“The Budget for Britain: the comeback country”

The Budget for Britain

In Monday’s blog we looked ahead to what we thought this week’s Budget might bring for contractors and freelancers. Osborne had already made it clear that there would be “[N]o giveaways, no gimmicks, a Budget for the long-term” and it certainly proved to be a steady Budget. Yesterday the Chancellor was at pains to stress that the UK is experiencing true national recovery, and with the highest rate of employment in history and businesses being backed, the Coalition is confident their measures are making work pay.

A Budget that “backs small business owners”?

So what does yesterday’s announcement mean specifically for contractors and freelancers…

Income Tax personal allowance

Back in the Autumn the Government announced that the Income Tax personal allowance will increase to £10,600 as of April 2015. This means the basic rate limit will be £31,785 and therefore the higher rate threshold above which individuals pay 40% Income Tax will be increased to £42,385. The personal allowance will rise to £11,000 by 2016/17 with the higher rate subsequently rising to £43,000.

National Insurance upper earnings and upper profits limits will increase to stay in line with the higher rate threshold. The basic, higher and additional rates of Income Tax for 2015-16 will remain at their 2014-15 levels.

Capital allowances

It had been expected that the Chancellor might announce an extension to the £500,000 limit to the Annual Investment Allowance due to fall back to just £25,000 on 1 January 2016 but this didn’t materialise in yesterday’s Budget.

Travel and subsistence claims for workers engaged through Employment Intermediaries (Umbrella companies and possibly PSCs).

The 2014 Autumn Statement announced that the Government would review with the intention of restricting the use of overarching contracts used by some temporary workers, and their employers to claim tax relief on travel and subsistence (T&S) expenses.

Yesterday’s Budget revealed that, with effect 6 April 2016,  Government intends to implement the conclusions of a consultation which is likely restrict T&S relief for workers engaged through an employment intermediary, such as an Umbrella company or a personal service company, who are also under the supervision, direction and control of the end user. They intend to force Employment intermediaries to provide workers with greater transparency on their terms of employment, including what they are being paid.

The springboard for these plans has arisen as HMRC seek to level the playing field between employment businesses that lower their costs by taking advantage of these arrangements, and those that don’t. But Osborne did say that the Government would continue to protect those genuinely self employed.The period of consultation will determine the finer details of the eventual proposals to restrict tax relief and we’ll post more about what that means for our clients as the plans unveil.

What else is there for contractors and freelancers in this year’s Budget?

Well, there are some ups and some downs for contractors with a range of benefits and penalties coming out of this Budget. The announcements to help savers will benefit most contractors and Osborne mentioned several times that this Government have made sure it pays to work. And with planned investment in infrastructure across all parts of the UK, this will be welcome news for contractors, especially in the North and South West.

Other headlines contractors will be interested in 

  • The annual Self-Assessment Tax Returns (SATR) will be abolished and replaced by online tax accounts. Osborne cited that the self-employed should be working for themselves, not the taxman. This news was particularly welcomed by IPSE, the Association Independent Professionals and the Self Employed who welcomed “a more flexible returns system to replace the current outdated model”.
  • Government will review Entrepreneurs Relief (ER) and this could impact on how contractors can extract cash efficiently from their Limited Companies.
  • A new personal savings allowance means the first £1,000 of savings income will not be taxed.
  • A fully flexible ISA that won’t penalise savers for withdrawing their own money or replacing it throughout the year.
  • A new Help to Buy ISA meaning first time buyers will get £50 from the Government for every £200  they save.
  • Tax relief on lifetime pension pots will fall from £1.25m to £1m but will be indexed from 2018 to protect those in place.
  • As predicted, investment will be made into the oil and gas industry, creating jobs for contractors in that field. The Chancellor stressed the importance of taking action in this area to protect the future of the industry.
  • TV, film and gaming tax credits will benefits contractors and freelancers working in the UK’s creative sector.
  • The freeze on petrol prices promises “£10 off a tank with the Tories” while alcohol duties will be cut.

Osborne hailed this as “[T]he Budget for Britain: the comeback country”. Will yesterday’s announcements make the sun shine for you? Let us know your thoughts.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Depreciation and capital allowances

Depreciation and capital allowances

Most contractors will purchase items for business purposes which will have a useful life for over a year, or even for several years. These items could be things like a computer, office furniture or telephone equipment. Such purchases could also potentially include goods and services associated with research and development, as the results could also eventually add ongoing value to the business. In accounting terms items which have a use or value to a business of over a year, and which cost over £1,000, are termed assets. Most assets will lose value over time and will eventually have to be replaced. In accounting terms this loss of value is demonstrated in a company’s accounts using a calculation called ‘depreciation’.

Depreciation

At its simplest depreciation is a calculation which shows the current value to the business of an asset within a specific accounting period. It is used to write off the cost of the asset across the period of its usefulness to the business. The most commonly used method of calculating depreciation is called ‘straight line’ depreciation. With this method the same amount is taken off the value of the asset for each year that it is deemed to have a useful life.

As a simple example, if a computer was bought for £3,000 and was depreciated over 3 years the calculation would be:

Asset value (purchase price) / period of useful life     =  depreciation per year

£3,000                                      / 3 years         =  £1,000 per year

The depreciation amount will be shown in the profit and loss accounts as a depreciation expense.

The value of the asset will be shown as the original purchase cost(s) less the depreciation amount, known as the ‘net book value’. This amount will not necessarily be the same as the current market value. This means that although in some cases the actual market value of an asset – say a computer – will fall very quickly, the accounts would show a steady decline in value with the depreciation spread across several years.

Capital allowances

Assets are treated differently to expenses for tax purposes and are usually ‘capitalised’ i.e.: shown as being part of the company’s capital in the accounts. A company cannot claim any tax relief on the depreciation costs of an asset, unlike other valid expenses which are 100% tax deductible. What they can do instead is claim for a ‘capital allowance’ against the costs associated with the asset. Calculating how much capital allowance should be claimed can become complex. Capital allowance amounts vary depending on the type of asset involved, so it’s important to apply the right rate. The allowance rates themselves also change each year because they are set in the annual budget. Another complication is that the amount of depreciation shown in the company accounts will often be a different amount to the sum of capital allowances claimed. This means that the company profit shown in the accounts may legitimately be different to the amount taxable under corporation tax. Due to this complexity, in most cases it’s recommended you let a professionally qualified accountant do these calculations for you.

Claiming back VAT on capital assets under the Flat Rate Scheme

Those who are VAT registered and using the Flat Rate Scheme won’t usually be able to claim back the VAT on capital assets purchased as this is taken into account in the flat rate applicable to their business type. However, it may be possible to claim if the VAT-inclusive purchase price is £2,000 or more. In order to be eligible the purchase must comply with HMRC rules which include:

  • It must be a single purchase of £2,000 or more from the same single supplier.
  • It must be a purchase of capital goods, not services.
  • You can’t claim on items you intend to resell, hire out or incorporate into other goods you intend to sell.
  • You can’t claim on items you intend to use up within a year

If you are un-clear on the eligibility of an item you’ve purchased speak to your accountant for further advice.

Recording Fixed Assets

As a director of your company you have a responsibility to keep an accurate record of all your company’s assets. Keep your accountant updated too so they have an accurate schedule of your fixed assets.

At Intouch our clients simply need to keep us fully up to date with details of their capital asset purchases via the portal. They can then sit back and relax as their personal accountant will take care of the tax issues for them.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.