Your Business Structure

Many people assume that everyone who has their own 'business' runs a 'company'. However the two words do not mean the same thing. There are actually four common forms of business structure:

• a sole trader – this is the simplest way of starting and running a business;
• a conventional partnership – where you work with one or more partners in the business;
• a limited liability partnership – LLP – this provides you and your partners with the protection of limited liability, just as with a company; or
• a limited liability company – this means that the business is quite separate to you as a person.

The issue of whether to run your business as a company or a sole trader or partnership is an important decision. And you may change your mind over time. If you want to move your existing business into a company structure this is called 'incorporation'.

When you run your business as a limited company you will have two roles. You will be a shareholder as you will own shares in the company. Shareholders may receive dividends on their shares. You will also be a director who runs the company. Directors are treated as employees even if they don't have employment contracts.

Less tax?

In recent years many people have formed companies (or incorporated their business) in the hope of reducing their overall tax burden. The 'plan' generally involves the company paying the director a low salary and paying Corporation Tax on net profits. The remainder of the company's profits are then distributed by way of dividend payments.

These days it is rarely a good idea to run your business as a company simply by reference to the tax payable on your annual profits.

Additionally, the tax traps awaiting newly incorporated small businesses might well negate the apparent savings. This is even more the case when people start trying to reverse the process and disincorporate their companies. All such issues should certainly be considered beforehand so that a reasoned choice of business structure can be made and justified in full knowledge of all the consequences.

Which approach is right for you will depend on a number of factors. These include your cashflow projections, your longer term plans for the business, whether or not you need the protection of limited liability, your willingness to comply with legal and administrative obligations and the nature of any investment you are seeking.

Headline differences

Sole trader

The advantages of being a sole trader include independence, ease of set up and running your business, and the fact that all the profits go to you.

The disadvantages include a lack of support, unlimited liability, the prospect of paying more tax on high profits and the fact that you are personally responsible for any debts run up by your business.

Partnership

The advantages of being in a partnership include its ease of set up and running, and the range of skills and experience that the partners can bring to the business.

On the other hand, problems can occur when there are disagreements between partners. There is unlimited liability and all partners are each personally responsible for all of the debts that the business runs up. Again there is the prospect of paying more tax on high profits than if you have a company.

Limited Liability Partnership (LLP)

LLPs retain the flexibility of a partnership with the added advantage that your personal liability is limited. At least two members must be 'designated members' - the law places extra responsibilities on them.

The formation of an LLP is more complex and costly than that of a conventional partnership. Problems can still arise when there are disagreements between the members. Again there is the prospect of paying more tax on high profits than if you have a company.

Limited Liability Company

If you run your business through a company your personal financial risk will be restricted to how much you invest in the business and any guarantees you have given in order to obtain financing. You will also be able to retain more money in the company after paying less tax than if you operate as a sole trader or partnership.

However, you should remember that this type of business structure, more than any other, also brings a range of extra legal duties, including the maintenance of the company's public records, e.g. for the purpose of the filing of accounts.

Franchise

The major advantage of a franchise is that it takes advantage of the success of an established business and support networks. Even if you become a franchisee you may still be allowed to choose whether or not to operate as a limited company.

However, as a franchisee your freedom to manage the business will be constrained by the terms of the franchise agreement. Also franchisees often pay a share of their turnover to the franchiser, which reduces overall profits.

Social enterprises

Social enterprises are businesses that trade for a social purpose and represent a diverse and growing range of business activity across the UK.

Incorporation issues

Capital gains

Incorporating an existing business will involve a transfer of goodwill – and possibly other assets too. This transfer can create significant capital gains which may be subject to tax. However, there are mechanisms for deferring these gains until any later sale of the company. We will need to discuss in detail with you the most appropriate mechanism for your business.

Income tax

Special rules apply when a business is transferred to a limited company. The old business is treated as ceasing for tax purposes. You may want to time this to your best advantage. The precise effects and choices will depend on how long you have been trading, whether your profits have been increasing and on your projections for the future.

Capital allowances

Once again the position needs to be carefully considered.

Stamp Duty Land Tax (SDLT)

If your business has any property interests there may be SDLT charges to consider when these are transferred to a company.

Other Advantages

There may be other non-tax advantages of incorporation and these are summarised below.

Limited liability

A company normally provides you with limited liability. If a shareholder's shares are fully paid he cannot normally be required to invest any more in the company.

