Do you submit a self-assessment tax return and are due to make a second payment on account for the tax year 2021-22 on or before 31 July 2022?

You may have an opportunity to reduce how much you need to pay.

Why would a reduction be possible?

The self-assessment tax payment you are due to make on 31 July 2022 (the second payment on account for 2021-22) is presently based on the profits/income you earned during 2020-21. If your actual earnings for 2021-22 are estimated to be lower than for 2020-21, you can elect to reduce payments on account payable in January and July 2022.

Let’s complete your tax return sooner this year

The most effective way to reduce your 2021-22 tax payments based on actual data is to complete and file the 2021-22 tax return before 31 July. In this way, we can apply – as part of the tax return submission process – to reduce payments on account due 31 July 2022.

But what if you can’t file your tax return before 31 July 2022?

If you can produce a realistic estimate of your income for 2021-22, we can lodge a formal request to HMRC to reduce your tax payments for 2021-22 without actually filing your tax return. The downside of this process is that if your subsequent tax return shows higher income levels than the estimate, then interest charges may be applied by HMRC.

What about the first payment on account for 2021-22 made on 31 January 2022?

If your taxable income for 2021-22 is lower than that for 2020-21, then any payment on account you may have made in January 2022 may have been too much. By rebasing your income on actual earnings for 2021-22, and if applicable, applying for both payments on account due January and July 2022 to be reduced, any overpayment made in January will automatically be included in the recalculated payment due 31 July. In some cases, this may result in a tax refund.

What to do next

If you have suffered a reduction in income – for 2021-22 compared to 2020-21 – call An Accounting Gem now on 01473 744700

From April 2024, landlords with rental income in excess of £10,000 per annum will need to submit quarterly returns of income and outgoings to HMRC using their Making Tax Digital links.

 This will not apply to property owners who run their property business using a limited company until MTD covering corporation tax is implemented at the earliest, April 2026.

 The challenges for landlords in meeting these new regulations are set out below.

What is MTD?

VAT registered businesses have been dealing with HMRC’s Making Tax Digital (MTD) program for a few years. Now it’s the turn of anybody with a trade, or property income, which together make £10,000 turnover (not profits) or more. It means you have to register with HMRC and make a return every quarter within 30-days of the quarter end of your property and trading results. At the end of the year, you will send HMRC, a fifth end-of-year statement which effectively is your annual accounts. This has to be done digitally and currently that means you can use a spreadsheet and upload it to the HMRC website, or you can use accounting software that is MTD compliant.

Why are HMRC doing this?

We think HMRC has three reasons for doing this, but only the first has been made public. The public reason is that HMRC wants to simplify and speed up tax recording for you, and it’s a cost saving for them.

Our best guess for the second reason, further down the line, is that HMRC may well say that if you can record how much you have earned quarterly, you can pay HMRC quarterly.  Apart from the cash flow implications, it does mean that your fifth full return after year end will almost inevitably have some adjustments and if profits are adjusted down, you have overpaid and need to get that back somehow whilst explaining why profits have dropped. This brings us to the real issue.

The most important reason is the third. HMRC admit there is a £8bn (2018) a year tax gap owing to avoidable mistakes. MTD gives HMRC far more data sooner and therefore far more opportunity to plug this gap by correcting your mistakes, plus potential penalties and interest. Politically this is a no-brainer. There would be no need to increase taxes to help fill the black hole of public finances, which would upset voters, and we are all supposed to be paying the right amount anyway. It’s an easy win for them. And of course – there is a penalty regime if you get MTD wrong. After all, HMRC would now have “proof” that your bookkeeping isn’t perfect.

What and when do you need to do something?

The £10,000 turnover limit applies to income in the next and following tax year, as that decides if you need to declare for 2024. Accordingly, we suggest you have to do something now. If you are below this limit in the 2023 tax year, then you can defer this decision until the tax year in which the limit is exceeded.

This will need some discussion and planning. But first it needs good quality information, which is why we suggest you start a year early. It also gives you plenty of time to get used to new ways of working so you don’t immediately fall foul of the new regime.

If you are over the turnover limit, and therefore have to comply, then another discussion is needed about how you will adapt your record keeping to comply. It’s perfectly possible for you to produce your own records. These have to be transaction based, which means no estimates. Everything has to be backed up by something on your bank account and a receipt. As we’ve said, you can use a spreadsheet but getting that into a format to upload to the HMRC website could take some time. Using accounting software is generally a lot quicker and is likely to be more accurate and also is likely to reduce the chance of an HMRC inspection.

That is simply because it’s complete and HMRC cannot “break the books”, which is their expression for describing something which is incomplete or unexplained in your bookkeeping.

We can help you with Xero software.

Use a separate bank account

Don’t use your personal account for any property business related entries. Keeping them separate means that HMRC can only look at the business records and can’t acquire access to your personal transactions unless they can show there are unexplained entries which might be income. Using your personal account also means you will have to record all the personal data in your software to evidence that these entries aren’t business.

There are a number of online bank accounts which are quick to set up and free, so it’s very worthwhile making this differentiation, as it saves you time, money and aggravation.

Are there any benefits?

Surprisingly there are benefits. We have found with the MTD for VAT regime that clients, sometimes with our help, have kept their books better and are therefore making better decisions because they are basing those decisions on more accurate up to date information.

