Legislation comes into force in April 2019 that will force those who have used a disguised remuneration scheme to pay or receive wages to pay back the tax that they avoided, and thus owe to HMRC. But what does this mean and who is affected?

What is disguised remuneration?

Colloquially referred to as the ‘2019 Loan Charge’, disguised remuneration refers to earned income which was received via non-taxable means in order to avoid paying national insurance contributions or income tax. For the most part, this means ‘loans’ from an employer which were never expected to be paid back or accrue interest, meaning that they are essentially just a salary. Other forms of this include retirement benefit schemes and employee benefit trusts.

Of course, there are legitimate trusts, benefits and loans which can be given by employers to employees, but if these were never intended to be paid back, or have not been declared so that they can be taxed properly, then they count as disguised remuneration.

Who is affected by disguised renumeration?

Businesses who have avoided tax in this way deliberately should already be aware that they may become liable under this legislation and need to start thinking about how to pay the tax that they owe back. However, this can also affect contractors, agency workers, nurses and supply teachers, who may have been forced to use one of these schemes in order to work and be paid by a company. These people may not even know that they owe this tax.

Anyone who has taken temporary work or been paid by an umbrella company needs to look into their pay and work out whether or not they were paying the correct tax. The way that these schemes generally worked, was that a worker was paid for the temporary or contracting work that they did by a separate business (umbrella company). This company would take the full amount earned by the contractor and pay them minimum wage or just below, thus avoiding NI contributions and income tax, whilst keeping the rest of the wage in ‘fees’.

HMRC are looking at loans made to workers dating back to April 6th 1999, meaning that up to 2 decades worth of tax might be owed from one contractor or agency worker.

Shouldn’t the umbrella company be paying this tax?

Technically yes. It is down to the choices of the umbrella company that the tax wasn’t paid, and not the contractor in many cases. HMRC will first attempt to take the tax from this company before they approach the contractor apart from under certain circumstances, including:

  • If the company no longer exists.
  • If the company is based outside of the UK and thus isn’t liable to pay tax in the UK.
  • If the company exists but is unable to pay.
  • If the company exists but HMRC believe that you were always aware that you should have been paying tax on your earnings and failed to do so.

Workers may find this unfair, and it is, for those who were forced into the situation and are now being required to pay tax that a separate entity should have been paying. In this instance you should contact HMRC as soon as possible to discuss the situation, as HMRC is willing to work on a case-by-case basis and provide advice and assistance as long as you come forward and make your case as soon as you can.

What can you do if you think you’ve been affected?

The new legislation comes into effect on April 5th 2019 and businesses and individuals who think that this might affect them should come forward and settle their tax before this date. You can contact HMRC over the phone or online to discuss it if you aren’t sure whether or not you owe tax, and to talk about what you can do next.

If you have copies of your old wage slips and accounts this will make it easier for yourself and HMRC to work out whether or not you have paid all of the tax that you owe, as well as to work out what you still need to pay. If you have been filling out self-assessment tax returns, copies of these should also help you, and will make it much faster to find out how much tax you have already paid and what you should have been paying.

How can the tax bill be settled?

Tax will be added up as though all of the earnings happened in the past tax year (2018/19) and then taxed accordingly, presenting you with one overall tax bill. HMRC will allow businesses and individuals to set up payment plans to make paying the tax back more affordable.

Those with a taxable income of less than £30,000 can spread their payments out over 7 years, whilst those with an income of between £30,000 and £50,000 have 5 years to pay their bill. For higher earners, HMRC will entertain an application for an extended period as well, but this will be handled at the discretion of the HMRC and will require further information and evidence to work out.

Seeking advice

HMRC is willing to work directly with those who have already extricated themselves from a disguised remuneration scheme, or those who want to, and can help you to remedy the issue and get up to date with your tax. If you speak with them as early as possible. HMRC can help you to work out and settle up what you owe before you have to worry about paying any extra charges

If you feel uncomfortable with contacting HMRC directly, there are various charities who can help you. Tax Aid works with people under 60 and will act as a go-between with yourself and HMRC, whilst Tax Help for Older People provides free assistance for people aged 60 years and over. These charities are perfect for offering assistance and advice for those earning less than £20,000, who are those most likely to be negatively affected by this change in the law.

Further information and help

This legislation has been subject to huge controversy due to it’s potentially devastating consequences on the individuals affected. The best approach for working out a strategy with HMRC and not being steamrolled by them into a draconian agreement is to speak to an accountant who is familiar with the legislation and can present the best case on your behalf.
If you are affected and need help please call us on 01473 744 700 or email us on contactus@aag-accountants.co.uk to discuss further.

