Category Archives: #TaxThursday

Changes to the Flat Rate VAT Scheme (FRS)

In the 2016 Autumn Statement, the Chancellor announced that changes are to be made to the existing flat rate scheme for VAT (FRS) in order to tackle perceived ‘aggressive abuse’. The changes, which will take effect 1st April 2017, are designed to ‘reduce the incentive for firms and agencies to move employees to self-employment to exploit VAT simplification aimed at small businesses’. The subsequent HMRC policy paper sets out the details of the changes, which will affect any users, or prospective users, of the FRS.

The FRS is a simplified VAT accounting scheme for small businesses, which currently allows users to calculate VAT using a flat rate percentage by reference to their particular trade sector. From 1st April 2017 a new 16.5% FRS rate will be introduced for businesses with limited costs. Interestingly, HMRC’s policy paper on this change comments that ‘many labour only businesses’ may be affected. Although not yet clarified, this may mean the adjustments will not apply to service-related businesses such as journalists, architects or engineers. Between now and 1st April 2017, anyone currently using the FRS for VAT, or thinking of joining the scheme, will need to decide whether they are a ‘limited cost’ business. For some businesses – for example, those who purchase no goods, or who make significant purchases of goods – this will be obvious. Other businesses will need to complete a simple test, using information they already hold, to work out whether they should use the new 16.5% rate.

A ‘limited cost’ business is defined in the draft legislation as one whose VAT inclusive expenditure on goods is either:
less than 2% of their VAT inclusive turnover in a prescribed accounting period;
greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).
Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:
capital expenditure goods;
food or drink for consumption by the flat rate business or its employees;
vehicles
If you need some assistance on checking whether you a ‘limited cost business’ please call us: 01672 624999

The Tax Burden on Small Companies

The corporate tax regime that is currently operating in the UK is one that has been designed for a traditional company. However, this is not necessarily well suited for smaller incorporated companies. Therefore, the Office of Tax Simplification proposes that there is an increasing need for a system change that accounts for the needs of the different types of small businesses.

Look-Through

This proposal moves away from the traditional corporation tax being paid, replaced instead with the company’s shareholders paying income tax on the profits directly. This will then make it simpler for the companies that distribute their profits.

Administration

It is acknowledged within the Office of Tax Simplification’s review that the system incurs a huge administrative burden on micro businesses, as they are subject to the same system as larger companies. The review suggests that there should be an analysis of ‘cash accounting’ for tax – although it is currently used by many unincorporated businesses, it is also thought to be a suitable option for incorporated ones.

Sole Enterprise with Protected Assets

This component of the review focuses on the process of the incorporation for small businesses, and the associated administrative strains that can result. This new approach would enable sole traders to protect their personal assets and limit their personal liability. It would then allow sole traders to retain their current accounting and tax benefits, and so continue to be far simpler. The review suggests creating an outline of this new trading vehicle, to evaluate its practicability.

For more tips, help and support, visit the KFS group website @ www.online.accountants

-  The KFS Group Blog Team

Tax Tips for Company Directors

There are different methods by which the director of a company can withdraw payment without owing more tax than is necessary. Below are some tips that will hopefully help you to achieve this.

Preserve Employment Allowance

From 2016/17, companies where the director is the sole employee will be unable to claim The Employment Allowance. Unfortunately, it is not enough to appoint another director, despite the company then no longer being a single-company. The regulations dictate that earnings need to be paid to another employee at the company who is not a director.

In order to preserve your EA, there are two options you can use. You could choose to resign as the sole director whilst remaining as an employee, and appoint a new director (this could be a spouse or family member). Alternatively, you could employ another individual, so that there is more than one earner.

Whether this option is going to be financially beneficial can only be determined on an individual basis, however it is definitely something to consider.

Executive Pension Scheme

The general rule of pensions is that you receive tax relief each year for the contribution you make into the scheme. The main incentive is the income tax relief on ‘net relevant earning’ yet, for many directors, they draw the minimum salary – making the pension unworkable as dividends are not counted.

One way to overcome this problem is to establish a ‘Director’s Pension’. The company will make contributions on the behalf of the director, with the payments being considered business expenses.

Bonus

A bonus is subject to income tax and Employees NIC for the recipient, as well as Employer’s NIC for the company. It is tax deductible in the corporation tax calculation of the company – saving 20% of corporation tax. In order for the bonus to be tax deductible, it must be paid within 9 months of the year end of the accounts it relates to.

For more tips, help and support, visit the KFS group website @ www.online.accountants

-  The KFS Group Blog Team