| This is a longer budget update then usual and we’ve put some general notes about cashflow etc as several clients have asked us about this and the recent Government updates. Please also call/email if you’re unsure of anything or need some advice. Also please note that we’ve only tried to put the relevant budget changes here, there are many more in the official Budget documentation: https://www.gov.uk/government/publications/budget-2020-documents/budget-2020 1) Coronavirus & recent Government announcements Business Interruption loans The Government announced approximately £330 billion of loans/grants for businesses. The details are not confirmed yet, however, smaller businesses would need to apply for a loan from a lender joined upto the scheme. The way it works is that the lender would review your business loan proposal in the normal way. But if “the computer says no”, then they can re-try the assessment with the Government guaranteeing 80% of the loan. So if you’re not able to pay the lender will get repaid by the Government. But your business will still be liable for the full debt. You can see more here: https://www.british-business-bank.co.uk/ourpartners/supporting-business-loans-enterprise-finance-guarantee/ Also, the following are not on the list of partners but have been quite helpful in giving loans to our clients in the past: -Funding Circle -Iwocca -Capital On Tap Your normal business bank may also be able to provide an overdraft or a loan (and many bank are part of the above scheme). Paying HMRC If you call HMRC you may be able to defer payments or agree a payment plan with them. If you don’t call them and then don’t pay, HMRC could charge penalties/surcharges for late payment as well daily interest. They will also chase you and usually after 1-2 pass debts on to debt collectors. https://www.gov.uk/difficulties-paying-hmrc Coronavirus helpline: 0800 015 9559 Payment Support Service: 0300 200 3835 Reminder of taxes: PAYE/NI payable every month by 22nd VAT: payable 1 month and 7 days after quarter end Corp Tax: payable 9 months after year end Self assessment: 2 instalments a year, 31 July and 31 January Staff Historically not many of our clients have used the sickness pay scheme, but with the potential for long absences, you may wish to consider how you deal with sick staff: – If you have the money available, you could pay them the usual wage as normal – You could use up their annual leave (with employee’s permission) – Pay statutory sickness pay Statutory sickness pay Staff are paid £94.25 per week for upto 28 weeks. It usually starts from the 4th consecutive day of sickness (including non-working days). So days 1-3 are unpaid. But if staff are self isolating or have symptoms of the Coronavirus then SSP can start from day 1. SSP cannot usually be reclaimed, but you can reclaim upto 2 weeks per employee SSP due to Coronavirus from HMRC. You can ask staff for a sick note after 7 days illness, but cannot delay SSP if they don’t give it. Please let us know if you wish to pay SSP as we’ll need to update the payroll for this. There are also complex rules about laying off staff. We would recommend that you take legal advice before firing any staff or making them redundant. Managing cashflow We would advise you to make a list of outgoing payments you need to make (both in the business and your personal expenses) and calculate your budgeted expenditure for the next 6 months. Then see if any of these can be deferred or cut back. If you contact your mortgage lender you may be able to defer payments without impacting your credit score if you are affected by the coronavirus. Its possible that some landlords may be willing to offer a payment holiday. For example, we were looking at new offices and landlords are currently offering 3-9 months rent free period. They may say no, but it might be worth asking them. We’re not sure about any Government assistance for residential tenants yet. Keep a close eye on debts that you are owed. But you may wish to strike a balance between agreeing extended payment terms and formally/aggressively chasing debts depending on the relationship with your customers. You may also wish to defer large expenditure on equipment, cars or home/office improvements etc if they’re not urgent due to these uncertain times. Insolvency / Administration The business impact of the Coronavirus is unprecedented in living memory for most of us. Even in the 1991 recession when interest rates were sky high, businesses were still able to trade. But now many businesses cannot even trade and there will be a knock on effect that could potentially affect everyone else in time. We believe that most of our clients should be able to survive but wanted to mention that there are strict rules about continuing to trade and to order goods and services if you know that the business is not viable and that you won’t be able to pay creditors. If you are worried about this, you may wish to speak with an Insolvency practioner. In a worst case scenario, if directors are found guilty of wrongful trading, they can be held personally liable for the company’s debts from the point they knew the company was insolvent. Business rates relief Unfortunately this won’t apply to the majority of our clients at the moment as offices still have to pay rates. However, retail, hospitality and leisure businesses will have a rates holiday for 1 year from April 2020. Grants for small businesses £10,000 grant (was previously £3,000) – This is only for businesses who qualify for Small Business Rates Relief (rateable value is under £15,000 ) and don’t pay much business rates. It will be paid directly by your local council in April if you qualify. We doubt that businesses who work from home will be able to claim it. £25,000 grant – this will also be provided to retail, hospitality and leisure businesses operating from smaller premises, with a rateable value between £15,000 and £51,000. 