of their life. This lifetime limit is to be increased to £2 million for disposals made after 5 April 2010. No additional relief is given for gains realised before 6 April 2010 that exceed £1 million.

Inheritance Tax

The nil rate band for inheritance tax has been frozen at £325,000 for 4 years. Although widows and widowers can benefit from the transfer of any unused nil rate band from their deceased spouse or civil partner, this freezing of the IHT zero rate represents a hidden tax rise in real terms.

Savings Income

The tax-free ISA limits have already been increased for 2010/11 to £10,200, of which £5,100 can be saved in a cash form such as a bank savings account. These limits will now be increased by the rate of inflation (RPI measure) every year from 6 April 2011. If the RPI is negative the ISA limit will not be reduced. The amount that can be saved in a cash form will continue to be half the value of the full ISA limit for stocks and shares.

Pension Contributions

Special Annual Allowance Charge

Taxpayers with total income of over £150,000 will have to pay a special annual allowance charge (SAAC) of 20% to 30% of the irregular pension contributions they make that exceed £20,000, or in some cases £30,000, in 2009/10 or 2010/11. Irregular contributions are defined as those made less frequently than quarterly. The measure of income is the taxpayer’s total income before deductions for the current tax year, or in either of the two preceding tax years.

Employees with total annual income before deductions of £130,000 or more can also be caught by the SAAC if the sum of their income plus value of the pension contributions made by their employer on their behalf totals £150,000 or more.

From 6 April 2011 tax relief on pension contributions will be tapered down to the basic rate of tax for those earning between £150,000 and £180,000 or more.

Annual Allowance Charge

Tax relief on pension contributions is capped at the lower of 100% of the taxpayers’ relevant earnings, or the annual allowance. This annual allowance is to be frozen at £255,000 for the tax years 2010/11 to 2015/16. Where the pension contributions made exceed the annual allowance the taxpayer must pay an annual allowance charge (AAC) of 40% of the excess pension contribution. The SAAC and the AAC can apply on the same pension contributions, but the amount subject to the SAAC is reduced by the amount of contributions already subject to the AAC.

The detailed rules that govern exactly how these charges apply are very complex, so if your pension contributions or earnings are likely to break any of the thresholds mentioned please ask us for tailored advice.

New Obligations on Employers

In spite of these excessive tax charges on high pension contributions the Government wants all workers to be a member of a pension scheme. From a date to be announced in 2012, all employers will be required to ensure that their employees are members of a pension scheme. If the employee is not already a member of a registered pension scheme he will be automatically enrolled in the Government scheme known as the National Employment Savings Trust (NEST). The employer will be required to make contributions to NEST or the employee’s registered pension scheme.

Stamp Duty Land Tax

One of the give-aways of this Budget is relief from Stamp Duty Land Tax (SDLT) due on buying residential properties that cost up to £250,000, where the property transaction is completed between 25 March 2010 and 25 March 2012. The issue is that this zero rate only applies to first-time buyers, and the relief will have to be claimed by those individuals, it will not be given automatically.

To help fund this tax relief an additional rate of SDLT is to be introduced at 5% on properties costing £1 million or more from 6 April 2011. So if you are planning to buy that million pound home, get on with it!

VAT

Rates

The rates of VAT have not been changed. The standard rate remains at 17.5%, the reduced rate is 5%.

Registration Threshold

The level of turnover that triggers a requirement to become a VAT registered trader within 30 days is to rise by £2,000 to £70,000 with effect from 1 April 2010. The turnover threshold below which traders can apply to become deregistered for VAT increases by £2,000 to £68,000 from the same date.

Postal Services

Certain commercial postal services provided by the Royal Mail and ParcelForce will become subject to standard rate VAT from 31 January 2011. Services provided to private individuals, such as stamped mail, will continue to be exempt from VAT.

Tax Avoidance

Off-shore Income

The Taxman has been gathering information about off-shore accounts held by British residents from banks based in the UK and in tax havens such as Liechtenstein. Now three further tax havens; Belize, Grenada and Dominica are about to sign information exchange deals with the UK.

Tax evaders with off-shore accounts were given until 12 March 2010 to come clean and declare all their off-shore income and gains to HMRC. If they persist in their tax evasion tactics after 1 April 2011 and hide money in a country that does not have an information exchange agreement with the UK, they will find themselves subject to penalties of up to 150% of the tax due. If the tax evaded is £25,000 or more, HMRC may publish the taxpayer’s name and address as part of their name and shaming powers.

Security for PAYE

Currently the owners or directors of new businesses may be asked to provide a lump sum to HMRC as security before the business is permitted to become VAT registered. The Tax Office tends to demand such payments where the business owners have previously been involved in a business that failed owing VAT. From 6 April 2011 HMRC will also be able to ask for security payments from the business owners before the business is permitted to operate a PAYE scheme.



