‘Stable Brexit platform for a global Britain’ as Spreadsheet Phil delivers last Spring Budget

The Spring Budget 2017

 

Chancellor Hammond or “Spreadsheet Phil” as the Treasury call him, quietly delivered his 2017 Spring Budget today with a spring in his step and mischief in his face as he taunted the Labour benches opposite. He reminded me of a latter day Robin Hood, taking a little from the rich and giving a little to the poor(er) members of society. Not a bad ideal you may think, but does his tinkering go far enough?

 

I prefer him imitating Robin Hood rather than being the Sheriff who would take taxes from the vulnerable for selfish gain. In this Spring’s Budget nasty surprises were noticeably absent as Mr Hammond basked in the reflected glory of improved economic growth numbers recently published by the Office of National Statistics.

 

No doubt weaker sterling has resulted in inflationary pressures and, to protect living standards, more pounds are required in the pockets of UK citizens. Hammond believes his Budget addresses this balance but that view is not shared by the leader of the Opposition.

 

A cautious Budget; it boasts of fairness and to “levelling the playing field”, specifically with reference to National Insurance contributions from the self-employed rising closer to those of the employed. The Government’s strategy of closing the tax gap (the difference between the taxes that should be collected and those which actually are) seems to be working. A continued hard line on all forms of tax evasion and avoidance, with stronger compliance tools to police best practice, is hard to criticise.

 

Faced with ongoing criticism on the timetable and a paucity of clarity surrounding the introduction of the public sector off-payroll (IR35) changes in 4 weeks’ time, it was good to hear that the implementation of Making Tax Digital for some smaller businesses has been relaxed. Nevertheless the public sector changes are still expected to result in procedural and contractual chaos and HMRC’s digital status assessment tool ‘ESS’ will need a thick skin.

 

Flexible workers, contractors and freelancers who comprise the ‘gig economy’ feel with some justification that they have been ambushed again with reductions in the dividend allowance, Flat Rate VAT changes penalising ‘low cost traders’ and public sector IR35 reforms, all of which are causing chaos and extra cost in the temporary worker supply chain. There is no doubt that the taxation differences between the employed and the “self-employed” (including single director companies) require harmonisation, but any changes necessary to bring tax treatment in line with new economy ways of working must be explored and considered thoroughly and not as a knee jerk response to abuse by an unscrupulous few. Flexible workers may feel bruised but if the Sheriff had written the script then far more radical changes can be imagined.

 

Consistent pleas for patience and reflection from stakeholders have fallen on deaf ears and many commentators believe that the outcome is unlikely to deliver the returns that HMRC expects. I do hope that in balancing his books and sharing the wealth around Robin has not prematurely spent the money from the flexible workforce. Otherwise I think the job of collecting it will go back to the less amiable Sheriff and then it will be goodbye to fairness and simplicity.

 

Call me old fashioned, but I doubt next Autumn’s Budget will be quite so Robin Hood-ish.

 

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.

Top Tax Tips: VAT Flat Rate Scheme

Top Tax Tips: VAT Flat Rate Scheme

The majority of contractors choose to become VAT registered, even if they are not yet earning the threshold amount for registration, as it can give a very professional impression to prospective clients.  HMRC offers several types of VAT accounting schemes which are suited to different sizes and types of businesses. Choosing the best matched VAT accounting system for your business can make a big different to the ease of administering your contractor accounts as well as offering the possibility of making tax savings. Many limited company contractors choose the Flat Rate VAT scheme as it makes their limited company accountancy much easier. Its more straightforward rules also mean errors are less likely which gives welcome peace of mind.

The Flat Rate Scheme

The Flat Rate Scheme for VAT came into force in 2002 as a way to help make VAT accounting much simpler for the smaller business. If you’re a contractor limited company with sales of up to £150,000 (excluding VAT) across any individual tax year you can be eligible to join this Scheme. Once you have registered, even if your VAT inclusive sales go over this amount you can still reap the benefits, up to a cap of £230,000. If you go over this amount though you will no longer eligible and will have to leave the Scheme.