2) Updates to taxes IR35: the reforms that were due to take place from April 2020 have now been delayed for 1 year Corporation tax will now remain at 19% from April 2020. It was supposed to drop down to 17% but this has been cancelled Employer’s Allowance has been increased to £4,000 (it was £3,000 previously) to save on employer’s NIC. Entrepreneur’s relief reduced to £1m of lifetime gains. Working from home: allowance will increase from £4/week to £6/week Pensions: Currently the annual allowance of £40,000 is reduced if gross pay + pensions contributions (e’ee + e’er) exceeds £150,000. But from 2020-21, the threshold will increase to £240,000. The highest earners who earn more than £300,000 (gross pay + pensions) will receive an allowance of £4,000 only (currently its £10,000) R&D There will be more funding for R&D and mathematics research. This is likely to be delivered through grants. You can check on the funding available through Innovate UK (used to be called Technology Strategy Board): https://apply-for-innovation-funding.service.gov.uk/competition/search R&D tax credits The refund rate is unchanged at 14.5%. Previously we mentioned that the SME scheme which allows for cash refunds would be restricted to the amount of PAYE paid. This has now been delayed 1 April 2021. Property tax: The government will introduce a 2% SDLT surcharge on non-UK residents purchasing residential property in England and Northern Ireland from 1 April 2021. Also we wanted to remind you that from 1 April 2020 mortgage interest tax deductions will be restricted to basic rate at 20%. The last few years the higher rate relief has been gradually decreasing and from now on there will only be relief at the basic rate. Company cars: The rules are quite complicated but if you’re thinking of buying or leasing a company soon please let us know the make/model you’re considering and we can check the tax situation. There are some generous tax reliefs if you buy or lease brand new cars, especially if they are very efficient/green. VAT: Zero rate of VAT to e-publications (ebooks etc) from 1 December 2020 VAT Postponed Accounting – From 1 January 2021 postponed accounting for VAT will apply to all imports of goods, including from the EU VAT exemption for fund managers: the exemption for special investment funds has been extended to pension funds |
Author: Mohammed Haque
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2020 Spring Budget & Coronavirus update
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Startup accountant
We are startup accountants & can help you setup
Setting up a new startup or business can be stressful with what looks like a mountain of paperwork and red tape to deal with.
We’re here to help you with the tax and accounting side of things and have advised startups as diverse as a new hotel chain to a payments platform to fashion stores and e-commerce. We can support you with the fund raising process from seed rounds all the way through to an IPO.
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Generally speaking, if you make money from a business then you have to pay tax on your profit.
Profit is defined for tax purposes as your sales and business income minus eligible business expenses. Most expenses incurred in running a business will save tax, but some are disallowed such as entertaining customers/suppliers with restaurants, events or gifts.
Business structure
Limited company
The vast majority of our clients are limited companies because this structure can save a lot of tax and offer a lot of flexibility.
If you want to scale and grow quickly via investment then you’ll need a limited company to issue shares to investors. You can also use a holding company to own subsidiaries if you may need to sell in future or will have different sites/sectors.
Limited companies also provide protection against personal assets (eg house/car) if the business goes bust and can’t pay its suppliers/lenders.
Some examples of the tax savings:
- use a salary and dividends payment structure to avoid NIC and pay less income tax
- you can decide how much money to take out the business and when
- delay/defer tax using a directors loan
- appoint family members as shareholders/directors to save tax
- EIS/SEIS tax breaks
- R&D tax credits
Limited companies are required to file annual accounts and corporation tax returns, as well as file an annual confirmation statement. There is also more documentation involved to deal with shares and directors will need to file a self assessment to declare their dividends.
Sole trader
Sole trader registration is best for very small businesses as it involves less admin and cost.
If you expect your profit to exceed the annual personal allowance (2019: approx £12k per year) then you’ll need to be registered with HMRC as a sole trader.