However, banks, franchisors and landlords often require personal guarantees from the directors for borrowings. The advantage of limited liability will generally apply in respect of liabilities to other creditors.

Pension provision

The company could establish an approved pension scheme which may provide greater benefits than self-employed schemes.

Legal continuity

A company (and an LLP) will enjoy legal continuity as it is a legal entity in its own right, separate from its owners (the shareholders). It can own property, sue and be sued. A company will also continue to exist even if you die.

Transfer of ownership

You can sell the shares in your company more easily than you can sell your interest in a partnership or LLP. When the time comes to sell however, the purchaser may prefer to buy the business from the company rather than buy your shares.

You can also transfer ownership of your shares to family members, friends and employees. There will be tax consequences of doing this so it is best to take advice beforehand.

Borrowing

Normally a bank is able to take extra security by means of a 'floating charge' over the assets of a company or an LLP. This will increase the extent to which monies may be borrowed against the assets of the business.

Credibility

The existence of a company is sometimes deemed to add to the credibility or commercial respectability of the business.

Staff incentives

Employees may, with adequate safeguards, be offered an opportunity to acquire an interest in the business, reflecting their position in the company.

Disadvantages

In addition to the prospect of more tax being payable on company profits, in some cases, there are also other disadvantages to consider:

Administration

The annual compliance requirements for a company in terms of administration and accounting tend to result in higher running costs than for a sole trader or partnership.
Annual accounts need to be prepared in a format dictated by the Companies Act and, in some cases, the accounts need to be audited by a registered auditor. This is typically only where you operate in certain fields or the company turnover (sales) is above £6.5m or its assets (eg: property) are worth more than £3.26 million.

PAYE/Benefits

If you do not have any employees at present, you do not have to be concerned with PAYE and returns of benefits forms (P11Ds). Once you have a company and become a director you will be considered to be an employee. The company will need to complete PAYE records for salary payments and keep records of expenses reimbursed to you. Forms P11D may also have to be completed each year.

Transactions with the business owner

A business owner may introduce funds to and withdraw funds from an unincorporated business without tax implications. When a company is involved there are often tax implications on these transactions. Then company's money is not your money until after it has been paid out to you by the company.

Director's responsibilities

A company director may be at risk of criminal or civil penalty proceedings e.g. for late filing of accounts or for breaking the insolvency rules.

Lack of Privacy

The annual accounts of companies and LLPs have to be made available on public record - although these can be modified to minimise the information disclosed. Details of the directors and shareholders are also filed on the public register held by the Registrar of Companies.

Extraction of funds

If you operate your business through a limited company structure you will want to consider the most tax effective methods of withdrawing funds. The options include: salary, bonus, benefits in kind, loans, dividends and, in some cases, repayment of monies you have loaned to the company. Each has different tax consequences and there are also certain legal obligations to ensure that the taxman agrees the nature of the transaction for tax purposes.

How we can help

The choice of business structure is an important one, both at the outset and also if you are considering incorporation at a later date.

We would welcome the opportunity to talk to you about your specific circumstances. We can help you to consider all the relevant factors and choose the appropriate business structure. If incorporation is relevant we can guide you through the process and relieve you of many of the administrative burdens.

Starting In Business

This guide is for whether you have already decided to start a new business, or you are simply considering your first move into self-employment. What do you need to think about before taking the plunge?

We hope this guide will help you make a number of crucial initial decisions and choices. We have touched on some of the marketing issues but the main focus is on business planning, financial and tax issues.

Are you sure?

Most people who set up their own business will tell you it was more of a challenge than they expected and that it took longer to achieve business success than they anticipated. Here are some of the challenges you need to think about.

Personal sacrifice

Be ready for the physical and emotional demands of starting up in business. Starting a business is a life-changing event and will require hard work and long hours, especially in the early stages.

Financial insecurity

Careful cashflow management is essential. Failure to do this will often result in a big drain on your savings, the loss of your investment and any security as well as the early failure of the whole business.

Loss of employment rights

You will need to take care of yourself as you will no longer receive sick pay or be paid when you are on holiday – indeed you may not have time for holidays.

Pressure on close relationships

You will need the support of your family and friends to help you cope with the pressures of building your new business. You may also need more 'hands on' help beyond simple emotional backing.

