When RTI comes into force in October 2013, employers will be required to send HMRC payroll payment information that includes information on the amounts paid and the number of hours. The submissions are made when the payroll is processed, which will have to be weekly or monthly to allow the Department of Works and Pension to use the information to calculate Universal Credits payments. The monthly reporting to HMRC will be a problem for small companies which pay a small salary below or equal to the personal allowance (£8105) as there is a requirement to log hours worked, which could breach national minimum wage rules Before RTI it was possible to declare a low salary as an annual payment, however under RTI if a monthly salary is taken this will need to be reported monthly even if there is no tax payable. This scheme is going to be an administrative burden on accountants and owner businesses, the scheme is already being piloted and planned to be online by 6th October 2013 HMRC have prepared a webinar on RTI which can be found at http://www.hmrc.gov.uk/webinars/pre-recorded.htm
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How good is your record-keeping? HMRC has announced it is planning a programme of Business Records Checks that will review both the adequacy and accuracy of business records within small and medium enterprises. The Revenue have stated that they will charged penalties for accounting records that are not adequate. To ensure your records are adequate enough, the Revenue have issued guidance on what they would expect someone to keep. http://www.hmrc.gov.uk/record-keeping/index.htm Sole Trader Vs Limited Company Corporation tax is currently 20%, for profits under £300,000 and 24% for profits above £1,500,000. Therefore conversion of your business into a limited company is more beneficial than before. You will enjoy a marginal rate tax saving of 9% from 1 April 2011, compared to 8% previously. This is compared to running your business under self assessment where Income Tax is 20% and Class 4 National Insurance is 9% for profits up to £42,475, profits up to £150,000 will be subject to 40% Income Tax and 2% National Insurance. Profits over £150,000 will be taxed at 50%. There are other factors to consider before incorporation its best to get in touch with us first. Annual Investment Allowance Where a business currently purchases plant and machinery, the first £25,000 of the expenditure qualifies for 100% tax relief in the year of the expenditure. VAT Flat Rate Scheme If you are mainly working for commercial customers it may suit your circumstances to register for VAT under Flat Rate Scheme voluntarily, even if your turnover is below the new VAT turnover threshold of £77,000 per annum. This is on the basis that you do not have much input VAT to reclaim (i.e. service companies). The scheme allows you to charge 20% to your customers, but only pay a smaller percentage of the gross turnover to HMRC. For example a computer consultant with a turnover of £50,000 would charge his customer 20% VAT and therefore receive £60,000, the additional £10,000 would be paid to HMRC, however under the Flat Rate Scheme only 14.5% of the gross turnover needs to be paid i.e. £60,000 x 14.5% = £8,700. Therefore a VAT saving of £1,300, which is taxable. You will also enjoy a 1% discount during the first 12 months from date of VAT registration under the Flat Rate. N.B - each industry has its own specific flat rate percentage. The forms P11D, and where appropriate P9D, which report employees and directors benefits and expenses for the year ended 5 April 2012, are due for submission to HMRC by 6 July 2012. The process of gathering the necessary information can take some time, so it is important that this process is not left to the last minute. Employees pay tax on benefits provided as shown on the P11D, either via a PAYE coding notice adjustment or through the self assessment system. In addition, the employer has to pay Class 1A National Insurance Contributions at 13.8% on the provision of most benefits. The calculation of this liability is detailed on the P11D(b) form. HMRC have issued some guidance as to common errors on the forms in the latest Employer Bulletin. These include the following:
HMRC has a number of task forces to investigate certain business sectors, A summary of the current work of those task forces can be found below, each task force will move on to a new geographical area once the first area has been investigated.
London Properties This task force is investigating commercial property deals in Greater London, where the VAT rules may not have been applied correctly. Where they find this is the case, the HMRC officers will review the entire tax compliance of the property owner, across all taxes. Landlords HMRC are targeting landlords with three or more let properties in the North West of England and North Wales. Have you or your family correctly declared all of your rental income? Construction Industry The targets are self-employed builders (including small companies) in the North West of England and North Wales. The task force is looking for under-declared sales (such as cash jobs) and over-claimed expenses (where there are no supporting invoices). Remember to keep every receipt for purchases and keep a log of all business mileage. We can help you by advising what expenses are allowable to claim against your income. No Tax Return Submitted This task force is operating in the South East of England, looking for businesses who have not submitted tax returns for corporation tax, VAT, PAYE or income tax. In April 2013 HM Revenue & Customs (HMRC) is introducing a new way of reporting PAYE: Real Time Information, or RTI.