Equally, having to do four returns to HMRC means that there are four opportunities for planning your tax affairs. We don’t think that you should restrict that planning to just property income, because all incomes are aggregated to arrive at your tax bill. In which case, it’s useful to including any PAYE income, dividends or anything else that impacts your tax liability.

Additionally, if this covers all your income, then you won’t need to submit a self-assessment tax return.

In which case it’s not all bad news. But this does need conversations quite soon to decide firstly whether this can be avoided for a year or two, and then if it can’t, how is it going to be dealt with, and by whom, and when. There are obvious cost implications, but there are obvious benefits as well.

Outsourcing is generally cost effective, and this might be a good solution for you.

An Accounting Gem can help

Landlords have thus far escaped many of the more rigorous filing regulations that apply to VAT registered businesses. The changes we have outlined above underline that these days are numbered.

Finding a suitable digital alternative to your present manual or spreadsheet systems should be your first priority. You will also need to decide if you are going to adapt and manage these alternatives or outsource record keeping.

We can help with both of these issues.

Can we start this conversation soon? Although April 2024 may seem a lifetime away, there are serious challenges to overcome, and as we have said in this report, it is not all cost and no benefits. There are real benefits to having real-time data available to help you make informed decisions about your property business.

 

Pick up the phone, let’s make a start… Call us today on 01473 744700

As we take a deep breath and consider our business planning options for 2022, the relevance of accurate, readily accessible accounting data has never been more apparent.

Without up-to-date, real-time data we cannot make the judgments that may mean the difference between survival and failure this coming year..

What is changing in 2022?

Why this sudden interest in sprucing-up record keeping?

We are used to recording historical data in order to comply with annual accounts production, annual tax returns and quarterly VAT returns.

The emphasis in this context is to meet filing deadlines and avoid interest and tax penalties. Usually, we are looking at historical figures to meet these demands.

What is unfolding in the coming year is the need to know how you are placed financially, day by day. This will be necessary to combat the present COVID-19 challenges and HMRC’s Making Tax Digital (MTD) changes.

MTD will require you to upload quarterly, not annual data to HMRC, and to achieve this, your bookkeeping needs to be up-to-date and accurate.

Aren’t the Making Tax Digital changes some time away?

MTD for VAT is already required and will be extended to all VAT registered businesses from April 2022. Returns can only be made if the underlying data is in a format that can link with HMRC’s servers.

MTD for income tax purposes will require sole traders to upload quarterly business data and is due to commence April 2024. This will be followed by similar demands for partnerships and companies in the following two years.

Business owners should ensure their records will be compliant as soon as possible as the conversion process, from manual or ineffective computerised systems, to effective and approved online bookkeeping systems, will take some time.

And don’t forget, we can help you with accessing real-time data to keep an eye on current financial challenges as COVID-19 continues to disrupt business activity.

How we can help

We would like to offer you the following range of services to deal with these challenges:

1. If you still using manual bookkeeping records or spreadsheets, we can recommend inexpensive, cloud-based accounting software that you can use and will be MTD compliant.
2. If you already use computerised accounts software, we can check to see if it will be suitable for MTD purposes.
3. Once your software is in place, we can provide initial training to show you how to process bank, sales, and other transactions.
4. Finally, we could access your accounts data quarterly and make sure that the numbers produced make sense. This could include a discussion of quarterly results and help you meet any upcoming financial challenges sooner rather than later.

The key to success in 2022 will depend to a large extent on your ability to gather, record and interpret your business results in real-time. The days of relying on instinct and historical data, that may be months out of date, are long-gone.

Call An Accounting Gem now so we can discuss your options

Let us help you manage your business challenges in the coming year.

A basic review of your bookkeeping is the best place to start. No point in building a wall if the foundations are missing.

Call now on 01473 744700 so we can discuss your options.

An Accounting Gem’s blog will take you through the tax allowances and reliefs that will help you celebrate with your business colleagues, family and friends this Christmas and New Year holiday period and claim any costs as a tax-allowable deduction.

Christmas magic and tax write-off

Christmas is usually a time for people to get together, and an opportunity for you to celebrate with your team. That’s been difficult in recent years, but this year, perhaps can be a bit better. So, instead of the usual Christmas party, why not do something a bit different?

Don’t underrate team building

As the economy starts to move towards higher activity levels we are increasingly living in a world of skill and labour shortages. Team building can help to develop trust which is an important element of keeping your people happy.
Team building activities are fully tax deductible and do not have to be open to all employees.
Other tax breaks available

The tax breaks you could utilise this Christmas include:

• You can spend up to £50 per employee as long as it’s not in the form of cash or vouchers and isn’t a payment required by contractual obligations or as a reward for work performance.
• If you are organising an annual Christmas party or other social activity – that is open to all your employees – you can spend on average up to £150 per person (inc. VAT). Guests of staff are included in the overall headcount. As long as you comply with these conditions you can deduct the total cost from your taxable profits.
• All costs must be considered, including the costs of transport to and from the event, accommodation provided, and VAT. The total cost of the event is divided by the number attending to find the average cost. If the limit of £150 per head is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring.
• VAT input tax can be recovered on staff entertaining expenditure. If the guests of staff are also invited to the event the input tax should be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contributions.

Still time to get organised

If you have a year-end event in mind to de-stress your team this Christmas and are concerned to make sure that there are no issues claiming a full tax deduction for any costs involved, please call An Accounting Gem on 01473 744700.

Merry Christmas and all the best for 2022!