Under the Flat Rate Scheme a contractor must still charge the relevant rate of VAT on invoices to their clients for the products or services sold (eg: 20%) but the VAT payment owed is calculated as a set ‘flat’ percentage of the contractor company’s total VAT inclusive turnover. The ‘flat’ percentage applied varies from industry to industry, for example:

 

Category of businessApplicable percentage
Computer and IT consultancy or data processing14.5
Computer repair services10.5
Financial services13.5
Management consultancy14

 

 

You cannot claim back VAT on your purchases unless you buy an asset for over £2,000, as the set percentage charged takes this into account. However, you save time because you don’t need to work out which purchases you can and can’t claim VAT back for and you don’t need to record the VAT you charge on your sales or purchases in your contractor accounts. Other potential benefits to contractors of using the Flat Rate Scheme include:

  • Although you need to show the rate of VAT applicable separately on your invoices, unlike standard VAT accounting you are not required to record the VAT amounts of every sale and business purchase made. This means the paperwork and admin involved is simpler and less time consuming.
  • In your first year of VAT registration you are eligible for a 1% discount in your flat rate percentage. This applies up to the day before your first anniversary of becoming VAT registered. This offers a welcome tax break.
  • It’s a simpler scheme to follow as there aren’t so many rules as standard VAT.  This makes it easier to get it right, which makes it less stressful.
  • As the Flat Rate Scheme is a set percentage of your sales you have a much better idea of how much VAT you’ll owe to HMRC.

 

For many contractors these benefits offer very worthwhile advantages and the potential for tax savings. However, check with a contractor accountant to make sure that this is the best option tax-wise for your own contractor limited company. For some business types there can be potential disadvantages of using the Flat Rate Scheme which might make it unsuitable. This may be the case for you if:

  • You make a lot of standard rate business purchases – as you generally can’t claim back the VAT on these purchases.
  • You’re currently registered under standard VAT accounting and frequently get a VAT repayment.
  • You issue a lot of zero-rated or VAT exempt invoices – as you won’t be able to charge any VAT to the client, but will effectively be paying it out from your total sales income.
  • You have rental income as the flat rate will be payable on it too.

 

At Intouch our clients can easily keep up to date with contractor tax issues which affect their contractor limited company. Our experienced personal accountants are also on hand to provide personalised advice to ensure our clients take home the maximum possible post-tax income. Contact us to find out more.

 

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.

New contractors’ guide to VAT

New contractors’ guide to VAT

One area that new Limited Company contractors need to think about from the start is the on-going tax liabilities of their company. Getting it wrong can potentially result in hefty financial penalties or worse, so it’s advisable to consult an experienced contractor accountant  to get the best advice for your circumstances. One type of tax which will be relevant to most Limited Company contractors is Value Added Tax (VAT).

 

VAT – what it is and where it applies

VAT is charged on the final consumption of a variety of HMRC specified goods and services and is applied to every stage of production and distribution. Most business-related goods and services fall under VAT so the majority of Limited Company contractors are likely to be subject to VAT charges.

 

How VAT is calculated

At its simplest a contractor VAT bill is the balance of the VAT you have charged to clients, minus the VAT you have claimed back on allowable items you purchased. If you have paid out more in VAT than you have charged, HMRC will refund the difference. The standard UK VAT rate is currently 20%. However, there are other rates which could apply depending on the type of goods or services being sold and where (in the world) they’re consumed.

 

VAT Accounting Schemes

HMRC offers schemes designed to help contractors in terms of how VAT is calculated and administered.

There are two options for accounting for VAT available to companies with a taxable turnover of up to £1.35million these are:

  • Cash Accounting – with this option the company only accounts for VAT when their invoice is actually paid. This can be helpful for the cashflow of the business. (Under this scheme you can also only claim back VAT on purchases once you’ve actually paid the invoice.)
  • Annual Accounting – with this option the company only submits one VAT Return a year. Monthly payments of the VAT bill amount are made to HMRC throughout the year. This too can be helpful for cashflow.