Starting your business as a self employed person is both an exciting and a challenging prospect. One key area you need to ensure is to register as self employed with taxman (HMRC). This post explains how you do this and time limits for you to register.

Time Limits

For National Insurance purposes make sure you are registered within three months from the end of the month in which became self employed. If you do not get around doing this it will result in £100 fine. Further, you will need to make payments of £2.40 per week for Class 2 National Insurance contributions. However, if your earnings are below the small earnings exception level – £5,075 for tax year 2009/10, you are not required to make any Class 2 National Insurance contributions.

How to Register

You have the following options to register:

• Call the Self Employed Registration Helpline on 0845 915 4515 or
• Completing CWF1 or mailing it to HMRC or
• Registering online via the government gateway portal on www.hmrc.gov.uk.

Whichever method you choose to register you will need to provide the following information: full name, address, post code, date of birth, national insurance number and, if you decide to pay your Class 2 National Insurance through a standing order – your bank details.

Joint Notification

Once you have registered, this will act as joint notification of tax and national insurance. You will receive a 10 digit Unique Taxpayer Reference (UTR) and a blank tax return for you to complete for the year 2009/10.

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In these recessionary times small businesses are looking  to cut costs, one area they are looking at is their accountancy fees. It is important to understand that accountants fees are based on time and skill involved in doing your work.  One key way you can reduce your accountancy fees is for you do  the bookkeeping on a computerised bookkeeping software.

It would be best if you use the same software as your accountant. This will reduce his/her time even further on producing  your accounts. You should go as far as asking your accountant to train you how to ensure your bookkeeping is up to the required standard making his/her life a lot easier. The other advantage of this is you will be able to see how your business is doing throughout the year- are you making a profit? You will be able to take action if your profits are not in line with your plans.

The bookkeeping software packages available now are very easy to use. They are designed to be used by non accountants. They are in plain English, some even have videos explaining how to use the software. Here are some the computerised bookkeeping  packages:

Software not (online)

• Cashflow Manager
• Quickbooks SimpleStart
• Sage Instant Accounts
• Tas FirstBooks
• VT Transaction+
  

Online sofware

• Arithmo
• Kashflow
• Liberty
• Liquid Accounts

Other areas you need to ensure are:

• Have a separate business account and make sure only business transactions go through this account. Do not have your personal expenses/income go through your business account.
• Keep all your paperwork in good order. Make it easier for your accountant to track your paperwork from the entries you have made on the computer.
• Make sure you pass to your accountant all the bank statements. If they are any missing order copies from your bank.
• Once the accountant has finsihed with your books, ask him/her what else you can do to help him reduce his time on bookkeeping even further.

Since your accountant will not be using up his/her time on very basic work, it will give him/her to think about tax savings and suggesting some tax saving areas for you.

The link below is to a check list on tax saving strategies.  It covers areas of tax savings that most small businesses should be looking at with their pro active accountant.

It should take you no more than 20 minutes to complete this check list.

Please feel free to contact us to arrange a one hour consultation with us to discuss any areas of tax savings.

Link to Tax Busting Check List: Tax Busting Check List

This is intended to help limited companies on ways to ensure you meet the legal requirements on information that you should put about your company on your stationery, website and emails.

You should put the following on your letterhead and invoices…

• The full name of the company, normally ending with the word “limited”.

• The company registration number given by Companies House.

• The company’s registered office address.

• Where the company was incorporated – England and Wales or Scotland.

• Your VAT number if VAT registered.

• Details of any regulated profession of which you are a member.

Directors names?

There’s no need to list all of the directors. However, if you do the rule is you must list them all. i.e. it’s all or nothing.

Outside the premises

The Companies Act requires you to display the company’s name in a prominent position, even if your business operates from home! Failure to do so could in theory lead to a fine. However, putting the name on your house could lead to a Council Tax Bill. It’s worth noting Companies House don’t go around checking.

Cheques and orders

You must show the company’s full name including the word “limited”. This is also important to avoid any confusion and you becoming personally liable for anything you thought was in the company name.

On Your Website

Every company must display on its website…

• Company name;
• Company registration number;
• Place of registration;
• Registered Office address.

All businesses whether companies or not must display the following on their website…

• Name and trading name (if different);
• Email address – it is not sufficient to have a contact us form, an email address has to be shown as well;
• Geographic address from which the business trades;
• Membership details of any trade or professional association including your registration number;
• VAT number

The details do not have to appear on every page of the website and will probably be included on a “About Us” or “Legal Info” pages.