Once your turnover exceeds £40-50k per year then it will usually be worth converting to a limited company.
If you expect to make a loss in the first few years then sole trader status can be quite beneficial as you offset the losses against previous years employment income to get tax refunds.
The main filing requirement is to prepare a self assessment tax return with details of income and expenses.
VAT
If your sales will exceed a certain threshold (£85k per year in 2019) then you have to be registered for VAT. This means you have to hand over 20% of your sales to HMRC, but you can also reclaim input VAT on expenses.
Most of our B2C clients will therefore add 20% to their planned sales prices so that they don’t suddenly start making a loss once VAT registration kicks in or lose consumers from having to increase prices. For B2B clients its not really an issue as business customers can generally just reclaim the VAT.
Many of our startup clients have voluntarily registered for VAT so that they can get regular refunds from HMRC for VAT paid on their expenses such as rent, software and consultancy etc.
VAT returns and payments usually have to be made quarterly.
Payroll
If you hire staff then you have to setup a PAYE scheme and issue payslips to employees. You’ll also need to calculate their income tax and national insurance and pay this to HMRC every month.
A pension scheme will also need to be setup and staff enrolled, although they can choose to opt out if they prefer.
Most of our limited company clients will setup a PAYE, even if there are no staff, as directors can pay themselves a salary to save tax.
Record keeping
As you can see above, various documents have to be filed with HMRC for accounts, self assessement and VAT etc on a regular basis.
In order to prepare these documents we need to have the full records of the business including:
- bank payments and receipts
- sales
- expenses
- loans
- share issues/options
Most clients will enter the transactions into cloud software like Xero, or use our excel template. Some clients are too busy or hate bookkeeping and so we do it for them.
Managing performance
If the bookkeeping is done regularly then we can check how the business is performing. We can also prepare cashflow forecasts and predict how the business will do in the next year.
This is important because the vast majority of startups fail in the first 3 years, but as we help clients to manage their performance, our clients tend to survive and thrive.
For example, we noticed one of our clients had a lot of slow paying customers with low value invoices and helped them to setup direct debit collections to automate the process. On another client we helped them to analyse their margins and to increase prices.
Next steps
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Please contact us for a free, no obligation consultation to discuss your requirements. Our offices are at Liverpool Street or we’re happy to have a phone/email discussion.
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Staff absence is expensive
Staff absence
Studies have shown that staff absences from sickness or holidays can be very expensive for businesses.
The cost of annual leave
Under UK laws, full time staff are entitled to annual leave of 28 working days. This is more than 1 month!
If we take an example of an employee on £25,000 pa and they are only in the office for approximately 11 months of the year. This lost month will cost a business £2,276 (at 2017 tax rates) in wasted wages.
Moreover, the business may need to hire temporary staff, contractors or pay overtime at a higher rate.
There will also be disruption to the business and temporary replacements may not know how to deal with regular customers or issues.
Sickness
Statutory sickness pay only has to be paid after 3 days of continuous sickness, however many businesses will have more generous sick pay policies.
Again, businesses are paying for lost worker hours.
There could also be urgent problems or deadlines that can’t be dealt with until the worker gets back.
What can be done?
We do believe that staff absence should receive annual leave and sickness pay, but why should your business pay for this in an inefficient manner and suffer disruption?
At MAH, we use teams of people to process your tasks and to get things done. This means that if one of our team will be absent for holidays or sickness, we’ll always have cover ready. This means your business will continue to run smoothly, without disruption and without paying for lost hours.
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How can SMEs prepare for the rise of the robots?
The robot apocalypse
Robot workers and AI… read the papers or turn on the news and its all doom and gloom for the masses.
Perhaps one day a robot will be able to smile, converse, think and empathise in a way that makes it indistinguishable from a human.
The robot apocalypse is coming, but rather than firing nukes Skynet will be firing staff. Or rather the wealthy elites will be doing the firing, as they’ll be the robot masters.
But what about small and medium businesses?
Well, if a hard working entrepreneur can afford the latest in robots and AI tech, then great. Mega profits lie ahead. The reality, however, is that a small number of large businesses will develop or acquire the latest and best technology and use it to improve their services and drive down prices. They won’t licence the tech and SMEs won’t have the resources or know how to develop their own. The large businesses will be able to expand into new markets, niches and segments at will due to the low costs from their new tech. They will then beat SMEs at their own game and drive them out of their business.