The number of buy to let mortgages fell drastically in 2016 and 2017, from 117,500 in 2015 to 74,900 in 2017, a two year drop of 38%, which has prompted many news outlets to herald the ‘death of buy to let’. A number of factors have contributed to this drop, including a 3% stamp duty surcharge introduced in 2016 and tightening of mortgage lending rules. But does a trend like this, even such a dramatic one, really mean the death of buy to let?

What does buy to let mean?

A buy to let mortgage is very similar to a regular mortgage, with a few key differences. Buy to let mortgages are given to home buyers under the explicit understanding that they will be renting that house out rather than living in it. The rent charged to tenants will often form a large part of the mortgage repayments.

Many buy to let mortgages are interest only, meaning that only the interest is paid back for a fixed term, after which the initial investment needs to be paid off in full. This may seem strange, but often a second property is seen as an investment opportunity, so that the rent will pay for the interest, and then the house can be sold, hopefully for a profit, at the end of the repayment term.

A buy to let mortgage is for people who:

  • Are the right age. There is an upper age limit of 70 – 75 and the borrower will need to have completed payments by the time they reach this age.
  • Earn enough. £25,000 per year is the lowest end that most mortgage brokers will consider.
  • Understand the risks of investing in property.
  • Don’t have too much outstanding credit. This includes credit cards, loans and existing mortgages.
  • Already own their own home, either outright or with an existing mortgage.
  • Have a good credit record.

So why is the buy to let market struggling?

Tax changes

Recent tax legislation has hit basic-rate taxpayers hard. Homeowners are now taxed on overall revenue as opposed to profit, meaning that they pay tax on everything that comes in, including rental income, even if all of that rent is going into paying off the mortgage. This has forced many taxpayers into a higher tax band, making it unprofitable to own a second home.

Stamp duty surcharge

In 2016 new legislation was rolled out which requires homeowners to pay a 3% stamp duty surcharge on their second homes. This is on top of the regular stamp duty they would already pay on a purchased home. This means that, for example, a house priced at £250,000 would be liable to pay stamp duty of 2%, which is £2,400. However, a second home or buy to let property would be liable to pay an extra 3% making stamp duty charges a weighty £9,750. For home buyers who are already financially stretched this can be the difference between being able to afford a second home or not.

Stricter mortgage lending

Tougher lending rules were introduced by banks in 2017 which now require borrowers to earn up to 45% above the mortgage repayment monthly to prove that they will be able to meet repayments. In the past, lenders only needed to see that borrowers were able to cover their mortgage repayments with the rent charged. This makes life difficult for several reasons. Borrowers might have to look for cheaper mortgages and thus cheaper houses, which can be difficult to find in the current climate (see below). Similarly, a high rent price in a market where rents are already high might make it difficult to secure tenants as quickly as necessary.

The only other option is to save a bigger deposit, which can take a long time and may put people who already own their own home off of attempting to break into the buy to let market.

Housing market issues

The financial climate in the UK has certainly caused more than a few problems with the housing market. More people are living in poverty and even those who have healthy finances are finding it hard to get together the amount of money necessary to buy a home. Brexit is a deciding factor for many potential home buyers, making people reticent to buy a home as they fear that the housing market will crash. This means that homeowners are currently facing their existing homes dropping sharply in value, making the idea of purchasing a second property untenable.

Why there might be some hope

All of this doesn’t mean the end for the buy to let mortgage market, though. Over the past couple of years, as the market has been struggling, many people are finding workarounds and other options to help them to continue buying to let.

Legal loopholes

A number of investors have figured out that buying through a limited company can help to lower tax bills. Statistics show that up to 77% of buy to let mortgage applications made in the first quarter of 2018 were made through limited companies, indicating that this is the most financially advantageous was of acquiring rental properties.

Banks, not wanting to lose their mortgage borrowers altogether, have also started to put together plans for existing customers, offering them cheaper rates to remortgage with them instead of going elsewhere. This makes it far easier for a first time buy to let mortgage borrower to afford their second home.

Rental demand is strong and getting stronger

Even though high rents can be off-putting, the fact is that rents are on the rise and people still need to find a place to live. Less home buyers means more renters, and demand for rental properties is at a high at the moment. This means that if a home buyer is able to secure a home on a buy to let mortgage, it is likely that they will be able to find tenants even if they do have to charge higher rents.

Further information and help

Whether you’re an existing landlord or a prospective one, there are many reasons to engage the services of a professional accountant to help you manage your portfolio in the most financially advantageous way.

Speak to an advisor at Accounting Gem to see how we can help you turn your bricks and mortar into profit. We have packages to suit all budgets and would lover to discuss them with you on on 01473 744 700 or via email at contactus@aag-accountants.co.uk

Self employment isn’t as simple as finding clients and starting to work. Before you can start working for yourself you need to carefully weigh the pros and cons of the legal form your business is going to take. There are two ways in which you can work as a self-employed person, and there are benefits and drawbacks to both.