Broad skills

All businesses need a mix of managerial, financial, technical and marketing skills. If you do not have these skills personally, you will need to learn fast or find people who can provide the necessary input and support.

Isolation

Being your own boss can be a satisfying experience. However, most successful business people need to have or develop a network of contacts with whom to share ideas and challenges.

At the outset

The business plan

A commercial business plan is the key to making a success of your new business. You will need to show it to anyone whom you ask to invest in your business. You will also need to show it to the bank or anyone else who you ask to lend you money. They will all want to know that your ideas have been thought through and that there is a good chance of getting their money back in due course.

Even if you do not need anyone else's money, a business plan is still a good idea. It can help you avoid many of the most common business mistakes and enable you to achieve success faster.

You may have your dream of what you want to achieve in your business. Can you express it in terms of target income over the next 12 months? And in the next year and the one after that? What will you need to do to achieve those objectives and what will be the consequences and cost of doing so? Drafting the plan and incorporating cashflow projections will force you to consider related issues. For example what actions you will need to take to achieve your objectives.

Writing a business plan will also help you to focus on all of the costs that will arise and when you will need to have the money available to pay for these. You may need to cover premises related costs, support staff, marketing and promotion, a website, business insurances and so on.

Your plan should include an explanation of how your business will start, build and develop. You also need to know who are you competing with and what will enable you to be successful. The plan should describe the business, product or service, your marketplace, mode of operation, capital requirements and projected financial results.

It's your business and your ideas but we can help you with much of the content of your business plan.

Business structure

Many people assume that everyone who has their own 'business' runs a 'company'. However the two words do not mean the same thing. There are actually four common forms of business structure:

• a sole trader – this is the simplest way of starting and running a business;
• a conventional partnership - where you work with one or more partners in the business);
• a limited liability partnership - LLP - this provides you and your partners with the protection of limited liability, just as with a company; or
• a limited liability company – this means that the business is quite separate to you as a person. It also means that you cannot simply draw money from the business whenever you feel like it.

Which approach is right for you will depend on a number of factors. These include your cashflow projections, your longer term plans for the business, whether or not you need the protection of limited liability, your willingness to comply with legal and administrative obligations and the nature of any investment you are seeking.

There are also tax issues to consider. In many cases it is better to start the business as a sole trader or partnership and only to transfer it into a limited company at a later date. This might be only when it seems that it will reduce the overall tax you pay on business profits.

Please ask for our advice before you decide which approach to follow as the wrong choice could be an expensive mistake.

Business stationery

Even businesses that operate over the internet need letterheads and invoices. Although you can choose the look, layout and design of your business stationery there are a number of relevant legal obligations. These specify certain minimum requirements for the contents of business stationery, both paper and electronic. The precise rules will depend on which business structure you have adopted.

Business name

Choosing a name for your business is a creative and enjoyable process. It is also one that you need to get right. Customers may infer a lot from your business name and first impressions count.

While it may be tempting to try to stamp your individual personality on your business name, there are many other issues to consider. Being objective and choosing a name that reflects your business strategy can be more valuable, especially as your business develops. You will also want to choose a business name that won't be confused with anyone else.

Website

Will your business be reliant on people finding your website when they search for the sort of services you provide or the goods you sell? Or will your website be more for people who already know of you and so that they can find out more information?

The design of your website and the need for any 'search engine optimisation' will depend on what you want the website to do for you and what you want people to do when they arrive on the site.

It is very easy to spend a lot of money on a website. There are also many low cost options for start up businesses, including blogs that look like business websites.

Whichever approach you choose you will need to ensure that your business website satisfies all legal requirements in terms of your business name and contact details.

Paperwork and records

All businesses need to keep records of all business income and expenses.

These records can be maintained by hand or may be computerised. They should always contain details of payments, receipts, credit purchases and sales, anything you have bought for the longer term (assets) and all the money owed by the business (liabilities). It's also very important to be clear as to the distinction between your money and that of the business – especially if you have a limited company.

It can be expensive to pay someone to sort out all of your paperwork so it makes sense to establish workable processes from the outset. There are many options here ranging from online accounting programmes, to computer based accounting software, to spreadsheets and paper based data entry books.

We would be happy to recommend a solution that is appropriate for your needs.

Accounts

Your books and records will be used to produce your business accounts. If the records are well kept, it will be easier to create your accounts. If your business grows quickly, you may need regular 'management accounts' through the year.