Sounds far fetched?
When the likes of Uber automate their cars, how will independent minicab companies compete?
When KPMG or Xero refine their tech and improve it such that they can offer prices at the same rate as the high street, why would businesses choose smaller accounting firms?
The robot apocalypse won’t just put workers out of jobs, it’ll put many SMEs out of business. But, there’s always a but. Businesses that focus on a level of service that is hard to replace with machines can still prosper, and will be able to offer something that the large businesses can’t.
For example, a personal service and a smile could go a long way. In the near future, advice that relies on instinct and experience and not just an algorithm will also be a winning formula. But in the long term, as machines get more and more data they’ll be able to analyse more and more complex situations and to use their “judgement”.
What can be done
SMEs need to take action now to break down their business into a set of distinct processes and figure out can be replaced by robots or AI in the future. Then focus on the areas that will be hardest to replace, the core features and benefits that will give them the best chance of survival.
The processes that are at threat can then be delegated or outsourced, freeing up the core workers to do what they do best.
Then, when the future arrives and the robots or AI tech is unattainable or prohibitively expensive, SMEs will stand a chance, not just to survive, but also to thrive.
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Tech startup outsourcing
Tech startup outsourcing for operations/admin
Tech startups will invariably have some processes which are not fully automated and require human input at some stage or another. This is where the operations/admin team comes in, especially for pre Series A startups where staff are multifunctional and systems are not yet fully developed. A few examples may include:
- completing orders
- dealing with suppliers and supply chain management
- onboarding, customer support and resolving issues
- analysing data and looking for ways to improving efficiency
- streamlining processes
- fire fighting and fixing a million and one problems affecting the business
The key to operations is that they keep the business going whilst also helping it to grow and get better at delivering their products and services.
The benefits of moving fast
The best lean startups move very fast to beat rivals to corner new markets ripe for disruption.
As soon as they have an MVP platform or app they’ll launch.
But they’re not always fully ready, there’s always a toss up between developing further and adding new features and the delays that this causes.
So what many tech startups have done is to use manual input from human staff as a stopgap solution to perform operations whilst their developers work on algorithms and automating processes.
For example, a well known receipt scanning app used to say “processing” for many hours until an invoice was analysed and coded for accounting purposes. Did their servers really need 5 hours to analyse a simple pdf? No, what they were doing was to use human staff in the background.
They did eventually develop an automated system to do the analysis much quicker. But by launching early they were able to gain traction and test the market. Once they were ready to launch properly they already had a loyal customer base and were able to grow bigger with a marketing push and lower prices due to lower costs.
If they’d waited until their automated process was fully ready they would have missed the boat and a rival would have led the market.
But as a tech startup outsourcing operations they were able to become market leaders.
Lean startups and outsourcing
Tech startups can minimise cash burn and maximise staff effectiveness by hiring a high calibre operations manager or COO inhouse to focus on strategy and heading up operations and then outsource to us.
If manual processes can be somewhat standardised or turned into a process, ie “if X happens, do Y” then much of the work can then be outsourced to an operations team.
Hiring staff in the UK will cost at least £20,000-£30,000 annually per staff member and they’ll also require time off for holidays and sickness.
Outsourcing can slash the cost to something like £9,000 and startups could hire a whole team of 3 for the price of 1 inhouse staff. This also means they don’t have to worry about holidays or sickness.
How can we help?
We are already doing this for several tech and fintech startups using our high calibre team in Bangladesh and have a waiting list of staff who want to join us because they’ve heard about how great our office is.
We can take over any manual, back office or operations processes and help you to launch quicker, save money and focus on growing the business.
Click here for more details about how our tech startup outsourcing works.
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2018 Autumn Budget Update
As usual there are many changes to the 2018 Autumn Budget, however they’re not all relevant to our clients. So here we have set out the important changes that may affect our clients. The 2 main issues are IR35 changes for contractors and limits on R&D cash refunds. We’ve also added a reminder about the changes in property taxes and an update for MTD for VAT registered clients.
1) Income tax / dividends: good news from company owners
The personal allowance threshold has increased to £12,500 per year and the higher rate tax will start at £50,000.This means that more dividends can be taken out at the lower rate of 7.5%. We’ll soon advise on the monthly amount of salary and dividends that can be taken without paying the higher rate from April 2019 onwards.