Using RTI, employers and pension providers will tell HMRC about PAYE payments at the time they are made as part of their payroll process. Payroll software will collect the necessary information and send it to HMRC Online. So you will submit information about PAYE payments throughout the year as part of your payroll process, rather than at the end of the year as you do now. RTI only affects the submission of PAYE information – payment arrangements will remain unchanged. Most employers will be legally required to use RTI from April 2013 with all employers submitting RTI by October 2013. HMRC will tell you when your business needs to make this move http://www.hmrc.gov.uk/rti/index.htm There has been a fair amount of panic in the contractor community about a statement buried deep in the Budget documents about the reform of IR35. It says:
"The Government is bringing forward a package of measures to tighten up on avoidance through the use of personal service companies and to make the existing IR35 legislation easier to understand. This will include HMRC strengthening specialist compliance teams, simplifying the way IR35 is administered, and consulting on proposals which would require office holders/controlling persons who are integral to the running of an organisation, to have PAYE and NICs deducted at source." This does not mean that everyone who is an office-holder of their own personal service company will have to be paid via PAYE. The proposed law change is aimed at the following situation: A is an director of PLC such that he personally holds a position on the board of PLC, or has a controlling role within PLC. Instead of being paid a salary by PLC, A has agreed that his own personal service company (L Ltd), will send PLC an invoice for the time he spends on PLC business. PLC may be a large company, or a public department, or a local authority. In this case PLC will have to pay A through its payroll. PLC will not be permitted to pay A through L Ltd. This change in the law will not affect genuine freelance workers or contractors who do not take up positions on the boards of their customers. Get in touch if you need any advice on operating a personal services company. The budget contained changes to personal and business taxation, including the 50p headline rate of income tax will be cut to 45p from April 2013.
The income tax personal allowance set to rise to £8,105 next month, the Chancellor also confirmed that a further rise will take place in 2013, taking the allowance to £9,205. However, age-related tax allowances are to be frozen, and will stop for anyone turning 65 after 5 April 2013. The main rate of corporation tax will fall from 26% to 24% in April 2012. Individuals and partnerships in business whose turnover is up to £77,000 are also set to benefit from 'radical reform' of the tax administration system. Tax Tables can be found athttp://cdn.hm-treasury.gov.uk/as2011_rates_and_thresholds_201213.pdf Reduction in the lifetime allowance - PENSIONS
The reduction in lifetime allowance which takes effect on 6 April 2012 reduces the allowance from £1.8m to £1.5m. It is possible to elect for the old limit to continue to apply to your pension savings, but you must do so by the end of the tax year. there can be no investment in pensions after 5 April 2012, and no increases in benefits other than those permitted by the legislation Annual Investment Allowance Reduction (AIA) Make full use of the enhanced annual investment allowance before it’s too late! If you leave the decision of whether to buy new equipment or plant and machinery until the end of your accounting year, you could get caught out by the changes to capital allowances which come into effect from April 2012*. Large purchases made from these dates to the end of your accounting period may not qualify in full for the 100% deduction against profits you are expecting. AIA is a form of capital allowances which offers tax relief at 100% on all qualifying expenditure in the year of purchase. From April 2012 the current level of annual investment allowance is being reduced from £100,000 to £25,000. If your accounting year end coincides with the fiscal year there are no complications as all qualifying expenditure (up to £100,000) will receive a 100% deduction for income or corporation tax purposes. But what happens if your trading year straddles the fiscal year end? The answer is that that the AIA relief available is time proportioned and this may result in a loss of relief. If your business has a chargeable period that spans the rate change the maximum allowance for the transitional period falls into 2 parts
ADVANTAGES
1. Generally speaking its more tax efficient than employment 2. More control over your personal income: No tax deducted at source or NIC 3. You can claim valid business expenses: Expenses lower the profit of the limited company, this decreases the tax it has to pay. This is a huge benefit for contractors because you can now claim expenses that you would not have been able to claim as a permanent employee. 4. Flat Rate VAT option: Under the flat rate vat scheme you pay VAT over to HMRC at a rate specific to your industry, but you still charge VAT at the normal rate (20%). The rate you pay to HMRC is always lower than the current VAT rate. Bear in mind its calculated on your gross sales. 5. National Insurance Uplift: Most recruitment agencies will offer you a National Insurance (NI) uplift if you decide to contract through a limited company. If the recruitment agency pays you like a normal employee (PAYE) they will deduct Employer National Insurance tax When you are a contractor you get paid for your services rendered, you do not get paid a gross salary which means no Employer National Insurance tax is payable by the recruitment agency. So in effect they save 12.8% tax. This is why the contractor’s rate is normally higher by 12.8% than the gross salary rate the recruitment agency will offer you. DISADVANTAGES Disadvantages: 1. If you don’t work, you don’t get paid: As a permanent employee you usually get permanent employee benefits like annual leave and sick leave. As a contractor you won’t have these benefits. 2. Accounting costs: This will off course be an expense to your limited company. However if you manage your company properly then your tax savings and higher rate could easily absorb these costs so you’ll still be much better off contracting through a limited company. 3. Administrative hassle: you’ll have some basic responsibilities as the director of a limited company. Responsibilities include the raising of invoices and payment of taxes at specific times during the year. Once you’ve got the hang of it, the tax saving of contracting through a limited company will be well worth the extra administrative tasks. Before going ahead its important to seek professional advice, for example, IR35 affects all contractors who do not meet the Inland Revenue's definition of 'self employment'. The IR35 rules will result in an increased tax and N.I. liability and will prevent contractor companies from retaining profits to grow their business in the future. |
AuthorLicenced Accountant in Brighton Archives
May 2020
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