What is the difference between a limited company and a sole trader?

Sole trader

Setting yourself up as a sole trader is probably the easiest and most popular option for those who are just starting out. People that consider themselves ‘freelancers’ or self employed are sole traders. You need to register with HMRC as a sole trader, which means that you are then considered to be in business for income tax purposes. You should register as soon as you begin trading but you must register by 5th October in your business’s second year of trading at the very least, so that you can begin paying tax.

You are required to keep all of your accounts up to date, as well as evidence of invoices and payments, and then fill out and submit a self assessment tax return by January of the following year in order to pay your tax. Sole traders are also required to pay class 2 and 4 National Insurance Contributions (NICs), which are worked out automatically when a tax return is filed online.

Limited company

Limited companies are more complicated and require more upfront work to get set up, but if you are an individual you are still able to set up as a limited company if you want to. Limited companies feature directors and shareholders, and if you set up a company as an individual then you will become both the director and the only shareholder, but your company has the opportunity to grow from here. As a limited company you will take your wages in the form of a salary, or from dividends, or more usually, a mixture of both.

You need to register with Companies House as a limited company, and give personal details such as your name, address and date of birth which will be listed on the Companies House roster publicly. You need to provide all of your annual accounts and a confirmation statement each year, which are also published publicly.

Benefits of being a sole trader

Quick and easy

The process of setting up a limited company is far more involved than becoming a sole trader. Although you do need to register with HMRC you can pretty much get started right away after this. A limited company requires a little more time, knowledge and business acumen, which can be overwhelming for those just starting out. Don’t forget that you can always become a sole trader first, and then form a limited company later, as well, so you aren’t tied to the choice you make if you go down this route.

Privacy

You don’t have to publish all of your details with Companies House if you start out as a sole trader. Most new businesses will fail in the first 18 months, and for those who value their privacy and the ability to project their own business image this puts a lot of pressure on them. As a sole trader you aren’t required to post your own details, or details of your accounts, online.

Control

Although you can work alone as a limited company, it is usual that you will bring on further directors and shareholders over time. This means that control over your business may have to be split over time, a fact which is frustrating for many business people. If your business is your baby, the last thing you want to do is allow other people to make decisions you don’t agree with. It is also easier to make decisions if you are working alone.

Allows for closer connection with clients

If you are a smaller business with close ties in the local community, you may find that people feel a stronger connection with an individual than they do with the faceless company. As mentioned above, you are also able to make decisions on your own, meaning that you can make them quickly and provide a more bespoke experience for your customers.

Benefits of being a limited company

Pay less tax

You may be able to pay less tax as a limited company. As of this year, corporation tax stands at 19% and is set to go down to 17% by 2020, making for a competitive rate. On top of this, if you are taking your wages home in the form of company dividends, you will not be subject to NICs and will be able to take home more of your profit than if you were a sole trader.

Business and personal lives are separate

If your business is set up as a limited company your finances within the business are considered separate from your personal finances. This means that if the worst happens and your business does run into financial trouble, you won’t be expected to bail the business out using your own money. Sole traders do not have this protection, so if they run into trouble and owe money to customers or lenders they will be forced to bail themselves out with their own money, which could lead to bankruptcy in the worst cases.

Trust and authenticity

A limited company has a ring of authenticity that sole traders don’t have. If you are looking to take your business to a wider audience, there is a better chance of them taking you seriously if you are a limited, registered company. A limited company offers a feeling of permanence that resonates with customers, so they are more willing to invest their money in you. The fact that you need to be more on top of your finances and understand business better helps customers to trust that you know what you are doing and will provide a professional service.

Further information and help

Sometimes the choice of whether to set up as a company or sole trader is easy, for the times when it is not an Accounting Gem advisor can talk you through all the pros and cons of both approached. Making the right decision at the outset will have a material impact on both the success of the business and the amount of money you can withdraw from it – so it’s a decision it is important to get correct

Please call us on 01473 744 700 or email us on contactus@aag-accountants.co.uk to find out more and discuss further.

If you are starting a small business, or working as a sole trader, it might be worth looking into hiring an accountant instead of trying to handle your accounts yourself. When you are first getting started, it might be fairly easy to stay on top of your accounts. You’ll only really need to keep simple accounts and fill out a tax return at the end of the financial year at first. However, finances can get more complicated once your business gets going.

What does an accountant do?