2) R&D: bad news for cash refunds
Currently many of our clients are claiming R&D tax credits to reduce their corporation tax bill if they are profit making, or to receive a cash refund if they are loss making.Many do not have any staff or have very low payroll costs as the majority of development is outsourced or directors are not drawing salaries.
However, under the new rules that may come into play from 1 April 2020, companies will only be able to receive a cash refund of upto 3 times the total PAYE/NIC bill for that year.
So for example, a client who has outsourced 100% of its R&D will not receive any cash refund at all.
Although the rule change has not yet been confirmed as HMRC will consult on this change, many of our clients are claiming cash refunds every year and so forecasts/cash burn and run rate calculations will need to consider that R&D refunds may be restricted in future.
Clients who use R&D tax credits to reduce their tax bill and don’t normally receive cash refunds will not be affected.
3) IR35: bad news for contractors
Private sector engagers (agency or “hiring” company) will now have to be responsible from April 2020 for deciding if contractors are within IR35 or not.Currently, the contractor can setup a limited company and when they start a contract they can decide themselves if they’re inside or outside IR35. They then invoice the engager their daily rate under both circumstances, but if they’re inside IR35 the contractor’s limited company has to pay NIC and PAYE.
The agency/employer isn’t affected either way. (our clients are all outside IR35 and so currently avoid NIC/PAYE)
But under the new rules, engagers will have to decide if the contractor is inside or outside IR35. If they’re inside IR35 because they’re basically like a shadow employee, then the agency/employer will have to pay them via payroll and deduct PAYE/NIC. The contractor can only be paid via an invoice if they’re outside of IR35.
What we saw last year with public sector engagers such as the NHS, is that they generally deemed most contractors to be inside IR35 and so paid them via PAYE.
Its not clear at this time what medium and large private companies such as banks and IT companies will do, buts its possible that our contractor clients may end up being paid via PAYE. In this case, it may not be worth continuing to use their limited company other than for investment purposes or to withdraw profits.
Small engagers will be exempt, but the majority of our contractor clients seem to work for medium and large engagers.
4) Other changes
Training costs may no longer be tax deductible – but we’d need to look into the circumstances, please check with us if the tax deduction is a factor in deciding to undertake training.Employment allowance: the £3k NIC allowance will no longer be available to employers with an employers NIC bill greater than £100,000 per year. This won’t affect most clients, but there a few with large wage bills. We/you’ll need to ensure that its not claimed from April 2020.
Entrepreneurs’ Relief: the minimum term to hold qualifying business investments is increasing from 1 year to 2 years. Although practically speaking, most clients with a capital gain on selling their business will have held it for more than 2 years anyway, so this may not have much of an impact.
Annual investment Allowances: increased to £1m temporarily. Some of our clients invest significant amounts in computer hardware or software which is capitalised as tangible fixed assets. Previously the tax deduction was limited to £200k.
Digital services tax of 2% on revenues for online marketplaces > £25m per year: we’re mentioning this as we have a number of tech startups with online marketplaces but their revenues are currently below the limits. Maybe something to consider if future growth plans are met.
5) MTD from 1 April 2019 for VAT registered businesses with > £85k turnover
We have been a bit quiet on Making Tax Digital as the Government kept delaying the start date and its only recently been confirmed that it will kick in from 1 April 2019 (although it could possibly be delayed again as this is straight after Brexit).
The first phase of MTD will only be compulsory for VAT registered businesses with > £85k annual taxable turnover.
Records will need to be kept digitally and submitted to HMRC in a different way than before.Xero will be MTD compliant but for clients who currently use spreadsheets, we are currently trialling different solutions to find the easiest/cheapest way to deal with MTD.
In the past we haven’t charged extra for dealing with new laws/regs eg flat rate VAT changes or auto enrolment pensions, but MTD is likely to increase our time spent working on jobs and there will be a cost for this.
Once we’ve estimated the extra time that we’ll need to spend on Xero and non-Xero clients we’ll inform you of the extra costs that we’d need to charge if you’d like us to deal with MTD. As usual, we’ll try to keep these fees as low as possible and for some clients we may not need to charge extra if it doesn’t take us long to deal with.