All businesses must produce annual accounts each year for HMRC. These will show your accounting profit or loss. They will normally also show the assets owned by the business and the monies owed to you and to other people.

The style and detail of your accounts will vary dependent on the level of your turnover (sales) and on the structure of your business.

Limited companies and LLPs are required to produce their accounts according to very strict standards and have to send them to be filed at Companies House each year. Strict penalties are charged for the late filing of accounts.

Accounting year end

At an early stage you need to decide when your first accounting year will end.

You will often benefit from choosing a convenient date rather than the anniversary of when you started in business. Thereafter your annual accounts will normally be produced to record the next 12 months results.

We can help you to decide on the most convenient date for your accounting year end depending on your circumstances and plans.

What taxes are relevant?

Tax on profits

Your taxable profit will normally differ from the profit shown in your business accounts. This is because the tax rules mean that some business expenses are not allowed to be deducted for tax purposes and there are some tax allowances that affect more than one year.

The type of tax you will pay will depend on the business structure you have chosen.

Sole traders and the partners in partnerships are subject to Income Tax on their business profits. Limited companies pay Corporation Tax on their profits.

Corporation Tax rates are generally lower than Income Tax rates. This does not always mean that less tax is payable if you operate through a company. You will normally also be subject to Income Tax on the monies paid out to you by the company.

Tax relief for losses

If your business does not make a profit initially you may be able to claim tax relief and get a refund of Income Tax from HMRC. A limited company can only claim back Corporation Tax that has already been paid. This means that new companies cannot claim any tax relief for losses until after they have made profits and paid tax on them.

National Insurance (NI)

The rates of NI contributions you pay are generally lower for a sole trader or partnership than if you run your business as a company. However your NI contributions also have an impact on the benefits you can claim when you're not working.

Value added tax (VAT)

You will need to register for VAT and add VAT to your prices if your turnover (sales) is likely to be more than the annual registration limit (£79,000 as at 1 April 2013). This should not cause your customers and clients a problem if they are also VAT registered. In such cases you may actually benefit from registering for VAT even if your turnover is well below the registration limit.

Correctly accounting for VAT is an essential part of any VAT registered business. Many people describe the system as obliging them to be unpaid tax collectors. Even so, if you fail to comply with your legal obligations you can become liable to penalties and investigations by HMRC.

You can choose from a number of VAT schemes that HMRC offers businesses that register for VAT. When the time comes, please ask for our Introduction to VAT.

Employment taxes

If you pay people to work for you may need to operate a PAYE scheme (more unpaid tax collecting). You will also need to do this if you are a director of your own limited company.

A PAYE scheme means that you deduct Income Tax and NI from the wages/salaries that you pay your employees. The taxman tells you what deductions to make and you then have to pay these over to HMRC. You also have to pay employers' NI on top of the wages and salary payments that you make. So this is an additional cost of having employees.

As with all other business payments you must keep good records of the payments to your employees and the amounts due to HMRC. They can charge penalties if you do not do this correctly.

Some people who work for you may claim to be self-employed. PAYE will not be due if they are genuinely self-employed or if you are paying a limited company. However there are strict rules that determine whether someone is or is not your employee. And if you get this wrong it can be very expensive when HMRC seeks additional taxes from you. This happens when HMRC decides that PAYE tax was payable after you have paid people in full.

We can help you with these rules and ensure that you only become an employer when you really need to do so. We can also run your payroll for you if this becomes necessary.

Tax credits

By starting a business you may hope that your income will be higher than the limits that apply for claiming tax credits. However it may still be worth registering to claim tax credits even if you initially receive a 'nil' award from HMRC. This is what happens if your income forecasts are too high. However, if, in the event, your profits are lower than you had hoped or you make a loss, you can tell HMRC. If you now qualify for tax credits you will then receive a backdated tax credits award.

What else?

Premises

You may plan to work initially form home, or you may need an office or a place where you can sell to the public.

Whichever option you want to take there are a number of factors to consider including:

• cost – at the outset and each year (including rent, rates and services)
• suitability for purpose
• compliance with legal regulations
• local by-laws
• physical restrictions such as access.

If your business is based at your home you will normally be able to offset certain costs against your taxable profits. This will depend on a number of factors including the size of your home, how many rooms you use for business purposes and the amount of time you spend working at home.

