The VAT flat rate scheme (FRS) allows small businesses to simplify their VAT records and, in many cases, keep a slice of the VAT they collect on behalf of the Government. Unfortunately, there has been abuse of the FRS, so HMRC is changing the rules. From 1 April 2017, it will be more difficult to make money out of the FRS. A VAT registered business which spends less than 2% of its gross turnover, or less than £1,000 per year on goods, will have to use an FRS percentage of 16.5%. The 'goods' counted for this test don’t include food and drink for the employees, motor expenses, or capital items.The high percentage of 16.5% means the business will have to pay over almost all of the VAT it collects, with no deductions permitted for VAT incurred on purchases. Businesses which operate in the knowledge and service sectors are unlikely to benefit financially from using the FRS after 1 April 2017, although the simplification for VAT records remains. If your business supplies services (anything from hairdressing to consultancy services) and you use the FRS, we should talk about whether you should remain within the FRS and, in some cases, whether you should even remain VAT-registered.
Since 6 April 2015, there are few restrictions for those aged 55 and over who wish to access their savings in money purchase pension schemes. You may have taken advantage of this 'pension freedom' as it is called. However, if you have drawn more than the tax-free lump sum from your pension fund, you need to think carefully about making further pension contributions. The total amount you and your employer can contribute each year to a pension fund in your name is limited by your Annual Allowance (AA). This is set at £40,000 per year, plus any unused AA brought forward from the three previous years. Once you have taken taxable income from your pension fund, your AA is replaced by a Money Purchase Annual Allowance (MPAA) for that tax year and all subsequent tax years. The MPAA is currently set at £10,000, but it will reduce to £4,000 on 6 April 2017. It can’t be boosted by unused allowance or carried forward to later tax years. If your pension contributions exceed your AA or MPAA (where that applies), you must pay tax on those excess contributions at your highest tax rate. The purpose of the MPAA is to discourage people from drawing funds from one pension scheme, then replacing that money in another pension scheme, attracting additional tax relief. This is called 'pensions recycling'. The low level of the MPAA may catch you out if you are still employed and contributing to an occupational pension scheme under auto-enrolment. Take professional advice before accessing any of your pension savings.
How and When Will It Affect You? Individual taxpayers We’ve been submitting personal tax information securely online to HM Revenue and Customs (HMRC) for many years now and from April 2017, every individual and business in the UK has a digital tax account. If you have chosen for us to look after your personal and/or your business’s tax affairs then, managing this account is another part of the tax service we provide for you. How HMRC receive information currently Information about your personal and your business’s tax affairs arrive with HMRC in various ways. An example would be information on an employed person’s weekly or monthly wage or a pensioner’s pension payments which comes directly to HMRC from the employer’s payroll submissions or in the case of the state pension, from the Department for Works and Pensions (DWP). Self-Assessment Tax Returns Businesses and many individuals complete an annual Tax Return called a Self-Assessment, which is needed to substantiate the information from the third parties and the information submitted by the individual, or from us as your accountant. Some examples would be year-end accounts, rental income and expenses, income from investments and sale of assets. Some big changes are happening HMRC want to rely more heavily on third party information via the digital tax accounts, and less on the end of year Self-Assessment Tax Returns. They want to collect this information in Real Time, with the ultimate intention of abolishing Self-Assessment Tax Returns for many individuals. The biggest change is that paper records will no longer be acceptable under tax law. Digital records and digital filing of quarterly reports, together with a year-end statement, will become mandatory for many taxpayers. As HMRC move forward with modernising the whole tax system, the changes being made will impact on you. Because of this, we want to let you know what’s happening and the timetable for the changes over the coming months and years. Which businesses will be affected? There are expected to be around 1.6 million companies, 2.4 million self-employed individuals (including Partnerships) and 900,000 landlords of residential properties affected by the changes to the way information is reported. Who’s exempt? Individuals, businesses and landlords of residential properties where the gross income is less than £10,000 will be exempt. Also exempt are those who are not able to engage digitally for religious reasons, or due to a factor such as age, disability or location (e.g. no availability of broadband). What will you have to do? As a business or individual comes to their Making Tax Digital for Business (MTDfB) entry date, they will be required to start keeping digital records and provide quarterly updates of income and expenses to HMRC via a dedicated online system, which will mean using software specifically designed for this purpose. After the end of the fourth quarter, a year-end statement will be required, which pulls together all of the submissions made, gives the opportunity to make any final adjustments and pulls in any gains from the sales of residential properties, if applicable. Who’s first? Businesses with a turnover above the VAT registration threshold applicable on 1st April 2018 will be the first to be affected by MTDfB. The threshold for VAT has not yet been set for 1st April 2018, but we are working with the current threshold of £85,000 until it is known.In this first tranche, HMRC mean businesses which are not incorporated (not limited companies) but include the self-employed, the majority of partnerships and those with residential property income. Turnover above £10,000 but below £85,000 Individuals and businesses (including landlords with residential property) who have a turnover in excess of £10,000, but are below the VAT registration threshold which applies on 1st April 2018, will be required to start keeping digital records on their accounting period start date which falls after 6th April 2019 although they can choose to do this voluntarily prior to that date. For more information on this article please call us on 01227 712714.