In the simplest terms, an accountant is someone that works specifically with your accounts and general finances. They will prepare and review accounts reports and statements, making sure that there aren’t any inconsistencies and that they are accurate. An accountant can also complete and submit your taxes for you. Accountants may also be hired to analyse the financial side of your business and offer advice and assistance, lending their expertise to help boost your profits.

Why do businesses use accountants?

Specialism

You wouldn’t try to build your own office with your bare hands so why try to handle your finances on your own when there are trained professionals available to do it for you? An accountant is professionally trained to work with finances and has a much better idea of how to handle your money successfully. If you try to handle your finances on your own, you’ll have to take the extra time to learn about taxes, profits, cash flow and projections. Whereas an accountant already has all of this knowledge and can dedicate themselves to getting your accounts in order. For important things such as filing a tax return, an accountant is also less likely to make simple mistakes.

Avoid an audit

Most businesses dread an audit. Mistakes and irregularities in your accounts can trigger an audit, which is when a company has its finances formally investigated by an official body such as HMRC. If problems are found there may be penalties, which include anything from fines right up to prison time, making an audit a very bad prospect for business. Many businesses will only think about hiring an accountant when they are already being audited, but the truth is if you hire an accountant from the outset you are much less likely to have to suffer one in the first place.

Audits don’t happen at random. They will usually be triggered by one of the following:

  • Earning a lot of money, or very little. Companies who have huge profits are more likely to have made mistakes, whilst a company that claims to have made very little raises red flags to the authorities.
  • Inaccuracies or mistakes on tax forms. If you don’t know what you are doing with taxes, it is far too easy to make mistakes. Make a few of these and you can expect the government to want to know why.
  • Being too charitable. The government expects charity pay-outs (which are tax deductible) to be a tiny fraction of the overall outgoings of the company. If it looks as though your business is giving away a large amount of profit to charity, they will want to investigate to make sure that this is legitimate.
  • Excessive deductions and credits. Creative accounting can lead to things being written off as expenses when they are actually not able to be claimed in this way. A good accountant will know the lines that you don’t want to cross and keep your business in line, financially.

Saves time and energy

Trying to run a business is difficult enough when you have to focus on the day to day minutiae of your operations. Financial matters are time-consuming and quite difficult to get to grips with in the beginning. An accountant is able to take this on as their entire job, and dedicate the right amount of time to it so that you can maintain your focus on your business goals.

When is a good time to hire an accountant

When you write your business plan

In the early stages when you are putting together your business plan and looking for funding, an accountant can help to create a plan that looks more professional and believable. Accountants use accounting software which can create cash flow projections and reports, and this shows that you have put real thought into your plan. This should help to convince lenders that you are serious and will be able to pay them back and funding you receive.

When you need to file your returns

An accountant can help you with your first tax return as a sole trader or limited company. They will be able to help you to get your accounts in order and show you what you need to do to file an accurate tax return. You may find, having worked with an accountant on the first tax return, that you would like to delegate this job to them forever going forward. But you may also decide to handle your own taxes for a few years until the business has grown. Either way, getting real advice from a professional accountant will help you in the early days.

When your business is growing fast

Delegation is key to success in a growing business. An accountant can help you to keep track of who owes you what and when, who you owe money to and what money is coming in and going out. These issues will become more pressing over time, and require more time and energy to keep on top of.

Accountants can also measure key business metrics such as employee salaries and other benefits compared to total revenue so that you can make informed decisions about what you are spending and on what. Graphs produced by your accountant can help you to see how your business is doing much better than words on a page, giving you a better idea of how your company is going and plan your next move.

Further information and help

Here at Accounting we recognise that hiring an accountant may seem like an unnecessary expense – especially in the early days. However we would encourage you to speak to other business owners and we believe the consensus you would hear is it that it is worth every penny, and generally pays for itself over time.

Talk to an advisor about appointing Accounting Gem as your accountant. We have packages to suit all budgets and would lover to discuss them with you on on 01473 744 700 or via email at contactus@aag-accountants.co.uk

Two million married couples and civil partners are missing out on the Marriage Allowance. Because so many of us have not taken up the allowance, it’s saving HMRC a massive £1.3bn every year.

For Accounting Gem clients who are married or in a civil partnership, is this worth considering for your circumstances? By claiming it, you will, as a couple, save £230 over the year in income tax.

There is no doubt that the Marriage Allowance brings a real benefit to married couples. But, if you and your spouse or civil partner both contribute to the running of your business, is the Marriage Allowance really right for you?

An Accounting Gem looks at the options.

The Marriage Allowance and the Married Couples Allowance

Married couples and civil partnerships actually have two tax-saving schemes open to them. Which one you qualify for depends on when you and your spouse or civil partner were born.

If one of you was born before 6th April 1935, you will claim the Married Couple’s Allowance. The Married Couple’s Allowance will save you between £326 and £844.50 a year.