6) Property tax restrictions for mortgage interest
As discussed previously, mortgage interest will only be tax deductible at 20%. There were no changes mentioned in this 2018 Autumn Budget, but we’d like to remind our clients about the reductions in tax relief as 2017-18 was the first tax year that the restrictions started and its being gradually implemented by 2020 at which time there will be no 40% relief available. -
Confirmation Statement
How to complete the Confirmation Statement
The Confirmation Statement is required to be filed at Companies House at least annually, normally on the anniversary of incorporation.
However, we often have to bring it forward or file an extra one if there is investment or changes to shareholder/director details and this is required to be updated at Companies House by investors or a bank etc.
It costs £13 to file online (or £4o via the more complex paper route) and is generally straightforward to prepare.
Online
Login using your webfiling account. Next enter the company’s registration number and also the company’s authentication code. If this is not available, it can be requested at this stage online and Companies House will post it within a few days to the registered office address.
General details
The directors’ and company’s details need to be checked and updated if necessary, typically these may be any changes to registered, home or correspondence addresses.
Shares
If SH01s and SH02s have been filed online, then the share capital is generally upto date, but the share capital should be doublechecked against expectations, in case any SH01s or SH02s have not yet been filed.
SIC code
If it is the first Confirmation Statement to be prepared then an industry code has to be selected. The easiest way is to use a code of another client, however there is a full list at https://www.gov.uk/government/publications/standard-industrial-classification-of-economic-activities-sic
although not all the codes may be available at Companies House.
Persons with Significant Control (PSCs)
A PSC is an individual or a company who can influence the company directly or indirectly.
If completing this for the first time, ensure that you doublecheck the personal/company details of the PSC
Many of our small clients only have 1 or 2 shareholders and typical details are shown below:
1) If there is only 1 shareholder, they will have:
- > 75% control and voting rights
- the right to appoint or remove a majority of board members
2) If there are 2 shareholders with 50:50 control:
- >25% but below <50% control and voting rights
Other boxes don’t usually need to be ticked for most small companies.
Paper return
The paper return is more complicated and time consuming and should be avoided wherever possible and is normally only required when the client doesn’t have their authentication code.
You should ensure that all director/shareholder/company details are doublechecked to source documentation to avoid errors.
Part 1: The statement is only 2 pages: make sure you check the company name and number and confirmation date to Companies House
Part 2: There are many continuation pages and so the pdf is very long, but we only need to prepare the following sections:
A1: find the SIC code (see above)
B1: most companies only have 1 class of ordinary shares, but some may have more. In this case check to the Register of Members or share cap table. Ensure that the correct number of shares is used, and aggregate nominal value = number of shares x nominal value per share. Ensure that the total is completed for each currency table used and that a grand total is put at the bottom of the page. The amount unpaid is usually £0
B2: the prescribed particulars can be found in the incorporation documents or in previous SH01 forms or share issue documentation
C1: usually “No”
D1: Enter the shareholders details and ensure this agrees to the Register of Members or Share Cap Table.
F1-F4: Enter the PSC details (see above) or use the next part for company details.
Don’t need all the continuation pages.
Need help?
Please do contact us if you need any help to file the Confirmation Statement
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Public sector contractors
Public sector
This post only applies to off payroll “contractors” (including locums or consultants etc) who are working in the public sector, such as for the NHS, a government agency, university or local authority and use a limited company to raise invoices.
Contractors working in the private sector will not currently be affected by these rules, although there could potentially be a risk of similar legislation in the future for the private sector.
Old IR35 rules
The old IR35 rules are explained in detail here, but basically if a contractor can demonstrate that they are not a “shadow employee” because they have rights of control over how/when they work, rights of substitution and no mutual obligations then they can raise an invoice via a limited company and avoid payroll taxes.
Under the old rules it was up to the contractor to decide if they were inside or outside of IR35, and so they could use their judgement or obtain professional advice about this. If HMRC disagreed with the contractor and believed that they were inside IR35, then the liability for unpaid salary taxes was on the contractor.
New IR35 rules from 6 April 2017
If the new rules are found to apply, then contractors will have to pay employment taxes similar to those paid via payroll/PAYE, even if they are using a limited company.
Under the new rules, it is up to the public sector body to decide if the contractor is inside or outside of IR35.