Cars and vans

If you will need a vehicle to run your business you may want to arrange this in a tax efficient way. The rules operate very differently dependent on whether or not you have a limited company. If you do have a company you also need to decide whether you or the company will own the car/van.

Certain vehicles qualify for special tax reliefs. There are also different ways to account for the costs of running a car that is used partly for business and partly for private purposes.

Insurance

You will be legally obliged to arrange comprehensive insurance for business motor vehicles and employer's liability insurance. You may also want to consider public liability insurance, consequential loss insurance, and cover for your business assets – even if these are kept at home. Other insurances that may be worth considering are Keyman and bad debts cover.

Pensions

Putting money into a pension scheme can be a way of saving for retirement because of the favourable tax rules. Many businesses have to provide access for their employees to a stakeholder pension.

How we can help

Whilst business success can never be guaranteed, professional advice can help to avoid some of the problems which befall new businesses.

We would welcome the opportunity to assist you in setting up your business. We can also help you establish a suitable strategy to build your business. And we can provide you with key services such as bookkeeping, management accounts, VAT returns, payroll, annual accounts and tax returns.

The Family Home

One of the most often used and valuable of the Capital Gains Tax (CGT) exemptions is on the sale of the family home.

CGT is a tax on the profit made from selling certain assets such as property, shares or other investment e.g. antiques and fine art. There are a number of exemptions available which can reduce or remove a taxpayer's liability to CGT.

In general there is no CGT on a property which has been used as the main family residence. An investment property which has never been used will not qualify. This relief from CGT is commonly known as 'private residence relief'.

Full relief from CGT

In general, taxpayers are entitled to full relief from CGT where all the following
conditions are met:

• The family home has been the taxpayer's only or main residence throughout the period of ownership.
• The taxpayer has not been absent from the home other than for an allowed period of absence or because they have been living in job-related accommodation, during the period of ownership.
• The garden or grounds including the buildings on them are not greater than the permitted area.
• No part of the family home has been used exclusively for business purposes.

Main residence

It is increasingly common for taxpayers to own more than one home and there are a number of issues that home owners should be aware of. An individual, married couple or civil partnership can only benefit from CGT on one property at a time. However, it is possible to choose which property benefits from a CGT exemption when it comes to be sold by making an election. There are special rules which determine the timing and frequency of changing an election which need to be considered.

Where a taxpayer lives in more than one property, they must inform HMRC as to which property is their main home. The home owner must make a 'nomination' within two years of changing the number of properties that they live in. A new nomination should be made whenever the number of homes a taxpayer lives in changes.

For example, a taxpayer lives in Manchester and purchases a second home in London in April 2013. The home owner can nominate either property as his main home provided this is done within two years i.e. by April 2015.

Where the taxpayer does not make a nomination within 2 years, HMRC will decide which is the main home based on the facts. This may significantly affect the amount of CGT to be paid.

Taxpayers that are married or in a civil partnership and own two or more homes between them must make a joint nomination and are only entitled to Private Residence Relief on one home between them.

Absences from the family home

There are special rules for home owners that have not lived in their home for the total period of ownership.

Final Three Years

The final three years of ownership is always treated as if the home owner had lived in the house as long as the property had been occupied by the owner as a main home during part of the period of ownership.

Working away from home

There are also special rules which may entitle the home owner to full relief due to not living in the house due to reasons of employment. For example where a homeowner carried on all of their work or duties outside the UK or where the distance from work or the requirements of their job stopped them living at home and they were absent for less than four years.

In addition, the home in question must have been the taxpayer's only or main residence both before and after they worked away. The taxpayer can also not have been entitled to Private Residence Relief on any other property during that time.

Living away from home

There are additional reliefs for taxpayers who were absent but not working away.

Some periods, when a home owner was not using the house as his/her only or main residence, will still qualify for relief and can be treated as periods of actual occupation in calculating the fraction of any gain that qualifies for relief.

The first 12 months (and exceptionally up to two years), because a homeowner was waiting to sell an old home or carrying out refurbishment, can be treated as if the house had been the only or main residence in that period.

Size of the Garden

The entitlement to private residence relief is usually only available if the garden or grounds including the site of the house, is no greater than 5,000 square metres (a little over an acre).

Larger gardens and grounds may qualify but only if they are appropriate to the size and character of the property and are required for the reasonable enjoyment of it.
HMRC should be notified where a taxpayer sells a house where the total site exceeds 5,000 square metres. In cases of dispute, the District Valuer will be asked to determine the size and location of the permitted area.