If both of you were born on the 6th April 1935 or later, you’ll qualify for the Marriage Allowance if:

  • the lesser earning of you is being paid less than £11,500 a year, and
  • the greater earning of you is receiving between £11,501 and £45,000 a year (£43,000 in Scotland).

The Marriage Allowance allow the partner who earns less to transfer 10% of their personal allowance to the partner who is bringing home more in pay. This 10% transfer increases the higher-earner’s personal allowance to £13,000 meaning a tax saving each year of £230.

Is this the right option for family businesses?

Many of Accounting Gem clients are family businesses. Husbands, wives, sons, and daughters all contribute to the success of the company.

In many cases though, there’s only one family member who owns the shares and is a director. By adding your spouse or civil partner to your shareholding register, you could see a tax saving on up to £16,500 a year worth of pay coming into your household.

Getting your spouse or civil partner on board means you can double the allowances you take advantage of

As you know, every single taxpayer in the UK has an annual tax-free allowance of £11,850. If you pay yourself up to that level, you’ll pay no income tax and £411.12 in Employees’ National Insurance.

Every company directors also receives a £2,000 annual personal dividend allowance. That means that you only start paying tax on your dividends when you’ve paid yourself £2,001 or more in a financial year in dividends.

If you and your spouse or civil partner contribute to the success of the business in different ways, you can double the allowance you bring into your household by making your significant other a shareholding director.

So that’s two lots of £11,850 personal allowance and two lots of £2,000 dividend allowance. If you structure your affairs in the correct way with the optimum salary and dividend split, you and your spouse or civil partner will be able to pay yourselves £13,850 each, totalling £27,700 without paying any personal income tax or National Insurance.

How would this work in practice?

Let’s say that your family company is making £150,000 a year. You are the only one who gets paid by the business and you’re the sole shareholder.

At the moment, your company makes £100,000 a year income. Your salary is £11,850 and Employers’ NI is £472.79. Your taxable profit is £87,677.21 on which you pay £16,658.67 in corporation tax. This leaves you with a maximum dividend payable of £71,018.54. You pay £14,306.03 in dividend tax and £411.12 in personal NI. Your total take-home pay is £68,151.40.

However, let’s say there are two of you as shareholding directors on a company making £100,000 a year income. There would be two lots of salary of £11,850 and two lots of Employers’ NI is £472.79. This leaves a taxable profit of £75,354.42 on which you pay £14,317.33 corporation tax. This leaves a total of £61,037.08 payable in dividends to both of you. The total amount of dividend tax you’d pay for the two of you would be £4,277.78 and two lots of personal NI at £411.12.

For each of you, you’ll receive £30,518.54 in dividend on which you pay £2,138.89 in dividend tax. You’ll also receive £11,850 in salary on which you’ll pay £411.12. That will leave each person with £39,818.53 each after all tax (personal and corporate) has been paid or £79,637.06.

Having two shareholders instead of one means that your household will be better off by £11,485.66 a year, significantly more than the Marriage Allowance.

The Employment Allowance

This offers a further opportunity to save money. If you are the sole director, shareholder, and employee in your family business at the moment, you can’t avail yourself of the Employment Allowance. The Employment Allowance is a scheme which allows you to take back the first £3,000 a year of payments you make towards National Insurance Employer’s Contributions.

If you’re not getting the Employment Allowance, try to use up all of your dividend income because the 19% corporation tax you have to pay on the profits.

Accounting Gem fact – a dividend is a payment from a company to its shareholders from the profit it makes.

The corporation tax you’d pay is less than the 25.8% cost you’ll pay on a salary payment on National Insurance Employer’s Contributions and National Insurance Employee’s Contributions.

You could claim Employment Allowance and both of you could pay yourself up to £11,850 each and the Employment Allowance would mean that HMRC refunds the company the two payments of £472.79 in National Insurance Employer’s Contributions for you and your spouse of civil partner.

Be careful to make sure you both work for the business and you can prove it

HMRC have noticed that more and more family companies have begun to structure themselves this way since the dividend scheme was made far less attractive in the 2015/2016 budget.

Try to keep evidence to show that you’re both engaged in the business and take a similar share of the workload.

Want to find out if this will work for you?

An Accounting Gem can talk you through all the options available to you and your family about saving tax. Please call us on.

Speak with one of our team on 01473 744 700 or email us on contactus@aag-accountants.co.uk.

Is someone undercutting your prices? Has a new competitor opened up and you can see from your takings that your customers are leaving you for them?

It’s a scary situation. Price is surely only one consideration when it comes to people parting with their money to spend cash with you.