The Distance Selling Regulations complete the set of the current regulations and have been in force since 2000. There are long lists of items to be shown including unambiguous prices (stating whether prices are inclusive or exclusive of tax), an accurate description of goods or services and the returns policy. If you are trading over the internet you should consult the Regulations.

Emails and Order Forms

All emails and order forms from a company must contain…

• Company name;
• Company registration number;
• Place of registration;
• Registered Office address.

Businesses will probably include this information in the footers or email signatures to each of their outgoing emails.

Please contact us if  we can help any further.

From 1/4/2010 all VAT registered businesses with turnover that exceeds £100,000 (excluding VAT) and all new VAT registered business will need to submit their VAT return online and pay the VAT electronically.

The online VAT return is similar to the paper version and there are no changes in the VAT rules. Further you will not need to change your record keeping system regardless of whether you maintain electronic or manual recording system.

Signing up for online VAT returns is straight forward. All you need to do is register on HMRC website.

Additional benefits of online VAT return is that you will receive an email reminder letting you know when you next VAT return is due. Further you get extra seven days (in addition to the usual month) to submit the return and ensuring your payment received by HMRC.

If we can help you with any aspect of this requirement, please contact us.

This is the third and the final blog on business structure that would be suitable for you. The first blog in the this series covered limited companies and the second blog covered partnerships.

Sole trader is the simplest form of business to start where you carry on business on your own account. You are liable to income tax and Class 4 National Insurance on your profits. You can employ people including your spouse for work done.

Your business format is not set in stone forever and you can change between them. It is fairly simple for a sole trader to take on a partner and become a partnership and for a partnership to become a Limited Company. There are however more complications with changing from a Limited Company to a sole trader or partnership.

This is the second of third blog covering the area of which would be most appropriate business structure for you. The first blog covered limited company structure. This blog cover the partnership structure. The third and final blog will cover sole trader structure.

Partnership

A partnership is two or more people carrying on business together with a view to making profit.

The partners are all joint and severally liable for partnership debts, although this does not apply to personal tax bills based on partnership profits.

It is advisable to have a partnership agreement to document the agreement between the partners. However, the partnership is often between husband and wife and there is no agreement.

Limited Liability Partnership (LLP)

LLP’s are treated like a normal partnership for tax purposes but have the protection of Limited Liability.

A LLP is a separate legal entity and can enter into contracts and deeds, sue and be sued. With normal partnerships every partner has to be party to certain documents and litigation. Floating charges can be granted over its assets in its own name, which normal partnerships can’t do. As with Limited Companies, there is public availability of accounts.

This is the first of three posts looking at 3 business structures:  Limited Company, Partnership and  Sole trader. We hope this will help you decided which is the best structure for you.

A limited company is a separate legal entity from its members. These are the basic facts…

• The business is owned by the limited company, not you.You are the shareholder who owns the business and with small businesses, the director who runs it.

• It must have at least one shareholder.

• It must also have at least one director. From 6th April 2008 it is no longer necessary to have a company secretary although the position may be retained if so desired.

• The shareholders do not have to be directors. Directors are employees of the company.

• The company pays corporation tax on its profits. A small company pays corporation tax at 21% (2009/10).

• They are governed by company law.

Main Advantages of using a Limited Company…

• A Limited Company may appear more credible and substantial although in reality this is not necessarily the case.

• The Liability of its shareholders is limited to the amount of the share capital issued and so offers protection to personal assets. In the event of company failure and not being able to pay its creditors,your personal assets are protected. However, banks, landlords and others when dealing with a Limited Company will often require personal guarantees.

• A Limited Company has better borrowing potential as it can use current assets as security by creating a floating charge over its assets.

• You can use shares to enable different people to have different shares of ownership that they can pass onto the next generation.

• You can have different classes of shares with different rights, such as non-voting shares for someone who wants to invest some money into the company but doesn’t wish to take part in the management.

• Having a limited company can change the tax rate of a higher rate tax payer from 40% to 21%, more than halving their tax bill. The exact savings do depend on how much of the profit you leave to reinvest in your business. Taxpayers can also avoid paying any national insurance at all by using dividends. For someone earning £30,000 in a year as a sole trader, the amount of Class 4 NI to be saved is around £2000.

Main Disadvantages of using a Limited Company…

• Your annual accounts have to be filed at Companies House and are available for public inspection as is other information about the company.

• Directors are personally subject to regulations and can be fined or found guilty of a criminal offence for failing to comply.

• A company is more complicated to wind up.

• Generally involves higher accountancy fees as there is more for the accountant to deal with.

• Taxable benefits on having your car in the company can be substantial.

Please contact us to help you decide which would be the best structure for you.