 

The Flat Rate Scheme

HMRC offers the Flat Rate Scheme which is designed to make VAT administration easier for many contractors. Rather than claiming VAT on each invoice you pay a percentage of your company turnover. For example 14.5% for an IT consultancy. There are main advantage to this scheme you can continue to charge clients 20% while you give a smaller percentage to HMRC. One downside is that you cannot claim the VAT back on your own business purchases unless they are capital purchases over £2000, which could be an issue for some business types. Another is that if you make a lot of zero rated or VAT exempt sales you’ll still be charged VAT on those sales, even though you’re not charging the client.

 

When you should register for VAT

VAT registration is mandatory for companies who have made taxable sales in the last 12 months above the current VAT registration threshold amount. For the 2013/14 tax year this is £79,000. HMRC usually increases the threshold by around £1,000 each year so for the 2014/15 tax year the threshold is likely to be higher. Even if your sales are unlikely to reach this level you can still voluntarily register your company for VAT. Many contractors choose to do this as it can offer several advantages as claiming back VAT on invoices they receive. If you decide not to register but you believe you’ll exceed the threshold in the near future (if you win a huge contract for example) you should register as soon as possible to remain within HMRC rules.

 

How to register for VAT

You need to apply directly to HMRC to register your company for VAT. This can be done online using their website or by post. You can do this yourself or your Intouch accountant can do this for you on your behalf.

 

Quarterly VAT returns at Intouch

At Intouch we offer Quarterly VAT return administration as a standard part of our comprehensive monthly service package (£98 + VAT per month). Contact us to find out more about our services and how we can help take the stress out of running your business.

 

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.

Expenses and disbursements

Expenses and disbursements – what’s the difference?

As a contractor you may incur costs in the process of supplying services to your clients. Where the costs are relevant you can pass these on by including them in your invoice. If you are VAT registered it’s important to understand the difference between HMRC’s definition of ‘expenses’ and ‘disbursements’ to ensure:

  • your invoices to clients show the correct VAT treatment
  • you are only claiming back VAT on allowable items

 

Expenses

For invoicing purposes you must charge VAT on expenses you pass on to your clients.  If you are using the flat rate VAT scheme you must also pay a percentage over to HMRC as you would with a normal invoice, so you may want to consider whether it’s worth staying on the scheme if you have a large amount of expenses.

 

HMRC defines expenses as ‘incidental costs that your business might incur’ when supplying goods or services to clients. These include goods or services purchased for your own use as a normal business cost. The key point in the definition is that a cost is defined as an expense only if you have not purchased the goods or services on behalf of your client, for the client’s use and benefit.

 

HMRC examples of an expense are:

  • Travel to visit a client or travel to a job
  • Postage costs when sending items to clients

 

If you have incurred expenses you can choose to itemise these separately on your invoice as ‘recharges’. These are subject to VAT. You will have to charge VAT on these even if you yourself did not pay VAT on the items.

 

You can claim back the VAT on items you purchased for you and not your client, even if you passed the costs on as a recharge. You must provide a VAT invoice for each item you claim. Your client can also claim back the VAT you charged them on your invoice if they are VAT registered.

 

Disbursements

For invoicing purposes costs incurred for disbursements are left out of the VAT calculation.

 

HMRC defines disbursements as costs you incur when buying goods or services on behalf of your client, for their use and benefit. In this respect you are deemed as acting as an agent for your client.

 

For the cost to be a disbursement it must be clear that the purchase was made on behalf of the client and must include the following HMRC criteria:

  • you paid the supplier on your customer’s behalf acting as the agent of your client
  • your customer received, used or had the benefit of the goods or services you paid for on their behalf
  • it was your client’s responsibility to pay for the goods or services, not yours
  • you had permission from your customer to make the payment
  • your customer knew that the goods or services were from another supplier, not from you
  • you show the costs separately on your invoice
  • you pass on the exact amount of each cost to your customer when you invoice them
  • the goods and services you paid for are additional to the services you’re invoicing your client  for performing yourself

 

If you paid VAT for goods and services you purchased on behalf of your client and treated it as a disbursement on your invoice you cannot claim back the VAT. Your client can only claim back the VAT if they have a valid VAT invoice.

 

In many cases the difference between an expense and a disbursement will be quite clear. However, if you are unsure of the correct VAT treatment for any items, contact your contractor accountant for guidance.

 

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.