Often, it isn’t though. It’s much easier to grab someone’s attention with a headline-grabbing price rather than an in-depth description of your business ethos, your social responsibility as a company, and how well your customers are looked after once the money has changed hands.

In this type of situation, how do you fight back?

First, find out what your competitor is charging

Try to get your hands on their price list. They may have it available to view on their website.

Sit down and crunch the numbers. Where you can, rejig your turnover figures by reducing it by the amount that they’re charging. For example, if you seem to charge £100 as an average price across the selection of goods and services your competitor is offering and they’re charging £90, reduce your sales figures by 10%.

How does that affect your monthly profitability? When it comes to the time when you have to pay VAT, would you struggle to meet the VAT on their figures?

Unless it’s a big chain, the chances are that your competitor may not be experienced in pricing and business budgets. They may have set up their business with a charging model that is actually not sustainable. They could have bitten the dust in six months’ time.

That’s reassuring of course, but it doesn’t address the problem you have now – you’re losing customers.

Fightback part 1 – hold your prices and offer extras for free

The extras you offer don’t have to cost that much and they can be described as “time limited” so customers aren’t permanently going to expect from now on to get these freebies.

It could be a delivery charge you no longer ask customers to pay.

If you install audio-visual equipment and want to charge £2,000 for something where your competitor is coming in at £1,800, is there something you could source for £30-50 which used to sell at RRP for more than £200 which would be a natural fit with the installation?

What can you add to your current proposition that the customer can imagine having a cash value that would make your offer feel like the better deal, even if it is more expensive?

Fightback part 2 – cluster pricing and voucher discounting

If you look at the major players in the pizza home delivery market – Dominos, Papa Johns, Pizza Hut – have you ever noticed how all of their brilliant offer hover around the £20 mark?

The pizzas themselves may cost £12-17 each on the menu but order it in the right combination and together with the right voucher and the “discounted special offer” total always seems to be around £20.

It’s a very deliberate and effective pricing strategy. Advertise the pizzas themselves as being at or above the price they’d expect to pay in a restaurant. That way, the pizzas maintain their “value” in the customer’s mind.

All the vouchers are contingent on certain conditions being met. You have to have the voucher to qualify for the deal or you’re paying £17 for a piece of unleavened bread with some cheese on the top.

Look at your lines. Can you come up with popular combinations of deals that can be offered on a time-limited voucher that would reward existing customers for their loyalty and tempt new customers in because they believe they are getting something for, effectively, half the price?

This is a time-proven and highly-effective form of attack that, while it may lower your unit margins, will up your average order value and mean that, when the competition has finally run out of money, you’ve never dropped your price.

Fightback part 3 – bring down your overheads

What you sell your products and services for is just one factor in this equation. The other factor is what you have to pay out in order to secure that level of turnover.

Are there any ways you can cut your overheads – utilities, broadband, payment processing fees, and so on?

If you run a £300,000 a year business and through diligent supplier management, you can cut your annual overheads by £9,000 a year, you’ve just added that money back to your bottom line.

Should I just reduce my prices?

That’s not for your Accounting Gem partner to tell you. You know your market better than anyone else.

But there is one truism – “it’s much easier to drop prices for a customer than it is to raise them”. If you engage in a race to the bottom in a war of attrition with your new competitor, it might be too much of an ask for them to go back to paying the old levels once the competitor has gone.

You may be left with a business that, unless you find a way to dramatically increase turnover and squeeze your overheads even more, is not worth running after all.

Want to talk?

If this is you and you want help running through the financial ramifications of making any sort of offer to retain and attract new customers, talk to the Accounting Gem team and we can work out the consequences of all the proposed courses of action for you. Speak with one of our team on 01473 744 700 or email us on contactus@aag-accountants.co.uk.

IR35 is coming to the private sector.

If you manage or own a business, you may well have noticed that your use of flexible workers, contractors or freelancers has grown substantially over the course of the last few years. You aren’t alone with this trend.

According to figures from the Office of National Statistics, unemployment in the UK reached its lowest rate for more than forty years earlier this year, thanks in no small part to the booming gig economy, self-employment and freelance workers. Consultancy UK calculates that around 15% of the labour force is now self-employed and around 41% of those workers are freelance.

As an employer, this means that you’re now likely to have a much smaller pool of permanent staff on your pay roll as more and more of us shun traditional employment and instead opt to take back control by setting up as contractors, freelancers or self-employed consultants.

Where you may have had a large in-house workforce 20 or even 10 years ago, today, you may well rely more and more on third party contractors, temporary staff or adhoc freelancers. Figures from FT Advisor suggests around 900,000 workers are currently employed as limited company contractors.