Business Use

There are also special rules for business use. Home owners who work from home do not suffer any restriction to the relief, where business use of the home is not related to a specific area e.g. where a home office also doubles as a spare bedroom.

However, where part of the home is used exclusively for business purposes e.g. a photo studio, then part of the proceeds from the sale of the house will relate to a chargeable rather than exempt use.

Selling Land independently of the house

In certain cases it is possible to qualify for relief from CGT when selling part of the garden attached to your home independently of a house sale.

In general the exemption will apply if the homeowner will continue to own the property with the rest of the garden and the total original area was within the half a hectare limit.

On the other hand if a homeowner sells a house and part of the garden and then at a later date sells the rest of the garden off separately, say for development? This would not qualify for exemption on the second sale because the land is no longer part of the main residence at the point of sale.

Letting Relief

Where all or part of the home has been rented out, the entitlement to relief may be affected. However, this may be covered by Letting Relief.

Home owners that let all or part of their house may not benefit from the full private residence relief but can benefit from Letting Relief.

The maximum amount of Letting Relief due is the lower of:

• £40,000;
• the amount of Private Residence Relief due;
• the amount of gain you've made on the let part of the property.

The letting exemption can be a valuable exemption but is only available on a property that has been a taxpayer's main residence. It is not available on a 'buy to let' property in which a taxpayer never lived.

Worked example
You used 60% of your house as your home and let out the other 40%.
You sell the property, making a gain of £60,000.
You're entitled to Private Residence Relief of £36,000 on the part used as your home (60% of the £60,000 gain).
The remaining gain on the part of your home that's been let is £24,000.
The maximum Letting Relief due is £24,000 as this is the lower of:

- £40,000
- £36,000 (the Private Residence Relief due)
- £24,000 (the gain on the part of the property that's been let)

There's no Capital Gains Tax to pay - the gain of £60,000 is covered by the £36,000 Private Residence Relief and the £24,000 Letting Relief.

CGT Rates

If part of the gain you make on disposing of your home is subject to CGT, the flat rate of 28% will normally apply. This rate applies when the total of your taxable income and gains are subject to higher rate tax. CGT is only payable if your total gains in the tax year are above your annual exempt amount. In 2013/14 this is £10,900.

If two or more of individuals own the property, you would normally each be subject to CGT on your share of the gain and you would each be entitled to offset your annual exemption with CGT only being payable on the excess.

Making a loss

In today's market it is quite possible for homeowners to make a loss on the disposal instead of a gain. HMRC do not make any allowances for this loss on the basis that any gain would not have been taxable.

If the homeowner would have only been entitled to partial relief on the gain then the same percentage will be allowable as a loss.

Claiming relief from HMRC

In general, taxpayers who qualify do not have to claim private residence relief. It is usually given automatically.

Notifying HMRC of liability to CGT

Taxpayers who complete a Self Assessment tax return can notify HMRC of any gains. The Self Assessment return will indicate if and when a taxpayer is required to provide any additional information.

Payment of tax

CGT is due on the 31 January following the end of the tax year. For example, for the tax year ended 5 April 2013, any CGT due must be paid by 31 January 2014 in order to avoid penalties and interest.

HMRC targets second home owners

HRMC have announced that second home owners are to be the latest group to be targeted for tax evasion. A campaign known as the Property Sales Campaign has been launched. The campaign is aimed at those selling homes in the UK or abroad where Capital Gains Tax should have been paid on any profits made. As stated above, there is usually an exemption from Capital Gains Tax on the sale of a property which has been used as the main family residence known as Private Residence Relief. However, the sale of a second home such as a holiday home or a property that was bought as an investment and rented out either in the UK or overseas may be subject to Capital Gains Tax.

Taxpayers with undeclared gains from property sales have until 9 August 2013 to notify HMRC. This can be done by email, mail or telephone. An actual disclosure together with an arrangement to make payment of all tax, interest and penalties due must be made by 6 September 2013.