If the public sector body is later found to have made an incorrect decision then they will be held liable for the unpaid salary tax/NIC. Therefore, it will be less risky for public bodies to apply a blanket rule of paying all contractors as employees and deducting tax/NIC, rather than verifying whether each and every single contractor is outside IR35 and paying the full invoice amount.
Our understanding is that the NHS and locum agencies will be generally by paying all doctors and nurses via PAYE under the new rules. IT and other consultants may also be caught by the NHS or other public bodies.
Impact of new IR35 rules for public sector contractors
The fee payer (eg NHS or agency) will calculate income tax and employee NIC and deduct these from the fee payable to the contractor. The contractor’s limited company will get a tax deduction for the income tax and NIC, but will then have to pay a further 20% corporation tax on the profit.
However, if all the public sector net income is withdrawn as salaries then there will not be any profit left and this is exempt from income tax/NIC as it has already been deducted at source.
The 5% allowance normally available to contractors inside IR35 is also removed for public sector contracts.
Overall, we CANNOT see any significant benefits from using a limited company if a contractor will be caught by the new rules. The normal tax planning using dividends or multiple shareholders will be affected by the extra corporation tax that is payable on top of income tax/NIC unless all net income is withdrawn as salaries.
In this case, the contractor would be better off being employed directly via the agency/NHS without the limited company. The limited company can also be closed down.
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New VAT flat rate scheme limited costs
Old flat rate scheme
Prior to 1 April 2017 the old flat rate scheme was very popular with many of our clients as they could earn an extra income under the scheme. Although they were not able to reclaim input VAT on expenses, they didn’t have to pass on the full 20% VAT charged to customers. Depending on their business category/sector they would pay a flat rate VAT less than 20% and so they could keep the difference.
New flat rate scheme for limited costs: 16.5%
The old scheme was originally designed to make things easier/quicker for small businesses to comply with quarterly VAT returns as it didn’t require businesses to record all their costs/expenses each quarter.
But in the Autumn Statement on 23 November 2016 the Government declared that businesses with limited costs were in effect “abusing” the flat rate scheme as their affairs were so simple they didn’t need it .
From 1 April 2017 businesses with limited costs would need to apply a much higher flat rate of 16.5%.
What are limited cost businesses?
A business will have “limited costs” if the gross amount it spends on relevant goods is either:
- less than 2% of VAT flat rate turnover (ie gross UK sales)
- more than 2% but less than £1,000 per year
Relevant goods include: stationery/office supplies, gas/electricity, stock, cleaning products etc.
They exclude services such as rent, accountancy fees, advertising, laptop/mobile and also electronic services such as software.
What is the impact of the new scheme?
If a business does not have limited costs or ….., then there is no impact and they can continue as normal.
For businesses with limited costs, the new flat rate scheme is 16.5%.
Example
Net sales £100,000
VAT charged to customers: £20,000
Gross sales: £120,000
Old flat rate scheme
eg consultant/contractor with flat rate of 14.5%
Flat rate payable is £120,000 x 14.5% = £17,400.
Profit on flat rate scheme is £20,000 – £17,400 = £2,600
So as long as input VAT on expenses is less than £2,600 then the flat rate earns an extra 2.6% for the business.
New flat rate scheme
eg any business meeting criteria of limited costs has a flat rate of 16.5%
Flat rate payable is £120,000 x 16.5% = £19,800.
Profit on flat rate scheme is £20,000 – £19,800 = £200
So this is a loss of £2,400 compared to the old scheme.
Normally most limited cost businesses will have more than £200 of input VAT, for example from accountancy fees, telephone bills, software/subscriptions etc. If so, then they should leave the flat rate scheme and claim input VAT under the normal scheme.
VAT returns that straddle 1 April 2017
VAT returns for QE April and May 2017 will straddle the start date. The return has to be split into 2 periods, before and after 1 April 2017. The first period will be treated as under the old rules and the second period under the new rules.
Leaving the flat rate scheme
For businesses with limited costs and turnover below £83,000 pa it may be worthwhile to deregister for VAT completely to avoid the additional admin.
For businesses with turnover above £83,000, it may be best to leave the flat rate scheme. This can be done by writing to HMRC and requesting to leave. The normal leaving date will be the end of a VAT return period, but a leaving date of 1 April 2017 could also be requested.