This scenario gives you much greater flexibility and agility as a business leader. You can tap into a bigger pool of talent and skills, access them when needed and not be stuck with a big salary bill when you don’t. As well as the monthly payroll shrinking, your employer National Insurance (NI) contributions will be smaller and you won’t be on the hook for benefits such as paid annual leave or sick pay.

For medium and large businesses, the use of contractors can provide a quick boost of much needed skills, supplement the existing workforce for larger jobs and bring in specialist expertise when needed without the lengthy, expensive recruitment process.

If this all sounds too good to be true, it is, but, while it’s a dream scenario for you, the government misses out on a huge amount of tax and NI contributions, so the gig might soon be up.

In the Autumn Budget, presented at the end of October, Chancellor Philip Hammond confirmed what many in the private sector had dreaded; IR35 would be rolled out to the private sector after its public sector implementation last year.

Confirmation that IR35 is coming to the private sector has been met with consternation by many, who point to a less-than-smooth deployment in the public sector. The launch has been delayed until 2020 following months of consultations and concern from prominent industry leaders and is currently limited to medium and large businesses.

What is IR35?

IR35 is a piece of tax legislation which governs intermediaries. It is intended to stop the use of workers or contractors through a third party (such as a limited company) if that worker would otherwise normally be classed as an employee. When supplying services through an intermediary, a large amount of tax and NI payments are avoided. HMRC considers some of these workers to be ‘disguised employees’ – contractors in name only.

IR35 is an attempt to clamp down on that tax avoidance by reclassifying certain contractors and workers as employed; meaning they will need to pay tax and make NI contributions just like a traditional employee. For the contractor, this obviously means a notable drop in income.

IR35 has been around since Gordon Brown’s chancellor days to stop workers forming a limited company and then working through that company in order to avoid paying tax.

What has happened in the public sector?

Last year, IR35 was rolled out in the public sector in a move that has been plagued with criticism and problems. With IR35, the public sector engager is responsible for determining the status of the worker. The engager is also the entity held liable if HMRC determines the contractor status has been incorrectly applied.

Critics say that the roll out in the public sector has been chaotic, that not enough time has been allowed for an accurate determination of employment status to be made and, because the engager is both responsible and liable, many contractors have been classed as workers to alleviate risk, even if this isn’t the case.

Contractors classed as workers under IR35 must pay more tax and NI but don’t receive any employment rights or benefits. Writing in the FT Advisor, journalist Seb Maley sums this up by noting, “…thousands of contractors have been placed inside IR35 without a fair review of their working arrangement. 

“These organisations were not helped by the government’s haphazard implementation of reform and were perhaps motivated to protect their own liability – which can run to hundreds of thousands of pounds.

“A number of public sector bodies made risk-averse IR35 decisions, which resulted in contractors being taxed like employees, yet without receiving any of the rights that come with employment – a lose-lose as far as a contractor is concerned.”

So, can we expect this when IR35 comes to the private sector in 2020?

IR35 and the private sector – looking ahead

While IR35 private sector roll out has been delayed for a year or so, and limited to medium and large businesses, the implementation looks much the same. As of 2020, contractors will no longer be able to determine their status themselves. The medium or large business contracting the worker will be responsible for setting the IR35 status.

The Treasury believes that it’s losing out on around £1.3 billion each year due to disguised employment. By placing the burden of classification on medium and large organisations, HMRC hopes to claw back this money but, this will place an extra burden on the business and could result in contractors being unfairly classified as we have seen happen in the public sector, leading to more tax and no resultant uptick in employment rights.

For larger firms, preparation needs to begin now. Deloitte employment tax partner Mark Groom says it is important not to underestimate how much work is required to be ready for IR35 in 2020. He says private sector businesses must consider how they will make classification decisions, how disputed status claims will be handled and make all necessary changes to contracts, internal systems and even commercial negotiations for new projects before April 2020.

There is also the question of how to balance HMRC’s need to recoup more tax with the importance of not stifling the booming freelance and self-employment movement. Some critics of the public sector roll out have cited a fall in contractor numbers and skills gaps for projects as a result of the legislation.

With the IR35 private sector roll out still 16 months away, there is still plenty of time for things to change and public sector lessons to be learned and applied to the private sector launch.

If you’re a contractor or a medium to large business and need help preparing for the onset of IR35, get in touch with us today.

Making Tax Digital – the countdown has begun

The roll-out of Making Tax Digital is, without doubt, the biggest change to the way tax liabilities are reported and paid for since the introduction of Self Assessment in the 1990s. This brand new system, or rather its first incarnation, will be with us on April 2019.

Here at Accounting Gem, we’ve been preparing for its introduction over the course of a number of months now so that, when it does launch, we’re ready for it.

But what is Making Tax Digital and how will it change the way that accountants and taxpayers interact with HMRC in the years to come?