Rates Allowances 2013-14

Capital Allowances 2013-14 2012-13
     
Plant and machinery    
-       Main writing down allowance 18% 18%
-       Long life assets, integral fixtures 8% 8%
-       First year allowances (certain environmentally efficient products) 100% 100%
-       R&D tax credits SME scheme 225% 225%
-       R&D tax credits Large Companies Scheme* 130% 130%
-       Annual Investment Allowance** £250,000 £25,000
Cars    
-       CO2 emissions up to 95g/km 100% 100%
-       CO2 emissions 96g/km - 130g/km 18% 18%
-       CO2 emissions over 130g/km 8% 8%
     
* Alternatively a new Above The Line (ATL) tax credit of 10% will be available by election from 1 April 2013.  
** The AIA increased from £25,000 to £250,000 for a two year period with effect from 1 Jan 2013.    
     
     
Mileage Allowance Payment  
Rate per mile  
Cars & vans    
- up to 10,000 miles 45p  
- over 10,000 miles 25p  
Motorcycles 24p  
Bicycles 20p  
These rates represent the maximum tax free mileage allowances for employees using their own vehicles for business. Any excess is taxable. If the employee receives less than the statutory rate, tax relief can be claimed on the difference.  
     
     
Tax Favoured Investments
Individual Savings Account (ISA) 2013-14 2012-13
-       ISA investment limit £11,520 £11,280
-       Cash ISA maximum £5,760 £5,640
     
Venture Capital Trusts
Income tax relief of up to 30% on investments up to £200,000.
 
Enterprise Investment Scheme
Income tax relief of up to 30% on qualifying share subscriptions between £500 and £1,000,000.
 
Seed Enterprise Investment Scheme
Income Tax relief of up 50% on maximum £100,000 investment plus Capital Gains Tax relief for reinvested gains accruing to individuals in 2013-14 that are reinvested in 2013-14 or 2014-15.
     
     
Key Dates and Deadlines    
Payment Dates 2013-14 2012-13
Income Tax and Class 4 NIC’s:
-       First interim Income Tax payment 31 Jan 2014  31 Jan 2013 
-       Second interim Income Tax payment 31 July 2014  31 July 2013 
-       Final balancing Income Tax payment 31 Jan 2015  31 Jan 2014 
Capital Gains Tax payment 31 Jan 2015  31 Jan 2014 
Class 1A NICs (22nd if paid electronically) 19 July 2014 19 July 2013
Corporation Tax is due 9 months and one day after the end of accounting period (or by quarterly instalments if large company). (2012-13 Return filling deadline)
 
File end of year PAYE forms Issue P60s to employees 19 May 2013
Issue P60s to employees 31 May 2013
Forms P9D, P11D and P11D(b) – and appropriate copies to employees 06 July 2013
Self Assessment Tax Return (SATR) – paper version 31 October 2013
SATR Online to have unpaid tax of up to £3,000 collected through the 2014-15 PAYE code 30 December 2013
SATR Online 31 Jan 2014
     
     

VAT Flat Rate Scheme

Introduction to the VAT Flat Rate Scheme

The purpose of this official VAT scheme is to simplify your VAT accounting and so reduce the cost of complying with your VAT obligations. In theory some businesses win and some lose when adopting this scheme. In practice you will only join it if you expect to benefit from so doing.

Before applying to use the scheme you should compare the amount of VAT you would be required to pay to HMRC as compared with how much would otherwise be payable.

How does the scheme work?

Normally the VAT you pay to HMRC is the difference between the VAT you charge your customers and the VAT you pay on your purchases. Using the Flat Rate Scheme you simply pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business. The amount of VAT you pay on your business expenses becomes irrelevant to your VAT returns.

Turnover limits

You can only apply to use the Flat Rate Scheme if you expect your annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT. Your annual taxable turnover is the total of everything that your business sells during the year. It includes standard, reduced rate or zero rate sales and other supplies. It excludes the actual VAT charged, VAT exempt sales and sales of any capital assets. Special rules apply if you sell capital assets worth more than £2,000.

The turnover test applies to your expectations as regards business turnover in the coming 12 months. You should retain evidence of your calculations. Your forecast may be calculated in any reasonable way but would usually be based on the previous 12 months if you have been in business for at least a year.

Once you join the scheme you can stay in until your total business income is more than £230,000 in a 12 month period.

Who can't join the scheme?