What is Making Tax Digital?

Making Tax Digital will eventually become the primary method by which companies and the self-employed report their trading income and expenditure to HMRC. To make this possible, every person and business will have, at some point, their own Making Tax Digital account.

The financial information retained on that Making Tax Digital account will be continuously updated using compatible, HRMC-approved software. Account holders will be able to log on at any time to see how much tax they owe as it accrues and be notified as to when payment becomes due.

HMRC believe that the “tax gap” – the difference between the amount of tax collected and the amount of tax anticipated for collection – is partly caused by inefficient and erroneous completion of tax returns. They believe that Making Tax Digital will reduce the chances of mistakes and omissions (whether accidental or deliberate) meaning that they will raise increased tax revenue from the same user base.

That’s the theory but Making Tax Digital has had a difficult birth. After years of changes and the occasional volte face, the system is going live in April 2019 and the first tax it will cover the reporting and collection of is VAT.

Any VAT-registered business with a turnover in excess of £85,000 will have to use the system. The Government Gateway for VAT will no longer work and paper files will not be acceptable. Most cloud bookkeeping systems will provide users with the ability to correctly use Making Tax Digital but others using bespoke software will need to invest in bridging software to comply with the new rules.

Under Making Tax Digital, you will have to keep a lot more information on the VAT you both pay and charge others including the date on an invoice, the invoice value, the rate of VAT applied, and much more. If you’re on the flat rate VAT scheme, you won’t need to keep a digital record of your purchases unless you’re actually claiming the VAT back on that purchase.

Are businesses actually ready?

There has been very recent political concerns regarding the introduction of Making Tax Digital.

As recently as 26th November, a parliamentary select committee urged HMRC to push back the launch date by one year. As reported in Civil Service World, politicians believe that HMRC has “inadequately considered the needs and concerns of smaller businesses in managing the rollout of the programme…The committee recommends that the next stage of Making Tax Digital is not implemented until 2022 at the earliest, to allow time to learn and act on lessons from Making Tax Digital for VAT.”

Indeed, the committee referred HMRC back to their March 2018 report in which they stated that HMRC was “alone in its confidence that all one million businesses will be ready for Making Tax Digital for VAT in April 2019”.

Not escaping the notice of parliamentarians was the closeness of the proposed date of Brexit and the introduction of Making Tax Digital.

As reported in The Register, committee chairman Lord Forsyth believed that preparations by many business for Brexit was going to mean that fewer businesses would be ready for the Making Tax Digital launch.

The committee also expressed concern about the cost of compliance with one practitioner estimating bills of between £100 and £500 for cloud users, £800-£1,600 for desktop users, and £1,300 to £2,600 for paper record users. The committee commented that “the software industry is, unsurprisingly, responding to the commercial opportunity of Making Tax Digital for VAT. We have seen no evidence that any free software products will be offered.”

Moore Stephens, the accounting network, recently published statistics showing that 37% of UK businesses are “unfamiliar” with Making Tax Digital. Nearly two-thirds weren’t prepared for the deadline and nearly half had “no plans in place”.

April 2019 for some, October 2019 for others

Some businesses will not be required to be ready for April 2019, specifically:

  • Trusts
  • ‘Not for profit” organisations that are not set up as a company
  • VAT divisions
  • VAT groups
  • Public sector entities required to provide additional information in their VAT returns (such as NHS Trusts and government departments)
  • Local authorities
  • Public corporations
  • Traders based overseas
  • Those that make payments on account
  • Annual accounting scheme users

However, their stay of execution is only an additional six months.

What’s next for Making Tax Digital?

Making Tax Digital, in its short life, has been a movable feast so far so please be aware that the following might change and change quite dramatically.

Making Tax Digital for income tax incurred by landlords and the self-employed who receive income from their properties, partnerships, or trusts is expected in April 2020. Corporation tax may also join the scheme at the same time.

Other than that, despite the grand plans for Making Tax Digital, there isn’t that much visibility just at the moment on anything else.

Preparing for Making Tax Digital with Accounting Gem

At Accounting Gem, we’re the people with the experience and the track record to fix any accounting issue you have. We represent over 500 different limited companies, sole traders, and partnerships here in Ipswich, Suffolk, and Essex.

Making Tax Digital is coming and we’re here to help. Speak with one of our team on 01473 744 700 or email us on contactus@aag-accountants.co.uk.

We are pleased to announce we now have a second office on the Norwich Road in Ipswich. If you would prefer to see us here instead of our main office, please feel free to pop in!

This year the rules have changed on tax relief for mortgages on buy-to-let properties. If you need help in completing the property pages for your personal tax return, please give us a call on 01473 744700.