You cannot join the Flat Rate Scheme if:

• you have previously been registered and only came out of the scheme in the last 12 months;
• you are, or were, within the previous 24 months, registered for VAT as the division of a larger business, or as part of a group, or you were eligible to do so;
• you use one of the margin schemes for second-hand goods, art, antiques and collectibles, the Tour Operators' Margin Scheme, or the Capital Goods Scheme;
• you have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year; or
• your business is closely 'associated' with another business

Notifying HMRC

To join the scheme you must apply to HMRC. This can be done by post, email or phone. If your business needs to register for VAT you can apply for the Flat Rate Scheme at the same time. The necessary forms can be downloaded from HMRC's website.

Advantages & Disadvantages of the scheme

Advantages

• Saves time and smoothes your cashflow;
• Removes the need to track all of the VAT you pay on your business purchases;
• A first year discount for businesses in their first year of VAT registration of 1%;
• Significantly fewer rules to follow and peace of mind as there's less to get wrong; and
• More certainty as to what percentage of takings will be due to HMRC.

Disadvantages

The scheme is unlikely to be beneficial for your business if you:

• Spend more on standard-rated business expenses than HMRC consider typical for your business sector;
• Regularly receive a VAT repayment under standard VAT accounting; or
• Make a lot of zero-rated or exempt sales.

Other official VAT schemes

Annual Accounting Scheme

You can use the Flat Rate Scheme in conjunction with the Annual Accounting Scheme. Businesses that use the Annual Accounting Scheme make nine monthly or three quarterly interim payments throughout the year together with one VAT Return at the end of the year together with a balancing payment or refund.

Cash Accounting Scheme

You can't use the Flat Rate Scheme with the Cash Accounting Scheme. However, the Flat Rate Scheme has its own cash based method for calculating turnover.

Retail schemes

You can't use the Flat Rate Scheme with any of the retail schemes. However, the Flat Rate Scheme does have flat rates suitable for use by certain retailers.

Invoicing customers and clients

Your invoices will not change when you move onto the Flat Rate Scheme. You will continue to be required to issue valid VAT invoices in the usual way to all customers and clients.

Record keeping

Once you are using the Flat Rate Scheme you must keep a record of your flat rate calculations showing:

• the flat rate turnover figures you used – in case your turnover exceeds the limit in the coming 12 months;
• the flat rate percentage you have used; and
• the VAT you have calculated is due each period.

Businesses must still keep a VAT account although if the only VAT to be accounted for is that calculated under the scheme there will only be one entry for each period.

Leaving the scheme

You can leave the scheme at any time by notifying HMRC usually at the end of your next VAT accounting period.

Businesses must also leave the scheme:

• On the anniversary of joining the scheme if your previous year's VAT-inclusive turnover was more than £230,000;
• If you expect your VAT inclusive turnover in the next 30 days alone will be more than £230,000;
• You start to use one of the other special schemes such as one of the margin schemes for second-hand goods, art, antiques and collectibles, the Tour Operators' Margin Scheme, or the Capital Goods Scheme
• Your business becomes part of a larger group or division or becomes eligible to do so.

Businesses that leave the Flat Rate Scheme are unable to rejoin it for at least 12 months.

Flat rate Scheme percentages

Flat Rate Scheme percentage rates are set out in official tables and range from 4% to 14.5%. There are over 50 trade sectors and options on the table.

The flat rate you should use will depend on which trade sector most accurately reflects your business. If your business includes supplies in two or more sectors, you should use the percentage that is appropriate to your main business activity as measured by expected turnover in the year ahead.

Changes in the standard VAT rate

When the VAT rate changes during a VAT accounting period, businesses will have to do the following calculations for that period:

• Apply the old percentage rate to their flat rate turnover from the start of the period up to the day before the rate changes.
• Apply the new percentage rate to their flat rate turnover from the first day of the new rate to the end of the period.
• Add the two figures together to produce the total VAT owed to HMRC for the period.

First year discount

Businesses benefit from a 1% reduction in the flat rate percentages for the first year of VAT registration. The discount continues to apply even if the flat rate percentage changes during the first year of registration.

Capital assets

If you use the Flat Rate Scheme, you can't normally claim back the VAT you spend on capital assets you buy for your business. However, if you are spending £2,000 or more on individual assets you may be able to claim back the VAT if certain tests are satisfied.

How we can help

We would welcome the opportunity to advise you on any of the issues related to registering for the Flat Rate Scheme. We can also help you choose the most appropriate and beneficial flat rate and advise or help you with your VAT record keeping generally. We can also help you retain all the related necessary information to support your approach and so avoid penalties and problems down the line.